Q3 2022 WideOpenWest Inc Earnings Call
To reiterate that these capital allocation strategies will not materially affect our leverage profile, which remains one of the lowest in the industry.
Now, let me get to our results.
For the third quarter, our total revenue was down five 6% as high speed data revenue declined slightly from last year's record quarter, which included a one time catch up of previously deferred HST revenue of $2 9 million.
Without this one time $2 9 million last year, we would've had approximately a 2% HST revenue increase this quarter.
Video and telephony revenue declined, 14% and 10% respectively from the same period last year.
Our pro forma adjusted EBITDA increased nearly 3% to $68 5 million, reflecting the increased proportion of revenue from the high margin high speed data business, which now represents nearly 60% of total revenue the.
Pro forma adjusted EBITDA margin was 39, 4% for the quarter.
During the quarter, we added 1400 high speed data or to us, bringing our total to approximately 519000.
With consistent levels of low churn, we once again increased the number of subscribers both year over year and sequentially ending the quarter with more than 538000.
For the ninth consecutive quarter, we maintained an average selling rate above 87% of our current customers purchasing high speed data only.
With the figure, reaching nearly 89% this quarter, which further drives our core financial metrics higher as John will discuss during his remarks.
Consistent with past quarters, new customers are buying the high speed data tiers with the majority taking speeds above 500, Meg including strong adoption of our recently offered $1 two gig service.
H F D. Our pool of $65 87 has stayed largely consistent with prior quarters as customers purchasing higher data speeds have been offset by the cost of promotional activity, which contributed to the increase in HST subscribers during the quarter.
We believe we will begin to see H S. D ARP, who increase as existing customers continue buying higher speeds and as we add fiber customers in new markets.
Our edge out strategy continues to drive growth, especially in our 2021 vintage with penetration increasing to 45%.
Our 2022 vintage continues to do well as we pass more home and maintain a double digit penetration rate in the early stages of this vintage.
Our 2020 vintage remains constant at a 23, 5% penetration rate.
As we said before we believe the performance from our edge out investments supports our confidence in our ability to grow quickly and new market <unk>.
Including our recently announced fiber edge out into headland, Alabama, and Greenfield markets in Central Florida, and South Carolina.
In addition to our Greenfield expansion plans, we continue to focus on enhancing our infrastructure in our existing footprint. This includes a highly efficient path to implementing multi gig service leveraging high split architecture and ultimately DOCSIS Bordeaux.
Our technology organization is currently laying the groundwork for this in our lab and field activity will begin early next year.
Our mobile partnership with reach mobile is also going well and as of Q3 has been successfully deployed in all of our markets and through multiple sales channels.
Now before I hand, the call over to John to discuss our financial results I'd like to spend a couple of minutes talking about the environment for HST subscribers and the factors that drove us to reduce our expectations for HST net adds for the remainder of the year.
I would like to emphasize that we believe this issue has not dampened our outlook for our growth strategy.
Especially as we continue to be one of if not the least leverage company in the space.
The first factor is the result of higher inflation, which has been rising faster than anyone expected driving up interest rates more than anticipated, resulting in a material cooling off of the housing market, which translates into significantly fewer movers Patel.
Potential customers moving into our footprint, our one key aspect of how we add subscribers. We have a proven track record of successfully competing for that business as demonstrated by the strength of our growing penetration rates.
The second factor, which negatively impacted our projected fourth quarter subscriber numbers also has to do with the economy as we have been working with a number of customers to help them stay connected despite customers competing financial priorities.
To this end, we extended customer terms to help them stay on our platform rather than disconnecting their service. Although a portion of these customers did remain on the platform. Unfortunately, many ultimately had to be disconnected. We are seeing the impact of these disconnects low through our net adds in the fourth quarter.
To conclude the core aspects of our strategy remains strong our edge outs continue to increase our penetration rates are greenfield expansion is making real progress with customers expected in the first quarter and.
And importantly, we're doing all of this with cash from operations, thereby enabling us to maintain our low leverage profile.
Now I'll turn the call over to John who will go over our financial results in more detail.
Thanks Teresa.
The third quarter delivered solid results. Despite the volatile macroeconomic environment, we continue to execute on our broadband first strategy as we are now building for growth.
The third quarter total revenues declined five 6% to $173 7 million, reflecting a 1% decrease in high speed data revenue and a 14, 2% and nine 9% decline in video and telephony respectively.
The decline in <unk> revenue was predominantly driven by $2 9 million of deferred revenue, which was recognized last year in the third quarter attributed to work completed in Dothan, Alabama as part of the connect America Fund.
Adjusting for that deferred revenue <unk> revenue grew one 9% year over year.
This increase is a result of new and existing customers buying higher speed tiers, partially offset by promotional initiatives, which helped drive continued subscriber growth.
Pro forma adjusted EBITDA grew two 7% from the same period last year to $68 5 million driving our pro forma adjusted EBITDA margin to 39, 4%.
On the next slide we see the incremental contribution margin grow sequentially and year over year to 76, 3% as a result of the favorable shift in our base to HFC only.
Incremental contribution margin increased four 5% from the same period last year, which reiterate the importance of this metric as it represents a strong leading indicator for adjusted EBIT growth 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 third quarter.
Trailing 12 months of savings is $19 $8 million. This.
This represents approximately 50% 56% of the $35 $5 million, we identified for reduction over the next few years. We're pleased that we're ahead of schedule on reducing our cost and continue to be extremely focused on managing our ongoing expenses.
We ended the quarter with total cash of $45 3 million and total outstanding debt of $746 1 billion holding our pro forma leverage ratio at two six times.
In the third quarter, our Capex from continuing operations decreased by $3 million from the same period last year to $37 7 million.
The year over year improvement is largely due to decreased spend on CPE, partially offset by investments made in expansion capex.
Now for an update on Greenfields, although interrupted at the end of the quarter due to constraints on the public power utilities caused by hurricane in Green.
Greenfields contributed $5 8 million of additional spend primarily split between engineering and construction cost.
We expect slightly lower Greenfield capex than planned this year.
Looking at the right side of the slide our third quarter results for Unlevered adjusted free cash flow, which we define as pro forma adjusted EBITDA less capex increased to $30 8 billion, which is up $4 8 million from the same period last year, enabling us to fund the capital allocation initiatives announced earlier this morning.
Finally, before we open the call for questions I'd like to provide our outlook for the remainder of the year.
The macroeconomic environment continues to be challenging with inflation remaining high and interest rates rising leading to a very difficult housing market with home sales at their lowest point in many years.
As a result of this and to a much lesser extent continued competition. We now expect net adds for the full year to be between negative 2000, and positive 2000 and.
The change in our outlook for broadband subscribers is driving us to lower our estimates for HFC revenue for the year. We now expect full year HFC revenue to be between 411 and $414 million. We expect total revenue for the year to be between $700 million to $705 million and adjusted EBITDA to be between 200 and <unk>.
78 and $281 million.
Closing this was another solid quarter for well in a very volatile environment.
Lowering our expectations for the remainder of this year, we want to reiterate our conviction in our strategy our growth prospects and our commitment to our customers and our shareholders.
And now we'd like to open up the line for questions.
At this time I would like to remind everyone in order to ask a question simply press Star then the number one Andre telephone keypad will pause for a moment to compile the Q&A roster.
Your first question is from the line of Krish <unk> with UBS financial. Please go ahead.
Great. Thanks.
You can start by talking a little bit about the competitive backdrop. Thank you for the color on what is driving the broadband subscriber headwinds for the fourth quarter, but would you also say that competition, maybe a bit worse than you might have anticipated and what are you seeing in terms of impact from fixed wireless relevant new fiber expansion in your footprint.
Thanks for the question Chris I'll go ahead and take this is Teresa and so in terms of what we saw in this quarter I think.
Fundamentally the issue.
Going forward for the fourth quarter two is around the inflation impact the interest rates on movers, but also those inflation impacts on people's budgets and even what we're seeing is some of the consolidation of homes. So that's the kind of growth level of what opportunities are available.
A smaller pool than what we've seen previously one thing I would like to reiterate though is that our churn is staying at record lows and so those customers that we have are being very loyal to us and we are very successful in competing for those customers that are available to us.
One of the things you've mentioned is around fixed wireless and we look at the data very closely and we are not seeing any kind of material impact on our business from fixed wireless at this point and just to keep in mind, how we would compete with fixed wireless.
Speeds are faster, we're completely reliable so customers know if they sign up with us that is the speed there'll be receiving.
All day it doesn't vary throughout the day and our pricing is such that customers can get.
At the same price higher speed and even with our mobile a customer can get from us for 2499, both internet and mobile together if they wanted to pair some of our offerings. So we feel very good about the offerings that we have and it hasn't been a big issue our salespeople are well versed in how to compete against.
But right now our main competitors are the same they always have been and that is the biggest msos in the ILEC set are out there and we feel very good about our ability to compete with them.
Thanks, that's helpful. And then maybe just on the buyback how should we think about the pacing.
The buyback over determined the program.
And you said it won't impact the leverage profile, but can you maybe remind us how high you might be willing to take leverage for both buybacks and the network expansion plan that you've articulated.
Yes, I'll take that so on the leverage question were two six times levered as of quarter end.
When we sold the five markets last year and did our massive deleveraging.
We were pretty much on the record, saying, we won't be taking leverage anywhere above three five times. So we would not go above three five times.
No.
The expectation is.
We will do as much as we can from the free cash flow, we generate and if we were to lever up a little bit it would be like one or two tenths of a turn it's not going to be a massive leveraging up to do something like this.
Okay.
Great. Thanks.
Your next question is from the line of Frank Louthan with Raymond James. Please go ahead.
Great. Thank you I apologize I got cut off a little bit earlier, but.
Walk us through sort of some of the cost pressures that you're seeing and to what steps you're taking to sort of abate those.
And how long do you think you can continue to see some pressure on the cost lines from all of those specs.
Yes, certainly.
Like the rest of the world, we are being impacted by inflation.
<unk> and I think one of the things about Wow is that we have always done a good job with cost containment and that has even been higher on our list over the last year. Since we did the transactions selling off the five markets last year and we've been in a process of proportionately sizing our corp.
But overhead so this isn't a sudden knee jerk reaction to something just happening now in the economy. This is always the way that <unk> has done business and we've made significant progress on that reduction that we said we would take last year. In addition, I just want to emphasize that over the last few years and <unk> been following our story for us.
On time.
We've been transforming the business with our systems and our processes and all of that is making us more operationally efficient and we're in a good position now where we're reaping some of the benefits of that operational efficiency.
So enhancing the customer experience. So it's really a win win there for example, our number of truck Rolls for service calls is down substantially year over year, just as it has been every year for the last couple of years, that's both because we're more broadband first and because of all the operational improvements we've made.
Anything else you want to add John or.
No thats it branches competing things going on here right. So we're in the midst of the cost cutting program.
Which we said we did $19 2 million.
TTM versus 35, we probably get you over three years. So those costs are cutting out a man, it's slightly mitigated by the inflationary impact of numbers. So.
So we're certainly keeping a steady state if you will so we're not getting we're not getting as much of a brain.
No for the cost cutting because its being absorbed a little bit by by inflation, but we're doing everything we can in theory should said with all of the process improvements in all of these.
And as we've done in the back office, we are really very very focused on continually driving cost out so it hasn't been hasn't been hasn't been.
Too bad but.
It is.
Day to day day to day Battle, but we're working on it.
So did something change in the quarter I mean, lowering the guidance sequentially for the EBITDA Im just was there something that came in cost wise you didn't expect back in August or what was it that shifted.
Okay.
No I think when we take.
As you know from the other guidance, we're taking down we're taking down the HFC number HSE ads number for the year.
That just blow through the P&L. So that's the take down so if we look at the take down on guide.
For HFC revenue and for EBITDA, they're both coming down about 1%.
If I take that so it's really a factor of <unk>.
Really a factor of <unk>.
<unk> that'll be coming in through the quarter, that's the biggie.
Got it okay. Thank you.
Thanks Frank.
Your next question is from the line of grants Jocelyn with credit Suisse. Please go ahead.
Hey, good morning, two if I can first we've kind of heard mixed commentary from your peer operators about whether fiber build costs are still manageable or if they are increasing so what is wireless experience then can that fiber builds still have strong rois. When they were initially planned.
And then second if I did my math right. It looks like the high speed Internet revenue guide appears to suggest a pretty significant step up in <unk> <unk> compared to <unk> last year. So does that reflect a rate event or a big shift in other factors affecting our crew and is there any change to our strategy of being the low price operator in its territories.
Okay, I'll start out and then hand, it off to John to add some more color. So on the fiber build we are as excited and bullish as we've ever been on what we're doing with our greenfield markets and.
We also talk about what we're doing in headline Alabama with a fiber edge out. So we feel very good about those prospects and in terms of the ROI our business case looks as solid as it always has one thing I also want to reiterate on Greenfield in our Bill is that we really have been.
Managing our strategic sourcing very tightly getting the materials that we need in the warehouse. So that we can keep rolling and we have continued to have great strength. There. We had just a very slight slowdown.
With hurricane Ian not because the hurricane actually impacted the markets very much that we serve so.
So it's not that it was just some of the resources that we rely on.
Such as our power company partners, obviously their focus was on the restoration as it should be so there was just a very slight delay there, but we still are on track as we have said to launch in the first quarter and feel very good about that.
On HST revenue.
Growth in <unk> that we continue to forecast really is largely because customers continually take higher speed tiers, so that both our existing base as well as new customers coming in at higher speeds, we've been especially pleased with the take rate of our newest service the $1 two gig.
Here.
And that I think is really.
Resonating well with our customers.
And the ERP. The ERP increased grant is it speed tear ups for the existing base, it's higher speed tiers for new customers and to a lesser extent promo roll offs, we'd have to do it.
Our Fisher promos.
They come out of the numbers, so expectation is <unk> to increase.
Very clear thanks, so much.
Okay.
Your next.
Question is from the line of Dan The day with B Riley Securities. Please go ahead.
Yes. Good morning, guys I appreciate you taking the questions. So.
I know youre, not giving sort of longer term guidance, but just should we be thinking about net adds.
Outside of Greenfield jobs, just talking about the legacy while markets be roughly flat over the next few years absent any change to this low move related churn is that is that really the big variable to look for.
Obviously, the economy, but it really is it just sort of.
Moving environment is what's going to move the needle for net adds over the.
The next 234 years.
Yeah, well I don't have a crystal ball for all of that but I can tell you that we have continued to grow the penetration within our legacy markets and we still anticipate doing that we compete very effectively in our legacy markets.
As well as our new edge out markets, we offer customers a high value reliable fast connection and especially as customers are looking at their budget, while is a great offering.
An alternative for those customers at this time, we're not giving projections for next year or beyond but we still feel very good about the plans that we've had in place and their projections for the fourth quarter are not ones that we're extrapolating to the future.
Yeah.
Okay. Great. Thanks can you just give us a timeline on the sorry, an update on the timeline.
Maybe your first greenfield customers.
The first half of 2023 of that.
We're actually seeing first quarter.
So first quarter 'twenty okay.
Great great.
Great.
That's all I had thanks guys.
Okay. Thanks.
Okay.
Your next question is from the line of Brandon <unk> with Keybanc. Please go ahead.
Okay great.
Two questions if I could <unk> I was hoping you could put maybe a little bit more finer point on the implied fourth quarter net add loss.
How much of it is voluntary versus involuntary churn.
Versus maybe lower gross adds and hopefully you can help quantify us help us get a little bit confident that it's not competitive and then for John similar question as others. The guide for fourth quarter on HFC revenue and EBITDA.
<unk> is a pretty meaningful step up maybe could you quantify the promotional expenses this quarter.
And where we should see our boots and it's hard to get to even the low end of the guide with the run rate the business is at.
Okay I'll take the first and then turn over to John So in terms of the fourth quarter loss that we're anticipating in the guidance numbers that we've put out.
We are seeing like we said a couple of things happening there is this.
One time churn wave that we really are attributing to those who needed some additional financial assistance through the hardship. So the bulk of what we're seeing coming through is in voluntary to your point.
And then John did you want to talk about the.
The comments on revenue and EBITDA.
Yes, so so.
So Brendan.
Again.
HST I appreciate continue to climb just due to the normal stuff speak tear ups and people buying into higher.
Talk a little bit before about promotional roll off the other side of some of these customers. We were working with is when.
When we take them out it's a hit to revenue its a negative revenue. So it's a one shot and then that.
We won't see that anymore. So it's a sort of kind of a promotion we were trying to work with these people to save them.
We hit revenue and then we won't be hitting revenue going forward. So we'll get a nice big jump back on the HFC Revlon.
It's just accounting stuff.
Thank you.
Your next question is from the line of cut gone up Mauro with RBC capital markets. Please go ahead.
Hi, This is patrik Jackson on for Chuck and Thank you for taking the question can you share an update on the success you've seen with your go to market strategy with wireless and the opportunity while she's with bundled broadband and mobile offers.
Conversations gone when selling to existing broadband subscribers and are there any read throughs to retention trends or other metrics do you expect from these customers going forward as a result of converged offers.
And just last how do you see your position you can increase your share in the markets for the offerings are available. Thank you.
Thanks, Patrick So on wireless we really have this is the kind of the first quarter. When we really started to have it launched in all of our markets and across many of our sales channel and channels. So we're still at the very initial stages and I would say we have had success with.
Both existing customers buying the product as well as new and with mobile. We also have the opportunity to sell the customers that haven't had one of our products previously thats, a very small number but we're experimenting with all of those I would say right now we're still in too early days to see any kind of an.
Impact on churn because customers just haven't been with us with the mobile service long enough to really see the impacts of that in comparison.
But what we believe is that this will be a stickiness to the bundle as you know my background is also in the wireless industry and I think this is a pairing that makes sense. So we are experimenting with how we do those bundles and how we get feedback from customers and.
We're still very much in those initial stages as we look at our offerings, but so far. So good we were very pleased that we went from really the inception of wanting to do this to launch very rapidly I think it was six seven months and we've got this up and running which just shows you about the strength of our.
Agility, and our ability to launch new products, which I think is part of the.
Really some of the benefits of wireless that we're very agile as a competitor and can do new things very quickly.
But we break thank you.
As we go further thanks Patrick.
Yes.
Your next question is from the line of Matthew Harrigan with Benchmark Company. Please go ahead.
Well. Thank you most of my questions were answered, but I was curious if you could give us a further.
Great.
Unusually strong.
And also it feels like you've got.
Pretty.
Good pricing power.
Possibly moving forward and I was curious what you could do in terms of the feature enrichment.
Okay brilliant.
The appeal of people moving to <unk>.
Thank you.
Thanks, Matt So in terms of usage trends, we really continued to see customers increased their usage.
We as.
As you know over the pandemic back in 2020 saw a huge leap in usage and then that growth has slowed some in 'twenty, one and 'twenty two but it has never gone back. So we still are at that higher usage amount for customers and one of the things that we're seeing is customers wanting to take higher and higher speed.
Tears.
So I think thats, a very positive sign for us.
For our industry and it also shows the strength of our network that it just keeps going from strength to strength as customers use more and more.
We continue to see customers increasing their usage, both on upload as well as download.
Probably upwards.
Increasing even a little bit more with different applications and we are well equipped for all of that so.
We're excited to see those trends and glad that customers continue to enjoy the speed and reliability of our network in terms of our pricing power or future enhancements.
I think what Youre talking about is.
How we might incent customers to move up to higher speeds and we definitely do that in our promotions and our packaging that as customers move up to higher tiers.
I think there are some benefits to them and so that is one of the reasons that I think customers more and more taking 500, Meg and above so we try to build that into our pricing models and I do think we are we have been successful in listening to our customers and making sure for our investors that we.
Don't leave money on the table either.
Does that answer.
As a complement to the raw Hornsby.
And you also saw us.
Advanced Wi Fi and some of the other.
New building blocks you tube okay. Good.
Most people along.
Absolutely.
Nation, It really highlights the conviction in our strategy and our belief that our stock is undervalued. So thank you for calling in today. Thanks, so much for joining us and your continued interest and support of well have a great day.
Thank you for joining today's call.
Each of those countries you may now disconnect.
[music].
Uh-huh.
[noise].