Good day and thank you for standing by. Welcome to WideOpenWest's Second Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr.

Andrew Posen, Vice President of Investor Relations. Please go ahead..

Good morning, everyone, and thank you for joining us for our second quarter 2021 earnings call. With me today is Teresa Elder, WOW's Chief Executive Officer; and John Rego, WOW's Chief Financial Officer.

Before we get started, I'd like to remind everyone that during our call, we will make some forward-looking statements about our expected operating results, our business strategy, the expected effects of the pending transactions to sell five service areas that we announced on June 30, 2021, and other matters relating to our business.

These forward-looking statements are made in reliance on the safe harbor provisions of the federal securities laws and are subject to known and unknown risks, uncertainties and other factors that may cause our actual operating results, financial position or performance to be materially different from those expressed or implied in our forward-looking statements.

You are cautioned not to place undue reliance on such forward-looking statements. We disclaim any obligation to update such forward-looking statements. For additional information concerning factors that could affect our financial results or cause actual results to differ materially from our forward-looking statements.

Please refer to our filings with the SEC including the Risk Factors section of our Form 10-K filed with the SEC as well as the forward-looking statements section of our press release. In addition, please note that on today's call and in the press release we issued this morning, we may refer to certain non-GAAP financial measures.

While the Company believes these non-GAAP financial measures provide useful information for investors, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP.

Reconciliations between GAAP and non-GAAP metrics for our historical reported results can be found in our earnings release and our trending schedules, which can be found on our website. Now I'll turn the call over to WOW's Chief Executive Officer, Teresa Elder..

Thanks, Andrew. Welcome to WOW!'s Second Quarter Earnings Call. In addition to our press release and quarterly trending schedule that are available on the Investor Relations page on our website, we have also included a presentation to complement our prepared remarks.

WOW! delivered great second quarter results, including our seventh consecutive quarter of record high-speed data revenue, continued growth in our adjusted EBITDA and EBITDA margin and a significant increase in our free cash flow.

At the end of the quarter, we reached agreements to sell five service areas in two transactions valued at approximately $1.8 billion that we believe will deliver significant benefits to our company and shareholders by enhancing our overall financial strength and flexibility.

In the second quarter, total revenues increased nearly 2% from the same period last year to $287 million.

The increase was driven by our high-speed data business, where revenues grew by 14% year-over-year to $156 million, more than offsetting the decline in video and telephony revenues during the quarter and driving adjusted EBITDA to $118 million, up more than 16% from the same period last year.

Not only are we executing on our strategy and growing our business, our employees continue to recognize WOW! as a great place to work. Once again, we have been named one of the best and brightest companies to work for in Atlanta, Chicago and Detroit.

Our employees are one of our main differentiators that enable us to provide exceptional customer service. All of these achievements highlight a successful first half of 2021 and underscores the strength and future prospects of our broadband-first growth strategy.

The following statistics demonstrate our execution during the second quarter of the year, with all of the charts showing both year-over-year and sequential improvement. During the second quarter, we added 3,400 high-speed data RGUs bringing our total number of HSD RGUs to over 826,000.

The number of net adds, while showing growth, was slightly below our expectations for the quarter, reflecting lighter-than-expected connects. However, we are still positive about our outlook for the year as we continue to benefit from historically low levels of churn.

We did not see as significant of an improvement in our growth from our commercial businesses, and businesses are still not yet back to pre-COVID level. We are beginning to see improvement there as more businesses cautiously reopen.

The federal EBV program, which launched mid-May, has seen strong adoption with more than 7,800 customers participating year-to-date. The program has predominantly resulted in existing WOW! customers upgrading to higher data speeds rather than attracting new customers.

HSD ARPU increased in the second quarter due, once again, primarily to customers purchasing higher data speeds. HSD ARPU was $63.20, up from $57.10 or nearly 11% versus the same period last year.

During the second quarter, all key statistics continue to trend upward as we grew our total number of subscribers again this quarter, highlighting the consistency of our historically low churn.

Another great indicator for the success of our broadband-first strategy is that we have maintained a high selling rate of 87% of new subscribers purchasing our HSD-only service. And not only is broadband becoming more important, but customers are requiring higher data speeds.

In the second quarter of 2021, 89% of new customers purchased speeds of 200 meg or higher, which increased for the third quarter in a row, reflecting the underlying growth in demand for high-speed data. Our Edge-Out strategy continues to deliver growth in homes passed and RGUs and is delivering increasingly positive penetration rate.

Penetration for both the 2019 and 2020 Edge-Out vintages increased again this quarter with the 2019 vintages increasing to 17.9%, up from 17.3% last quarter and the 2020 vintages increasing to 19.5%, up from 17.7% last quarter.

We are continuing to see incremental improvements and acceleration of Edge-Out and expect those trends to continue in the back half of this year. And lastly, before I hand the call over to John, I would like to go into some detail about the two transactions we announced at the end of June.

I'll focus on reiterating the benefits we expect the transactions to deliver for our business and our shareholders. As we highlighted when we announced the transaction, the divestitures will generate gross proceeds of approximately $1.8 billion at an implied combined multiple of 11x adjusted EBITDA.

These transactions continue what we have done over the Company's history, strategically buying and selling markets in our business.

They also highlight the tremendous value and attractiveness of our service areas and provide us with increased financial capacity and enhanced flexibility to expand our position as a trusted provider of fast, reliable and affordable broadband products and services while also creating significant shareholder value.

The divestitures represent a significant step towards strengthening WOW's balance sheet and providing the capital to support our strategic growth. We expect to use the proceeds to reduce our debt and continue to invest in our broadband-first strategy.

The investment will support increasing penetration through Edge-Out as well as building out our infrastructure in greenfield markets.

Our advanced IP-based network enables us to enter new less competitive nonadjacent markets and deliver both broadband and our IPTV service, WOW!tv+ or other streaming alternatives through the fiber-to-the-home technology. These greenfield opportunities, in addition to Edge-Out, allow WOW! to bring our fast and reliable service to new customers.

We are working towards completing the transactions before the end of the year. We have also begun to restructure our sales and product organizations to reflect the fact that upon completion of these transactions, we will be a smaller company.

Accordingly, we have moved our sales organization to our Chief Customer Experience Officer, Don Schena, and our product organization to our Chief Technology Officer, Henry Hryckiewicz.

We believe this is an important initial step towards increasing the efficiency of our structure and better aligning it with the future size and strategic focus of the post-transaction WOW!. As a result of this change, our Chief Commercial Officer role was eliminated.

To conclude, I'm excited about the continued execution of our broadband-first strategy and our continued progress in strengthening our financial position.

I'm also pleased with our success in driving top line growth and EBITDA while delivering fast, reliable and affordable broadband products and services to our customers and opportunities to our employees. Now I'll turn the call over to John, who will go over our financial results in more detail..

Well, thanks, Teresa. This quarter, we made good progress on growing our business as our strong HSD revenues and adjusted EBITDA are up significantly year-over-year, pushing our adjusted EBITDA margins to 41% in the quarter.

In addition, the two transactions that we announced at the end of the quarter will lower our leverage ratio to approximately 2.5x at closing and provide us with significant added flexibility to enhance our broadband-first strategy. Before I talk some more about the transactions, I'd like to review our second quarter results.

Due to GAAP accounting rules, you will notice that our income statement now includes a required column for discontinued operations to reflect the impact of the announced transactions.

It's important to point out that these figures only reflect those items that are specifically identifiable as being associated with the service areas being sold, and thus excludes some relevant corporate overhead. The numbers associated with discontinued operations will continue to evolve as we work towards closing the transactions.

And to other respective deals close, we will continue to speak only to the figures as they represent the financials for the business that we continue to manage.

In the second quarter, total revenues increased nearly 2% to $287.3 million, reflecting a 14% increase in high-speed data revenue offset by declines in video and telephony, which decreased 11% and 12%, respectively. The growth in HSD revenue reflects the addition of new customers as well as existing customers upgrading to higher speed tiers.

The outperformance in our HSD business contributed to our higher EBITDA in the second quarter, which increased more than 16% in the same period last year to $117.8 million with an adjusted EBITDA margin of 41%, also a significant improvement from the same period last year. Our results through the first half of the year are also very strong.

Total revenue increased 1.3% to $573.6 million, driven by a nearly 13% increase in high-speed data revenue to $309.1 million. Adjusted EBITDA grew nearly 15% to $230.2 million with an adjusted EBITDA margin of 40.1%.

As you can see on this next slide, our incremental contribution margin saw a significant increase during the second quarter to its highest level ever, nearly 70%, up from 67% last quarter and 64% in the second quarter last year, consistent with the improvements that we are seeing in our adjusted EBITDA and EBITDA margin.

In the second quarter, our CapEx decreased by $1 million from the same period last year and by more than $3.1 million from the first quarter, primarily due to lower CPE and the benefit of customers taking advantage of self-installation kits.

Excluding the potential impact of the transaction, we continue to expect our full year CapEx to be consistent with or slightly lower than last year. We ended the second quarter with total free cash flow of $41.4 million, reflecting $23.1 million of free cash flow in the second quarter.

With regards to liquidity and leverage, we had $23.3 million of cash on hand and organically lowered our leverage ratio to 4.8x as of June 30.

We're very pleased with our ability to bring our leverage ratio below 5x organically, but we've been very clear over the past year that we need to get our leverage more in line with our peers, and we're committed to increasing our free cash flow.

The transactions that we announced in June represent a significant step towards achieving those objectives. After closing these transactions, we expect our leverage ratio to be approximately 2.5x calculated off of a significantly lower level of net debt.

The transactions will vastly improve our capital structure, while also creating a new WOW! that continues to operate a robust business with numerous growth opportunities before it. Following the completion of the divestitures, we will continue to operate in 14 service areas in Alabama, Florida, Georgia, Michigan, South Carolina and Tennessee.

Excluding the five service areas to be sold as of June 30, our financial model remains strong. On an estimated pro forma basis for the trailing 12 months, total revenues in high-speed data revenues would have been approximately $733.6 million and $381 million, respectively, with growth rates of 2% and 12%, respectively.

The adjusted EBITDA would have been approximately $297 million with an adjusted EBITDA margin of 40.5%. The year-over-year growth rates are consistent with the trailing 12-month figures without taking into account the transaction. And finally, before we open the call for questions, I'd like to talk about guidance for the remainder of the year.

Due to a significant scope of the transactions that we announced and their impact on our business going forward as well as the precise timing for completing each of them, we've decided not to revise guidance for the remainder of this year.

We have significant momentum in our broadband-first strategy and continue to expect growth in our HSD revenue and our adjusted EBITDA. After we close the transactions, which we expect will occur before year-end, we'll host an Investor Day, where we will provide an update on our strategy and financial model.

In closing, I'd like to reiterate that we are executing our broadband-first strategy, building on our own momentum and delivering strong results and taking steps to keep us on a promising and upwards trajectory. And now we'd like to open up the line for questions..

[Operator Instructions] Your first question comes from Kyle Evans from Stephens..

Congrats on the incremental contribution margin growth. If we kind of run forward double-digit HSD growth and double-digit decline in telephony and video, where do you think that margin could go over time? And a follow-up question. The 2020 Edge-Outs look like they're dramatically outpacing the 2019 vintage.

And without getting into specifics around cities and neighborhoods, could you just talk qualitatively about the differences between the 2?.

I want to do the first one, Teresa. I think on the incremental contribution, easily, we'll get to an 80-plus percent number. And I think we can get there in the next three years perhaps, so 82%, 83% incremental contribution. It shows up in my own modeling, but the reality is that high-speed data is a 97-ish percent gross margin product.

And video, as you know, is sub-20%. So it's literally just a flipping of the whole thing. So I feel very, very comfortable about that. And we already saw a massive, massive improvement in just the course of 12 months that we've sort of really been into the HSD..

I'll go ahead and answer the second question. Thanks, Kyle. On the Edge-Outs, the Edge-Outs that we built last year, as you recall, we backed up a little bit. Just because of the pandemic, we had to stay a little closer to home.

So a lot of the 2020 Edge-Outs we're filling in, in areas where there were new homes being built and some MDUs that were kind of very close and surrounded by areas where WOW! does business. So it was really a close extension of our existing plants. And I think we had good name recognition, and we're just doing a great job penetrating those markets.

So we feel good about the return we're getting on both the '19 and the '20 Edge-Outs. But yes, pleased to see that the '20 Edge-Outs that we're doing this year are doing well..

Your next question comes from Brandon Nispel from KeyBanc Capital Markets..

Yes.

Could you guys talk about the subscriber growth in RemainCo versus assets that are being sold, particularly on the HSD side? And then can you talk more about the restructuring of the sales force? Where can selling general and administrative expenses go relative to the $45.5 million you guys reported for the RemainCo?.

Do you want to do the first one, Teresa, on that. So when we look at RemainCo, and we will -- again, we'll do an Analyst Day some time in the fourth quarter. But when we look at RemainCo, we see a competent amount. Firstly, we'll be better penetrated for RemainCo and the current company.

And the prospective growth rates and the historical growth rates for RemainCo are a little bit higher than the overall company. And I think that has just a bit to do with the real estate and the location of where things are. So we should be looking for higher penetrated route and we should be looking for the higher growth rate [indiscernible]..

Thanks, Brandon, and I'll talk about the second one around the sales force.

So like we said, when we announced the transaction, we want to make sure that our corporate expenses are in line on a proportionate basis with the new size of WOW!. And therefore, we made the difficult decision to reduce one C-level in our business.

Fortunately, we had a good place for the sales organization to go in the capable hands of Don Schena, who now has all the customer experience touch point within his organization. And Don has also a long history of running sales organizations through many businesses he has been a part of.

I think in terms of the sales expenses, the marketing expenses and all that, that will be part of what we talked about at the Investor Day as we will give you a fast forward for RemainCo..

If I could just follow up on that. Historically, you guys have offshored a lot of your customer call center and your service support.

Is that something that you're looking at bringing onshore for RemainCo?.

Yes. We have a mix of onshore as well as some offshore operations, and we're pleased with how that's working. So right now we don't have plans to shift that substantially..

Your next question comes from Frank Louthan from Raymond James..

Great. On the guide, just to clarify quickly, any reason to believe that there's anything changing in the operations materially that you're going ahead and go close the synergies that we might expect? And then you mentioned on the deal call that leverage is possibly going back up.

Can you walk us through that what would be driving that? I would assume it would be additional broadband growth, but can you clarify kind of what your thoughts are on how much more you could grow that business with a little bit more financial flexibility?.

Sure. So I think the trajectory of RemainCo is the same, if not, slightly better than, let's call it, OldCo for the moment. With the guidance, so complexity is, I'm not closing one. I'm closing two transactions. And quite frankly, [indiscernible] they might close in different quarters. So it really starts to get typical to what are we looking at.

So it seems to be most prudent to kill the guys. But again, as we said on the call today, we expect the trajectory of the Company to be pretty much the same, if not, a little bit better because we'll be more penetrated. So that's the first part as I see it..

Okay. Great.

And any thought then on future expansion in broadband and so forth through that?.

Yes, I'm sorry. So yes, as the moment in time when we calculate the leverage of [about 2.5] my expectation would be that we will keep leverage in the low 3s to the high 2s at best. And what are we going to do? I mean the expectation and one of the reasons why we did this was first to clearly to delever consolidated effects of return for the equity.

But it gives us the opportunity to pursue growth opportunities, which might go a bit today about [indiscernible] thinking about. And we've always got Edge-Out for the growth opportunity. So we'll be able to take advantage of that improved robust market and fund that growth.

That being said, there's no expectation whatsoever that we'll ever be 5x levered again. So if it's in my life science. So we will keep leverage, again, at best low 3s and reality right now is in the 2s until get a little bit bigger. So that's the idea..

I'd also just like to add in addition to the Edge-Outs and the Greenfield, we still see opportunity for growth within our organic footprints as well, both in our commercial business as well as in the residential and our organic footprint, all right?.

Your next question comes from Daniel Day from B.Riley Securities..

Yes. So just on the topic of greenfield expansion. As you kind of think about that and you sort of look at the infrastructure builds floating around in Washington that you go and hedge some clearly a lot of support for kind of subsidized build outs sort of on [indiscernible].

As you think about greenfield, you kind of want to stay in the sort of poor suburban markets? Or can you kind of look at that, say, the Company is interested in sales force. I'd imagine some like the Southeastern Michigan sales force are keeping. If you venture out a little bit, you might qualify for some of those.

So just wondering your thoughts on that..

Yes. Thanks for the question, Daniel. We're really evaluating our criteria for markets we may enter, really looking at opportunity for us to bring the very valuable high-speed, good pricing to markets that really haven't had the chance to avail themselves of those.

So places where there are less competitors, certainly, so that could be a consideration but also that has a great return for our investors. So we'll probably be talking more about that certainly in the future. But certainly, we're looking at all the opportunities. There's a lot of great opportunities out there..

Great. And then just CPE in the quarter, the tax returns was super low. A really good job there. Anything in particular driving that? And then just anything supply chain related that you've had any concerns getting CPE higher table on -- just anything you're doing with [indiscernible]..

Yes. So CPE -- great question. I'm sorry, Teresa. CPE is a little bit down. We got a little bit ahead on CPE last quarter. Secondly, included in that CPE line is also the capitalizable portion of an installation. And now that customers are taking the self-installation, that number is going to start to trickle down, for sure.

And there haven't been any particular supply chain issue. So it's really just the timing. But my expectation is, over time, we should see CPE continue to sort of trend down..

Your next question comes from Batya Levi from UBS..

Can you talk a little bit more about the high-speed data trends that you saw during the quarter. I think you mentioned 7,800 EBB participation. How many were new to the Company.

And please a bit more color on the slower activity and how that has paced through the quarter?.

Yes. Thanks, Batya. In terms of EBB, the vast majority of those were existing customers. And perhaps I was a little optimistic that more of them would be new.

But I think across the industry, we've -- all the operators have done a really good job making sure that the EBB program has been in place for subscribers who can qualify to avail themselves of that. So I'm proud of what we've done as an industry. With that said, it definitely was not an opportunity for a lot of new acquisitions.

So across the board, I think we've seen a continued record low churn, which is fantastic for our industry. We did see some trends in commercial. We were optimistic that the businesses would bounce back a little faster than they have with the economy really starting to open up more.

But we've seen some businesses delay some decision-making and just be a little bit slower than what we had optimistically hoped. With that, we feel very good that the seasonal trends that we traditionally see in our business are starting to come back, especially things like back to school. And so we're looking forward to a great second half..

Your next question comes from Matthew Harrigan from Benchmark..

I was going to ask you about Washington's community that could be significant that actually pivoting to risk. Have you seen anything from [T-Mobile] [indiscernible] in your markets? I mean it feels like you're thinking about a few of your markets already. And I know it's somewhat a durable product that you can deliver.

But how do you assess that even as any element of pricing is not something that's actually gross to your market share. Congratulations on the results and, of course, the deal..

Thanks, Matthew. Yes, we really haven't seen too much from TMO doing much from a competitive situation that is impacting us. We're always watching those kinds of things. And I think our product is value-based. And certainly, it's about the reliability, the fees, as well as really the home WiFi and how that makes such a difference.

And so I think that's where we really excel. So, of course, we're always up to see what's going on with our competitors, but so far so good. Customers understand the value of the service we provide..

Your next question comes from Tim Nollen from Macquarie..

I'm intrigued by the kind of split between a slightly soft HSD net adds number and yet very strong revenue and EBITDA growth. I wonder if you could maybe just address on the first part of that. Understanding the year-over-year comp was tough and it's difficult to forecast with the COVID impact.

But just is there anything more you can say about why that HSD add number was kind of on the light side. Maybe it was just that.

But then on the flip side, given the strong revenue and earnings performance, how much more upside might there be to things like upgrading customers to higher tiers, pricing power that you may have there? Is that a trend we can look forward to?.

Great. I'll take the first part and then turn it over to John for the second part. I want to put the HSD net adds for the first half of the year really in perspective. We've gained 13,400 net adds this year. And if you go back to 2019, we really, this year, have done more than double and triple what we did in 2019. And I think 2019 was a little low.

It was before we pivoted to broadband first. And 2020 was certainly high with the onslaught of the pandemic as well as really with greater guest that we launched our broadband [indiscernible] in a bigger way. So I realize that the comps are difficult, but I feel good about the HSD net adds that we've had this year and good about our future prospects.

And I'm also pleased that we're doing this with great HSD revenue gain. And I'll turn over to John if he wants to add something to that..

Yes. I mean I think we will continue to see the HSD ARPUs increase. It's not just people tiering up. It's people purchasing ancillary services, such as the whole home WiFi solution and other services that we will probably be adding to the product lineup over the next several quarters. So I don't really see that changing any time soon.

There hasn't been any significant price action on HSD. So much of this is the tiering up and people just kind of rightsizing. I think people are going to continue to tier up as streaming becomes more and more as an option for folks and just going to want a greater bandwidth coming in. So I think it's a positive trend for us.

It isn't going to change anytime soon..

Right. It can be also, of course -- we also said -- just to add, Tim, we also, of course, sell our mesh network co-home WiFi product, which has a very good selling rate. And we've also launched the version six of WiFi, which really gets even higher speeds in WiFi throughout the home. So I think all those things are really making a difference..

Yes. No, that all makes sense. I just thought it was interesting the actual sub number versus the revenue growth number.

And I might have missed it, did you give or have you given -- can you give a kind of a number of what proportion of your HSD subs are on a 1 gig type of level?.

No. We don't usually give that out. But on the chart for the webinar, we did show how many are 200 meg and above. And I can tell you that, that proportion keeps rising. And certainly, a lot of customers are in the 500 mb and 1 gig level. I think it's a significant share of the new customers coming in..

There is no further questions at this time. I would now like to turn the call over to Teresa Elder for closing comments..

Thank you so much for joining us this morning, and thank you for your continued interest and support of WOW!. We look forward to speaking with many of you in the coming weeks. Have a great day..

This concludes today's conference call. Thank you for participating. You may now disconnect..