Q2 2022 WideOpenWest Inc Earnings Call
Good morning, My name is Rex and I will be your conference operator today.
At this time I would like to welcome everyone to the wide open west acute.
Due 2022 earnings call.
Lines have been placed on mute to avoid any background noise after.
After the Speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
If you would like to withdraw your question again press Star one thank you.
At this time I'd like to introduce Andrew Posen, Vice President and head of Investor Relations you May begin your conference.
Good morning, everyone and thank you for joining our second quarter 2022 earnings call.
With me today is Teresa elder Wow, 's, Chief Executive Officer, and John Rego, whilst Chief Financial Officer.
Before we get started I would like to remind everyone that during our call. We will make some forward looking statements about our expected operating results our business strategy and other matters relating to our business.
These forward looking statements are made in reliance on the safe Harbor provisions 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.
SEC, including the risk factors section of our Form 10-K filed with the SEC as well as the forward looking statements section of our press release and.
In addition, please note that on today's call and in the press release, we issued this morning, we may refer to certain non-GAAP financial measures. While the company believes these non-GAAP financial measures provide useful information for investors.
The presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP reconciliations between GAAP and non-GAAP metrics for our historical reported results can be found in our earnings releases and our trending schedules, which can be found on our website.
We have also included a presentation. This morning to complement our prepared remarks now I'll turn the call over to <unk>, Chief Executive Officer Teresa Elder. Thanks, Andrew Welcome to Wild second quarter earnings call I'm pleased with the results. We reported this morning, and I'm really excited about the progress we consistently make.
As we execute our long range plan.
High growth low leverage business.
We continue to grow our base with the addition of new HFC subscribers, which exceeded our expectations for the quarter and drove a record pro forma adjusted EBITDA and EBITDA margins.
Naturally we have to balance our optimism for the future with the challenges of the current economic environment. However, despite these challenges, which we believe are short term in nature, our outlook for next year and beyond remains positive.
For the second quarter, our high speed data revenue increased 4% on a pro forma basis, while video and telephony revenue declined 14, and 12% respectively from the same period last year.
Our pro forma adjusted EBITDA increased nearly 10% to a record $76 million driven largely by the growth in our high margin high speed data business.
The pro forma adjusted EBITDA margin was also a record 41% for the quarter.
Not only are we executing our strategy and growing our business, but our employees recognize wow is a great place to work. Once again, we have been named one of the best and brightest companies to work for in Atlanta, Detroit, and Denver, and workforce Research group and Florida trends have named US one of the.
Best companies to work floor in Florida, our employees are one of our main differentiators that enable us to provide exceptional customer service.
In recognition of wireless efforts to continuously innovate to meet the needs of our customers and to close the digital divide we were recently honored by cable facts with the 2022 independent digital equity award.
All of these achievements highlight a successful first half of 2022 and underscore the strength and future prospects of our broadband first growth strategy.
During the second quarter, we added 2200 high speed data RG use.
Bringing our total to more than 517000.
With consistent levels of low churn, we once again increased the number of subscribers both year over year and sequentially ending the quarter with 537000.
The success of our focus on adding HFC only customers is demonstrated by a sell in right around 87% for the eighth consecutive quarter.
Consistent with the past several quarters, a majority of new customers are buying speeds over 500, Meg and the 85% of new customers are buying speeds over 200 Meg.
HST <unk> of 66, 30 is up sequentially and year over year, predominantly reflecting customers' purchasing higher data speeds and a slight rate increase that took effect in March.
Our edge out strategy continues to drive growth, especially in our 2021 vintage with penetration increasing to 40%.
Our 2022 vintage is off to a great start with penetration jumping to over 14% within the first 100 days and our 2020 vintage remaining constant at 23, 5%.
As we said before we believe the performance from our edge out investments supports our confidence in our ability to grow quickly and our greenfield markets and.
And with regard to Greenfield expansion, we officially started construction in central Florida and are also preparing to put shovels in the ground in Greenville County, South Carolina. These.
These initiatives are progressing well and we're able to fund them using cash from operations without having to increase our leverage.
Another key factor in this effort is that we have secured the necessary materials and labor, which gives us confidence in our timeline.
We're also making substantial progress on our mobile initiative and recently announced that while mobile powered by reach is now offered across our entire footprint.
In this tightening economic environment. We're so pleased to add this product to our portfolio keeping customers connected at a price that fits their budget on a reliable no contract cell phone plans with unlimited talk and text.
We believe this additional offering will further enhance customer acquisition and retention, while providing a great service that our customers expect and value.
Not only are we making progress on these strategic growth initiatives, but we have also enhanced our core business with new initiatives to our infrastructure, including the introduction of our one two gig speed tier with 50, Meg upload for our commercial customers.
We've launched our live agent chat option and wild business continuity service, which insurers are small and medium sized business customers always have access to an internet connection.
To conclude I am so pleased with our second quarter results, which included record pro forma adjusted EBITDA and EBITDA margin. Our team is extremely focused on executing our growth strategy with continued momentum in our current footprint.
The growth of our HST subscriber base higher penetration rates in our edge out markets and progress on our Greenfield expansion demonstrates that the pillars of our business are strong.
Now I'll turn the call over to John who will go over our financial results in more detail.
Thanks Teresa the.
The second quarter delivered solid results despite increased volatility in the macroeconomic environment.
We continue to execute on our broadband first strategy and attack the opportunities ahead and.
In the second quarter total revenue declined three 2% to $176 1 million, reflecting a 4% decrease in high speed data revenue offset by declines in video and telephony, which decreased 13, 7% and 11, 6% respectively.
The growth in HFC revenue was predominantly driven by existing customers buying higher speed tiers, and a marginal rate increase on our <unk> service, which took effect in March where a portion of our subscriber base.
These results were softer than expected, primarily due to promotional initiatives, which helped to drive subscriber growth.
Pro forma adjusted EBITDA grew nine 8% from the same period last year to a record $70 6 million driving pro forma adjusted EBITDA margin above 40%.
Also the highest that we've reported on a pro forma basis. We're now very close to the adjusted EBITDA margin that we reported prior to divesting the <unk> service areas last year.
On the next slide we see the incremental contribution contribution margin grew sequentially and year over year to 74, 8% as the proportion of our high speed data revenue, which is now 58% of total revenues continues to decline.
To reiterate the importance of this metric as it represents a strong leading indicator for adjusted EBITDA and free cash flow generation.
Now for a progress update on our cost structure alignment following the divestiture of the <unk> service areas as of the second quarter, we cut an additional $200000 of costs, bringing our trailing 12 months savings to $16 1 million. This represents approximately 45% of the $35 million we identified for.
Over the next few years.
We ended the quarter with total cash of $49 9 million and total outstanding debt of $749 million holding our pro forma leverage ratio at two six times and.
In the second quarter, our Capex from continuing operations decreased by $6 8 million from the same period last year to $34 7 million. This improvement is largely due to decreased spend on service enhancements and network support partially offset by investments made in expansion Capex.
Greenfield construction began to ramp up during the quarter contributing $4 5 million of additional spend.
Looking at the right side of the slide our second quarter results for Unlevered adjusted free cash flow, which we define as pro forma adjusted EBITDA less capex increased to $35 9 million up $13 1 million from the same period last year, enabling us to fund our Greenfield investments.
Finally, before we open up the call for questions I'd like to talk about our outlook for the third quarter and beyond.
With full recognition of the broader economic headwinds, we expect to face we are revising our outlook for the year for HST and total revenue, but maintaining our guidance for adjusted EBITDA. We believe these challenges are short term in nature and as a result, we are maintaining our long term targets.
For the third quarter, we expect <unk> revenue to be to be between 100 to a $106 million total revenue to be between 171 and $175 million and adjusted EBITDA to be between 66% and $69 million, we expect HFC net additions to be between 1003 thousand for.
For the full year <unk> revenue is expected to be between 415 $419 million total revenue to be between 704 and $708 million and pro forma adjusted EBITDA to be between 281 and $284 million. We expect HFC net adds to be between 12 and 15.
In closing this was another solid quarter for well we're thrilled about the growth ahead as we continue to make good progress in executing our broadband first strategy.
And now we'd like to open up the line for some questions.
Okay.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
Well pause for just a moment to compile the Q&A roster.
Your first question comes from the line of Frank Louthan. Your line is open.
Great. Thank you very much.
Can you can you give us a little bit more update on sort of the timing and status.
Build that Youre working on now are you still progressing on schedule.
First and then secondly give us an update on the take rate with the wireless product that you've been reselling and what's sort of the reaction from customers. Thanks.
Thanks, Brent at Greenfield is doing very well, we're extremely pleased with the progress that we're making so far we're under construction enrolling in our Florida market and you are right about to start construction as well in the Greenville County, South Carolina markets as well. So we're feeling very good about everything that we are.
We're seeing there and as we mentioned, we're really thrilled with the kind of the penetration we're seeing from the targeting of the most recent vintages of edge outs, and we think Thats a great predictor of the future with edge outs with Greenfield as well in terms of mobile we've just launched that within the last couple of weeks enterprise wide.
Some customers are starting to avail themselves of that service, we view it as a nice add on should customers want to get a discounted bonds no for both but I wouldn't say, it's one of our most core offerings as it is with some of our competitors. It is definitely an opportunity for customers so to get a discounted bundle with.
Broadband and mobile from Wow, and so we're just kind of starting with toe in the water there, but so far so good.
Alright, great. Thank you very much.
Yeah.
Your next question comes from the line of Brandon Your line is open.
Thank you for taking the questions could you maybe unpack the HST revenue in <unk> this quarter.
You guys had guided to $104 million to $107 million versus what it came in in terms of HST revenue at $102. Three so hoping to understand better what the driver is for that and then in terms of.
The guidance for the year HST revenue decreased by $11 5 million at the midpoint total revenue guide was down $3 five so where are you picking up.
Similar revenue thanks.
Thanks, Brandon So we're really pleased to see that HFC revenue is up 4%.
And what I like about that is that it is really customers, taking the higher speeds from us.
Thrilled that so many customers are buying 500, Meg and above and then the very recently introduced one two gig product has been taking off it has not only the high speeds on the download, but 50, Meg upload which is very strong so that is increasing <unk> as well as.
I think customer satisfaction are pretty excited about that product. So those are some things that are helping us feel good about the continued growth in our <unk> and HFC revenue, but yes, we did recognize that the current economic environment and adjusted guidance.
And I think.
And Brandon the reality of the situation as we have been we've been doing a lot more promotional activity perhaps than normal.
That's just to be able to put the subs on which clearly.
Versus our competitors, we seem to be one of the only ones who has been able to do that.
So that takes a drag on earnings but those types of promotional activities. They roll off after a quarter or so so I think we're setting ourselves up so that's the challenge right now and the environment is really tough out there, but we've been able to find a balance where we can still grow EBITDA still grow revenue.
Not as much as before and with some promotional activity to keep growing the sub base, which will help us in the future our real story by the way he starts in 2023.
And we start selling into the Greenfield market. So this is sort of a transition year.
If I could just if I could just follow up with that relative to the midpoint of your guidance for this quarter would you say that there was $3 billion incremental promotions relative to your expectations. This quarter and then Teresa.
Selling commentary can you provide some stats in there.
500, megabit or one.
Gigabit products selling is this quarter.
Yes, so I don't know if you want to take that the mid point, but it's all it's all promotional activity.
We're just groups out there trying to get this diesel on the other side of the house I mean, we have probably still one of the lowest churn.
Profiles in the industry, and Thats, holding up rather nicely, but going out and getting new subs right now.
He is taking a bit of a.
Okay.
Yes.
Sorry on fragrance.
And then on the EBIT side I mean.
Very efficiently managing our P&L. So we've got a lot of cost cutting activity going on partially due to getting to the $35 million. We identified at analyst day, plus everything else. We normally do so it's a business we're managing the business right now.
And I think to your point about the promotions are one of the things that I think we're really pleased about is our ability to do promotions is very targeted and strategic so that we're always continuing to be the value provider in the market, but we're not leaving money on the table either.
Multiple times on previous earnings calls, we've talked about some of the work we've done on the billing system conversion of systems, we've really simplified the complexity of our system that has given us increased speed and agility and that certainly is helping us in these economic times and on 500, Meg and above.
We don't give out specific details on that but it definitely is becoming a much larger percentage of our sell in as well as across the entire base. So we're not only seeing new customers coming in at those higher speeds.
It's more than 50%.
But our base is also upgrading into those 501 gig and one two gig services at a rapid pace, which we're very excited about because.
They really like the service that the speed and the reliability and our network is just so strong so I I am pleased with how everything is performing.
Thank you for taking the questions.
Next question comes from line of Dan Day. Your line is open.
Yes. Good morning, guys I appreciate you taking the questions first.
First one for me.
Came in a little above the net add guidance for broadband subs in the quarter.
And slightly lowered it for the full year.
Maybe if you could talk about what youre seeing in the back half as far as broadband net adds Joe Jonathan talked about we think the challenged environment, just maybe give a little more around that is it just like we've heard a lot about move related churn being so low that it's tough to get net adds is that what's driving it or is there something else you're seeing out there.
Yes, thanks for the question Dan.
We're really seeing a variety of things I mean.
First of all just overall the economy, it's difficult for us to predict so antibody abundance of caution we're adjusting the guidance on inflation is certainly hitting our customers just like the rest of the environment, but in some ways. That's all.
Advantage as customers look for more value and Wow is the value provider with that reliability and speed. We also are starting to see some of those green shoots of CS.
Seasonality returning back to the way that it was and.
We'll just see what happens, especially in the third and fourth quarter, especially third quarter is traditionally a fairly good quarter in our industry evidenced the fourth but.
We're just trying to read the tea leaves and find out what's happening. We definitely also are enthusiastic about the response that we've seen as I mentioned from our new products and then what we're seeing from our edge out areas. So that's giving us.
So good thoughts of what will happen in the future but also.
<unk> view of what's happening in the economy, and then lastly, everything we're doing with new products edge outs in Greenfield I just want to reemphasize is based on the investments that we can make now because of the two transactions, we made last year to sell off five markets.
Buy down our debt and then refinance our debt and that is giving us the fuel that we need to grow for the future. So I think thats one of the reasons that our net adds are stronger than most everyone in the industry.
And that's what we've got going back to analyst day, our expansion capital our growth capital for the year is $80 million $60 million of which will be for greenfields and anticipated that we will actually get through that number by the end of this year. So we are we're in growth mode right now as well.
Sure.
Okay.
Awesome. Thanks, guys.
We heard some of the larger plan nationwide cable claim.
Players talking about the competitive pressures, particularly with fixed wireless and especially in the recent quarter.
Are you guys seeing any competition in your footprint if youre now do you think.
That has to do with kind of the geography of your footprints and where your specific assets are located.
Yeah. It's a great question. Thanks, Dan I think there's a couple of things happening.
For one thing.
Since the day, we were founded Wow has always been about competition and so we're happy to compete I think the competitive intensity that we bring to our markets.
Might in some ways hold off other competitors in some ways from coming in so we don't see I think as much as what our peers are describing in terms of for example, fixed wireless activity, that's taking place in the market, we see a little bit of that.
But I think the speed and the reliability of the services that we provide both upload and download is very superior and our prices are so competitive that we tend to win on those occasions. When we do go up against others.
So.
In terms of the competitive environment, we're not seeing.
You know a significant shift in anything we've seen before it does appears I think some of the fixed wireless players or perhaps more in areas where broadband isn't.
Maybe more rural areas, but.
We haven't seen a big focus there.
Okay.
Great well I appreciate that.
Best of luck I'll turn it over.
Thanks.
Your next question comes from the line of Pickton morale. Your line is open.
Great. Good morning, and thanks for taking the questions I wanted to ask about a few different topics first on margins.
See that margins are now already near where you were prior to last year's divestitures.
As you continue to execute on the HFC growth trajectory.
The strategic efficiency efforts.
Are you thinking about the margin expansion opportunity longer term, maybe even away from that.
This year has anything changed in your view the margin profile of the business.
And then just on that and just.
On bad debt quickly unless I misheard or misread it seemed like bad debt expense was actually lower year over year, which is a bit surprising given.
What we've heard from some of your peers and so I'd appreciate any color on bad debt and if there's any incremental commentary you'd be willing to share on consumer payment trends. Thanks.
Let me take the first couple here in terms of the EBIT margins fully expect that they will continue to grow I think it is an important milestone we were on a growth trajectory prior to the five market divestiture, we've hit 40, 45%.
EBITDA margin that we're growing we're at 41% today on a smaller company.
So that continues to go the two largest drivers of that clearly are.
Our broadband first which brings us to a significantly higher gross margin at the top and drove significantly lower operating expenses at the bottom. So that's one of the big drivers and then the other driver that's going to help that along as we are as we said during analyst day, cutting ultimately $35 million of stranded corporate overhead out of the businesses.
No no end in sight to that project. So that's going to keep growing so we're very.
We're very we're very pleased with that as to the bad debt portion.
We were very aggressive in the beginning of the pandemic and really beefing up the allowances, we thought we were going to have.
We are currently more bad debt issues and we actually did.
And so all you're really seeing is a reversal of a little bit of that in the quarter. As we wrote off some people who had more difficult times.
In the second quarter.
That's the disparity.
Understood I appreciate that and just lastly, I have asked about M&A its the number one.
That we get from investors.
Is there anything you can share about whether or not there is an official review in place.
Four.
The entirety of the company or at least parts of your asset basis.
Your asset base and any other perspectives on M&A.
I think we'd all be curious about that.
No really nothing to share.
Okay Fair.
Fair enough. Thanks, Thank you.
Your next question comes from the line of Matthew Harrigan. Your line is open.
Thank you.
Realize this is not purely germane to your business.
No.
Not all that important but on the video business. It feels like when you look at some of the larger msos.
Slight variance in the HFC number market does matter because on the video losses people are just endured to whatever video loss arises I know you approach is more in the context of Allergan stimuli.
Youre high speed business, given the growth in data usage, you're seeing on the broadband only customers. Rick can you talk about how that <unk> with your business and how even things like <unk> and.
And which has really been somewhat of a disappointment, except with the streamers and ultimately 8-K could help your your broadband business. Thank you.
Thanks, Matt.
Yes.
We really have always done is pizza customer focused.
Once again since the day, we were founded as a business and we know that customers like to use broadband to watch video. So they may have a traditional legacy video product, but that's becoming a smaller and smaller portion of our base but.
I think it's over 80% now of the population has at least one streaming service and so our network is robust to take care of all of those customers.
Streaming needs.
And as the demand rolls for higher streaming needs, we keep upping the amount of bandwidth that we have.
Can provide to those customers. So we try to take an approach of being agnostic on whether our customers want to take a bundled video service from us or they want to put together their own list of over.
Over the top streaming partners, that's fine either way with US we don't require our customers to take a bundled service with either mobile or video to get our best prices and I think that has really resonated well, especially with customers in this tough economic environment, who are looking for the best deal. So.
We'll just always be listening to our customers and go with them, whether it's streaming or four K 8-K, whatever the future might bring in our networks can hold up to it with its reliability and speed at the very best prices.
Great. Thanks, Chris.
Thanks, Matt.
Our final question comes from <unk> Levi Youre line is open.
Great. Thank you can.
Can you. Please go over again, where you see the most impact of macro uncertainty on your business right now.
<unk> held the EBITDA constant despite the promotional pressure.
What does that assume in terms of inflationary cost picking up for the rest of the year and maybe just a follow up on if there was any indication for telco fiber building out senior area. Thank you.
Thanks, Matt I'll start and then John if you want to add.
Way and that's fine as well so on the macro environment.
Everyone I don't know that we can predict the future, but we certainly are seeing the impact of inflation seminar costs like gas and the trucks and things like that but I think we have always been very focused on cost reduction certainly we have been as we've been ratcheting down our overhead.
With the proportion of sizing of our business relative to the transactions. We did last year were very tight on our expense management and you can see that in some of the numbers that we put forward and Thats why we feel confident that we can hold on our EBITDA margin for the year and that we've been keeping our long term targets in place as.
Well, so we've been offsetting any bits of the inflation.
<unk> and <unk>.
In terms of how it's impacting our customers I think for our existing customers. We continue to provide great value, but it also I think as you can see from our HFC net add numbers. It attracts new customers that perhaps have been paying more with some of our competitors to really look at us and say here's.
An option that is as good or better speed someone im getting today at a bit of a better price. So that creates an opportunity for us in the market and we're trying to make sure we get that message out. The other thing we haven't really talked much about today is the affordable connectivity program that has continued to go from strength to strength for us we promote that to all of the customer.
For whom it is an option for those who perhaps are in financial hardship and we make sure that we have as streamline processes as possible to make sure that they can get onto the service.
It's available to them. So those are a couple of ways. We are really trying to stem inflation from both the cost side as well as being available to our customers in terms of the.
Telco overbuild fiber, we really haven't seen any increases from what we've seen in the past once again I think as others are being rational in their deployment of capital. They think about where should we deploy what we can get the highest growth and generally that's not where wireless. So I think that has been a bit of.
The barrier to entry anything else that I missed John or on the on the EBITDA piece I mean look we're still growing revenues, 87% of new customers come in or HST, only which we had a high 90 percentile gross margin and while that's going on.
That increase in gross gross profit budget, we were simultaneously on the cost cutting.
Production here. So it's a 35 million we identified at analyst day, plus we've always sort of been cost efficient anyway. So a lot of cost cutting and we're still growing the business and have a lot of confidence in the EBIT number.
That's great color. Thank you.
There are no further questions at this time Ms <unk> I turn the call back over to you.
Thanks, Rick. Thank you so much for joining us this morning, and thank you for your continued interest and support of Wow have a great day.
This concludes today's conference call you may now.
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Okay.
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