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

Okay. Great. My name's Frank Louthan. I'm the senior wireline analyst here at Raymond James, covering WideOpenWest since their IPO, cover their predecessors and so forth. I'm really pleased to have CFO, John Rego, here today to talk to us a little bit about the business. I'm glad to have everybody back after a little 2-year hiatus here. So my, what a difference a year makes for a company, John. So walk us through kind of the focus of the business here now that the transactions are complete. What are sort of the top priorities of the organization here under the new company here?

Sure. Great start. So I've been with the company since June of 2020, so really walked into an interesting time where the company was sort of operationally fixing all the stuff that should have been fixed from the beginning, certainly, stuff like 5 billing systems down to 1 billing system, stuff like that. Chat functionality for the care guys, that would be helpful, so those kind of things. But the balance sheet was a little bit messy, so what we did is we made the active decision to sort of shrink to grow. So we sold 5 of 19 markets for $1.8 billion, which enabled us to pay down about $1.5 billion of debt. So we took our leverage down from 5.5x to 2.5x. But more importantly, we freed ourselves up and picked up about $80 million of what used to be cash interest expense going out the door, so shrink to grow. So the focus of the company now that we've done that is to turn on the growth engine again. We're going to do that in 3 ways. So historically, we've grown by doing Edge-Outs, meaning we would build extensions onto the periphery of our network. So we always did that. We're going to continue that. We would build into commercial enterprises, which we passed in our home passings. And then the more exciting one, the new exciting thing is greenfield. So greenfields are going to be pure complete fiber, fiber-to-the-home builds that we don't have to edge-out on the periphery. We can build them anywhere we want to in the country. So that is a big focus for us. So our growth really started to slow down in the pandemic. So where we used to spend between, say, $30 million to $40 million a year on edging out, that went down to like $5 million because we could put construction crews out. And quite frankly, we couldn't have sales guys knocking on businesses' doors to try to sell them stuff. But everything has kind of turned itself around now. So this is a big, big growth year for the company. So that's the focus. Second focus is to continue with the movement into broadband first. We were sort of late to that party, but we're catching up. So as of last quarter, I think 56% of our revenue was high-speed data revenue, and that's a really, really important part of this thing because high-speed data revenue, if you didn't know, it is like an upper 90 percentile gross margin product and video is not that. So that's something big that we're doing. We're starting to get more sticky. So we just announced an MVNO strategy. So we're going to be offering mobile phone service to our customers starting next quarter. And we're continuing looking for new products to help with the sticky factor, for instance, Whole-Home WiFi and security systems, so really a complete shift in operationally what the company looked like, what the balance sheet looks like, and now we're really ready to be ready to start growing the business again. So that's exciting.

All right. So talk to us a little bit about the greenfield builds you're taking on, you or maybe at least members of the team. So they've been spending some time in the Orlando area recently. Talk to us about this sort of decision tree you went through to decide how and where to put a stake in the ground.

And quite the decision tree, it is, my friend. You start off with looking at the entire United States, it's about 128 million, 130 million households. And you say like, well, where should I go build this thing? And so we went through this massive amount of work, very cross-functional teams throughout the organization to keep down selecting, down selecting, down selecting. So what we're looking for specifically are areas that are higher density, so we need more people in there. But we're looking for places where we can build and the build would involve more aerial versus underground. That's another one we were looking for. And there's like 60 things we're looking for. But the most important thing we're looking for is what's the competitive profile of that market. So historically, when WOW! was edging out into areas that had, say, a single 1 gig provider as 1 and maybe a DSL provider, that's the sweet spot for us. So if there was one thing I'd be looking for more than anything, it's going to be that lower competitive blueprint, so maybe a 1 gig provider, a DSL provider. And historically, when we've entered those types of markets with the Edge-Out platform, we've seen penetrations in the 30% to 40% neighborhood. And so that's a big part of the math here. If I can get in there, be the second 1 gig provider, we're competitors. We're a competitive brand. We're a share taker. So once we're in that situation, I think we'll do well. So that's what we're looking for. And it took a lot of work to get to this place.

Yes. Yes. That's similar to what we see across research across the country. So how many more -- you announced 2 markets so far this year, almost kind of the same market. But how many more markets do you think you can do this year, can the team support?

Yes. So it's interesting. So on our Analyst Day back in December, we suggested we wanted to go out and build 200,000 homes. That's significant because when you look at new WOW!, we've done 80,000 homes in the last 5 years. And then we're saying over to 200,000 homes over the next couple of years. We just announced Seminole County, Florida and Orange County, Florida, which I believe we're sitting in right now. That's 100,000 homes in and of itself. By the way, what we did announce is how many commercial enterprises do we pass as well, so there's more upside from that. We'll tell you how many more announcements to be, but I promise you, there will be another announcement this year. So we're going to keep looking at it. But again, we have that whole criteria, and these are going to all be built sort of simultaneously. And so this is a year of building. So that's exciting.

Okay. So walk us through the economics of a greenfield version Edge-Out? Because the Edge-Out, you have the -- some advantages. You've got network in the market. You just go hop off of existing network that gives some advantages. Greenfield doesn't necessarily have that. So walk us through the economics and how you're deciding to deploy capital into one strategy versus the other.

This, I know a lot about, Frank. So my model, which I wish I built but I'm too old for that. But the kid that built the model did a great job. It has 60 disparate inputs into it that cover all these things. So for the record, greenfield builds are...

We'll have it up on the screen in a minute.

I can't even open it.

They just filed an 8-K.

But greenfield builds are somewhat more expensive, not wildly more expensive, but they're more expensive and predominantly because it's all fiber, okay? And it's not on the edge of my network. So I do have some building to do, so to put that in perspective. But you couple that as slightly more expensive with the other side, which is if I look at the penetration of our total marketplace, total WOW!, penetration now is around 27% of our total blueprint, whereas the expectation here is that these are going to be penetrating it in the 30% to 40% neighborhood. And so even though they're slightly more expensive, the penetration makes it really work for us. So our models are IRR-based. You're looking at IRRs and these kind of builds in the 30-plus percent neighborhood. It's all on paper right now, but I think it's going to work. And so that's really the big difference. When we build into the Edge-Out communities, again, we're on the edge of our network, so it's a little bit less expensive. The other thing that's different is starting with the pandemic and starting with the new movement, which is around 89%, 90% of our new customer acquisitions are high-speed data only. High-speed data lends itself rather easily to a self-installation kit, meaning we just drop the modem off at your house and you plug it in and look for the WiFi password. So not going to be quite the case with greenfields as they're fiber to the home, so that initial build, we're going to have to go on the house and do that. So it will make it a little bit more expensive, but the economics still work. It's going to be -- I think, it's going to be pretty cool for us.

Okay. Great. So walk us through kind of the marketing you used to take share from Comcast and Charter. It's always a curiosity to investors like how do these guys compete with these big companies. What do they do? But you've taken market share with -- from them and kept it for 25 years. You must be doing something right. What is it that you're doing that helps that?

Well, we have a handsome CFO. I think you start with that. But...

That helps.

Well, it's a couple of things. So if we look at our whole blueprint, there's not a single market that we're in today that doesn't have Comcast or Charter or sometimes Comcast and Charter, sometimes Comcast, Charter and AT&T. So we're the overbuilder, whereas Teresa, my CEO, Teresa Elder, likes to say, we're the competitive brand. So how do we do that? So you have to have 3 things to be successful. You have to have the best price. You have to have the best network, and you have to have the best customer care. And if you have those 2 -- latter 2 things, then it gives you the benefit to sell for a smaller price. So when we go into these areas, we're bringing choice where there might not be choice. And quite frankly, I don't think myself as an example. I live in Princeton, New Jersey. I have Fios. I have a home in Nantucket. I have Comcast. Comcast is the exclusive provider for Nantucket. And if I have a problem, it's good that I like music because I enjoy listening to that music for 40 minutes until the kid answers the phone. That's not what you get with us. You get answered in 30 seconds. So if we're going to be competitive, those are the kind of things that we have to do. So we're -- again, we're the competitor brand. We're the share taker, and we have to butt right up there and give an element of choice to folks, and that's how we do it.

Okay. And on the price equation, how does that fit in there? I mean your -- how much cheaper do you need to be? Is it just a few pennies? Or is it a few percent? Or what do you think?

No, it's 10% to 15% less to be honest with you, and it's still really good business. And again, now that we're defaulting towards HSD most -- first it was broadband most -- broadband first. Now it's broadband centric. It's moving towards broadband most. I mean high-speed data business is like a 95%, 97% gross margin. And quite frankly, it drives a significant less amount of OpEx than video does. It just does. And we can measure that in terms of calls to the care center. I'm -- I've been doing this for a long time. I was -- started working when there were no computers. I mean -- and what they used to tell you 35 years ago, they tell you now, shut it off and turn it back on in 30 seconds. So that's the answer for HSD issues. when a guy has a TV issue, like 20% of the time, we got to go roll the truck out because you like kicked the wire out or something. So it's less expensive to do it. So it's overall just a better business for us to be in.

Okay. So one of your larger markets you're still in, Pinellas County, Florida, your friends at Frontier have a new lease on life. How much do you overlap with kind of where they have fiber? And how competitive do you expect them to be in that market? That's one you've had less market share over the years. How do you view that?

I say bring it on. So it's -- yes, they are there. And we do have a fairly large overlap in that particular market with them. But fascinatingly, we keep penetrating, and the penetration is increasing. So again, I go back to the consistency of best price, best network, best customer care and you bring the element of choice. So far so good. So it'll be challenging in certain markets. I mean if I look at all the markets, I would say maybe 25% across the board, maybe we're crossed over by somebody with fiber. 70%, we're crossed over to somebody with DSL, which we bring that 1 on any day, any day of the week. So we just keep doing what we're doing. We're the competitor. We have to be the share taker and we just keep following and saying that. So the fact that they're there hasn't really hurt us in any great way. We just keep -- if we keep increasing penetration, clearly we're doing something right.

What are you doing to increase that penetration? Because it was a tough acquisition. Your predecessor bought it and so forth. And where do you -- were you having to put more investment in the plan? Or is it just a marketing focus? What did you do to get that market share back up to ratable with the rest of the business?

Yes. What's interesting about the WOW! plant is that the investment was made. WOW! was the first cable company in the United States to have 1 gig across the entire platform. So we have probably the best-in-breed network right now, which we compete pretty much with anything. We have speeds just as robust as fiber, and we're not done. So we're going to keep moving. We're at DOCSIS 3.1 right now. If they should ever invent the equipment needed for DOCSIS 4, we'll put that as well. So very, very competitive. I find that customers are less concerned about, "Oh, it's fiber. Oh, it's this. Oh, it's that. It's the speed." So if you can deliver the speed with customer service at a reasonable price, you're going to do fine. So we've been -- we're scrappy. We go in there. We tend to get very local with our marketing. We tend to buy local. We tend to work with local. We make our presence known. We sponsor a local minor league baseball team. If you know anything we can do locally to become a presence and so far, so good. It's working. And we've done phenomenally well against Frontier in any market that we go against them.

All right. We've got a couple more, and then we'll see if we got some questions from the audience. So walk us through the target leverage over time. That was obviously always a big struggle with investors prior to getting the deal done. Now you're back on the good side of things.

Yes.

Where do you see leverage going? And what are your thoughts on what's the right capital structure?

Sure. So the company bought an entity called Knology in 2014, and they really levered up rather nicely for that, $2.3 billion worth of debt. So when Teresa joined 4 years ago, we were 7.5x levered. When I joined, we were 5.5x levered, which might be nice for a private company, not too good for a public company. And so before I took the job, I built my first model. Excited I can still do that. So I built the model, and I'm looking at the EV of the company and I go like, gee-whiz, we're like 80% debt, 20% equity. We're just like choking on it. So when we did our divestitures last year, there's really 2 reasons to do that. One, the stock was really undervalued. So to be able to get 11x multiple for the company, in fact, 5 markets sold for a larger amount than the entire market cap of the company. At least we could point to investors and say this thing is undervalued. We took the leverage down to 2.5x, okay? So as an infrastructure company, that's probably not the right answer, okay? The right answer is not 7.5x or 6.5x.; but as a public company, I'm comfortable right now with 3.5x. So that's what I committed to my Board. I kind of committed that to S&P and Moody's. But if I wanted to do that right now, that gives me another $300 million in capacity and have to -- something to do with the money. So we don't want to be really high levered anymore. We're -- our new kind of motto is low leverage, high growth. We even have hats. I'll get you one, LLHG hats. But yes -- and look, don't know what the future holds. I mean if there is -- in my role, every banker in the planet is pitching something. Everybody's got an M&A book. Everybody comes to visit. They visit virtually now, but haven't seen anything really interesting to do on like an M&A front. There's no tuck-in that makes sense right now, but never say never with these things. If we could do something really transformative and I've got to go up to 4x levered or 4.5, we'll talk about that at the time. But I know the answer wasn't 7.5 or 6.5 for sure. We were just choking on it, and it was really negatively impacting the equity holders of the company.

Yes. So how long do you think it would take to get to 3.5x kind of your current capital spend?

Yes. Well, we're not going to get the -- if everything goes according to the guidance that I put out, we'll probably be like 2.1x by the end of this year. So it's going to take some doing. But that's nice. It's nice to know that we have that capacity. One thing we talked about at Analyst Day with greenfields is, on the Analyst Day, we suggested we had a plan to build about 200,000 homes. And if things look good, we would be comfortable inching it up to 400,000 homes, building more network to pass 400,000 homes. By the way, I could do that from the cash flow generated from the business, not having to lever up. When I talk to very astute investors, "Can you have 1 million? Can you do 2 million," all of those things. So if we were looking at wildly successful, that would be the opportunity, I think, to do something like that. We just sold markets at 11x, and I can't afford that. So we got to build our own. So that's the plan. So I think we told the world we'll do 200,000 homes over the next 5 years, and we announced 100,000 5 weeks later. So I think we're on a track to accelerate if things go in the way we think they're going to go.