Q2 2023 WideOpenWest Inc Earnings Call
Thank you for standing by my name is Robert Mccarthy and I'll be your conference operator today.
At this time I'd like to welcome everyone to the White Oak and West Q2, 2023 earnings call. All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there'll 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'd like to withdraw. Your question you can press star one again.
Now I would like to turn the call over to Andrew Posen VP.
Head of Investor Relations Andrew go ahead.
Good morning, everyone and thank you for joining our second quarter 2023 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.
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.
With the SEC as well as the forward looking statements section of our press release. 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.
Not intended to be considered in isolation or as a substitute for 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.
I've also included a presentation. This morning and complement our prepared remarks now I will turn the call over key wireless Chief Executive Officer Teresa Elder.
Thanks, Andrew welcome to while its second quarter earnings call. Our results. This quarter continue to reflect our strategic focus on market expansion strengthening our legacy footprint and aggressively managing our customer our cost base.
Wow is undergoing two significant transitions.
First is our market expansion.
We are committed to building 400000 fiber greenfield homes by 2027, which accelerates our transition to our broadband business.
Additionally, we are also increasing our edge out activities with both advanced H F C, which can enable DOCSIS tornado antenna G capability as well as fiber to the home Mab droughts in certain markets. We are pleased to share that as of the end of July .
We have added 16900, new homes passed so far this year in both Greenfield and edge out areas, which is more than we've added in the last three years combined.
I'm pleased to share that we are on pace to achieve more than 50000, new homes passed this year.
More than the last four years combined.
These market expansion initiatives continues to be central to our strategy and represent the core thesis of our growth and value proposition.
In Q2, we saw success in improving our legacy footprint, while adding new homes passed in our Greenfield and edge out markets importantly, the growth of new customers in these areas is exceeding our expectations.
Our second transition is primarily within our legacy base.
We made the shift to broadband first a few years ago, and we have seen our margin consistently grow while customers appreciate our high speeds and good value with great service.
We listen to our customers and embraced streaming and the customers' desire to cut the cord on traditional video services.
We just launched the next step in our transformation to a broadband business, which involves transitioning our low margin video business to a high margin streaming service.
We believe this partnership with Youtube TV creates a competitive advantage and presents an excellent opportunity to offer customers what they want at an exceptional price point.
Youtube TV gift customers, a more robust choice of programming savings.
Savings of hundreds of dollars annually over traditional cable.
Customers get an additional discount off of Youtube TV when they subscribe with Wow. They also get a discount on add ons like the NFL Sunday ticket, which is exclusive to Youtube TV.
In addition to the benefits to our customers, we will be able to accelerate the reclamation of bandwidth previously used for our legacy video service.
This allows wow to efficiently transition our network for DOCSIS, Bordeaux and serve the growing demand for customer usage without overbuilding our own network.
Youtube TV also allows us to transition away from higher cost low margin video to our high margin service with an even greater mix of channels.
What we are doing is unique among cable operators and is giving customers more of what they really want at a much better price.
These initiatives represent the next phase of the strategy that we articulated at the end of 2021.
With regard to HFC subscribers, we saw a steady improvement as we make further progress in our base and continue to be on track to return to growth this year.
During the second quarter, we lost 900 high speed data argued which was better than expected and as of the end of the second quarter. We now have approximately 508000 high speed data subscribers.
Our video business declined further during the quarter, which we expect to continue as a significant number of customers are no longer taking traditional video and choosing to stream content instead.
As mentioned the new partnership with Youtube TV presents a fantastic opportunity to capitalize on this trend and we believe will also drive an increase in HST subscribers. In fact, we are seeing an uptick in HST connects already just one week after launching Youtube TV.
V.
This new video model also will decrease our operating expenses over time since we will see fewer truck rolls and calls into the call center than from our traditional video.
We expect to see positive contribution this year to a limited extent and a more meaningful contribution next year.
Our broadband first strategy continues to be reflected in our metrics at 87, 1% of new customers purchased H F D only.
This is the 12th consecutive quarter with an average sell in rate of approximately 87% or higher.
Demand for higher speeds is not abating either.
In fact, a record share of new customers is buying higher speeds than ever our high speed data only sell in mix showed that a record high of 91% of our customers new customers are buying speeds up 200, Meg or a bus and approximately 82%.
Are taking speeds above 500, Meg, including further momentum and customers, taking our one that two gig service.
As we said before this trend is even more pronounced in our new markets, where nearly 94% of customers are buying speeds of 500, Meg and above.
These statistics demonstrate the strong demand for faster at higher speeds and the superior quality and reliability of our network.
It also reinforces our confidence in our ability to continue taking share in a new market.
High speed data or <unk> increased to a record $70, reflecting the full effect of the rate increase that was introduced on March 1st for a small number of customers and to a greater extent customers purchasing higher data speeds.
High speed data, our appeal will continue to increase in the back half of the year as we see the impact of an HST rate increase that was put into effect on July 1st two another portion of our base that werent impacted in March.
We also expect <unk> to grow as existing customers upgrade to higher speeds and from the addition of new fiber customers in Greenfield markets and new wedge outs.
I would like to spend a few minutes, providing an update on our expansion strategy, which is really starting to accelerate.
Through June 30th we passed a total of 11700 Greenfield homes in Central Florida and in our edge out since the end of June we added another 5200 hubs, bringing the total number of new homes passed this year in greenfield and their jobs to 16000.
900, which is nearly six times the number of new homes added in all of 2022.
In fact since the beginning of 2021, we have now passed nearly 22000 new homes.
Of which nearly 78% were added this year.
We expect the pace of adding homes path to continue to increase throughout the year.
As you can see in the slide response to our entrance to these markets has been fantastic. The Greenfield homes are built with the latest fiber to the home technology and our 2023 edge outs are utilizing either fiber to the home or new technology for HFC.
Which puts us on the road the DOCSIS four Dato and 10 G capability in those markets.
The strength of these technologies is absolutely contributing to the strong penetration rates that we're seeing.
The chart on the right hand side of the slide shows exactly how successful our expansion strategy is with strong penetration rates across all of our vintages.
Our 2023 vintage of edge outs are already at 23, 4% penetration rate.
While our 2021 and 2022 vintages also reported exceptionally strong penetration rates of 45% and 31% respectively.
And while our Greenfield markets are at 20% penetration in aggregate.
They're averaging penetration rates.
Of 30% in 30 days from lunch now that's a 1% increase in penetration per day.
This is substantially faster than we expected in our original business case, which tells US we picked the right.
And our playbook is resonating with customers.
Edge outs are also performing very well with early penetration rates that exceed our expectations and demonstrate the extremely strong reception to wireless high speed Internet exceptional customer service.
And competitive value proposition.
As we said before our expansion strategy remains an engine of growth for our business and the performance supports our composites and our ability to grow quickly in new markets.
Well, we haven't externally announced a target for new homes passed for 2023 before we now feel confident in saying that we will surpass 50000, new homes in 2023 between Greenfield and edge outs.
To conclude before handing the call to John .
We are in the midst of two major transformation of our business.
First the expansion of our homes passed through Greenfield and edge apps already this year, we have built nearly six times more homes than all of last year and well more than the last three years combined.
We're driving subscriber growth faster in those markets than we'd planned.
Second we are continuing to transform our legacy footprint through the next phase of broadband burst through our unique partnership for a cable operator with Youtube TV, which gives us a lower cost higher margin service that is more attractive to our customers and efficiently accelerates our path.
<unk> to DOCSIS Bordeaux.
Our strategy, our plan and our execution continue to put us in a good position to deliver value to our customers employees and shareholders as we look to the remainder of this year and into 2024.
Now I'll turn the call over to John who will go over our financial results in more detail.
Thanks Teresa.
Second quarter total revenue decreased 2% from the same period last year to $172 6 million, reflecting a 4% increase in high speed data revenue and a 12, 8% and six 2% reduction in video and telephony respectively.
Increase in HST revenue reflects a full quarter impact of last quarter's rate increase on a portion of the base as well as new and existing customers upgrading to higher speed tiers.
Adjusted EBITDA decreased three 5% from the same period last year to $68 1 million as we continue to invest in growing our expansion footprint in central Florida, South Carolina and edge outs.
There are upfront cost associated.
Upfront operating costs, which we incur while developing a new market.
30th tumor market expansion operating expenses totaled $2 1 million, which was a drain on EBITDA as the expenses are incurred before the market goes live.
This dynamic will start to normalize as we continue to increase our expansion subs.
Our adjusted EBITDA margin was 39, 5%.
The incremental contribution margin increased sequentially and continues to grow year over year, driven by the proportionate increase in HST revenue, which increased to 62% of our total revenue this quarter up from 58% in the same period last year.
Incremental contribution margin increased by two seven percentage points from the same period last year.
Now for a progress update on our cost structure alignment to following the divestiture of the five service areas. We continue to be on pace to hit our target of $35 5 million by the end of 2025 as of the second quarter, our total savings equate to 24 million, which represents approximately 67% of the 30.
<unk> been a half million dollars, we identified for cost reduction over the next few years.
Two these measures we've also implemented additional head count reductions predominantly in our corporate and administrative areas that are reflected in integration and excluded from our adjusted EBITDA.
We've made tremendous progress on realizing savings across the company and we will continue to be diligent as we manage costs. Despite the higher inflationary environment.
We ended the quarter with total cash of $23 million and total outstanding debt of $868 $1 million with our leverage ratio at three one times, we reported total capital spend of $63 6 million, which is up $28 9 million from last year, our core capex efficiency increased to 19, 2% of the SEC.
<unk> quarter.
Spansion Capex increased 22, and a half a million from the same period last year as we continue to heavily invest in our future growth and bring fiber to the homes of central Florida, and Greenfield South Carolina.
The second quarter, we spent $23 million on Greenfields.
$3 7 million on edge outs, and an additional $3 7 million on business services.
Looking at the right side of the slide.
Our results for Q2, 2023 unlimited adjusted free cash flow, which we define as adjusted EBITDA less capex decreased to $4 5 million down from $35 9 million in Q2 of 2022, primarily driven by the share repurchase program and higher expansion spend predominantly on greenfields.
Morning, We reported a net loss of 101 7 million. This was due to a non cash impairment charge that we took as a result of the decline in our stock price during the quarter. This charge, which is a non cash accounting adjustment does not affect our ability to manage our business or alter our investments in greenfields edge outs or any aspect of our <unk>.
<unk> strategy and we remain excited about our progress in the new markets.
In the second quarter, we completed our share repurchase program and repurchased approximately one 8 million shares at an average price of $9 37 per share.
Finally, before we open the call for questions I'd like to provide our outlook for the third quarter and full year.
We expect our third quarter <unk> revenue to be between 109 and $112 million.
And for the year to be between 437 and $441 million.
Our transition to Youtube TV is impacting our outlook for total revenue, we just launched our new video offering which is replacing our current video delivery service. This will result in lower total revenue because we will recognize the Youtube TV revenue on a net basis. Unlike current video revenue which is reported.
On a gross basis.
In the near term as we migrate our customers and add new subscribers the impact will drive total revenue lower.
As the business scales and grows this transaction will have a significant and positive impact on our EBITDA and EBITDA margins.
Over time, we anticipate our new video strategy will drive down calls to our call center and video related truck rolls.
[laughter] today, we are lowering total revenue for the third quarter and for the full year and expect third quarter total revenue to be between 173 and $176 million.
And be between $6 91, and $696 million for the full year.
We expect our third quarter adjusted EBITDA to be between 70, and $73 million and be between 286% and $290 million for the full year.
For HFC net adds we are maintaining our expectations for the year, we're seeing significant progress in the pace of construction in new markets and we're excited by the increased number of homes passed and the penetration rates.
We have been realizing as we light up those new homes. We're also seeing the benefits in our legacy markets as we see ARPA growth within our subscriber base and increasing HST growth with the addition of Youtube TV is a streaming service, we expect third quarter HFC net adds to be between negative 1500 and positive 500.
And continue to expect the full year to be between 6010 thousand net adds we believe that we are now at a true inflection point in our transition to a broadband first business.
Market expansion initiatives are now accelerating and delivering results as seen in the strong penetration rates, our partnership with Youtube, which transitions our video business to a live TV streaming service will give us a competitive advantage across our entire footprint and contribute to strong adjusted EBITDA and EBIT margins as that business ski.
<unk>.
All of these initiatives underway and progressing well, we anticipate our business to achieve mid single digit EBIT growth in the near future.
And now we'd like to open up the line for some questions.
Yeah.
Thank you at this time I would like to remind everyone in order to ask a question Press Star and then the number one on your telephone keypad, we'll pause for just a moment as we compile the Q&A roster.
Yes.
Yeah.
Our first analyst is Frank Louthan from Raymond James Dodd Frank go ahead.
Thank you do you clearly having some good success with the edge outs in the Greenfield So talk to us about kind of what's going on with the base business. That's still having the ads go negative and what do you do to change that and are you, giving out any significant promotions or anything that's helping you get this pretty significant penetration.
In the Greenfield and then secondly on the balance sheet. So you got $100 million still left on the revolver. How long is the revolver available and then what about funding for next year running pretty close to breakeven on the free cash flow are what do you see as far as needs new funding and where do you see leverage topping out thanks.
Thanks, Frank I'll take the first question and then turn it over to John for the second half on the revolver I'm actually really pleased by the things that we're starting to see within our legacy base. In addition to the good goodness that we're seeing from the Greenfields as well if you really break down the second quarter as our net adds.
You know would have been without the greenfields on that lots of just 1300, which is a significant improvement from the previous quarter and that is even with a rate increase that is in there. We're also seeing I think some good traction.
With the launch of Youtube TV that is having an overall uplift effect on our HFC net adds we have also had some success with some promotions that we've done but yet with that we're also able to bundle with other services and continue to drive that ARPA growth. So we're actually pleased.
By some of the goodness that we're seeing within our legacy footprint as well along with the work that we're doing on cost efficiency.
We see the operating statistics looking very good on legacy as well as in our Greenfield business.
John do you want to talk about the revolver.
Yes, excuse me, yes, so as you know the revolver. Our total capacity is 250 million. So we did dip into it where we hit it out of the revolver, but we stepped into it a bit I think drivers of that in the past quarter, where the sprint settlement that upfront payments that we had to make and quite frankly, the cost of capital as you guys know with variable interest rates has been.
Rising sort of expectation that we will start to take the revolver down as we flow through the second half of the year. It's also my expectation that the revolver excuse me that the that the bill.
Leverage ratio is not going to go above three and a half times. So I think we see a path to do all the things we want to do.
But it's day by day, so we don't see any big.
We don't see any big need to do to push the revolver.
In excess of $3 and.
And I don't anticipate at this time going out to try to get more capital I think we can do this.
Okay, great. Thank you very much.
Thanks Frank.
Right.
Our next animals, it's Brandon Misspell from Keybanc Brendan go ahead.
Great. Thanks for taking the questions can you maybe give us some more detail on the price increase I think you mentioned there was one in March and that was one.
July maybe could you unpack that in terms of percentage of customers receiving each and average rate. So we can understand the underlying growth in <unk> from just pure upselling.
Yeah on the second half you just eat that add perspective, it still implies fourth quarter is by far and away your best quarter.
Big positive number after the first three quarters of the year are expected to be negative.
How do you get confident around that it seems like a pretty healthy ramp. Thanks.
Thanks, Brandon Okay on the rate increase or rate increases a dollar wise are consistent with our competitors that are out there. So it still keeps us at the same kind of value proposition for our customers.
Our competitors have also increased rate increase or increase the eight high speed data rate, we had a small percentage of the customers in March in July .
July it was a the majority of our base was due for a rate increase and so that started with July builds and that's pretty well will work its way throughout this whole quarter, then that they'll get that rate increase.
In addition, though I can't emphasize enough the higher speed tiers that customers are taking so we decided for the first time this quarter to share more about the percentage that is taking 500, Meg and above of the new customers as well as up tearing among our existing base. So all of those things.
A lot of confidence as we look for the future I'm speaking of confidence I guess for the future in terms of our high speed data adds for the remainder of this year I think there are a number of really exciting things that are happening both in our legacy edge out and Greenfield area as we mentioned.
And we are seeing an uplift from Youtube TV in terms of our high speed data connects throughout all of our footprints legacy as well as edge outs in Greenfield and then in our new areas, we're not only seeing much faster penetration than we anticipated, but the rfps are being.
Higher as customers take higher speeds. So all of this makes us feel good about our high speed data numbers all of this done with a still a very loyal customers and low churn. So we feel good about those components and believe that we can hit that full year HST number.
For the year.
Yeah.
Thank you Brandon.
Okay.
Next up we have Matthew Harrigan from benchmark Matthew go ahead.
Thank you.
As you know I've always been fascinated by your largest mall with seems to be working pretty well for determining what area. As you go into for Greenfields I know you havent gone into that many areas. So you don't have that much of it.
Cross sectional comparison, where do you feel like Youre learning I mean, do you have to be really happy with the results you're getting thus far.
Are there any implications for Oh, sorry in the build I know you're trying to remain remained thin on your on your spending and all that but.
Is that still a moving target in terms of how active you are going to be say over a three year timeline on the edge outs given the evident success on the.
The greenfields given the evident success. Thank you.
Well Matt.
I think we're learning a number of things first of all we feel very confident in the criteria that we're using for the selection process of new markets. We're delighted by what we're seeing and.
Part of that also is the playbook, we use once we've selected a market and that playbook is everything from making sure we have strong relationships with the local communities.
The leaders of those communities the city officials the power companies all of those things and those partners that you need to build out the market. In addition, we do a lot of pre work in terms of market awareness and then I think our sales packages and our strategies for addressing the market are very strong.
As evidenced by the results, we're seeing a 30% penetration in 30 days, 1% penetration per day for those first 30 days. So we feel good about the whole playbook from selection through launch of the market.
We do feel like we are probably on track to announce another market or two yet this year.
And for the first time today, we shared that we do plan to pass 50000 homes between Greenfield and edge outs. This year and we're still on track to deliver our 400000 homes that we have promised so we feel good about the pace of what we're doing as you can see from our trajectory.
<unk> from the first quarter to the second quarter and that we even tipped our hand and shared what we've been doing in July the pace is picking up there is a significant amount of pre work that needs to be done, but then you get the machine rolling and I feel very good about the way that our market expansion team has been.
And really rolling out these new homes, it's a joint effort, it's very exciting and in terms of the learnings as well what's interesting is those things we're learning in our new markets.
Those insights were bringing back into legacy if we're learning something that's a good best practice and vice versa. We have been competing against very strong operators, our entire existence and the learnings that we have as a challenger brand continue to reinforce how we know.
How to compete in every market that we go into so I would say that what we're learning in it it's been a very exciting opportunity for our whole company and.
And we always are keeping an eye on the financials and the leverage to make sure that the pace is appropriate.
Log in models of liver model like the U S. Constitution is a living document that's good to hear thank you Oh, absolutely, yes, we're constantly feeding back in best practices, what we're learning everything along the way and that's how it works, we're always innovating always learning always trying to get better and.
I think that's what keeps that exciting here and keeps us a very formidable challenger brand.
Great. Thanks, Chris.
Thanks, Matt.
Teresa that's the last of our questions can I turn it back over to you for some closing remarks.
Thank you so much and thank you all for joining US. This morning. We appreciate your continued interest and support of Wow have a great day.
Yeah.
That concludes today's call you may now disconnect.
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