Q4 2019 Earnings Call

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Good day, ladies and gentlemen, and welcome to the fourth quarter and full year 2019 wide open West Inc. earnings Conference call.

You may registered to ask a question that anytime by pressing the star and one on your Touchtone phone you can withdraw your question by pressing the pound key again that a star and one for your questions today.

I'd now like to turn the call over to Mr., Lucas Spender Wows, Vice President of corporate development and Investor Relations Mr. vendor. Please proceed.

Good morning, everyone and thank you for joining our fourth quarter for your 2019 earnings call.

With me today is to reduce the older Wells Chief Executive Officer enriched fish wells Chief Financial Officer.

Before we get started we need to remind everyone that during the 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 provision of the federal Securities laws 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 FCC, including the risk factor section of our form 10-K filed with the FCC. This afternoon.

In addition, please note that today's call and in our earnings release, we refer to certain non-GAAP financial measures such measures include adjusted EBITDA transaction adjusted EBITDA, because actually doesn't capital expenditures transaction adjusted capital expenditures, excluding trainees actually just expansion capital expenditures transaction adjusted free cash flow.

I transaction adjusted diluted earnings per share or the company believes that these non-GAAP financial measures provide useful information for investors.

The presentation of this information is not intended to be concerned in isolation or as a substitute for the financial information presented in accordance with gap.

Include a reconciliation of reported adjusted EBITDA, So transaction adjusted EBITDA and the other metrics in our earnings release and training schedule available on our website at <unk> Dot com.

Well that's the other otherwise noted references the transaction. It doesn't results discussed on this call means results adjusted to include the impact from acquisitions and exclude the impact from dispositions excludes the impact from Hurricane Michael I associated insurance so.

Now I'll turn the call over centuries.

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

As we start 2020, I want to highlight our strategic direction and how we are building on an accelerating our efforts of the last couple of years.

Our business is rapidly evolving as more customers access content, where when and how they choose their enjoying more choices than ever before and are becoming agnostic as to how their entertainment is delivered.

This market dynamic has led to record cord cutting and cord shaving and the industry.

In 2020, Wow, it's positioned to meet this dynamic as we continue to grow our broadband business by improving the value proposition of our high speed data or HST services and further building upon the strength of our advanced network.

We are accelerating the transformation of our network to all IP based services.

We're accomplishing this transformation by supporting streaming altered in hips through partnerships across our footprint.

In addition, we've also launched an IP TV offering.

Which is up broadband driven video solution that uses our network more efficiently than the current traditional video offering.

These services will drive enhanced penetration of high speed data facilitate long term reductions to operating expenses.

And provide more efficient use of capital as we reclaim bandwidth on our network ensuring that we have sufficient capacity to meet the multi gig demands of the future.

All of these streaming services right on Wow HSD.

In addition, when customers switch to streaming services, they often consider upgrading to faster speeds and there's a greater probability of whole home Wi Fi adoption.

As a result, wow benefits from higher margins through the elimination of programming expenses and the annual double digit cost increases from content providers.

In addition overtime as our embedded base of customers change from linear video to streaming alternatives, we expect to realize operational efficiencies as a result of fewer calls to our care organization and fewer truck rolls for in home service repairs.

Further we expect to become more capital efficient as a result of shorter time spur installation and the elimination of legacy video customer premise equipment.

Our focus is to facilitate the transition as quickly as possible for those customers for whom they get a streaming services is an attractive alternative.

We have an advanced network that we are able to leverage and we welcome the de emphasis of linear video across the industry and how that will benefit while as well as our customers.

We have already seen any increase in those buying.

HSD without a video service.

From 57% of total new subscribers in December of 2018% to 66% of total new subscribers in December of 2019.

As we continue to transform the business.

Our initiatives are focused on several key objectives.

To free up bandwidth capacity.

To provide more customer choice.

And to optimize our customer service capabilities.

These objectives take advantage of how the industry is evolving toward Wow strengths.

Wow vision connecting people to their world through the Wow experience, which we define as reliable easy and pleasantly surprising every time is the driver of this evolutionary outlook for awhile.

We are offering new products in certain locations to test our next generation services. These offerings, our IP driven.

Recently, we launched our Wow TV plus service in our first market.

This is a new customer offering that provides IP based video service curated in an easy to navigate and intuitive manner for our customers.

Our new IP platform offers many advantages compared to the legacy video surfaces, we provided including an integrated customer experience for watching content on multiple platforms.

The platform also provides for integration with Android based internet of things devices within each customer home as well benefits for Wow as we deploy more efficient set top boxes recapture bandwidth within our network and realize operational efficiencies.

Additionally, in conjunction with our prior agreements with five alone and through both TV. We have entered into agreements with you to TV and sling TV to promote their surfaces alongside the Wow HST service.

We are finding new ways to enhance the value of our HST services by providing robust IP based video choices for our customers.

We have begun to promote these live TV streaming services to new HSD customers in our first test market to understand how we can best meet our customers' needs and we look forward to expanding this partnership across our footprint in the next several months.

After making these investments and ultimately transforming our business. We believe the company will enjoy increased customer penetration rates of HSD.

Realize higher margins and become more capital efficient in the future and will be better positioned to accelerate EBITDA growth.

Let me highlight now some of the accomplishments from the fourth quarter and full year 2019.

Total subscribers grew 5800 in the fourth quarter of 2019.

HSD RG use grew by 7600 in the fourth quarter, which included 4500 organic HST RG you net additions.

For the full year 2019, Wow added 23700 total HSD RG use.

Above the high end of our revised full year guidance and the best fourth quarter in five years.

Total subscriber churn was stable with the record results of the year ago period for the full year churn built on the success of 2018 and improved for the full year 2019.

In part as a result of the changing mix of our customer base away from the traditional linear video to data services.

HSD only churn if typically 15% to 20% lower than double play customers, who also take our traditional linear video services.

We have been very pleased with our customer retention efforts and look to build on this success in 2020.

Through the started the year strong new customer acquisition, coupled with continued retention efforts give us confidence that HSD RG you growth at the start of the year should be up year over year.

We expect to continue our recent positive trends in growing HSD subscribers and net net additions for the coming year will exceed 2019 HSD net additions.

We have had a strong start to the year in HST net additions.

[noise] edge out homes past grew by 20300, and the fourth quarter and full year 2019 solve while add 48000 total homes passed through edge out efforts.

Ed jobs added 3000 subscribers in the fourth quarter and 7000 subscribers for the full year 2019.

We have seen several nodes launched in 2019 that have already exceeded double digit penetration.

As we discussed last quarter, we put through a video rate increase at the start of December the rate increase was inline with our expectations.

We expect to continue to update you on our rate plans as the year progresses, but it is safe to assume that we will continue to focus on offsetting content costs as much as possible.

Fourth quarter 2019 business services subscription revenue grew 7.7% year over year. This was an improvement over the third quarter and we remain encouraged by our commercial business and expected to continue to be a key contributor to growth going forward.

Fourth quarter transaction adjusted EBITDA.

109.1 million was down 1.4% on a year over year basis.

The decline was due to a change in voice revenue for the fourth quarter because of an accounting requirement that it now be booked as an offset to future capital expenditures.

For the full year transaction adjusted EBITDA was 431.5 million up 3.8% over 2018.

Customer behavior has continued to evolve toward higher speed tiers, and more services associated with our HSD offering.

With the launch of our 200, Meg speed tier adoption has rapidly move to higher speeds.

December side more than half of connex coming from 200, Meg or higher.

We expect to continue to drive greater adoption of 200, Meg or higher as the year progresses with 200 501 gig being the main selling tiers for awhile.

Whole home Wi Fi as an added surface coupled with high speed data has seen adoption rise significantly as well for the fourth quarter home Wi Fi take rates were up 50% over the fourth quarter of 2018.

And up 7.4% over the third quarter of 2019.

Our online sales channel the lowest cost acquisition channel has grown to be the second largest channel for new connex.

There is a preponderance of HSD only sold through this channel.

In December we achieved one of our key milestones for online.

Over 30.6% of Connex came through the online channel a new record for awhile.

As I have described we have a number of initiatives ahead of us for 2020 that will drive greater customer customer adoption of HSD, while making the overall customer interaction with Wow more seamless.

We are confident that we can execute against this outlook and come out position to grow into the future.

This is an exciting time for Wow as we migrate to a broadband centric approach, which takes advantage of our advanced network.

What we have been doing is transformational for a while we have an exciting as attractive offerings for our customers, which represent services our customers want.

As we proceed with these initiatives we will continue to update you throughout the year.

Now I'll turn it over to rich to discuss some of the quarterly financials and the outlook for 2020. Thanks Teresa.

For the fourth quarter of 2009 team, we reported total revenues of 283.5 million, which were down 0.7% on a year over year basis, and net income of 6.9 million.

Fourth quarter 2019 transaction adjusted EBITDA totaled 109.1 million and transaction adjusted EBITDA margin in the fourth quarter increased approximately 40 basis points to 38.5%.

Excluding the impact of the voice related revenue reclassification to Capex. The trees I mentioned transaction adjusted EBITDA margin percentage would have increased by approximately 70 basis points to 38.8%.

As of December 30, Onest 2019, total subscribers increased by 5800 were 0.7% over the September Thirtyth 2019 total subscriber Kim.

In total HSD or to use increase was 7601% from the into the third quarter.

Subscriber activity during the fourth quarter 2019 represented a continuation of a return to growth for well as the HST per unit change during the quarter included organic HSD urging you net additions of 4500.

Business services subscription revenue totaled 35.0 million in the fourth quarter a year over year increase of 2.5 million were 7.7%.

As we head into 2021 take a minute to refresh or discussion on edge outs and why these investments are so attractive.

As we've discussed before it does represent a unique opportunity for well to expand or footprint at very favorable economics.

The total cost to expand our network for any given project generally ranges from approximately $600 to $750 per new home passed.

These total costs to expand our network vary because of any number of factors that impact the total cost to build including differences in the amount of aerial versus underground. Please.

In the density of homes within any given a job project.

Including those total network construction costs to expand or footprint to all the new homes in the project plus the customer acquisition costs for new subscribers, including sales and marketing customer premise equipment and installation costs.

The total all in cost of acquiring covert customers typically ranges from approximately 2500 to $3000 per acquired so subscriber assuming an ultimate penetration rate of approximately 30% being achieved after three or four years.

Based on current contribution margins per subscriber this implies an acquisition multiple ranging anywhere from three to five times being paid to acquire these customers.

As this is well below the company's current valuation multiples. This represents a highly accretive investment opportunities and even with a lower penetration rate the acquisition multiple would still be well below current valuations in a substantial discount to where we believe this dog should trade.

Understanding economics in the highly accretive nature. These investments gives further insight to success, we experience with our 2016 in 2017, Jounce, which have achieved 34.1% in 28.0% penetration respectively as of the end of 29 team.

Given the aging in these investments we will be removing them from the training schedule and consider them apart of the organic footprint on a going forward basis.

Through the into 2019, the 2018, Joe to achieve 17.3% penetration in the 29 team Joe's have achieved 9.1% penetration.

2019, adjusts added 48000, new homes passed through our footprint during the year most of which were completed in the second half of 29 team.

Well penetration rates for the 20 team in 2019 adjuncts has not quite kept pace with the 2016 in 2017 cohorts.

These more recent joke nodes have slightly lower total cost for construction per home passed and we've seen great improvement recently in penetration rates for these vintages.

We believe we believe we still have significant upside in these more recent nodes and expect their penetration rates will continue to improve over the next couple of years as these projects mature further.

Capital expenditures for the fourth quarter of 2019 totaled 56.4 million on a reported basis for the full year 2019 capital expenditures were 247.5 million on a reported basis.

Excluding the capital investments attributable to the Chicago fiber project, which totaled 11.4 million in 2019 in 3 million from Hurricane Michael transaction adjusted capital expenditures for 29 to totaled 233.1 million.

This total included approximately 56.5 million of expansion capital expenditures for business services in jobs as well as approximately $10 million to $15 million of capital related to the strategic initiatives initiatives, the trees as highlighted including or launch.

As well TV plus in our partnerships with streaming services and our efforts to improve bandwidth utilization, we will continue to make these investments throughout the year.

Excluding the 56.5 million of transaction adjusted expansion capital expenditures transaction adjusted Capex totaled 176.6 million were 15.4%.

2009 teens total revenues.

With regard to liquidity and leverage as of December 30, Onest 2019, we had 21.0 million in cash on whom outstanding debt totaling 2.31 billion and 239.5 million Undrawn revolver capacity.

We continue to see sequential improvements in net leverage which came in the 5.3 times as of December 30, Onest 2019 on a trailing 12 month transaction adjusted EBITDA basis. This was down from 5.54 times at December 30, Onest 2018.

A quarter term reduction on a year over year basis.

And finally in the context of the transformation that we're undertaking in our business, let me highlight our outlook for 2020.

We expect to continue or recent positive trends and growing HSD subscribers in the net additions for the coming near will exceed 20, Nineteens HST net additions with the first and third quarters being the seasonally strongest.

Total revenues could declined slightly in 2020, largely driven by the loss of higher ARPU, both lower margin video RG use.

We do anticipate however, improving gross margins as a result over a strategic shift towards greater focus on brought down the investments that we're making in the network for Ben move up optimization in the beneficial transition of our subscriber base towards higher margin HST or to use.

This margin improvement should also potential declines in revenue and we expect transaction adjusted EBITDA would be flat in 2020.

We anticipate however accelerated growth in transaction adjusted EBITDA, when we begin to realize the benefits from the investments in the transformation of our business that we're making.

During this transitional time, when we're making investments that we've discussed on the call today capital expenditures are likely to rise slightly for the upcoming year.

As trezza outlined we believe that making these investments and ultimately transforming our business will allow the company to benefit from increased customer penetration rates of HST.

Realize higher margins and become more capital efficient in the future and will be better positioned to accelerate EBITDA.

So that concludes our prepared remarks, we'll turn it back to Catherine to open the call for questions.

And as a reminder, that as star and one for your questions. Today, We will go and take our first question from back silver with B. Riley FBR. Please go ahead.

Okay, great. Thank you for taking the question. So you guys got that a lot of success in growing the broadband sub base and you said you see an acceleration of that growth next year.

That said free cash flow is very important metric for cable investors in your conversion as a percentage of EBITDA is significantly lower than the overall industry. So looking at.

Hey, going forward post 2020 can you talk about what levers do you have at your disposal to improve the free cash flow conversion and trajectory of the business.

Yeah, I'll just start out thanks to the question Zac, and then I'll hand, it off to rich as well, but in general I think what we're seeing what this transformation is that we're moving to services that are higher margin for us that our customers like we're seeing lower operational costs associated with.

These kinds of services, which will flow through the whole business. So we also think that will eventually have impact on more efficient capital expenditures as we get these products and systems launched so that's the general hypothesis, and then I'll turn it over to rich as well the only thing I would add Zack.

As well as it relates to 2020, certainly when you consider all of the contributors.

To go into cash flow kind of starting at the top of adjusted EBITDA Capex.

Interest taxes working capital all the integration expenses there is theres, obviously, a number of levers the.

We will be working aggressively to manage in order to control free cash flow as much as possible.

And we will be certainly working to manage is closely for this coming year to breakeven as as we can.

Based on the timing of the investments that we've highlighted in some of the uncertainty as it relates to.

The new product launches that we've had.

This year in how they will play out it's possible that free cash flow for 2020.

Like I said to be right around that breakeven breakeven to slightly positive to slightly negative for for the upcoming year.

Got it and then.

Yes, I guess, we're in a period.

A lot of.

Macro uncertainty in noise and your net leverage.

You've made some improvement on that in 2018, but it's still at 5.3.

There's a bit high relative to the industry average.

Is there anything you can do.

Yes.

Things like noncore asset sales like Chicago fiber or any other.

Thank you have at your disposal disposal.

That could potentially accelerate that deleveraging, if we do get some macro deterioration and as kind of add onto that can you remind us of sort of your long term net leverage targets.

Yeah, I would say that we remain open as always to any conversations with any.

Party that would have the benefit of maximizing value for shareholders. So.

There are currently so with that being said I get also tell you that there are currently no ongoing discussions.

In that vein, but.

Like us and we certainly remain open to any and all discussions that we'd be value accretive.

From a long term kind of.

Trajectory for anticipated leverage we've said in the past and.

And as repeated again our target.

Is mid to low fours.

On a total net leverage basis.

And certainly we believe that.

The.

A quick as path to de leveraging this company actually goes through the transformation initiatives.

That we've talked about on the call today's such that.

The improvements that we should get.

From higher margin HSD subscribers.

Much more operational.

Much more operationally efficient back office.

From a better customer experience as well as being more capital efficient.

That will drive in the future accelerated EBITDA growth.

As well as.

Kicking off more growing profile of free cash flow all of which will help accelerate the de leveraging of the company.

Got it thank you both.

We'll take our next question from Patio Levy with yes. Please go ahead.

Great. Thanks. This is Chris robot yet on the broadband subscriber outlook can you help unpack what is driving the acceleration and what you're assuming in terms of the contribution in both the legacy footprint and the edge out territories and you mentioned the lower levels of churn that you saw in 2019 do you see room for further improvement in 2020 or growth come more from the gross.

But.

Okay. Thanks to the question, Chris then I'll start out.

Yes, I guess just starting in terms of the subscriber growth. We've been very pleased with the continued response from the market to both the increase in our speed tiers the.

I said a moment again, our 200 501 gig speeds are very attractive rates for our customers.

For all the streaming services that they want to end the many applications that customers have I'm with the increased demand for bandwidth. We also offer these at very competitive prices.

And we have reliable services that coupled with our mesh home Wi Fi network, the whole home Wi Fi product is a very attractive offering for our customers now that we're starting to offer a streaming through these partners that we mentioned for live streaming services, we feel that even stickier product as well.

We help customers navigate the many choices that they have on streaming and then even help them through the installation in their home. So those things all contribute to I think why customers are attracted to us and then the churn rates is really through the reliability of our network and our legacy of a commitment to come.

From a service that we've always had in terms of churn.

We really.

Continue to be delighted with our churn numbers and how customers are sticking with us. So yes, we actually do see arm that there's going to be some improvement even over 2019 numbers, which kept the kind of record levels that we had in 2018 that we had set.

I think the last part of your question was also about edge out.

We've been pleased with the number of homes passed which were delivered in 2019, and especially in the third and fourth quarter that was a huge inventory of homes to be delivered to our marketing and sales folks to offer new customers. Our services I think we have a very robust cam.

Pain in those markets to attract new customers and as far as rich said I feel like the ramping process for those continues to be good. While we also look to deepen penetration in our vintage.

Edge out areas as well so.

I think you would also asked about the difference in margins and I don't know that we yes.

If you could repeat the question I wasn't sure that we picked up one of the difference in margin.

Oh I don't think I was mentioning margins I was just say different tend to contribution you were expecting to do you think your legacy footprint versus.

Okay, I'm, sorry, I was thinking country smart centers, okay and in terms of edge out one of the levers that we think we can pull this year is because we have such a big inventory of homes passed that were delivered in 2019, we're looking to probably add fewer new edge out home areas. This year.

Here as we use capex for the new services and continuing to become a more operationally efficient.

Great and then just one more question if I could on Capex can you provide a little more color on where capex. What we spent 2020 it sounds like CP costs should continue to continue to come down with video declines and greater emphasis on the IP offerings, but what other areas are increasing to offset that.

Yes, well we're not.

As I said, we've not really giving a lot of specific guidance as it relates to capex other than kind of the directional.

Certainly as we think.

Of how we will play out across the kind of the individual line items.

CPG and installation.

Actually on a year over year basis were more than likely it will go up.

In that is not necessarily as result of lifts video is really more attributable to the fact that last year, we were able to utilize some existing inventory.

Of boxes customer premise equipment that was on hand.

We wouldn't have really this year.

So the other areas that.

Certainly be drivers of Capex for this year is really across the initiatives that.

We have spoken too so.

That will be.

A combination of scalable infrastructure.

Line extensions on a year over year basis, we'll probably be lower from 19 into 20, and then the support capital.

Line item will most likely be up on a year over year basis, because that is where a good chunk.

The development activities related to the transformation initiatives in the digital transformation Slash back office initiatives would be captured in that line.

Great. Thank you for all the color.

You bet.

We'll take our next question from Brandon Nestle with Keybanc capital. Please go ahead.

Great. Thank you taking the questions treats its helpful. Cu, maybe on rich what once you bring us worry as you go about making this transition and what are the steps you're taking to mitigate it.

To maybe for rich.

Turning to is the penetration rate you're targeting for video.

Got you make the transition and then can you maybe helpful Economics that you received from selling.

The MPV services. Thanks.

Okay. Thanks, Brandon So Mike I guess my greatest worry.

It is one of them I had even before we launched some of the new services. The map is what will the customer reaction b and the good thing what we're doing to mitigate it is we're launching really exceptional products and we're testing them. We have good data on how we're launching new products.

And quite honestly I think my worry is being mitigated as we're seeing the customer reaction in the marketplace I think what I've been asked this question before I've said my worry is about our ability to execute on these things I would say that is not my.

Worry now because we are executing on these things we're seeing if the customer reaction in the marketplace and we've been very pleasantly surprised with just the adoption rates of what we're seeing already so I guess.

Our continue mitigation is continuing to look at the data and respond to the customers and so far that has been treating us quite well.

In terms of the penetration on video there is not a specific target number that we're looking for rather where are we really feel as a broadband centric business. Our focus is on first of all our customer relationships, but that is really led by our HSD services and just to be clear, we don't ever sell video.

So without in HST offerings to 100% of our customers virtually have an HST offering and then that should the wild TV plus or the OTI t. would be an additional add on to those HSD services.

I think the last question was the economics around streaming.

Certainly every every partnership is different.

With.

What is what is offered there is really a nominal I don't want to describe it as a nominal nominal bounty for some that is offered.

So it's not really revenue share kind of model per se the real partnership benefit the we derive is with.

Streaming providers is is leveraging our strength, which is to say, having no TT streaming customer.

Is that that's a choice because they're making that they want and we want.

Is the customer relationships. So that we can provide the data services to that customer.

It's well done.

But data services or 95 plus percent gross margin services, they're very efficient.

As it relates to operating costs.

Coals into your call center, there so much more capital efficient customer.

Et cetera, et cetera, so from our perspective.

The benefits are really derived from the data relationship.

In the any sort of.

Revenue bounty that might be available from one of our partners.

Is really just a small piece of.

The puzzle right. These streaming services absolutely play to the strength of Wow, and our advanced network that can handle the and continue to provide just great experience for our customers.

Great. Thanks for taking questions expands.

Well now go to Frank Loosen with Raymond James. Please go ahead.

Hey, Thank you.

Tim This is what you were going through the statistics.

On the penetration of the edge out by various years, what did you say with the 28 29 in many.

Hey, good statistics and that got to follow.

28 team Frank is currently stands at 17.3% penetration.

2019.

At least stands at 9.1.

Percent penetration.

The vast majority of the 2019 edge out homes that were the new homes passed the were added to the network, which totals approximately 48000 were added in the second half of 2019. So the average days the 2019.

Cohort have been active and available for sale is actually quite quite young.

Okay.

Well just sort of in light of the the edge out strategy historic that's a good decent penetration rates, a little a little higher than that.

Now running breakeven on free cash flow why Wouldnt you consider a go private transaction, where you can possibly you invest in growth business and let the different different investor base.

Then the seems like a little but.

Why wouldnt, you consider or private transaction.

Yes, I guess first I wouldnt say that and we feel like there is a setback certainly on edge out I think one of the things that rich mentioned is that are much more recent additions of edge out homes actually arts on costing us slightly left as well penetration is just one of the factors that we look at they are still.

Highly accretive and attractive to us and we will continue to utilize the edge out strategy, we see lots of penetration there as opposed to any kind of a transaction I think it's back to what rich said earlier we're.

Open to a variety of transactions, but we feel good about running the business that we are right now.

Okay. Thank you very much experience.

We have no further questions at this time and is now my pleasure to turn the call back towards speakers for any closing remarks.

Well. Thank you also much for joining us this afternoon and we appreciate the continued interest in our business and your supportive Wow. So thank you so much and have a great day.

This does conclude today's program. Thank you for your participation you may disconnect at anytime.

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