WideOpenWest, Inc. (WOW) Earnings Call Transcript & Summary

Okay. Perfect. So hello, and welcome to the 24th Annual Credit Suisse Technology Conference. I'm Brian Russo, part of the Crédit Suisse Research team here covering the communications sector, and I'm pleased to be joined today by Teresa Elder, Chief Executive Officer of WideOpenWest; along with John Rego, who recently joined as Chief Financial Officer. Thank you both for being with us today.

Thank you.

Thanks, Brian.

Great. So our time is a little bit limited. So let's jump right in. I'll start with a question with -- for -- I'll start with a question for Teresa. So WOW! is a new strategy, sort of a broadband first approach that some of the others in the cable sector are also focused on. Can you help us understand how WOW! now operates differently than maybe just a year or 2 ago?

Yes. I can absolutely answer that. In the last year, we've done some really transformational things for the company. Specifically, it was a year ago at this time that we launched a trial in Charleston, South Carolina, for really emphasizing streaming services first rather than our video packages with our customers. That was so positive, we decided to launch that across the whole company. And it was really about giving customers' choice and leaning into it and being agnostic on what video services our customers subscribe to. We also, early this year, launched in our first market, WOW! tv+ which is our IPTV based service, which allows us to offer those video packages but in a way that is much more visually appealing and easier navigation for our customers, but operationally, much more efficient for us and allows us to reclaim bandwidth. So we've launched in the last year, WOW! tv+ as a service to over 80% of our footprint, our streaming services, and helping customers -- really customize that to their needs for 100% of our footprint. And the other big change, of course, we have to acknowledge is with COVID. We have dramatically accelerated our self-install capability. Since, of course, like all of us, customers don't want people in their homes. So that has been a win-win for customers. But also, it has been financially good for us as well, and it keeps our technicians safe.

Terrific. That's a great intro. We'll touch on a bunch of the topics you just covered throughout the question. But I also wanted to give a question for John, just right off the bat. You joined the company relatively recently. Maybe you can tell us kind of what brought you to WOW! and why you're excited about the opportunity in front of you.

Yes. That's great. Great one. Thank you. Yes, so I've been here, at the end of this month it will be 5 months -- 5 months [indiscernible] passed. So it's going so fast. But when I was looking for new opportunities, I had just sold my last company, and I was looking for new things to do, and I kept getting drawn back to WOW! And my early routes were in large telco companies. And I actually worked for time at RCN, which was part of Astound by the way. And I was fascinated that the company was sort of at that pivot point into the broadband first strategy and that this was going to become predominantly a high-speed data provider. When I started drilling into the numbers, like, it remained to be a little bit like a software business, like, it's high 90% like gross profit margins with less OpEx below the line and less CapEx in running that business. And just think can you -- in a period, a very short period of time, you like, could do something absolutely transformational. I also saw a company that had a stock price that struck me as somewhat depressed versus where peers were trading. And on many levels, it felt like this is like a pre-IPO startup, and we're getting in just as like something really good as we're going to get the big contract, something big is about to happen. It seems like a really great opportunity to help the team sort of further to -- for the broadband first story as we go forward. And it just -- everything kind of came together for me. And it's been nothing but wonderful being here for the past 5 months.

Terrific. So sticking with the broadband first strategy, I think one of the things that investors saw when you reported your 3Q is that you sort of put through a significant price increase on the video side, and we saw a corresponding drop in WOW!'s video subs, probably the largest in the last 5 years. Would it be fair for investors to expect those kind of trends to continue in the coming years, given sort of the increased focus on broadband and the more agnostic view of video?

Yes. We're absolutely customer-led. So if customers are deciding they want to take more streaming services in lieu of a video package, we're right there with them. So we absolutely coach our customers on how they can manage their budget, if that's what they're asking us to do and we provide a wide array of choice for them. We actually have a pretty sophisticated system that allows our online customers as well as customers talking to our representatives to really go through the process of deciding what kind of genres, what kind of content they want. And helping them pick the package that's right for them. So yes, we'll always be customer-led on that. If streaming services continue to increase their prices, if there's a bit of a move back, we have that hedge with our IPTV service, which allows us to have a curated package for customers.

Okay. So you may have actually answered the question I was about to ask, which was just a little bit more about WOW! tv+, your IP video product. It's available, 80% of your passings. And at the same time, like you said, you're offering these third-party video services like YouTube TV and fubo and that sort of thing. So maybe you could talk about like why invest in your own video product as a service at all? Is it -- have you -- do you find there's still a lot of customers that really prefer to deal directly with you instead of a sort of third party? Or maybe you can help us understand what the rationale is behind continuing to sort of invest to have a great robust video product of your own?

Well, a couple of reasons. And the first always starts with the customer. There are customers who do like that kind of curated pay TV package. And so we have that for them. We also have a base of customers, many of whom have a video package. And so we'll migrate them eventually to the IPTV product, if that's what they want as well. But as we look at new customers, incoming customers, what we've seen is that 80% of the customers are signing up for high-speed data only. And that means they may also be subscribing to multiple streaming services. So when we say high-speed data only, it doesn't mean that they're not subscribing to video. Video consumption is up dramatically. For us, it's really about keeping the relationship with the customer. So we've been continuing to grow subscribers, even though the video product, or RGU, is declining. So it's about really being where the customers want to be and having those options for the customers.

Got it. That makes a lot of sense. So I want to turn to WOW!'s broadband service. I think, when we just sort of look at the results in 3Q, I think there's a number of factors that sort of influencing the trends there, whether it was COVID or the Keep Americans Connected Pledge or some other things. So I was hoping to break these down a little bit, just to help folks understand what was going on underneath. Maybe we can start with COVID. So in your view, has COVID helped you grow subscribers sort of more than it has hurt perhaps. Maybe there's a demand pull forward or the need for businesses and consumers to have this versus maybe the inability to get into the customer's home or the lack of maybe when college starts up, that you would normally seasonally see a lot of broadband ads. So maybe you can talk through how COVID has influenced things this year with your broadband product.

You bet. And I'll start out, and John, feel free to kick in as well. So I think it's been a mixed bag, but probably for WOW! and really for our whole industry, a bit of a benefit in a way because we were there to help solve our customers' problems, which is what we're all about. And like all of us, we're working from home. Our kids are learning from home in many places. And then just all that demand for entertainment as well. We started out the year even before COVID in January was very, very strong net adds and then it just continued to accelerate. And one thing I'm especially proud of is how our network has been operating. We've been the first operator in the U.S. to have over 1 gig services and 95% of our footprint. So our advanced fiber-rich network really was built for a moment like this, so we were well prepared. And not only did we see the huge increase in demand for broadband subscriptions but we also saw our existing subscribers use much, much more bandwidth. And our network was able to take care of that and really served our customers well. So those things have happened extremely well. But the FCC pledge, clearly, we've participated in that Keep Americans Connected that ended June 30. We did see, for us, we had the net adds in the second quarter. We saw quite a few disconnects associated with that in the third quarter, which was more than our usual associated with that as customers have had economic challenges. We've also seen some economic challenges clearly in the commercial space, especially with some of our small business customers. We're there to help them become more digital if they have a business that's able to go online. And then the back-to-school this year was just different than usual. Because students might have moved back-to-school but then moved back home. And so it was different than our normal big third quarter back-to-school push. So things have just been different this year. Some of the city trends have kind of been thrown out the window.

Got you. Just a follow-up on the Keep Americans Connected Pledge, I imagine you're constantly working with your customers to sort of, if they have financial hardships that may be temporary to kind of stick with them. Do you think that we've seen most of the impact of that pledge ending in the third quarter? Or are there still customers that you're continuing to work with that we may see something in the fourth quarter that like lingers on or what have you?

Yes. I don't know. There might be a few that linger on into the fourth quarter. We always have been a company that works with our customers in financial hardship. And I would say, not that it's published data throughout the industry, but just from my history of being at multiple companies, I can say this is some of the best churn I've seen anywhere in the industry. In terms of, WOW!, we really work with our customers. And also, our products, at the starting point are value priced. So we try to make sure that we fit in our customers' budget and work with them. So it remains to be seen. We'll see what happens as the quarter goes on.

Makes sense. And just a follow-up on the churn comment. I think you put through sort of a modem fee increase we saw that in the ARPU. Can you tell us what you saw with respect to churn for the customers who maybe bought that increase?

Yes. I would say customers, if they didn't want to keep leasing the modem, there's an easy choice and that is to buy their own if they would like to do that. But we are still have a substantial number of our customers who felt that, that was a fair price, it's very competitively priced with all of our peers. And we provide wireless modems, which are it's a great product, too. So those who kept it, I think, are happy with the product that we're providing them. And if they decided not to do that, they bought their own modems.

Got you. So let me follow-up on one of the questions -- or sorry, one of the things you mentioned about with regard to the speed. So I think there was a slide in your earnings presentation, showed in the past sort of roughly half of your new HSD only connects took 100 megabits a second speed. But in the past 2 quarters, it was the majority, roughly 80% or so that took 200 megabits or higher. Can you talk a little bit about sort of what you think drove this change? And is there anything sort of noteworthy in the behavior of those customers that are taking higher speeds? So I'm trying to understand if it's a certain type of consumer that would like that? Or is this just a trend that sort of everyone is realizing that faster is better?

Well, I think it's -- the pandemic, our customer base, it's a lot of things that are coming together at once. We previously talked about all the streaming services. And I think the streaming services operate very well on higher speeds, especially if they're being used in multiple places in the home and maybe with a video gamer and somebody doing video conferences all day long. Customers just need higher speeds. We've encouraged that because our network can handle it, and we know customers like it and stick with us longer when they're happier with higher speeds. So we've made it an easy transition to upgrade for our existing base as well as we've had attractive rates for new customers. And those customers at the highest speeds, many of them also take advantage of our Whole-Home WiFi mesh network product which we think is a terrific product. I certainly have it in my home, so does John. And it really allows people to have that kind of high-speed WiFi throughout every part of their home and gives them additional security and control. So we like that add-on product for our customers and the customers who have it tend to be stickier and have longer lifetime value too. So that's all good with us.

Yes. Okay. Life is definitely better in my household for having the Whole-Home WiFi for sure. And so one last follow-up on this. So the vast majority of your new customers are taking these high speeds. Are you also seeing sort of a material percentage of your existing base of customers migrating up beyond the 100 megabits as well?

Yes, this year has been unprecedented in terms of seeing our existing base upgrade as well. And I think it's for the same phenomena that we're seeing with new customer acquisition, people are streaming more services, there's more home learning, there's more working from home. And all those things just mean that there's a need for more bandwidth consumption.

Got you. All right. So I wanted to turn to ask a couple of questions about Edge-Out and your Edge-Out strategy. In your -- the earnings slide that we saw, you showed both your 2018 and 2019 Edge-Out vintages, have been growing penetration pretty steadily every quarter. The 2018 vintages are now up to 19.6% penetration. The 2019 vintages are now up to 14.8% penetration. Can you discuss sort of how the pace of the new Edge-Outs may be -- change this year? And what investors should expect, I guess, for next year?

Yes. I think there's a couple of changes that transpired this year. One is we actually have had such big years in terms of growing out new Edge-Out areas the last couple of years. We slowed a bit this year, both because of COVID and some challenges with build-outs but also just preserving CapEx as we were trying to figure out what exactly all the impacts of COVID were going to be on our business. We also saw that we really with prioritizing the safety of our employees, we took some of our field sales folks out of the field for about 4, 4.5 months at the beginning of COVID. And while they aren't our largest sales channel, they are an important one when it comes to Edge-Outs. Believe it or not, that kind of door-to-door sales really works when you're introducing yourself to a new neighborhood. Now they have been back in the field, and we have great protocols in place and we continue to grow our Edge-Out properties. We're very selective in how we choose those areas, and I've been pleased with the progress we've been making.

Got you. So with respect to your -- how selective you are when you choose these areas, is there anything you can tell us about maybe what caused to pass a new home or what the ROI is for these new passings that you do select?