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

Welcome, everyone. I'm Bryan Kraft. I'm the cable telecom media analyst at Deutsche Bank. And I'm pleased to introduce today, Teresa Elder, the CEO of WideOpenWest; and John Rego, the CFO of WideOpenWest. Teresa, John, thanks for joining us today, welcome.

Thank you.

Thanks for having us.

Why don't we start off with some reflection back on 2020? In what ways has the pandemic impacted your business, both in terms of demand for your products as well as how you're operating the business? And what are some of the trends that you think might last longer versus those that could return to normal more quickly?

Well, thanks for the question, Bryan. Clearly, what we did right at the start, like many businesses, was started working from home with the majority of our workforce, except for those technicians, who are in the field taking care of the network and the customers. And I feel like we did a really good job with that shifting our business. Like goodness, we had done a lot of the transitional systems work over the last 2 years prior to the pandemic to really get us in a good place so that we were ready to go from day 1. The impact on the business of the pandemic has really been good and bad, so a mix of things. From the good side, first of all, we're just so pleased that our 1 High-Speed Data network was there to serve the demands of our customers when they needed us the most. And we think that demand for new service and for more bandwidth usage is really here to stay. We also, over the year or so before that, saw a real shift from our customers from the Pay TV packages to more streaming service. And that only accelerated with the pandemic as people were looking for different content and also on the main budgets. We also saw that customers became more self-reliant. They didn't want technicians necessarily in their home and our ability to launch self-installed services for our High-Speed Data only services really took off. We were pre-pandemic only about 30% of our installs were taking place. As a self-installed by the customer, we ended the year over 80%. I also think that's a trend that is here to stay. Some of the bad things, clearly, the overall impact on the economy, of course, impacted us, too. And we have really worked closely with our customers, especially those who are in financial hardship, both the residential customers as well as the commercial. We also saw an impact on our advertising business, but that's really starting to come back, and we're excited about March madness ahead. So I really think it's been a mixed bag, but in many ways, we're just so thrilled that we've been here for our customers.

Could you remind us what you're expecting for the first quarter in terms of an outlook? Any sense for how things have shaken out so far versus your expectations? And is there any full year color that you're ready to give at this point?

Yes. Let me jump in. So we, like many other companies, we canceled guidance for 2020 because I didn't really know what was going to happen with the pandemic, but we decided to bring it back for at least the first quarter. So on the revenue, we're looking at between 281, 284, which is relatively flat to a year ago. And it's an interesting story behind that because High-Speed Data, we call it for 150 to 152, that's a 10% year-over-year increase if we hit that. And that's really the full story of the company. EBITDA $1.06 to $1.09, so 8.5% year-over-year growth. And a key metric for us, it's HSD net adds 8,000 to 10,000 net adds in a quarter. So it's kind of indicative of the pivot to the business to broadband first. So as video becomes less significant for the company, it drives a lot of good news throughout the company. To give you perspective, High-Speed Data gross margins are in the upper 90 percentile, whereas video gross margins are sub 20%. So as the business shifts out of that, it has dramatic impacts on the bottom line and on free cash flow generation. So in Q4, we started to really see that, and we're going to continue to see that through the year. We didn't give the full year guide. I do have plans to probably do that on the first quarter earnings call. And we just don't know how COVID shakes out. COVID cost us around $13 million in 2020, so a lot better than we thought it was going to be. But we just want to see how that plays out. Before I sit, the business is in a really great spot and a critical metric for me is in Q4, about 51.5% of all of our revenue came from High-Speed Data. So the pivot is on. And so when you look at that business out a couple of years, that's a dramatically different business. In fact, that could envision -- we did $437 million in EBITDA for the year of 2020. I could easily see that being $500-plus million by 2023. And if you consider seeing kind of CapEx metric, so I'm calling for -- on the earnings call, I call for flat to somewhat down. You're talking about several hundred million dollars in levered cash flow generation by that time as well, so you could be talking like $2, $2.25, $2.35 per share in free cash flow. So let's just get out of the pandemic, and let's keep doing the broadband pivot, but it's an interesting time for us. And I think the market is finally starting to catch up with the story, which has been great.

Yes, broadband, as you mentioned the growth has been great, grew 13% year-over-year in the fourth quarter, 9% year-over-year for the year last year. Can you talk maybe in a little more detail about the major drivers of the growth, some of the macro factors as well as some of the internal initiatives that you're working on that have helped to drive that growth? And if there's any color you could give on just directionally on how much of it has been gross adds or churn or whether it's been both, that would be great as well.

Sure. Why don't I say a little bit and then John can chime in if he would like as well? I think it's really what he was talking about. In '19, at the end of 2019, we really made this pivot to broadband first, and not putting in a great position. It is really listening to what our customers want, and we did strategic partnerships with some streaming services, and we also launched an IP-based WOW! tv+ service, so that we can transition our customers off the QAM infrastructure. Over the last few years prior to that, we also did a lot of a digital transformation work that has really put us in a good position to give our customers more choices and more ability to do things on their own online, which I think customers like very well. All of those things are decreasing our customer churn. They're driving lifetime value of the customers. But they're also fundamentally changing the operations of our business and driving higher margins, because it really is a business that is much more operationally efficient. What we're doing is really giving our customers choice, that reliability and speed. We always, as a company, have offered good value for our customers for some of the highest speeds that are out there. In fact, we were the first operator to provide 1 gig throughout most of our footprint in the U.S. And it's exciting to see what's been happening. To your point about is it better gross adds, lower churn, I'd say, yes. It's a combination of both. Our message is resonating with customers when they need in our services the most. And I think that has created a lot of success on the financial side, too.

Yes. And I would jump in with one of the positive aspects of what happened in the pandemic year, which, I think, is permanent, not temporary, is that if you looked at us a year ago, 80% of the base was at the 100-megabyte offering, the entry-level offering. And today, 80% of the base is at 200 mega or above. And of the new adds that came in, in 2020, over half of them we're taking 500 mega to 1 gigabyte. I don't think that goes backwards. I think that stays post pandemic. Because of that mix shift, one of the great things that we saw this year, which is reflected in the numbers is we had a 9% increase in HSD ARPU, predominantly due to mix shift. So there wasn't no real price increase in there. So that's goodness. That's here to stay. And I think it's one of the positive aspects of the positive aspects. So more and more people realize that they need a broadband, so we got more customers. And then even in my own house with 4 people in college at the same time and me trying to work from home, we tiered up to the 1 giga offering as well. So it's been helpful. And it's been good. And I don't think it goes backwards. I think it stays. In fact, we're poising ourselves to be able to offer higher speed at some point down the road. So I think that's one of the positive things to talk about.

Can you talk a little more about that plan to offer higher speeds down the road?

Sure. The way that our network has been engineered is that we really have a roadmap for the future. So if consumers down the road actually have a need for 10G, we have a path to get there. And in fact, we already offer 10G to commercial customers who need that. We also have flexibility on things like upload and download speeds for our commercial customers. and as we look at the future, when we look at the things like little latency, our network is flexible with really the opportunity to drive future growth, wherever that may take us. So right now, we actually upgraded all of our existing base to a minimum of 100 MEG. We did that in December, and I think that has also delighted our customers, pleasantly surprise them and has created a better customer experience, and it also is flowing through into looking forward to it as well.

Okay, great. One thing I wanted to ask you is, a lot of investors ask about whether the 2020 strength was a pull forward of net adds and just some of the growth, the phenomenal growth last year for the industry broadly, does some of that come at the expense of 2021? Any thoughts on that on pull forward or not a pull forward?

Well, there's certainly no question. 2020 was unprecedented, like we've heard over and over again, and it was for us in many ways, too. We had our highest HSD net adds in the company's history. So -- and that was really with seasonality being very different than what we traditionally have seen in the cable industry as there were shifts back and forth with what was happening or with work from home and learning from home. We didn't have, for example, the traditional back-to-school. So as we look to 2021, we're not sure if this year, we'll go back to traditional seasonality trends, or if we'll continue to have something, which is just kind of overall demand through much of the year. One thing for us, I can say is we're really looking forward, we did our pivot towards the end of 2019 to broadband first. So I know some folks are saying, "Oh, it's going to look like 2019." We are looking to continue to grow. So we'll see what happens.

Okay. Did you observe any difference during COVID in terms of how your longer-tenured markets performed versus more recent builds? And how do you think about the potential for pent-up demand from COVID as a result of your challenger status, might that contribute to higher levels of connects this year as the switching environment improves and more moves, et cetera?

Well, I think it's a really interesting question. The first part of that, when I think about our more longer-tenure markets versus the new Edge-Out areas is what we call them. Some of those that we brought in at the end of 2019 and even the beginning of 2020, we did have a little bit lower start to growth in those markets, but it was partially mainly because we pulled our field sales folks out of the markets at the beginning of the pandemic out of concern for just their own safety and in respect for the neighborhoods that we served. And they didn't really get fully back into the marketplace until all about summertime. So certainly, generally, when we launch a new area, we would have a much bigger focus on that kind of field sales and that does help drive growth. When I look at this year in that challenger status we have, I think it's an interesting question. Customers have gotten really used to higher speeds. They certainly are using bandwidth like never before, many, many more have moved to streaming services. And all of those things mean that you have to have a robust broadband pipe into your home. And as customers look at their budgets and realize, "Hey, there's a challenger out there, who can provide great service, great reliability, high speeds", and maybe do it for a better price that's more responsive, I think, we have a really great thing to offer. And we're always looking to challenge the big guys and see how we can serve those customers better.

When we look at the landscape, we see AT&T increasing their fiber deployment, Charter was -- and some other companies came away with new territories they're going to build out through the art of auction. Cable companies, generally, I think, are trying to Edge-Out their networks. So it seems to be, I guess, an increase maybe in competition that we're going to see over the next few years. I guess how do you think about that? Do you expect to have more competition? Or you think it will be more of a stable outlook for yourselves? And can you talk about what kind of overlap you have with gigabit fiber today, competitive fiber today?

Sure. No, I think it's great. And I love that the industry is now embracing the strategy that we've had for many, many years. When I first got here, I know I had to define what Edge-Outs were to people because it was a kind of a new concept. So it's great that others are starting to get on the bandwidth of what we've known was a great opportunity all along. We -- and I see where people are building out, especially in some of the rural areas, that's really generally not where we do business. We are generally in the suburbs, a little bit denser, but no not as dense as the downtown areas of a lot of cities. And if you think about it, our full aim as a company for the last 21 years, has been to be a challenger, a competitor. It's in our DNA since day 1. So the markets that we originally went into were to be the second provider and offer choice. So I would say, generally, for companies that are looking for a place where they can really make a big splash, our markets would not be very attractive since we were the second provider into most of our markets that we served. And also, I think we're known as a very scrappy competitor who knows how to be successful. So it's interesting to see what's happening there, and we continue to look at opportunities to grow our footprint as well.

Can you give us a sense as to where your market share is today across the longer-held markets versus newer markets? And any thoughts on where you think your broadband penetration levels can reach over time?

Yes. Well, one way we look at it is just as our penetration of the homes that we. And right now, that's about a 26%. That does vary in some markets. We have some markets that were acquired where we looked more like an incumbent, and certainly, those get up into the 40% range. We, definitely, have been moving that penetration number up, and we think there's certainly more opportunity ahead for us.

Going back to the competition question. I wanted to ask you specifically on fixed wireless. That's something -- there are 2 flavors of it. Obviously, you have companies going into rural areas and using excess capacity, which doesn't sound like it's an issue for you, then you have the Verizon strategy of using millimeter wave and putting fixed wireless in select areas, but those are the areas where you may already have 2 or 3 providers. So any -- do you worry at all about incremental competition from millimeter wave, fixed wireless? Just any thoughts on that would be great as well.

Yes. I definitely wouldn't say worry. We're aware, and we always monitor what's going on there. But at the end of the day, we have, in place, existing today, a robust fiber-rich 1 gig network that is completely built out. And we really have engineered it for the flexibility of the future. I talked about the future of 10G, and we already offer that to commercial. So our we move to all IP services like High-Speed Data, and our WOW! tv+ product really positions us to reclaim even some of the bandwidth we have so that we can have further flexibility for the future. And the other thing about 5G networks is that they also can provide an opportunity for us for our wholesale business and for some backhaul services. So just like everything in our industry, it could be an opportunity as well as a risk. But we like to focus on the opportunity side.

Okay. John, you talked a little bit about how people adopting faster tiers or -- is driving ARPU growth. Can you talk a little bit about the pricing side of the equation? Just how you view taking price increases as people are using your services more versus the opportunity to take more share and how you go about balancing that?

Yes. So there's a couple of things. So tiering up has certainly improved the ARPU in 2020. There's also ancillary products like the Whole-Home WiFi solution shows up in HSD ARPU. So to the extent that we can come up with interesting ancillary products and so that's one way to get there. Get off HSD for the moment, video ARPU keeps going up because we have to keep pace with the content delivery costs increasing year-on-year and year-on-year. So -- but my real focus is on the HSD. We've never really taken a major price increase in that. I think one of the interesting aspects about being the challenger brand is that to be the challenge for the privilege of being the challenger, you have to have the best network, the best customer care and the lowest price. That being said, there's probably room in our price because in some cases, we're substantially lower. So although we haven't done it yet, I wouldn't say it's off the table to do something at price somewhere down the road. We did a little bit in 2020. In September of 2020, we took a modest price increase on modem rentals for HSD. It's a small portion of the base. Most people in the base actually own their own modem, but some people still rent it. So the opportunity is there, and we'll just have to see which way the market goes. I don't know if you want to jump on that one, Teresa, but that's how I see it.

Absolutely. We see customers taking higher speeds and Whole-Home WiFi is a great product, which really also helps decrease churn and give the customers even a better experience. So we encourage that as we consult with our customers.

Okay. Two follow-up questions on that. I guess, first, it's interesting that most of your customers own their modem because it's the inverse for most of the incumbents. So I guess I'm curious as to how that came about, how it evolved that way. And then the other question is, you mentioned Whole-Home WiFi. And I'm just curious as to what trends you're seeing there. It seems like it's -- as you mentioned, an increasing retention opportunity but also an ARPU opportunity. So would love to hear how you're innovating on the Wi-Fi side as well.

Yes, absolutely. Actually, it's a good mix of those who rent modems versus those who don't. And I think that is a trend across the whole industry as people feel more comfortable doing their own self-installs and kind of managing their own network at home. So it's a mix, especially as you look at more millennials, they are very unlikely to rent things like a month because they know they can get it pretty easily. Whole-Home WiFi has been such a great success story for us. The service that we provide, we launched in the summer of 2018, and we had continued to see increases in the sell-in, in that product. And I think word-of-mouth is a good reason why that takes place because it really provides higher speeds throughout your whole home. And whether you're working from the basement or an upstairs bedroom someplace, don't have to be right at the one place where the Wi-Fi is strongest in the home, it really extends that. And it gives you controls and security that I think also helps you easily manage the network from an app on your phone. So that product has been fantastic for us. And it does, I think, help us reduce churn and give customers a better experience.

And in the past, I've heard you talk about increasing -- or reaching more MDUs in your footprint as an opportunity for growth. Can you just talk about that opportunity and what the economics of that look like?

You bet. Yes. So we have always done Edge-Outs in a variety of ways. But one of the focus we have for this year is really around multiple growing in so MDUs. Those are great opportunities for us because, of course, it's a higher density of homes within footprint. So the build-out is quite easier. And if you can establish a relationship for a preferred or perhaps an exclusive status, of course, you can drive higher penetration, and it really provides a great experience for the customers. We have done that in the past with the planned communities and some of our properties where we've offered broadband throughout the whole community, even a home on Wi-Fi in at least one is whole -- I'm sorry, whole community Wi-Fi in at least one instance. And we think the economics look very strong for doing that right now. This year, we're really focusing on making sure, as always, we use capital very efficiently while we also grow the business. And this provides a great opportunity.

Okay. And I thought we'd talk about video a little bit. I know your strategy is really centered on broadband connectivity, and you've made that real strategic shift. But would love to hear more about your video strategy, how you think the industry will continue to change in the coming years in terms of cord cutting and the shift to streaming? And also, how you're kind of leaning in streaming versus traditional video? And maybe, John, you could talk about -- a little more about what it means for revenue, profitability and CapEx going forward.

No, you bet.

Sure. Why don't I start to talk a little bit about some of the trends that we're seeing, and then John can chime in certainly. So definitely, we all read the news about the trends in the video cord cutting. And we see that happening. What we've tried to do is really be on our customer side and not push packages and bundles that maybe the customers don't really want it. So we offer our customers choice. We did strategic partnerships with some streaming services, but we also are kind of agnostic and really help consult with the customers on the streaming options that best meet their video habits and for the best price. That could be a couple of streaming services. It could be our WOW! tv+ product, which is a curated service that we provide, but provides even more flexibility for the customers as well. So we really listen to the customers, and I think that is helping traditional -- the push of traditional cable companies. We think that is a differentiator for us versus our competition is that we really are advocating for our customers in what they want. And generally, when we are helping the customer get to the streaming services they want, they also want to take a higher-speed service. And once again, back to that Whole-Home WiFi product so that they can get the best viewing experience in all parts of their home.

Yes. I would jump in and say, as far as video line losses, it's accelerating, right? So I think the last stat -- as of a couple of years ago, I think 40% of U.S. households don't have linear TV at all anymore, which is interesting. And just looking at us, I mean, we -- in 2019, we dropped 32,000 video RGUs. In 2020, we dropped 66,000. So by my math, it's not perfectly linear, but by my math, we'll have sub-100,000 video RGUs, probably by the end of 2023, maybe into the Q1 of 2024. And that's not necessarily a bad thing because as long as we keep the HSD part as well. But video is sub-20% gross margins, and it drives a disproportionate amount of OpEx below the line. Video drives an awful lot of calls into the care center. Those are long calls. They take a long time to resolve, and probably 20% of the time that call revolves in the truck having to be rolled again, and truck rolls are expensive. You can't self-install linear TV. You guys got to go out in the truck, which drives a lot of CapEx. So video drives a disproportionate amount of CapEx as well. The set-top boxes are pricy and the truck rolls, much of the cost of the truck roll gets capitalized and shows up in the CapEx number. So I can envision 3, 4 years from now, when we're predominantly HSD, you're going to see much more streamlined, high EBITDA, less OpEx, higher gross margins and less CapEx, meaning more free cash flow. And it's kind of built into the math of my multiyear model. So I think we're finally starting to see it in the numbers now. And how quickly TV drops off is to be determined, but it looks to me like it's accelerating. And that's not necessarily a bad thing for us as long as we keep the HSD sub, we keep growing more.

Is -- you mentioned as long as you keep the HSD sub, competitively, what do you have to do to retain people that are being lured away by competitive bundles that do include video? I guess at the endpoint, if video penetration is really low, it doesn't -- truly doesn't matter. But do you have to remain competitive to compete against those bundles in the meantime?

Absolutely. We always are competitive in listening to our customers. We know customers want video. It's just do they want it as a streaming service or like I said, we have WOW! tv+, which is a curated video product that we can position with our broadband, if that's what customers want. So the key is we offer our customers choice, and I think that's very competitive versus pushing them into something they may or may not actually want. And what you've seen from our numbers is, although the video subscription numbers continue to come down, we have, for quarter-after-quarter, been growing our overall subscriber base. So we are keeping those relationships with the customers and growing that.