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

Good morning. My name is Julie, and I will be your conference operator today. At this time, I would like to welcome everyone to the WideOpenWest Third Quarter 2021 Earnings Conference Call. [Operator Instructions] Thank you. Andrew Posen, you may begin your conference.

Thank you. Good morning, everyone, and thanks for joining us for our third 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 would 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 recently closed transaction to sell 5 service areas that we announced on June 30, 2021, and other matters related to our business. These forward-looking statements are made in reliance on the safe harbor provisions of the federal securities law 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 releases 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 Third 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. Last week, we announced the completion of the sale of our Chicago, Evansville and Ana Rondo service areas stand broadband. This follows the sale of our 2 Ohio service areas to Atlantic Broadband, which closed on September 1. We are really pleased with how quickly both transactions closed. Combined, the sale of these markets generated $1.8 billion in gross proceeds for WOW, which were used to significantly reduce our debt by approximately $1.5 billion, strengthen our financial position, and better enable us to make significant greenfield investments funded by free cash flow generated by the business. Our broadband-first strategy continues to yield positive results as ended by another strong quarter of performance for WOW!. To help you better understand our third quarter results and compare them to our historical performance, we have adjusted our trending schedule to reflect a pro forma view, which excludes the 5 service areas that we sold. Furthermore, the metrics and results referenced on this call and in our accompanying presentation also exclude the service areas we have recently divested. In the third quarter period last year, driven by growth in high-speed data revenues, which grew by 15% year-over-year on a pro forma basis to $103.3 million. This growth was partially offset by the decline in video telephony revenues during the quarter. Pro forma adjusted EBITDA increased 6% to $66.7 million in the third quarter compared to the same period last year, driven largely by the growth in our high-speed data revenue. Third quarter pro forma adjusted EBITDA margin was 36.3%. We continue to report both sequential and year-over-year improvements across all the categories shown on this slide, demonstrating the strength of our core broadband business. During the third quarter, we added 1,600 high-speed data RGUs, bringing our total number of HSD RGUs to over 509,000. Although we saw a slower HSD subscriber growth during the quarter, our levels of churn remained low, and we increased the total number of subscribers during the quarter. Now that we have enhanced our balance sheet following the completion of the service area divestitures, we are in a very strong position to more aggressively invest in our broadband-first strategy, which we expect will result in a reacceleration of HSD subscriber growth in 2022. We'll provide greater detail on these initiatives at our Investor Day in December. When competing specifically for broadband customers, our key differentiators are the strength and reliability of our network, which can deliver speeds of 1 gig across our footprint. Our exceptional customer service, which is consistently recognized by our customers, and lastly, our ability to deliver our service at a competitive price. All of these are possible because of our talented and passionate people. We have maintained a sell-in rate of approximately 87% of new customers purchasing our HSD-only service for the fifth consecutive quarter, which we view as another great indicator of our broadband strategy success. When coupled with our low churn, this demonstrates the value our customers see in Edge-Out service. Not only is broadband becoming more important, but customers are requiring higher data speeds. In the third quarter of 2021, 87% of new customers purchased speeds of 200 meg or higher, reflecting the continued demand for high-speed data. HSD ARPU increased to 67 70 in the third quarter. Our HSD revenue during the period included a $2.9 million previously deferred revenue. Excluding that revenue, our HSD ARPU would be 65.80, an 8% increase from the same period last year, driven predominantly by customers purchasing higher data speeds. Our edge-out strategy continues to deliver growth in homes passed and RGUs and increasingly positive penetration rates. Penetration for both the 2019 and 2020 Edge-Out vintages also increased this quarter with the 2019 vintages increasing to 18.8%, up from 17.8% in the second quarter and the 2020 vintages increasing to 20.6%, up from 17.6% in the quarter. We are continuing to see incremental improvements and acceleration of edge-outs and expect those trends to continue. You can especially see why we are so optimistic about our Edge-Out strategy based on the results we are seeing so far this year with the 2021 vintage of new homes passed. Even though it is a relatively small sample size, penetration rates of our 2021 vintages have increased to 21.1% this year, up from 15.4% at the end of the second quarter. This is a great indicator for our core business, demonstrating the strength and opportunity for growth following the divestiture of the 5 markets. To conclude, I'm really excited and pleased about the continued successful execution of our broadband-first strategy and the progress we've made in strengthening our financial position following the divestitures. The success of our core broadband first business in driving high-speed data is clearly evident in the continued growth of our top line and EBITDA driven by our ability to deliver fast, reliable and affordable broadband products and services to new and existing customers. I look forward to giving you an update on our strategy and outlook at our Investor Day on December 9. Now I'll turn the call over to John, who will go over our financial results in more detail.

Thanks, Teresa. We accomplished a lot in the third quarter and took significant steps towards accelerating our broadband-first strategy. We're pleased to have successfully completed the divestitures, generating gross proceeds of approximately $1.8 billion. Teresa mentioned that we've updated prior periods in our trending schedule and presentation on a pro forma basis to reflect the new WOW!. As we disclosed last quarter, due to GAAP accounting rules, our income statement includes a required column for discontinued operations to reflect the impact of the transactions. Note that these figures only reflect those items that are immediately identifiable as being associated with the service areas we sold. The revenue numbers in continuing operations exclude the full impact of the divested service areas. Operating expenses that are part of the transaction services agreements remain in continuing operations but are netted out in a pro forma adjusted EBITDA as the reimbursement for those expenses are included in other income. You'll also notice that the earnings release includes 2 definitions of adjusted EBITDA. The first reflects the total reported figure. The second shows the pro forma adjusted EBITDA, which excludes all 5 of the divested service areas. We believe that this best reflects the ongoing business. the trending schedule, which is available on our IR website has a third definition, transaction adjusted pro forma EBITDA, which includes the estimated cost savings we expect to realize over time as we reduced the corporate overhead. As we go forward and incrementally rightsize the business, the transaction adjusted and pro forma adjusted EBITDA will begin to converge. Each quarter, we'll provide an update on our progress. Now let's talk about our third quarter results. In the third quarter, our total pro forma revenues increased to $184 million compared to the same period last year, reflecting a 15% increase in high-speed data revenue. [indiscernible] revenue in the third quarter increased due to the addition of new customers as well as existing customers upgrading to higher speed tiers. This was offset by declines in video and telephony, which decreased 16% and 11%, respectively. ASC revenue included the recognition of $2.9 million of [indiscernible] attributed to work completed during the third quarter in Dothan, Alabama as part of the Connect America Fund. Even though this revenue represents work over the past 2 years, GAAP accounting rules only enable us to recognize the revenue upon the completion of the network upgrade. It is also not onetime in nature as we will realize approximately $390,000 of HSD revenue on a quarterly basis as part of the program. The outperformance in our HSD business contributed to the growth in pro forma adjusted EBITDA in the third quarter, which increased more than 6% from the same period last year to $56.7 million with a pro forma adjusted EBITDA margin of 36.3%, up from 34.4% in the same period last year. Our results to date are also very strong. Total pro forma revenue increased 0.8% to $547.4 million driven by a more than 13% increase in high-speed data revenue to $298.6 million. Pro forma adjusted EBITDA grew 12% to $192.6 million with an adjusted EBITDA margin of 35.2%. As you can see on this next slide, our incremental contribution margin increased in the third quarter to 71.8%, up significantly from 66.4% in the third quarter last year. Consistent with the improvements we are seeing in our adjusted EBITDA and adjusted EBITDA margin. Now I'd like to spend a few minutes talking about our current debt, leverage ratio and our balance sheet. On November 1, we completed the second of the transactions, generating $661 million in gross proceeds from the second transaction. Due to the tax efficiency of the transactions, we now have reduced our debt by approximately $1.5 billion as a result of the divestitures. The debt reduction significantly improves our capital structure while also creating a new WOW! that continues to operate a robust business with numerous growth opportunities ahead of us. For the first time in WOW!'s history at 2.6x, our leverage ratio was more than 2 turns below our historical average as a public company. For a former basis, our CapEx increased by $5.9 million in the third quarter from the same period last year but decreased sequentially by more than $800,000, primarily due to the timing of network spend. We'll provide an update on our CapEx spending expectations at our Investor Day. We ended the quarter with total cash of $59.6 million, reflecting $30.7 million of free cash flow generation in the third quarter. Finally, before we open the call for questions, I'd like to talk a little bit about our upcoming Investor Day, which we will be hosting on December 9. We'll send out the details regarding the agenda and logistics over the coming weeks. At the meeting, we will lay out our strategy and path forward, including plans on greenfield and edge-out expansion as well as our thoughts regarding investments we plan to make to grow our commercial business within our existing footprint, all with a strict eye on capital allocation, profitable growth and further generation of free cash flow. In closing, we continue to make good progress in executing our broadband-first strategy, building on our momentum, delivering strong results and taking steps to keep us on a promise and upward 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 new leverage profile. Looks good on you. Could we maybe start out with any possible reverse operating economies of scale on the service sales. John, you mentioned that you were going to lower overhead going forward. I just wonder if there's anything else that's tougher about being a smaller company going forward than I've got a follow-up.

Yes. So we talked about that when we first announced the question. So we have a very highly centralized organizational structure here. So we identified those are probably about $35 million in corporate overhead that we need to get out of the business. some of that's easy to get out. Some of it's a little bit more complex. And we believe it's going to take about 3 years to get it fully out. And so by giving these 2 definitions of EBITDA, Kyle, we'll let you see where we're tracking, we'll report back every quarter. Some of it will be -- easier things will be some reductions in force. Harder things are getting out of software contracts or getting out of real estate contracts. But all within the window of 3 years, we think we could be done, we think we'll be about 1/3 of the way there through 2022. I think is my expectation right now.

Great. It sounds like you didn't want to talk about CapEx until the Analyst Day. So I'll take a turn.

To service them, for example, higher video subscribers. So we're feeling good about that. And we continue to have programs and promotions in place then I think customers are availing themselves of and we feel good about where the numbers are. And if they go up higher, we certainly are well positioned to take advantage of that with the strength and reliability of our network.

Your next question comes from Frank Louthan from Raymond James.

Can you walk us through on the Edge-Out. What are you doing maybe differently now to try and continue to get traction there? And how much plant can we expect you to build on an annual basis, you get a number of homes passed or some other metrics you can give us on how much you're going to reinvest and grow that part of the business.

Thanks, Frank. Great question. And as you can see, we really are focused again on Edge-Out, and I'm really pleased with how rapidly we're growing the penetration in our most recent cohorts or vintages. We plan to lay out on Investor Day more about the plans for the future, but what the deleveraging has really done is put us in a position to have low leverage and really focus on high growth. I think the success we've had with the recent ages really shows how focused and we've been on making sure that we're investing in the right areas. We're also focusing more on the MDU side of things, which allows us the ability to, I think, penetrate faster, too. So we have a number of strategies for the future, and we're excited with the position that the divestitures and deleveraging really have put us in for high growth for the future.

Yes. Let me jump on that I think when we look at CapEx, we break it into 2 parts, and we'll get more into this on December 9. But if I consider base CapEx, which supports the business, that is is naturally starting to come down. And the reason that's coming down is because video cord cutting is happening. The delevering and our ability now to choose how we allocate our capital a lot better than we had opportunities to before. What we'll talk a lot about at Analyst Day is, hey, we have an opportunity now to really go out and build a ton of homes here and through a greenfield strategy or a continuation of the Edge-Out strategy. and we'll take you through our thinking of that, but we're going to make you wait a month. But I think we're in a very, very different situation now than we were. To give you some perspective on that. I mean what was delevering actually means $1 million a year. Now it's not. It's going to be significantly less. So that really opens up a lot of opportunities to put the capital to better use.

Through what the plant is going to look like as well. So we'll wait for that. But just 1 last quick follow-up. What, if any, EDP customers you currently have in the base? Are you counting them towards new customers under that plan of subscribers? And what are your thoughts on that program going forward?

Yes. The emergency broadband benefit certainly has been a positive for customers who are in footprint of our existing base now that we've done with divestitures. In fact, it was a 60% growth. So we had about 5,000 customers last quarter. on the EBV plan. Now we're sitting at about 8,000. We do not count those as new customers unless they truly are new customers. So the vast majority of those, as we've said before, are really helping our existing customers get the ability to take advantage of that program if they're eligible for that. So that 8,000 we show is predominantly existing customers, and it's one of the inhibitors in addition to a reliable network and the value of our service on continuing to keep churn out. As that evolves to the permanent broadband benefit plan under the infrastructure bill that I assume is going to get signed.

Any thoughts around marketing towards that customer base going forward?

Yes. We definitely communicate with those customers, and we're going to continue to look at what is in the infrastructure bill and how we can take advantage of that for our customers. So stay tuned with that. But I think we've done a good job trying to make customers aware of the program if they're eligible for it and then helping them get through all the steps to sign up for the plant as well. So it's definitely been good for our customers.

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

So obviously, shifting to growth year stage and understanding your plan is to provide more detail on the Investor Day in a couple of weeks. But just in general, should investors be thinking about this business as something that can support both capital returns and this edge-out/greenfield expansion growth opportunity for the next, call it, 1, 2, 3 years? Or do you see this more as the expansion opportunities eating up most of free cash flow for the foreseeable future.

I think we're in just an amazing position after the divestiture because we have now very low leverage, and we plan to keep it at a relatively low level, certainly for the industry and certainly historically for where we have been as a company. This will allow us to fund capital for Edge-Out and importantly, for greenfield through the existing operations of the business. So we are quite excited about that. And yes, you're right, we do plan to lay out more on that come Investor Day. John, is there anything else you'd like to add?

No, I mean, the company just prior to the divestitures started moving into sort of the continued free cash flow generation that hasn't changed. In fact, it gets a little bit better now that will be new WOW!. And yes, we are going to fund expansions we want to do to the network from our free cash flow generation. But I think if you follow along with me in again, December 9 isn't that far away, we'll have a lot of opportunities, and we'll be having to make real decisions on how we want to allocate our capital. I think we're going to be fine. So the answer -- the long-winded answer is yes, there'll be opportunities to do other things with the capital?

Got it. And then just leverage ratio longer term, like you're going to be well below your peers in terms of the leverage for WOW. -- Do you see that as sort of the right leverage longer term? Are you going to lumber up even a bit more for maybe 3x or something? Or I guess how are you thinking about that as you can call with free cash flow or incremental debt.

Yes. So I mean I think that -- and it is rewarding after having been so levered to get it down to 2.6x. And for an infrastructure company, that's probably too low, to be honest with you, but we're a smaller infrastructure company. So my perception is I don't see us getting ever above 3.5 turns. And when Teresa joined, we're at 6.5 turns. When I joined, it was 5.5 turns, and it was literally sort of choking the business. So we want to keep a proper balance there. So there's there's opportunities. And so no, I don't think it's 2.6 forever. And if real opportunities for investment present themselves, then we'll take a look. But always with an eye towards, I think 3.5x is probably a good number.

Yes. Great. Eric, I was looking forward to the Investor Day.