WideOpenWest Inc. Q1 2023 Earnings Call

Speaker 1: Ladies and gentlemen, thank you for standing by. Today's conference will begin momentarily. Until that time, your lines will again be placed on music code. Thank you for your patience.

Speaker 1: At this time, I would like to welcome everyone to the Wide Open West Q1 2023 Earnings Conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, please raise your hand.

Speaker 1: simply press star followed by the number one on your telephone keypad. If you want to withdraw your question, press star one again. Thank you. I will now hand today's call over to Andrew Posen, Vice President, Head of Investor Relations. Please go ahead, sir.

Speaker 2: Good morning, everyone, and thank you for joining our first quarter 2023 earnings call. With me today is Teresa Elder, WOW's Chief Executive Officer, and John Rego, WOW's Chief Financial Officer.

Speaker 2: 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.

Speaker 2: These forward-looking statements are made in reliance on the safe harbor provisions of the Federal Security Laws and are subject to known and unknown risks, uncertainties, and other factors that may cause our actual operating results in an initial position or performance to be materially different from those expressed or implied in our forward-looking statements.

Speaker 2: You are cautioned not to place undue reliance on such forward-looking statements.

Speaker 2: We disclaim any obligation to update such forward looking statements.

Speaker 2: For additional information concerning factors, it could affect our financial results or cause actual results to different materially from our forward-looking statements. Please refer to our filings with the SEC, including the risk factors section of our form 10K, filed with the SEC, as well as the forward-looking statement section of our press release.

Speaker 2: In addition, please note that on today's call 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 an isolation.

Speaker 2: or as a substitute for the financial information presented in accordance with GAP. Reconciliation between GAP and non-GAP metrics are our historical report of results to 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.

Speaker 2: Now, I'll turn our call over to our Chief Executive Officer, Theresa Elder.

Speaker 1: Thank you, Sandra. Welcome to Wild First Quarter earnings call. I'm pleased with our results this quarter, especially as we continue to execute on our expansion strategy.

Speaker 3: Our 2021 asset sales built a solid foundation and a clean balance sheet, which enabled us to focus on our strategy with a clear vision to drive growth.

Speaker 3: As we report our first quarter results, we are seeing significant progress on our Greenfield initiatives in Central Florida and South Carolina, as well as in our fiber to the home edge out in Alabama.

Speaker 3: All while delivering financial results that were in line with our expectations. Importantly, we continue to do this with cash from operations while maintaining a very low leverage ratio.

Speaker 3: In the first quarter, our total revenue decreased 1% from the same period last year. As a 5% increase in high speed data revenue was more than offset by declines in video into revenue, which dropped 13% and 9% respectively.

Speaker 3: Our adjusted EBITDA decreased 2% to 65.2 million, largely reflecting the upfront cost associated with our expansion in Central Florida and South Carolina.

Speaker 3: The adjusted EBITDA margin was 37.9%.

Speaker 3: During the first quarter, we lost to 2,900 high-speed data RGUs, bringing our total HSC subscribers to approximately 509,000.

Speaker 3: The reduction in HSC RGU also drove a decline in our total number of subscribers.

Speaker 3: and they'd the corridor with more than 527 thousand.

Speaker 3: Despite a reduction in HSC, RGU, our operating metrics continue to be strong.

Speaker 3: For the 11th consecutive quarter, we maintained an average selling rate of approximately 87% or higher of our customers purchasing HSD only.

Speaker 3: Also consistent with past quarters, new customers are buying higher data speeds, with approximately 75% taking speed above 500 meg.

Speaker 3: including further momentum in customers taking our 1.2 gig service.

Speaker 3: We're seeing an even stronger dynamic in our new greenfield market, where more than 90% of customers are buying speeds of 500 megan above, including a number of customers taking either our 3 or 5 gig services. These statistics demonstrate the strong demand for faster and higher speed

Speaker 3: driven by customers purchasing higher data speeds, and the full effect of the rate increase that was introduced to a portion of our base last October .

Speaker 3: We believe we will continue to see HSDRP increase as we add fiber customers in new markets, including Greenfield and Edjow, and as existing customers continue to upgrade to higher speed.

Speaker 3: Our expansion strategy continues to show positive results and build momentum, especially in our most recent vintages.

Speaker 3: Our 2023 vintage, which includes our new grade field market in Central Florida, reported an early penetration rate of 23.5%.

Speaker 3: The 2022 vintage increased dispanetration rate to 27.6%. And the 2021 edge out vintage continues to be particularly strong with penetration rate staying constant at 45%.

Speaker 3: As we have said before, our expansion strategy remains an engine of growth for our business.

Speaker 3: and the performance in those markets further supports our confidence in our ability to grow quickly in new markets.

Speaker 3: Now I would like to spend the next couple of minutes providing an update on our Greenfield expansion initiative.

Speaker 3: As we said last quarter, we're making significant progress in Central Florida, where, as of March 31st, we passed 1,700 homes and have seen fantastic reception in the market, achieving a penetration rate of 23.5% in less than three months.

Speaker 3: In fact, considering that we added our first customer on January 25th, I'm particularly pleased with our progress and proud of the effort of our team, driving this exceptional momentum.

Speaker 3: We expect the pace of adding homes past to increase significantly throughout the year. We have continued to build out our quick print with construction well underway in additional Central Florida communities.

Speaker 3: Construction is also advancing in Greenville County, South Carolina, where we expect to begin providing services to consumers and several communities in the near future. The progress in these new markets represents the first phase of our commitment to bring our reliable data, the art fiber network.

Speaker 3: to 400,000 homes passed in new service areas by 2027.

Speaker 3: We are excited about the initial returns in our Greenfield markets and new fiber edge-outs. The core aspects of our strategy remain strong. And importantly, we are doing all of this with cash from operations, which enables us to maintain our low-leveraged profile.

Speaker 3: Now, I'll turn the call over to John who will go over our financial results in more detail.

Speaker 2: Thanks, Teresa. 2023 is off to a good start. Our high-speed data business continues to grow. We're seeing strong initial results in our new markets.

Speaker 2: Constructions moving along at a great pace and we are maintaining a low leverage ratio which puts us into a fantastic position to further execute our expansion plans.

Speaker 2: In the first quarter, total revenue decreased 1.4% from the same period last year to $172.2 million, reflecting a 5.1% increase in high-speed data revenue and a 13.4% and 9% reduction in video and telephony, respectively.

Speaker 2: the same period last year to $65.2 million, largely driven by higher upfront spending on expansion initiatives with revenue expected to follow later this year, as well as higher operating costs in our core business related to inflation.

Speaker 2: year to $65.2 million, largely driven by higher upfront spending on expansion initiatives, with revenue expected to follow later this year, as well as higher operating costs in our core business related to inflation. The mixed shift in our revenue...

Speaker 2: Continue towards a greater proportion coming from HSD, which increased to 61.1% of our total revenue this quarter.

Speaker 2: The incremental contribution margin decreased sequentially, but continued to grow year-over-year. The sequential decline is largely due to the timing effect of the video programming cost increases, which took effect in January , while the corresponding rate increase was applied to customers in March.

Speaker 2: The Eurovier increase continues to reflect the favorable shift in our base to HSD only.

Speaker 2: Incremental contribution margin increased by 2.7 percentage points from the same period last year.

Speaker 2: Now for a progress update on our cost structure alignment following the the Vesiture of the 5 Service Areas.

Speaker 2: We continue to be on pace to hit our target of 35.5 million by the end of 2025. Although the pace of cost reduction has been somewhat tempered as we shift headcount to our expansion into new markets.

Speaker 2: As of the first quarter, our total savings equate to 22 million, which represents approximately 62 percent of the 35.5 million, we identified for cost reduction over the next few years.

Speaker 2: We've made tremendous progress on realizing these savings.

Speaker 2: and will continue to be diligent as we manage costs despite the higher inflationary environment. We ended the quarter with total cash of $21.2 million and total outstanding debt of $791.2 million.

Speaker 2: With our leverage ratio at 2.8 times, we reported total capital spend of 60.2 million, up 18.1 million from last year. Our core CAPEX efficiency remained at 18.5% in the first quarter.

Speaker 2: Expansion capex increased $23.5 million as we continue to heavily invest in our future growth and bring fiber to the homes of Central Florida and Greenville, South Carolina. In the first quarter, we spent $20.2 million on Greenfields, $4.2 million on edge outs, and $2.5 million on the edge outs.

Speaker 2: and at additional 3.9 million on business services.

Speaker 2: Expansion cap expense on green fields will continue to trend at this level throughout the year.

Speaker 2: Looking at the right side of our slide, our results for Q1 2023 Unlovered Adjusted Free Cash Flow, which we define as adjusted EBITDA less CAPEX, decreased to 5 million, down from 24.3 million in Q1 2022.

Speaker 2: This was primarily driven by the Sherry Purchase Program and Higher Expansion spend, predominantly on greenfields.

Speaker 2: This morning we disclosed in our 10Q that we settled litigation on a 2018 patent infringement lawsuit for $48 million.

Speaker 2: including 27 million that will be paid in May, and the remainder paid over the next three years.

Speaker 2: This does not impact their expansion plans in any way, and we remain excited about our progress in new markets. In the first quarter, we're repurchased approximately 1.9 million shares, totaling $21.1 million at an average price of $10.88 per share. And they are saddening and go up to $11.16 million.

Speaker 2: Since inception of the program and through the end of the first quarter, we've repurchased 3.1 million shares for approximately 33.4 million of the $50 million authorization.

Speaker 4: And finally, before we open the call for questions, I'd like to provide our outlook for the second quarter and the full year.

Speaker 4: For the second quarter, we expect HSD revenue to be between 106 and 109 million, total revenue to be between 173 and 176 million, and adjusted EBITDA to be between 65 and 68 million.

Speaker 4: We also expect HSD net additions to be between negative 4,000 and zero.

Speaker 4: We are maintaining our full year guidance as we are seeing significant progress in our base business and strong momentum in new markets.

Speaker 4: For the full year, we expect HSD revenue to be between $437 and $441 million, total revenue to be between $703 and $707 million.

Speaker 4: and the adjusted EBITDA to be between 286 and 290 million. Reflecting continued investments related to market expansion.

Speaker 4: We expect to add between 6,000 and 10,000 HSD RGUs for the year.

Speaker 4: as we add more fiber to the home passing throughout the year. In closing, this was another solid quarter. Our conviction in our strategy, our growth prospects, and our commitment to our customers and our shareholders hold strong.

Speaker 1: And now we'd like to open up the line for some questions. At this time, I'd like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster.

Speaker 1: Your first question is from a line of Frank Loutin with Raymond James.

Speaker 5: Great, thank you. So, you've been in a pretty active build mode for the last couple of years, but the reported homes are kind of flat. Maybe you can just talk us through why that is. In the last couple of quarters, you've been seeing subscribers down, and you're calling for subscribers down again in Q2.

Speaker 5: Can you walk us through what's going to cause the significant inflection in the back half of the year that's going to get you to positive subs and will that also result in hitting the midpoint or better of the guidance? Thank you.

Speaker 3: Thanks, Frank. A couple things. First of all, starting out with the home pass that looks kind of flat for this quarter, although of course we did add on past both in the edge out and the green field areas. There are always some adjustments that are done to the overall home pass every so often. We have some cleaners of some multiple dwelling units where they're.

Speaker 3: maybe were fewer homes that were built than originally planned. So that kind of netted that all out. So that's why you're seeing that dynamic on Home Pass. But of course, on the charts, we did show you what we've actually been building. And in terms of the build process, we have the permitting and the walkout and all of the things that go into the build process.

Speaker 3: before you actually deliver activated home's path. So there is that ramp up time and we're really seeing the machine start to take off. So as we look at this quarter in our base as well as in Griefield, we're seeing very low churn continues to be something that we experienced that while the demand for new connect, I would say on the legacy side continues. So.

Speaker 3: that's when we're really going to see those subscribers take off, as well as the improvements that we're seeing within the legacy business as well, just with tactics as well as with some of the macroeconomic trends that might be getting a bit better. Does that answer your question, Frank?

Speaker 5: So what are the tactics that you're going to use to turn the tide in the legacy business and what gives the confidence that the new homes coming on are going to see the sort of explosion of growth that we haven't seen so far?

Speaker 3: Yeah, well, one of the things that we can do it wow is really localize many of our strategies. And what we're seeing is that although Connect have been soft for the, you know, last year or so, just with the softness in the whole economy, we're seeing a little bit of pickup.

Speaker 3: We could find that we compete extremely well with the offerings that we have, our fast, reliable network at some of the best prices that are out there really seem to resonate well with customers. So we've seen the very end of the first quarter and even a little bit the beginning of the second quarter.

Speaker 3: some upticks. So please, we'll see that in the legacy business. And as you've seen, we feel very good about the areas that we have selected for both Greenfield and Edge out where we can get these very incredible pops of penetration quickly.

Speaker 3: So that 23.5% for example in Central Florida, we just started their January 25th. The 10.7% penetration that we're already seeing in Hebblin, Alabama, we started mid-February. So those are very quick results and we're pleased with the reaction that we're seeing in those markets. That's why I have a lot of confidence in our ability to execute.

Speaker 3: both building as well as driving sales.

Speaker 5: Okay, great. That's helpful. And when you're not winning a customer, what's sort of the overarching competitive factor? Is it the wireless bundles that the cable competitors are throwing in there? What would you say is sort of the main factor when you don't win?

Speaker 3: Yeah, I would say head to head, we usually win. So it's just if the customer is not choosing to perhaps switch or there's just fewer moves, 6 wireless really continues to be a non-factor in our market. So I would say if we have the opportunity to be in front of a customer, we are very successful with our close rates. So I would say head to head, we are very successful with our close rates.

Speaker 5: All right, great. Thank you very much.

Speaker 6: Thanks, Rick.

Speaker 1: Your next question is from the line of Dan Day with B. Rally Securities.

Speaker 7: Thanks for taking the question. John , you mentioned higher operating costs in the core business just related to inflation. Maybe just you can dig in a little more there where exactly you're seeing that inflation. Is it just wages? Is there anything else in OPEX that's hitting you from an inflation perspective?

Speaker 4: Now, nothing dramatic. I mean, it's of course every year, every year we have the...

Speaker 4: National average merit increase, so we got that one. A little bit of pricing increases across the board. I think the bigger things we see if we're looking at OPEX versus last year and EBITDA versus last year is this year really introduces more of an upfront cost.

Speaker 4: upfront spend relating to greenfield. So remember you go into a market, you have to do like a blitzkrieg marketing campaign. There's a lot of stuff we do that does not get capitalized on the front end. So that's some of what we're seeing. Light increases in pricing and annual raises. So that's the inflationary pressure. Okay, thanks. And then looks like you've pulled on the revolver in the course.

Speaker 4: point eight times levered. When we first did the big reduction in dead, we were at 2.5 to 2.6 times levered. My commitment was to keep us below 3.5 times levered, so that's not the intention. So we've got a couple of things going on at the same time. We're spending heavily on the greenfield, the board authorized doing the Share Repurchase Program. resources on the plan.

Speaker 4: which you have to raise 50 million, so you realize that we were at 33 million at the end of the quarter, we're almost done.

Speaker 4: Ending up the sprint litigation so that's the intention is not to just keep drawing down on that thing to take it up to It's total which if I did I think that put us a three and a half times lever, but that's not the plan

Speaker 1: All right, great. I'll turn it over. Thanks, guys, for being a question. Next question is in line of Brandon this bill with bank.

Speaker 8: Great. Thanks for taking the question. Following up on Frank's question, can you talk a little bit more specifically about the ramp you expect in HSD revenue, EBITDA, and HSD subscribers? On my math, when you look at first half versus the quarterly run rate that you need in the second half.

Speaker 8: You need to get to 113 million in HSD revenue quarterly versus less than 107. You know, based on your guide EBITDA needs to get to 78 versus the guide of 1,666 this quarter and HSD net ads need to get to 6,000 a quarter verse you're running at a minus 2,000 obviously.

Speaker 8: So, we would appreciate a little bit more detail in terms of how you get to your guide and why we should not be just expecting the low end of the guide at this point this year. Yes, so, Frank, the homes are, the new homes are being built as we speak. There is a massive ramp. So, if you think about.

Speaker 4: and the penetration rate into the new homes built are coming very, very quickly as we've seen. And remember when we did the whole Greenfield Initiative, for myriad factors that were looked at, but one of the principal factors was we're hand-picking markets where there is de minimis competition.

Speaker 4: With a large player, and maybe a very small player that are providing very good service at a higher price. So we feel really comfortable. Based on what we've seen.

Speaker 4: in our edge out fiber markets and in the Greenfield markets built that we're going to hit those numbers. So, yes, you're right. You're going to see a big back half of the year and that's what I have modeled and that's what we think is going to happen.

Speaker 8: happen for sure. John , can I just follow up on that? When you say tens of thousands of new Greenfield homes, are we talking about 15, 20,000? Are we talking about 50 or 60,000? And then can you just address the core business in terms of HSD net ads? I mean, when we back out Greenfield and edge out additions from, you know, the reported numbers, it looks like the core business continues to lose subscribers.

Speaker 3: to that 10,000 mark for second quarter. And then it really ramps from there. Keep in mind, we will be working in multiple markets, not just one delivering home pass. So I think that ramp for the year is significant. And you will see then following that, of course, the penetration with all those subscribers. So we feel good.

Speaker 3: while we continue to have very low churn and compete very effectively at a local basis. But most of the upside of growth, I'd say, clearly is going to come from these new markets where we're just really seeing great reception from the customers.

Speaker 3: to have very low churns and compete very effectively at a local basis. But most of the upside of growth, I'd say, is clearly going to come from these new markets where we're just really seeing great reception from the customers. Great, thanks for taking the questions.

Speaker 3: Thank you. I will now hand today's call back over to Teresa Elders for any closing remarks. Thank you. And thank you all so much for joining us. And I appreciate your continued interest and support of WOW. Have a great day.

Speaker 1: This concludes today's call. Thank you for joining. Please now disconnect your lines.

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