Q3 2019 Earnings Call

Good morning, ladies and gentlemen, and walking through the third quarter 2000, like eat a wide open West incorporated earnings conference call.

At this time all participants are in a wasn't only mode. Later, you will have the opportunity to ask questions. During the question answer session.

Hey registered to ask a question anytime a pressing the star and wonder what your Touchtone phone every move yourself from the Q by pressing the pelkey.

As you know today's call is being recorded.

Now what you're trying to call over to Mr. Lucas better Wells, Vice President of corporate development Investor Relations Mr., Ben or please go ahead.

Thank you Keith good morning, everyone and thank you for joining our third quarter 2019 earnings call with me today stories, the older Wells, Chief Executive Officer, and rich fish, well Chief Financial Officer.

Before we get started we need to remind everyone that during our call. We will make some forward looking statements about our expected operating results our business strategy and other matters relating to our business.

These forward looking statements are made and reliance on the safe Harbor provisions of the federal Securities laws.

Our subject to known and unknown risks uncertainties and other factors that may cause our actual results financial position our 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 our factor 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 FCC, including a risk factor section of our Form 10-K filed with the FCC.

In addition, please note that in today's call and they're in our earnings release, we refer to certain non-GAAP financial measures such measures include adjusted EBITDA transaction adjusted EBITDA trends actually invested capital expenditures transaction adjusted capital expenditures, excluding transaction does its strategic capital expenditures and transaction adjusted diluted earnings per share.

Well the company believes these non-GAAP financial measures provide useful information for investors. The presentation of this information is not intended to be concerned in isolation, whereas a substitute for the financial information presented in accordance with gap.

We've included a reconciliation of reported adjusted EBITDA to transaction adjusted EBITDA in our earnings release and training schedule available on our website I, our dot wild way Dot com.

Unless otherwise noted references to transaction adjusted results discussed in this call. These results included adjusted to include the impact from acquisitions and exclude the impact from dispositions exclude the impact from hurricane Michael and associated insurance element.

Now I'll turn the call over to Teresa.

Thanks, Lucas and thank you everyone for joining today's call.

We're very pleased with the operational execution reflected in our third quarter 2019 result.

We saw positive HFT RG you additions.

Organic HST Archie you additions.

Although the edge out subscriber growth.

Our basket edge out cost path expansion, Mike in our history and continued growth in transaction adjusted EBITDA.

Total subscribers grew 7800 in the third quarter at 2019.

This represented the best quarterly subscriber growth in six quarters.

HSD argue you grew by 10200 in the third quarter.

The best HST RG you growth since the first quarter 2018.

Organic HST Archie grid RG use also grew in the third quarter, adding 7900.

Total subscriber churn remains consistent with the your window period, which had been our bat third quarter churn on record.

As we exited the second quarter. We noted that connects had returned to expected level.

Coupled with continued execution on our retention efforts, we were able to dry that's strong operating results seen in the third quarter.

Edge out cost pass grew by 14000, which included our best month of growth in edge outcome passed in the company's history.

Jobs added 1900 subscribers, which was that that growth since the third quarter of 2018.

Several recent lead last edge out no. It's continued to demonstrate rapid adoption, reaching double digit penetration within a couple months of lunch.

Third quarter 2019, total revenues were up 285.4 million was down 2.1% year over year.

The decline in total revenue was driven by lower subscription revenues.

Specifically at 12.9 million or 10.8% decline in video subscription revenue.

This was partially offset by HFT subscription revenue growth of 11.2 million or 9.4%.

As we have discussed the focus on our customers has been the hallmark of our transformation efforts and this has been why we continue to provide a compelling video offering for customers who want linear video.

At the same time, well, we're not happy to have declined the subscription revenues the mix shift toward HFT is accretive to the business.

Additionally, notifications to customers will be going out this month that we're implementing a rate increase our out of contract video customers effective December 2019.

The reason for the acceleration into the end of the year it to better match ongoing programming increases that will take effect at the start of 20 Twond.

Third quarter 2019 business services subscription revenue grew 5.2% year over year, we remain encouraged by the potential of our commercial business and expected to continue to contribute to our overall growth.

Third quarter transaction adjusted EBITDA 110.4 million was up 3.5% on a year over year basis.

As we have discussed the investments in the business. We made in 2018 have helped to drive an inflection in 2019.

Wow vision connecting people to their world through the Wow experience by being reliable easy and pleasantly surprising every time resonates do all of our interaction.

Over the last year, we have continued to make investments in our people to ensure we can attract develop and retain the best talent in our industry.

Our investments in our employee training compensation and benefits are yielding strong results.

During the third quarter of 2019, we saw are employing voluntary turnover declined by five percentage points versus the third quarter of 2018.

We also saw our employee net promoter scores remain at the high level, we achieved throughout 2018.

We also remain focused on removing bad volume from the business, which we define and unnecessary calls or truck rolls.

We've highlighted this in the past, but the increased penetration of whole home wife, I have begun to drive a discernible decline in service calls.

[noise] network improvement initiatives through decreases in outage events and driving down outage time have reduced costs throughout the year.

Additionally, customer premise equipment retirement removal legacy boxes from or network have had a similar effect.

This is an area we will continue to focus on throughout the rest of this year and 2020.

The launch of our 200 Megs speed tier has been highly successful and the adoption continues to accelerate.

We're particularly pleased that the preponderance of the adoption within 200, Meg speeds are coming from 100 make buyers opting to take higher speeds and driving higher ARPU.

Whole home Wi Fi and our online channel Wow weighed dotcom are making excellent strides as growth drivers of the business.

We have expanded whole home Wi Fi throughout our footprint and have added features and functionality to the online store, which continues to be developed and deployed.

We saw strong subscriber growth in the third quarter and have continued to see solid October connex.

The shift toward November and December , we'll likely see more tempered connect behavior consistent with our seasonal expectations.

Turning was stable in the third quarter and our investments in the business contributed to the continued growth in transaction adjusted EBITDA of 3.5%.

Now I'll turn it over to rich.

History, So for the third quarter of 2019, we reported total revenues of 285.4 million, which were down 2.1% on a year over year basis net income.

7.2 million.

As trees to mention third quarter 2019 transaction adjusted EBITDA totaled 110.4 million.

Which was up 3.5% on a year over year basis and transaction adjusted EBIDTA margin in the third quarter increased 38.7%.

This represents an improvement of over 200 basis points on a year over year basis. As a result is a beneficial margin impact from growth in HST or do you use in ARPU increases.

Business services subscription revenue growth and lower operating expenses.

As of September Thirtyth 2019, total subscribers increased by 7800 were 1.0% over the June Thirtyth 2019, total subscriber count.

In total net HST or do you use increased by 10200 or 1.3% from June Thirtyth 2019.

Subscriber activity for the third quarter of 2019 represented a solid returned to growth for well.

The HSD RG unit change during the quarter included organic HSD Archie you additions of 7900.

Business services subscription revenue totaled 34.7 million in the third quarter a year over year increase of 1.7 million were 5.2%.

As treat the mentioned edges continue to be a growth driver and we expect to continue to see momentum in this footprint expansion initiatives into the future.

Nodes, we started in 2016 of that as a total of 41700, new homes passed and we've achieved 33.6% penetration to date in these communities.

The 2017 edge up news about a total of 66600, new homes passed and current penetration now stands at 27.9%.

The 2018 edge up knows about it 30100, new homes past penetration continues to ramp which is now at 16.6%.

And the edge out nodes. We just started during 2019 have already added 28200, new homes passed at this point.

We continue to see great opportunity in or edge up projects.

And although we do expect to see some variability in both the pace of investment and the penetration percentages across both individual projects in yearly vintages, because each project has different cost to build characteristics all edge out projects that we've decided to pursue have attractive or.

Right opportunities and are expected to be highly accretive.

Capital expenditures for the third quarter of 2019 totaled 63.4 million on a reported basis.

At a minimum 2.0 million was incurred towards completion of the Chicago fiber project, which is substantially complete as of the into the third quarter.

Excluding the capital investments the attributable to the Chicago fiber project transaction adjusted Capex for the third quarter of 2019 totaled 61.4 million.

Which 16.5 million was incurred in transaction adjusted strategic investments.

Excluding those 16.5 million of transaction adjusted strategic capital investments transaction adjusted Capex totaled 44.9 million were 15.7% of total third quarter 2019 revenue.

And finally with regard to liquidity and leverage as of September Thirtyth 2019, we at 9.3 million in cash on hand.

Outstanding debt totaling 2.3 to 4 billion in 224.5 million of Undrawn revolver capacity.

We continue to see sequential improvements in net leverage which came in at 5.35 times.

September Thirtyth 2019 on a trailing 12 month transaction adjusted EBITDA basis, which was down from the previous quarter of 5.37 times at June Thirtyth 2019.

So that concludes our prepared remarks and alternate about the keys open the call for questions.

And at this time, if you'd like to ask your question. Please press the star and worn on your Touchtone phone you can always remember so from the Q by pressing the pankey once again that Star then one.

Well take todays first question from Frank Louthan with Raymond James. Please go ahead your lines open.

Great. Thank you very much I'm looking at the success with the data can you give us some idea of how many homes have the whole home why five and.

And any thoughts on adding maybe some some lower speed tiers and like that to get some additional penetration and then follow up is there. Other is there any footprint rationalization you would consider maybe to help with de levering and so forth. Thanks.

Thanks, Frank to take your first question on whole home Wi Fi, we really don't breakout specifically the amount of sales that we get a whole home Wi Fi, but what I can tell you is that we continue to see growth in the take rate with the HST product and.

Oh, my product really helped us drive down those call to the care organization and truck rolls. So it just plays a key role and I think helping the whole customer experience as well as our bottom line in terms of the speed tiers. We do also have the hundred Meg product and Oh, we feel like the mix of products that we have for.

Our customer arc is quite good and we continue to it always evaluate our products and what our customers need a with regard to your question about the footprint, we like the markets that we have the out and you know we always are.

Looking at where things can work opportunistically, but I feel very good about the footprint that we have and how we're driving our customer growth.

Okay, great. Thank you very much.

Well take our next question from Zacks Silver with B. Riley. Please go ahead.

Okay, great. Thanks for taking the question I wanted to your first start with a rate increase on the video side and I understand that that's there to get to get ahead of some programming escalators coming out at the beginning of next year.

Charter, who you have quite a bit of overlap with just raised.

HST prices dive for non promotional pricing and I'm. Just wondering is this something are you guys could see some ARPA growth from about price hike in HST, Oh are you sort of holding off on that at this time.

So yes, we decided to go ahead and take the video increase in December to get ahead of the programming increases that take place at the first of the year with regard to high speed data I think we always makes sure that we are value priced compared to our competition. So we look at both the hour rack rate.

As well as promotions and discounts in the market. So we continue to evaluate that at this time, we don't have plans to increase our HST pricing.

Okay and then.

The.

I'd sort of net HSD subscriber growth in the quarter, which accelerated meeting many play from a year ago period.

You said that it was interesting is that I was sort of a mix of churn. It also connex, but you know that would imply that connects or upgrades to substantially year over year. I'm. Just wondering if you can give us a little bit more detail on maybe what's working what's.

What's going on maybe the competitive landscape, that's helping drive the higher connect volume.

Okay, Great and yes, you're correct, we are seeing improvement both on the connects as well as continuing to maintain a the record lows that we had on churn. So I think there are number of things that are taking place in.

In general I'd say, the competitive environment really hasn't changed materially over the last few quarters.

We of course are focused on our retention and save activity, but the rate increases at our competitors have put in place across the board help offset some of the that challenges that we've had to do in terms of discount. So that's a good thing.

We continue to I think benefit as well from improved sales processes.

From the collaboration between our field, our marketing and our sales force and the continued growth of our website Wow way dotcom, we make rolling improvements to that on an ongoing basis and that has become an even larger percentage of our total sales.

Got it. Thank you series and then maybe just a quick one for rich just on working capital it looks like it or.

Yes, it increased pretty substantially year over year, just wondering if you can walk us through what's driving that and also if you guys are still expecting a positive free cash flow for the year.

Yes, the working capital inside the quarter yacht really on a year to date basis is from attributable to bringing down some accruals that were related to a new has been put a previously.

Firms that are no longer needed access accruals.

From a free cash flow standpoint.

We still the guidance that we put out as it relates to free cash flow from those balance of the year.

Was positive we still believe that we'll be right there.

Great. Thank you.

Well take our next question from but yeah, we buy with UBI. Yes. Please go ahead.

Great. Thank you on high speed data you mentioned that we we should expect some seasonal slowdown in connection the fourth quarter, but do you think that we're still on a good pace to show year over year growth in high speed data ads and then second can you provide more color on what percent of the video base, we'll see a price increase and how that would come.

Parents to the last one that you took and maybe just a balance that with programming cost. It came down sequentially. This quarter. What drove that then what kind of price increase would you expect back.

Okay. Thank you for the questions body, yet so the first question regarding HSD and the seasonal slowdown for for the fourth quarter. That's just really across the whole industry third quarter of course is our strongest as we have the back to school push and many people are moving into new homes. So.

We still believe and will reiterate the guidance that we gave a last quarter on HST net adds between 10 and 20000 I think we'll be at the high end of that obviously from the strong results of the third quarter and we believe that our results for the full year, we'll probably be at least comparable with a great growth that.

We saw last year as well in terms of a video I don't think we've put out the number on terms of how many video customers will be impacted by this or the percentage increase on that but needless to say what we do that for is to try to cover the programming increases.

That is becoming the first of the year.

And thank him, but Oh, Okay. Go ahead [laughter] no no I was just going to follow up on the sequential decline in the programming cost.

It's an increase in I'm sorry in the programming cost adds up the first of the year are you mean the revenue the video revenue.

The programming costs in the quarter looked like it trended down it was that more a function of video subscribers coming down or were there any true ups is that is that the good base to think about Oh in terms of escalator that we'll see next year, yes, but to your that is primarily driven by volume as videos.

Scrapers or or trading we experience the volume reduction associated with the programming costs primarily.

Okay. Thank you.

Well take our next question from James Ratcliffe with Evercore ISI. Please go ahead.

Good morning, Thanks for taking the question not too if I could first of all on the HST side.

You bet last call, we talked today about system changes in Twoq and the impact that had did that those essentially push any of those connects into Threeq. You. So should we really do looking this uncertain to Q plus three Q as.

Right versus last year sort of a block.

And secondly.

Can you talk about your thoughts around becoming a sort of a centralized hub for the increasingly fragmented OTI T. services and some same way that clearly some of your.

Competitors on looking at Oh, that's being a platform even for customers, who don't take your video service. Thanks.

Thanks James.

So yes, we have some system changes that we certainly feel impacted the softness of the HST connects in the second quarter I do think third quarter wasn't standalone very strong quarter on its own and some of the changes that we made in systems are really benefiting us now so.

I would say I feel quite good about a third quarter, even on a sound second quarter.

Certainly was quite soft and we saw momentum even coming out starting in June .

For your comment about being a centralized hub for OTI T. services I really believe that Wow has positioned itself well for many years to be an exactly that position. We were the first operator to have one gig surfaces and over 95% of our footprint we have.

At very early days establish a different relationship with Netflix to put the contact closer to the customers. So that we routinely are in the top rankings of Netflix I S. P. Our.

You were shipped so that it looks a much better on our services. The Digitization is just very crystal clear with Netflix. So we feel very good about our ability to provide streaming services and we believe that customers come to us specifically for that so it's definitely something there.

At a we Inc.

Encouraged and I believe that with the whole Om Wi Fi product, it's just an excellent customer experience. So we definitely embraced those changes.

Thank you.

Well take our next question from Brendan to spell with Keybanc capital markets. Please go ahead.

Great. Thanks for taking questions I guess as a follow up to everybody else's questions can you give us a sense of.

So I'll just try and a different way what percentage of total customers are out of contracts led to the video increase and then just on the edge outs can't help but look at sort of the 2018 and 19 been pinches by active days and compare them to 2016 in 2017, maybe help us understand why penetration rates are so much different.

Different for the different vintages.

Last one can you give a sense of just what percentage of your customers are taking two other than the 100 megabit product and maybe just average speed tier overall would help us understand certain.

Where the businesses that in terms of driving customer tighter higher speed tiers right.

Thanks, Brandon I for all the questions I don't really think we have those percentages to talk about in terms. The the total percentage of customers that are out of contract and Ah on the video side. So.

I look at anything you want to add to that different [noise] excuse me, Brian I was just say it's.

The cohort that is eligible for a rate increase continues to shrink as more people kind of our on contract and their typical rate increase would coincide with the timing of when they are when their contracts expire. So the you know those were eligible continues to shrink [noise], but it is ER.

No. It is probably one of the smaller cohorts that we've done the possible. So a decent number of people who are out of contractor, we'll get that rate increase. However, you know throughout the year, there will be others will get their rate increase timing with if you joined in August and your contract is up in August and your rate increase what happened in August but for those who are eligible they're going to begin a received there either.

Increase on December Onest.

In Britain and this is rich on your question about the edge up penetrations, we actually or not I'm concerned by having different penetration rates across the annual cohorts and the reason being is you know we.

We continue to see great opportunity virtually I would say in an unlimited since I'm the as we move and we evaluate the next individual projects.

The actual cost to construct the network expansion projects that were looking out that are edge out every one of them is quite different and the in was specifically with regard to the cost of the network or two in but basically extend over to the new.

Community some communities can be Ariel some must be underground.

The density of the homes inside of the community that we're building too.

Could vary greatly so there are multiple multiple variables that go into the project cost analysis. Certainly penetration is is a very important one as you know who speaks to clearly the revenue opportunity that we've garnered.

But you could have low penetration rates on relatives and looking at one cohort to the next.

But still have the same return opportunity if not greater.

All dependent upon the or the cost to build characteristics. So we do not believe but any structured imagination that we are reaching.

Any sort of limit as it relates to a jet opportunities third quarter. This recent mentioned in the in the remarks was.

Really the most significant a quarter that we had as it relates to adding homes passed.

And we continue to as a C is doing.

Almost the.

Full full you know opportunity full range of opportunities to continue to expand into the future.

Brandon I'll go ahead and answer your third question I'd, just by saying a 100 make a continues to be our most popular we do have certainly some legacy customers that are speed below that but what we continue to see is that the take rate of new customers continues to move to.

The higher speeds and we also are encouraging and having higher take rate if those customers, taking a whole home Wi Fi both of which increased the ARPU and enhance the customer experience.

I think this is once again another way that really underlines, how we are so well positioned to take advantage of the growth you know T T services.

Great. Thank you.

Well take our next question from Kyle Evans with Stephens. Please go ahead.

Hey, good morning, we've been circling that video price increase on this call and I'm going to hit the dead horse a few more times, how big is that increase on a percentage basis and what are your expectations for video chime based on prior increases in that Ive, a few follow ups as well.

So colleagues because here as far as the specific amount. It's more it's got a series of emphasize it's meant to match the a the increases in cost. So we can draw any conclusions, but we're not going to specify the amount with regard to how its taken in what is expected churn.

I would just note that when we put the rate increase in February we actually had a pretty good stick rate. We've you know I think we message very much around the costs that are incurred and that's what's pass along don't expect any material change in our churn rates.

Than we've done we've been experiencing thus far and obviously a video is.

Under pressure from a number of other factors and not just from rate hike, but we don't expect any different.

A spike in churns result for US right Big difference is that we're taking it a in December versus a in the first quarter like we did last year or this year rather 2019.

Got it and then just a few more high level ones on TV.

And what do you guys doing to that bundle or what could you do that bundled to make it more durable how much lower is HST churn. When you have that RG you as a video customer and then how should we think about kind of fully loaded margins on the TV side. If I can I know, we can see kind of the gross margin on it.

But help us kind of think longer term or through your pod three to five year basis on fully loaded margins. Thanks.

Yeah, I don't think would give projections out that far what I can tell you is that we still have a something over 40% of our new customer acquisitions are looking for a video service. In addition to the HST service. So we continue to follow and listen to our customers and provide a surface for them that they enjoy.

So we.

Look at the turn on a variety of ways I would say, we're managing FOP HST only as what was the HST and video churn very tightly and work hard to retain the customers across the board and Ah that has shown continued improvement and all of those processes.

Anything else on a.

That area Kyle.

No. Thanks, Okay. Thank you for your question.

Yes. It does appear we have no further questions I'd like to return the floor to Teresa elder for closing comments.

Thank you everyone for joining us this morning, and we continue to appreciate your interest in our business and your supportive Wow have a great day.

And this does conclude todays program you may now disconnect.

[noise].