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

Good afternoon, everybody. My name is Brandon Nispel, I cover communication services for KeyBanc. This is a 25-minute fireside chat. Very pleased to have WideOpenWest, Teresa Elder, CEO; and John Rego, the CFO. Thank you for coming.

Thanks for having us.

I guess let's just start at a high level, give us an overview of WOW! and sort of the transformation journey you guys have been on over the last couple of years.

Great. Happy to. I'd love talk to about it. WOW! is a broadband company that is headquartered in Denver but doesn't have operations there. We passed 2 million homes roughly in the Midwest and the Southeast. And we've been in business for 22 years, always as a challenger brand. And we're excited by the transformation that we've had over the last 3 years, really transforming the financials of the business to become one of the lowest-leveraged companies in the industry. We've transformed our strategy to become broadband first. And we've done a major transformation of operations as well to take us to a new level of customer experience. We're excited about it.

Awesome. And to bring John in right away, tell us about the deleveraging event that you had. You recently divested 5 markets. Tell us what that did for the business and now financially where you're heading.

Sure. So when I joined about 20 months ago, we had $2.3 billion of debt. We were 6x levered. Our cash interest expense was like $130 million a year, and it was really just kind of difficult to move the ball forward a little bit. So we kind of looked at our business and said, "Hey, we have 19 markets. If we sell some of these markets, we could do a massive delevering. And if we did this massive delevering, in effect, we'll have given ourselves the ability to shrink to grow the business." So that's exactly what we did. And it had a couple of interesting effects. At the time, our stock was not really trading well against our peers. So to go out and sell, which we did at 11x EBITDA, that was a valuation that was significantly higher than what we were trading at, so that was great. To go down and pay $1.5 billion of debt off and take our leverage down from 5x to 2.5x and then freeing up all of this free cash to go back in the business, that was the plan and it actually worked. We're excited about that.

Awesome. Teresa, I wanted to ask you, when I started covering the company, WOW! didn't have the ability to point customers directly to an online portal with a purchase service. So I wanted to ask you about the operational improvements you've made in the business, whether it's from self-installed truck rolls, online service. Where are you and where are you steering the company to in the next couple of years?

Well, I love talking about this stuff because I'm an operational nerd big time. And we're so excited. When I first started, I did my own due diligence and tried our website and I was surprised anybody could buy anything online through the company. It was about 3% of our total sales. Now over 30% of our sales come from the online channel, which is also our lowest-cost channel and the preferred method for many people. Self-installs is another really big success story. We started this before the pandemic. And this is for customers who are buying high-speed data-only that they can actually self-install it themselves. We had 0% of customers who have the capability of doing that because we didn't provide them the kits to do it. We now have 78% of our high-speed data only customers doing self-install, and customers absolutely love it. And those benefits also fall right down to the bottom line of the financials. So we have many nuggets of great operational successes like that. Another one that I love is that we've gone from 5 billing systems, which does provisioning and the underlying basis for care and so many other things, down to one. Operationally, that allows a speed, agility, ease. So lots of good work has been done in the company to make sure we maintain that customer experience.

And how have some of these operational improvements changed the customer experience? And how do you ultimately measure that?

Right. We have metrics throughout the business. We're a very data-driven company. So we manage all of these things very precisely. And the customer experience just continues to get better and better, giving customers more control and choice. We're really all about listening to our customers and really making sure we operationalize that. So for example, we don't force customers into a bundle. We listen to them. If they want to cut video cord, we offer them an array of options, whether it's streaming partners or our own IPTV service. So all of those things, I think, have continued to have us have one of the lowest churns that we've ever had as well as continuing to drive penetration and subscriber growth. And let's not forget to mention what it's done for margins and the improvements in the financials.

Yes. So it's interesting as the business becomes more broadband-centric, if you will, so more broadband. And we're clearly there. At the end of the fourth quarter, 56% of our revenue was high-speed data revenue. And it has unique characteristics. High-speed data business is like a software business, the gross margins are in the high 90s. And HSD as a business drives significantly less operating cost into business than, say, a video does. And that's measured quite a bit by the calls that are coming into the care center. HSD calls are less frequent and the shorter in duration to resolve than, say, a video call is. So as the business goes through that transformation to broadband-centric, broadband most, you can see it in the financial statements. So if you go back like 8 quarters and look at the transition of EBITDA, everything is moving in the right direction now. So it's clearly kind of an interesting time.

Are there other initiatives that you have in place? What's the focus for 2022 from an operating perspective in some of these initiatives?

Of course, we always have lots of aspirations and things on our plate. I know we're going to get to greenfield because we can't wait to talk about that. But operationally, within the business, we're also rolling out more tools for online account management and customers having the capability of getting the information they want when they want it, easily. Online chat has become a bigger part of our care business going from 0% to -- over 30% of our inbound care requests are going through online chat. All of those things are just empowering our customers more. So yes, we have lots going on.

Okay. Let's talk about the growth strategy, I guess. In my mind, the company really has sort of 2 avenues to grow, right, grow within your footprint organically and through greenfield and Edge-Outs, so maybe outline those for us.

Absolutely. So one of the great reasons we did this deleveraging was to give us the ability to fund that growth through our free cash flow. So this year, we're so excited that we have already announced 2 new markets for greenfield. And greenfield to us is launching new markets that are not adjacent to our existing properties. That's Edge-Outs that are adjacent. We've been doing that for probably 15 years. In fact, I can remember coming to conferences like this and having to define what that is, but now kind of everybody is doing it. But greenfield markets, we have announced 100,000 new homes passed that we're launching in 2 counties in Florida. We're very excited to grow into markets that have the kind of characteristics that we know we can really drive fast penetration and be very successful and offer customers a choice and an alternative where they haven't had one before.

So let's talk about, I guess, within your existing footprint. You're at about 27% penetration today. Where do you see that going in the next 3 years?

Yes. We believe we can get to 30% or maybe higher. And I believe that if you look at how we have been steadily growing, that is very doable. And that's an average across all of our markets. It varies by market. We have an incumbent market that is growing very steadily and actually has surpassed 50%. So we have some very high-growth markets where we have a lot of opportunity and some where we're in a great, strong position. And we grow through doing better in our organic footprint, through all the things that I've been talking about, launching new products. We also grow through Edge-Outs. We still see some opportunities for Edge-Outs off of our existing base. And we're also growing in the commercial and wholesale space. So we have some good things happening in all 3.

So one of the interesting aspects of your Edge-Out -- of course, greenfield strategy is a different technology that you're utilizing in the underlying network. So I'm curious, in the cable network, in your existing footprint, what's your plan for upgrading it to DOCSIS 4.0?

Yes. We are absolutely on the road map to get to DOCSIS 4.0. We're already DOCSIS 3.1 in our hybrid fiber-coax, or HFC, plant. We do have a number of markets that actually are fiber-to-the-home already even within our existing footprint. It's a small amount, but we have experience in that as well. But in terms of the road to DOCSIS 4.0, we're already well on our way. The DOCSIS path has really been in the cable industry for about 20 years, always staying ahead of what the customer actually needs in terms of speed. So we already, actually last year, upgraded our customers, our loyal customers, to 200 meg as a minimum, which seems to be a popular thing to do these days. And our customers appreciated that. We also have higher upload speeds than our cable competitors, which is more than double on 500 and 1 gig.

Interesting. And John, what's the investment required to get DOCSIS 4.0? How much different is it to moving the network to 3.1?

Yes, it's a path. It's a journey. And it's sort of built into our long-term modeling. So it's not going to break the bank, but we're steadily doing the things we need to do. And the interesting thing about 4.0 is that some of the gear that's necessary to achieve 4.0 has not been invented yet, of course, coming to the table. So we are constantly in sort of this upgrade maintenance mode. So it's not going to be a killer.

And there's kind of a 3-step process, just to briefly go through that. We've launched IPTV or WOW! tv+ in 100% of our footprint. By transitioning our customers off of the legacy video of QAM network, we are reclaiming bandwidth and giving ourselves greater runway. Then you go into the next phase, which is where you do mid-splits and high splits and the DAA type of technology. Then we think that we'll start to get into that DOCSIS 4.0. We've got quite a runway ahead where we can continue to launch new speeds and do more, but we're more than satisfying all of our customers' demands today. And for our commercial customers who actually do have applications for fiber, we have that today. So we have 10G speeds for commercial customers today, should they need it.

Got it. All right. Let's go into sort of the greenfield markets. You've announced 2 markets. I think it's $100 million in total CapEx, and you've talked about 100,000 new homes. Why did you pick these 2 markets?

We picked these markets for a wide variety of reasons. But they really have the kind of characteristics where we know we can be extremely successful, both from the demographics, from the way the plant looks, mix of aerial and underground; we also looked at our relationships with both the power companies, the regulatory bodies, a whole variety of things; but also looking at areas where we understand the competitive intensity and know that we can be very successful there and looking at business cases within our existing footprint. We know in the kind of characteristics that are in those markets, we can rapidly be very successful and offer customers value, choice, reliability and speed.

And how should investors think about sort of the broader goals from an expansion standpoint over the next couple of years?

Well, like you said, we are having a strategy within our organic footprint as well as in the greenfield. On the greenfield, we said that we will add 200,000 homes within the next 5 years. But we have aspirations that we could even do more than that, maybe up to 400,000. And we're funding that all through free cash flow of the business. So we're not having to lever up the business again.

That's the plan, from the cash we generate from the business. And by the way, just in doing the transformation and paying down as much debt as we did, just the cash interest expense alone, savings is enough to fund the CapEx that we need to do this stuff.

Yes. Absolutely. I suppose I should stop. If there's any questions in the audience, please feel free to stop me and just raise your hand, and we'll try to get that question answered.

What's your return on IRRs?