WideOpenWest Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
March 13, 2024

There are 9 speakers on the call.

Operator

Thank you

Speaker 1

for standing by and welcome to the WideOpenWest 4th Quarter 2023 Earnings Call. I would now like to welcome Andrew Pozen, Vice President, Head of Investor Relations to begin the call. Andrew, over to you.

Operator

Good morning, everyone, and thank you for joining our Q4 2023 earnings call. With me today is Teresa Elder, Wow! Chief Executive Officer and John Rego, Wow! 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.

Operator

These forward looking statements are 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 ks filed 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.

Operator

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 financial reported 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 the presentation this afternoon to complement our prepared remarks. Now, I'll turn the call over to Teresa Elder, Wow! Chief Executive Officer.

Speaker 2

Thanks, Andrew. Welcome to Wow! 4th quarter earnings call. We are continuing to build momentum in our market expansion initiative, and we are seeing positive early indicators in our legacy markets in response to the efforts we are taking to stabilize subscriber losses. Our 4th quarter results include high speed data revenue of $108,700,000 up 1.5% year over year adjusted EBITDA of $71,200,000 which decreased 4.6% year over year, but increased sequentially for the 3rd consecutive quarter and a record adjusted EBITDA margin of 42.2%, which increased steadily throughout the year.

Speaker 2

For the full year, our high speed data revenue increased 4.4% from the last year to $430,400,000 while adjusted EBITDA declined by 1.7% to $275,400,000 with an adjusted EBITDA margin of 40.1%. The pace of construction in our greenfield and agile markets accelerated throughout the year, culminating in a total of 48,400 new homes passed, including 30,400 in our greenfield markets and 18,000 new homes passed in Edge Outs. In fact, our Q4 was the most robust quarterly expansion of our network in our 25 year history. We passed nearly as many homes in the Q4 alone as we did throughout the 1st 3 quarters of the year. Our momentum has continued through early 2024 as we have added over 10,000 more homes as part of our expansion initiatives so far this year, predominantly in our greenfield markets.

Speaker 2

I extremely proud of the effort of our teams that is driving our expansion, which is central to our growth strategy. I'm not the only one who recognizes the quality of Wow! U. S. News and World Report just named Wow!

Speaker 2

A best Internet Service Provider of 2024. Out of the list of 25 providers offering all types of Internet across the U. S, including fiber, cable, digital subscriber lines, satellite, fixed wireless and 5 gs home Internet services, Wow ranked 1st for fastest cable upload speeds, 2nd for best cable internet service providers and 4th overall. This is a proud moment for our team and we will continue to prioritize innovation and customer satisfaction in this competitive marketplace. Our HSD subscribers losses during the Q4 of 13,000 300 were in line with the expectations that we set on our last call as the macro environment continued to be challenging.

Speaker 2

Low move activity, higher churn in lower speed tiers and ongoing competitive threats from fixed wireless carried into the Q4, but have begun to improve in the Q1 as a result of several steps that we took to address these challenges. Specifically, we increased our minimum speed for existing customers to 300 meg, giving them a surprise boost in their broadband speed at no additional cost. We gave a surprise boost as well to the 500 meg customers. 2nd, we introduced a simplified pricing option, which includes the price lock, free modem, no data caps or contracts. This surprise free approach has been extremely well received.

Speaker 2

3rd, we strategically offered short term extensions to help create a soft landing for customers rolling off promotions. The early success of these steps has given us additional confidence in the progress we are making to strengthen our subscriber numbers in our legacy footprint. The chart on the lower left quadrant on the slide shows a small increase in the proportion of new customers buying in the lower tiers. This shift during the quarter did not limit the growth in HSD ARPU as a majority of new customers across our legacy markets, edge outs and especially in greenfield markets continue to buy 500 meg and above. The chart on the lower right hand side of the slide shows our HSD ARPU reaching a new high of $72.90 We expect HSD ARPU will increase further in 2024.

Speaker 2

Although the rate of growth will likely ease as the impact of the steps we're taking to address subscriber churn work their way through our financials. As of the end of the Q4, we now have more than 490,000 HSD subscribers. As expected, our traditional video business declined further during the quarter, which will continue as we transition to YouTube TV. As mentioned, this YouTube TV partnership provides a fantastic opportunity to provide our customers more content at a much better value and to capitalize on the shift to video streaming, which we believe will also contribute to great results this year. Our penetration rates remain strong in our greenfield markets and the early positive reception reinforces our conviction commitment to our expansion strategy.

Speaker 2

Our 2023 Edge Out Vintage has a penetration rate of 24.4%, while the 2021 2022 vintages also continue to report strong penetration rates of 47.6% and 31%, respectively. Penetration rates in our greenfield markets decreased to just under 10% in the 4th quarter because we significantly increased the number of homes passed late in the quarter. However, the cohorts are demonstrating extremely strong penetration rates, averaging more than 20% within the 1st 6 months after activation. To conclude, before handing the call to John, I want to reiterate the key points that I made at the outset of this call. First, we continue to make great progress in our expansion markets, passing 48,400 new homes in both greenfield and edge out markets through December 31, and more than 10,000 homes so far this year.

Speaker 2

2nd, we took steps during the quarter to stabilize the losses in our legacy footprint and improvements are evident in our expectations for the Q1. And lastly, we continue to see positive reception to our YouTube TV offering. Now I'll turn the call over to John, who will go over our financial results in more detail.

Speaker 3

Thanks, Teresa. In the Q4, we reported $108,700,000 of HSD revenue, which increased 1.5% year over year, reflecting the impact of the respective rate increases as well as new and existing customers upgrading to higher speed tiers. The growth in HSD revenue was more than offset by a 19.7% and 4.8% drop in video and telephony revenue respectively, resulting in a 6.5% decline in total revenue from the same period last year to $168,800,000 Adjusted EBITDA decreased 4.6 percent from the same period last year to $71,200,000 with a record adjusted EBITDA margin of 42.2 percent driven by the increase in higher margin HSD revenue. The incremental contribution margin increased sequentially and continued to grow year over year driven by the proportionate increase in HSD revenue, which increased to 64% of our total revenue this quarter, up from 59% in the same period last year. Now for progress update on our cost structure alignments.

Speaker 3

We continue to be on pace to hit our target of $35,500,000 by the end of 2025. As of the Q4, our total savings equate to $28,800,000 which represents approximately 81% of the 35.5 $1,000,000 we identified for cost reduction over the next few years. In addition to these measures, we also made further headcount the company and we'll continue to be diligent as we manage costs despite the higher inflationary environment. We ended the quarter with total cash of $23,400,000 and total outstanding debt of $934,500,000 with our leverage ratio at 3.3 times. We reported total capital spend of $80,600,000 which is up $27,900,000 from last year.

Speaker 3

Our core CapEx efficiency was 23.6 percent in the 4th quarter and 19.9% for the year. Expansion CapEx increased $26,300,000 from the same period last year as we continue to invest in our future growth, bringing fiber to the homes of Central Florida and Greenville County, South Carolina. In the Q4, we spent $33,800,000 on greenfields, $3,400,000 on edge outs and an additional $3,600,000 on business services. Our unlevered adjusted free cash flow, which we define as adjusted EBITDA less CapEx, decreased to negative $9,400,000 in the 4th quarter, almost entirely driven by higher expansion spend predominantly on greenfields. For the full year, we reported $6,500,000 in adjusted unlevered free cash flow, which is down significantly from last year.

Speaker 3

We are undertaking several steps to increase our free cash flow in 2024. In 2023, we invested $132,000,000 in market expansion with a significant portion on the upfront spend to support the entrance to our new markets. This year, we plan to spend approximately $60,000,000 predominantly focused on passing new homes, leveraging the investment spent last year in these markets. In addition to managing our expansion spend, we will continue to be particularly targeted in our network spending as we strategically identify areas within our infrastructure that will immediately benefit from investment, whether it is upgrading in support of DOCSIS 4.0 or fiber to the home upgrades. We also executed hedges on $500,000,000 of our long term debt, which will help us manage our annual interest expense in 2024.

Speaker 3

Combined, we believe these efforts should put us back in a position of generating free cash flow by the end of this year. Finally, before we open the call for questions, I'd like to provide our expectations for the Q1. As Teresa indicated in her comments this morning, we're seeing some positive indications from the steps we are taking to address the challenges in our legacy markets and we believe that we will see further improvements throughout the year. For the Q1, we expect HSD subscribers to be between negative 2,000 negative 5 100, a significant improvement from the 4th quarter. We believe HSD revenue will be between $104,000,000 $107,000,000 We expect total revenue for the Q1 to be between $159,000,000 $162,000,000 and adjusted EBITDA to be between $64,000,000 $67,000,000 And now we'd like to open up the line for questions.

Speaker 1

The floor is now open for your questions. Our first question comes from the line of Chris Scholes with UBS. Please go ahead.

Speaker 4

Great. Thank you for taking the questions. You guided to an improved broadband subscriber trajectory in 1Q. I recognize you highlighted the steps you're taking to mitigate the impact of fixed wireless, but can you help us think through maybe other factors that contributed to the 4Q result that you don't expect to repeat here in 1Q? And given what's going on with the ACP program, can you help us size your ACP exposure and how you're thinking about mitigating churn there if funding does lapse?

Speaker 4

Thank you.

Speaker 2

Thanks, Chris. I'll go ahead and get started. This is Theresa. And so I do not believe we will see any repeat of the Q4. Q4, as we said in our last call, when we were telling you what was coming, was unusual because we had just come off a large rate increase and we're also seeing significant promo roll offs from the customers.

Speaker 2

We've taken significant steps, as I outlined in my remarks, to really address that. And we saw improvement coming out of the end of the Q4 and certainly in the 4th Q1. So those steps again are really focused on a soft landing for our promo roll off customers, the simplified pricing that we have done that is really attracting great attention from both existing and new customers as well as, the upgrades of speed tiers that we did as a surprise and delight for our existing base. All of those are really getting tremendous traction and I think hit the sweet spot of what customers really want. On the simplified pricing, we did significant research.

Speaker 2

We really know what customers want and that is that consistency and in pricing, I think we hit a great sweet spot there with the pricing, with the tiers, not having any kind of surprised fees and giving them an option if they want to do a price lock for the future. So a very different approach I think than some others have taken and customers are responding well. So we feel very good about Q1 and really the results for the rest of the year as we think about the greenfield homes that are coming on. I believe your second question was about ACP. And yes, we've been watching that news closely and certainly preparing for that.

Speaker 2

We currently have 30,000 customers who are on the ACP program. 99% of those have opted in to continue services with Wow when the program ends. And we feel some certainty of that. We'll have to see what happens in the future. But about 82% of our ACP participants were existing Wow!

Speaker 2

Customers prior to enrolling in the ACP and many use this really to up tier to higher services. So it's hard to say exactly what's going to happen, but we feel that we should be okay in terms of the subscriber side and we'll continue to offer attractive pricing so that hopefully we won't see much of any hit from the revenue side, but more to come since that hasn't been implemented yet.

Speaker 4

That's very helpful. Thank you. And then if I can just do one follow-up. There's been a lot of focus on fixed wireless, but can you maybe just remind us where telco fiber overlap is in your footprint today and how you expect that to evolve this year?

Speaker 2

Yes. We have continued to have some telco overlap. It's grown a bit. It's still not one of the largest, I think compared to our peers. I think generally fiber is deployed in areas where they know they can get a good return.

Speaker 2

And given that we are an additional provider to the incumbent in our markets, it's usually not the most financially beneficial to come in with another alternative in our footprint. So, we compete extremely well with that. And so I feel good about our ability to compete with fiber where it is, but we do that every day. So, not a huge concern of us.

Speaker 4

Great. Thanks again for all the color.

Speaker 1

Our next question comes from the line of Frank Louthan with Raymond James. Please go ahead.

Speaker 5

Great. Thanks. So you continue to build a lot outside your market. Can you give us some color on some of those builds and how that's expected to kind of drive ads going forward? I mean, in theory, those should be relatively easy ads.

Speaker 5

Last year, we saw more base erosion there. Is there a point where you think that's going to shift? And what is the competitive issue in the larger in your larger legacy markets that's kind of still overwhelming the base builds or the new builds here? Thanks.

Speaker 2

So, I think I understand your question, but Frank, I know you'll correct me if I don't quite understand it. So, talking about the new builds and the new markets, we are driving penetration very quickly, 20% within 6 months. Those are very attractive markets. The reception that we're getting is extremely strong and we feel great about the pace of the construction. Last year, we really focused a lot on many of the upfront aspects of that construction, be it the warehouses, getting the inventory there, getting all of the initial work, the hubs, everything, the locations for the hub sites, all those things in place.

Speaker 2

So now this year, we really are cranking homes past and that is going extremely well. In terms of the legacy markets, we have both some edge out additions that we've done that we added last year and continue to add some this year as well, as well as the work that we're doing that I outlined in the previous question to really kind of address competition and turnaround some of the losses that we've seen in those markets. And I feel like we are making significant progress both on the legacy side of the business and certainly continuing to accelerate momentum on the greenfield side. So, did I get it the essence of your question, Frank?

Speaker 5

Well, I mean, it seems like the bigger issue is the losses in the base that are overwhelming the new builds. And can you point to is there a point in the future where that's going to cross where you're going to be able to see you're spending a lot of money and still losing subscribers. At what point can we see that start to work in the right direction? And it seems like the bigger drag is the legacy business. And I mean, I hear what you said about some of the changes and so forth, but what gives us confidence that this one's going to stick?

Speaker 2

Yes. No, I think that's a great point. So I mean in the legacy business, of course, we have 1,900,000 homes and we've added another 30,000 in Greenfield. So just the scale there is significant. But what we are seeing coming out of the Q4 and certainly into the Q1 is a reversal of some of the trends in the legacy business and then the continued expansion and growth that we're seeing in the greenfield.

Speaker 2

So I do think we see a point in the future where that starts to cross and we start to see the business growing again.

Speaker 5

Is that this year or is that next year? At what point will that be?

Speaker 2

We're not giving guidance really for HSD net adds for the rest of the year. For the Q1, we've substantially improved over the Q4 saying negative 2,000 to negative 5 100 adds. That's also an improvement, I believe, over the Q1 of last year. So, we believe it is within our grasp and we'll just have to continue to see how things play out with all the many tactics and new strategies that we put in place. But we are feeling good about the momentum we've got so far.

Speaker 5

Okay. Thank you.

Speaker 1

Our next question comes from the line of Dan Day with B. Riley Securities. Please go ahead.

Speaker 6

Yes, morning guys. Appreciate you taking the questions. So I know you track pretty closely, when people churn out, the reason for it and where they're going. Can you just talk about in the Q4 where some of these customers went? Was it still mostly the low end moving to fixed wireless?

Speaker 6

Was that sort of the most common response that you got? Or anything to call out in terms of increased competitive pressures from the larger peers with these wireless bundles?

Speaker 2

Yes. The majority of the place our customers go is not to fixed wireless. I think we talked about that last quarter and brought it up because it was the first time it was even much of a blip on the radar. It hadn't been much for us previously. So the majority of customers who churn in and out of Wow will go to a Comcast or a Charter who are our biggest competitors every day kind of all day.

Speaker 2

And so we feel like we created a bit of an opportunity because we had done the rate increase last year and we also at the same time had some customers rolling off of promo. So we've really done some things to, I think, shore up the certainty of pricing, competitiveness of that and just simplified it for customers. They want that certainty going forward, and I think we're really addressing some of those kinds of things. So we've seen churn, really step down, this quarter, in the Q1. And of course, we don't want to get too much ahead of ourselves giving you 1st quarter data.

Speaker 2

But just to let you know, those are metrics, of course, that we track very, very closely and always remain competitive. That's just the DNA of Wow is that we're a competitive provider. We pride ourselves being a challenger brand and that means always being able to anticipate and respond to any competitive dynamics.

Speaker 6

Thanks. And I think you started to get at this in the last question that was asked, but maybe I'll ask you just little more directly. So for the Q1 guidance for subscriber net adds, can you talk about your expectations for Greenfield and what the maybe just directionally what you're thinking for gross net adds in Greenfield and then losses in the legacy markets?

Speaker 2

Yes. We really haven't broken it down that way. So we've given you the overall number. But of course, greenfield continues to contribute well. But in order to have that kind of a reversal from Q4 to Q1 and what we're guiding you for, for the Q1, Clearly, we are seeing significant improvement in the legacy side of the business as well.

Speaker 2

So we're lifting the boats on both sides. We've got more homes passed on the greenfield side to go out and attract new customers. So I was just with a group of our top salespeople. They're very excited about the reaction that they're getting there and feel good about the new markets that we're going into. And on the legacy side, both shoring up, churn, getting back down to those levels that Wow!

Speaker 2

Has always enjoyed and, also attracting new customers with, the new pricing options, delighting our existing customers with those speed upgrades. So really, I think, working on all fronts.

Speaker 6

Okay, guys. Thanks.

Speaker 1

Our next question comes from the line of Matthew Harrigan with Benchmark. Please go ahead.

Speaker 7

Thank you. You have to be very happy with how robust your econometric model is for identifying new market entry given the penetrations you're getting on your cohorts. But do you think those markets or some of the characteristics are going to evolve over time? So where they near the more competitive base markets and have you kind of identified your ROI or modified your ROI and your hurdle rates and maybe being a little bit more cautious moving forward in reaction to that? And when you look at these new markets, I mean Florida, etcetera, I mean, there's some great demographic areas as far as household formation and all that.

Speaker 7

But how much of your knack for identifying these great new markets is a function of good demographics and all that versus just the competitive intensity at least for a while being a little less intense whether it not be having much fiber or T Mobile or Verizon not really doing too much on fixed wireless in those areas yet. Sorry, I apologize it's been a little bit long winded, but I'm sure you get the gist of my question. Thank you.

Speaker 2

Thanks, Matthew. Yes. Dan, I think I get the gist of what you're saying. So in the new markets, we do have some competitive dynamics. There's no question about it.

Speaker 2

But I believe what we are offering with the fiber to the home, with attractive pricing, once again, actually the simplified pricing where we really are bundling together the key components of the service that customers want so they don't have to do it piecemeal, so really being very transparent in all our pricing. That started in our greenfield markets as opposed to doing various promotions. And that has worked very well in greenfield, very, very low churn. And we took some of those key learnings along with additional research when we rolled out what we're doing now in our legacy markets. So we feel very good about the markets that we have selected and the penetration rate growth and not seeing really anything for churn, lots of good word-of-mouth.

Speaker 2

So those markets continue to be good. I think the second half of your question was about, okay, as we look at new markets, how does that compare? What kind of criteria do we use? And how does it compare to our original business plan. We still feel like we are beating the original business plan and some of those metrics we put out way back when we did in Investor Day, I believe in 2021.

Speaker 2

And we're feeling very good about those criteria that we had in the initial model. The criteria that we have for selecting markets is not just about competition, although that is a very important factor. We also look at the density of homes, the cost to build, the ratio of underground to aerial, the growth of the market itself retracting in size, the speed with which we can get launched. We look at so many different criteria. And I think that kind of secret sauce of how we've selected markets has proved very positive.

Speaker 2

We've announced some other new markets in addition to the ones where we already have homes passed. And we're extremely pleased with the early response from the community and how the builds are going. So far so good and we feel good about our ability to choose wisely.

Speaker 7

And you clearly feel able to continue to finance the new build given the limited free cash generation right now?

Speaker 2

Yes. We John put out a guide for what we anticipate in terms of CapEx for Greenfield this year of $60,000,000 Last year, we spent a lot as we did a lot of the up front work in many of these markets and those kinds of upfront costs really will support 100 of 1000 of homes, not just the ones we've done so far. And John, did you want to add more to that?

Speaker 3

Yes. So I mean, Matt, it's clearly less CapEx dollars for Greenfields than last year. However, a lot of the upfront work, all the setup building of the hubs, building the warehouses, getting the materials out there, this year is more purely focused on adding homes passed. And that actually requires less money to set up stuff. So we feel pretty comfortable.

Speaker 3

We're going to stay on pace. And we still feel pretty comfortable we'll be on pace that we set actually on the Analyst Day, which was back in 2021. So it's just a matter of where the dollars are spent. But obviously, we're watching everything. We'll be careful.

Speaker 7

Thanks, Theresa. Thanks, John.

Speaker 1

Our final question comes from the line of Brandon Nispel with KeyBanc Capital Markets. Please go ahead.

Speaker 8

Hey, guys. Thanks for taking the question. John, I was hoping you could just address the liquidity position. It looks like you drew on the revolver again. To the extent that you do want to go faster on pre refills, it sounds like you're slowing down quite a bit at least from a dollars perspective.

Speaker 8

But what options do you have to get some more liquidity in the business? And then do you think you'll be free cash flow positive sort of towards the second half of the year as CapEx comes down?

Speaker 3

Yes. So the plan is to be free cash flow positive for the full year. So we're doing a lot of different things, Brendan, just so you know. So one, we are literally taking the expansion capital dollars down and that's purely discretionary. So we can do that.

Speaker 3

As I just said on Matt's question, we spent a lot of money in 2023 and that was a lot of the setup work. So by spending less money, we can actually just focus on adding homes. So that's one thing for sure that we're doing. We kind of blurted it out on the call, but we executed multiple hedges on about $500,000,000 of our debt. So that will save us some cash flow as it relates to interest expense.

Speaker 3

We also took another hard look at the OpEx of the company and we also referenced that there on the call. We've done some more cutting on top of the cutting that we talk about all the time to hit the $35,000,000 over the next several years. So we feel we're in a place that we can do that. And the important thing to remember is that the bulk of our spending outside of running the businesses is purely discretionary. So we take a little bit of cutbacks in terms of dollars spent on greenfields, dollars spent on core CapEx, we've done hedges and we've kind of right sized, we believe, some of the OpEx of the company.

Speaker 3

So we feel fairly

Speaker 8

comfortable that we'll be back to

Speaker 3

a cash flow breakeven to some Thanks.

Speaker 8

Thanks.

Speaker 1

I would now like to turn the call over to Teresa Elder for closing remarks.

Speaker 2

All right. Thank you. And thanks so much for joining us this morning. We appreciate your continued interest and support of Wow! Have a great day.

Powered by Quartr
Earnings Conference Call
WideOpenWest Q4 2023
00:00 / 00:00