WideOpenWest Q2 2024 Earnings Call Transcript

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Provided by Quartr
August 8, 2024

There are 7 speakers on the call.

Operator

gentlemen, thank you for standing by. My name is Desiree, and I will be your conference operator today. At this time, I would like to welcome everyone to the WideOpenWest Second Quarter 20 24 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

I would now like to turn the conference over to Andrew Posen, Vice President, Head of Investor Relations. Please go ahead.

Speaker 1

Good afternoon, everyone, and thank you for joining our Q2 2024 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.

Speaker 1

These forward looking statements are made in reliance on the Safe Harbor provisions of the federal securities laws and are subject to known and unknown risks, uncertainties and other factors that may cause our actual operating results, financial position or performance to be materially different from those expressed or implied in our forward looking statements. You are cautioned not to place undue reliance on such forward looking statements. We disclaim any obligation to update such forward looking statements. For additional information concerning factors that could affect our financial results or cause actual results to differ materially from our forward looking statements, please refer to our filings with the SEC, including the Risk Factors section of our Form 10 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 afternoon, we may refer to certain non GAAP financial measures.

Speaker 1

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 to our historical reported results can be found in our earnings releases and our trending schedules, which can be found on our website. We have also included a presentation this afternoon to complement our prepared remarks. Now, I'll turn the call over to Wow! Chief Executive Officer, Teresa Elder.

Speaker 2

Thanks, Andrew. Welcome to Wow! 2nd quarter earnings call. Before we start, here is a brief update on the unsolicited non binding acquisition proposal from Digital Bridge and Crest View Partners. A special committee of independent directors has been formed to evaluate the proposal and the work of the committee is ongoing.

Speaker 2

While stockholders do not need to take any action related to the proposal at this time and we do not have any updates to share today. We will take questions at the end of our remarks however, we will not be taking any questions related to the unsolicited bids. Now I would like to turn to our 2nd quarter results. Our results this quarter were in line with our expectations and reflect momentum in our greenfield fiber expansion and improvements in our legacy markets, which were offset by the loss of subscribers due to the ending of the ACP program. As we have emphasized over the past several quarters, we are focused on growing our fiber footprint in our expansion markets, including both greenfield and edge outs and stabilizing the losses in our legacy footprint.

Speaker 2

This quarter, we made substantial progress on both fronts. Excluding the impact of losses related to ACP, we would have reported a net gain of more than 300 high speed data customers. Our 2nd quarter results include high speed data revenue of $105,000,000 down 1.6% year over year. Adjusted EBITDA of $70,000,000 increased 2.8% year over year and an adjusted EBITDA margin of 44.1 percent was up 4.6 percentage points from the same period last year and 2.4 percentage points from last quarter. We have now fully realized the target of $35,500,000 savings, more than a year ahead of schedule.

Speaker 2

I am pleased with the progress that we continue to make, both in terms of growing our fiber business in new markets, while also reducing our cost base and managing expenses to drive adjusted EBITDA growth. During the Q2, our fiber expansion proceeded well. We passed an additional 7,000 new homes in our greenfield market, bringing our total number of homes passed in greenfield markets to 52,500. We also added 1900 new homes through Edge Outs. Our expansion efforts are further driving our growth and continue to lay the foundation for our exciting future, providing exceptional quality fiber to the home broadband service with what we believe is the best value in the market.

Speaker 2

The consistent improvement in our penetration rates across Edge Outs and Greenfields reinforces my conviction in our strategy. The penetration rates in our Greenfield markets increased nearly 3 percentage points to 15.4 percent, up from 12.5% at the end of the first quarter. Our Edge Outs are also performing extremely well, especially the 2024 vintage, which increased to 38.6 percent, growing over 6 percentage points from the end of last quarter. Our 2023 Edge Out vintage increased to a penetration rate of 28.6%, which is also a great improvement from last quarter. The 2022 vintage remains strong at 31%.

Speaker 2

I am pleased with further progress we made during the quarter with respect to our subscriber numbers. The ending of the ACP program resulted in a churn of 5,000 high speed data subscribers, resulting in a total net loss of 4,700 high speed data subscribers. Excluding the ACP impact, HSD net adds increased by 300 subscribers. I would like to break this down a little bit further to emphasize the progress we are making in our legacy footprint. Specifically, in the Q2, our greenfield markets added 2,400 new HSD subscribers.

Speaker 2

Excluding the 5,000 subs from ACP, the losses in our legacy markets accounted for a loss of 2,100 HSD subs, which is 1,000 fewer losses than the Q1 and a significant improvement from the Q4 of last year. While there will be further impact from ACP in the Q3, our efforts to keep those customers on our platform are mitigating some of these losses. Overall, we continue to see very low churn across our base and the strategic steps we introduced during the Q1 are continuing to show extremely positive results. Specifically, we introduced speed upgrades and our simplified pricing plan, which includes an optional price lock, modem included, no data caps and no contracts. The continued success of these strategies has given us additional confidence in the progress we are making to strengthen our subscriber numbers in our legacy footprint.

Speaker 2

The chart on the lower left quadrant of the slide shows customers buying in the lower tiers was consistent with last quarter as we work to lower the impact from the ending of the ACP program. This resulted in a slight decrease in HSD ARPU relative to last quarter. Although compared to the same period last year, ARPU increased 2.6%. The year over year increase was largely driven by last year's rate increase as well as the impact of new customers buying higher speed tiers, especially in greenfield markets. As of the Q2, we now have 485,000 HSD subscribers.

Speaker 2

As expected, our traditional video business declined further during the quarter, which will continue as we transition to YouTube TV. The success of this partnership is another factor that is contributing to the consistent load churn across our customer base. We are seeing a nice increase in customers buying an HSD YouTube TV bundle, a trend we expect to continue, especially in our expansion markets. Our partnership provides a fantastic opportunity to offer 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. To conclude before handing the call to John, I want to reiterate the key points that I made at the outset of the call.

Speaker 2

First, we continue to make great progress with our fiber build and expansion markets, both in terms of passing new homes and increasing our penetration rate. And we are seeing ongoing progress with regard to stabilizing our numbers in our legacy footprint. I'll now turn the call over to John, who will go over our financial results in more detail.

Speaker 3

Thanks, Teresa. In the Q2, we reported $105,000,000 of HSD revenue, which decreased 1.6% year over year, largely reflecting the decrease in HSD subscribers due to ACP as well as the impact of lower ARPU during the quarter. Total revenue for the 2nd quarter decreased 8% to 158,800,000 dollars as video and telephony revenue dropped 26% and 11.6%, respectively, in addition to the decline in HSD revenue during the quarter. Adjusted EBITDA increased 2.8% from the same period last year to $70,000,000 with an adjusted EBITDA margin of 44.1%. The incremental contribution margin increased sequentially and continued to grow year over year driven by the proportionate increase in HSD revenue, which increased to more than 66% of our total revenue this quarter, which is up from 62% in the same period last year.

Speaker 3

With respect to our cost structure alignment, we made significant progress this quarter and have now fully realized the target of $35,500,000 more than a year ahead of schedule. In addition to these measures, we made further expense reductions predominantly in our corporate and administrative areas as we continue to focus on reducing our cost structure, which helped drive our adjusted EBITDA higher this quarter. We ended the quarter with total cash of $20,700,000 and total outstanding debt of $974,500,000 with our leverage ratio at 3.4 times. Our current cash position is largely in line with last quarter as we continue to lower our cost base and manage working capital. We reported total capital spend of $51,100,000 down $12,500,000 from last year and down $21,400,000 from last quarter.

Speaker 3

This reflects a significant decrease in expansion CapEx. Our core CapEx efficiency was 21.1% in the 2nd quarter. Expansion CapEx decreased $12,800,000 from the same period last year and $29,400,000 from last quarter as we emphasize lighting up homes we passed and increasing penetration in our expansion markets. In the second quarter, we spent $10,200,000 on greenfields, dollars 2,700,000 on Edge Outs and an additional $4,700,000 on business services. We believe we are on track to spend no more than $60,000,000 on greenfield expansion this year.

Speaker 3

Although the pace of greenfield construction has slowed down compared to Q1, it is in line with our CapEx and we'll continue to operate at a slower pace for the time being. We're currently exploring options to enhance our ability to accelerate our expansion initiatives. Specifically, we're actively exploring a number of options to secure additional funding. This process may or may not result in a near term transaction. Our unlevered adjusted free cash flow, which we define as adjusted EBITDA less CapEx, was $18,900,000 for the 2nd quarter, a significant improvement from last quarter driven by the reduction in expansion CapEx.

Speaker 3

Finally, I'd like to provide our expectations for the Q3. As Theresa indicated in her comments this morning, we're seeing positive indications from the steps we are taking to address the challenges in our legacy markets. However, we believe that our results in the Q3 will reflect a number of competing dynamics that may negatively impact our HSD subscriber numbers. First, we believe that there will be an additional ACP impact on our numbers this quarter. And secondly, we're anticipating reduction in capital spend in our expansion initiatives, which could lower the number of HSD subscribers in these markets.

Speaker 3

As a result of these items, we expect our HSD net adds to be between negative 5,000 negative 3,000. We believe HSD revenue will be between $106,000,000 $109,000,000 We expect total revenue for the 3rd quarter to be between $157,000,000 $160,000,000 and adjusted EBITDA to be between 67,000,000 dollars 70,000,000

Operator

Thank you. We will now begin the question and answer session. Your first question comes from the line of Brandon Nispel with KeyBanc Capital Markets. Your line is open.

Speaker 4

Hey, guys. Thanks for taking the questions. John, I was hoping you could go a little bit deeper in terms of the options you're exploring for liquidity. It looks like you ended the quarter with a fully drawn revolver and $20,000,000 in cash. And maybe level set us what do you expect for free cash flow for the rest of the year and what does that mean in terms of new home expansion on Greenfield for this year?

Speaker 4

Thanks.

Speaker 3

Okay. So thanks, Brandon. A lot in there. So clearly, we're managing our cash position. I think we did a great job of it in the Q2.

Speaker 3

We've done a lot of different things that we mentioned on the call. So we've lowered our OpEx and that's one of the reasons we were able to hit the 3 year target of $35,500,000 early. We've gone beyond that. Clearly, we've not stopped, but we've slowed the pace of capital spending in expansion. And obviously, we're managing our working capital.

Speaker 3

So we've got lots of ways to preserve the liquidity and I don't really feel we have any issues there. The theoretical possible funding options or any other options we would look at, too early to give you great detail on that, but the whole purpose of that would be to be able to expand the pace, I think, of expansion CapEx. So right now, we're on a pace to spend the $60,000,000 for Greenfield

Speaker 4

that we said we would spend

Speaker 3

at the beginning of the year. We've already done about $51,000,000 of it. I don't see any change at all in that. And to the extent that we create some sort of transaction then think you'll see us expand that a bit. That's where we're at right now.

Speaker 4

Great. Thank you for taking the questions.

Speaker 1

You bet.

Operator

Next question comes from the line of Patia Levi with UBS. Your line is open.

Speaker 5

Great. Thank you. Can you provide a little bit more color on HST subscriber trends you're seeing, specifically the guidance for Q3, how much of that is do you think related to ACP? Are you taking any reserves against that? And should we assume it will be done by the end of Q3?

Speaker 5

And a bit of color in terms of the competitive environment would be helpful. In terms of fixed wireless, are you seeing any incremental build from over builders or anything different from the cable side? And maybe lastly, a bit more sort of how you're thinking about HST ARPU trends going forward would be helpful. Thank you.

Speaker 2

Thanks, Batya. So first of all, on the HSD subscribers, I think we're feeling very good about certainly this quarter we're talking about right now, that we would have had 300 net ad positive except for ACP. And I feel like we've been managing the ACP base quite well. At our peak we have 30,000 subscribers so certainly less exposure than many of our peers out there. Specifically for the Q3, we will continue to see some impact from ACP.

Speaker 2

And I can tell you well over half of the disconnects that we are seeing are customers who were in a non pay status. So they may have had all of their fees subsidized with the $30 or the majority of it. But then when the subsidy went away with the ACP program, they were no longer able to cover those. I think we've done a good job converting as many as possible into ongoing paying subscribers. We certainly are always balancing preserving EBITDA with throwing caution to the wind on ARPU and balancing that with customers.

Speaker 2

So for the Q3, we'll still seek some of that impact. It's hard to know exactly how much that will be, which is why we've put the guide out there the way that we're seeing it. From I think your second question was around the competitive environment. And I think things have shifted a bit in terms of the competitive environment. I think we've seen a softening of any competitive impact from fixed wireless as has been widely reported throughout the industry.

Speaker 2

I see, I guess two reasons for that. One is just the fixed wireless providers themselves. I don't know if they're getting to saturation on that or what their issues are. But specifically I can point to the competitive strategies we took starting February 1st this year. Specifically on our customer base, we upgraded the 200 meg subscribers to 300 and our 500 meg customers to 600.

Speaker 2

And I think customers have appreciated that surprise and delight and appreciate the speeds that they're getting. We also rolled out on September 1st simplified pricing that provides no contract, no data fees, no hidden fees. We also have an optional price lock that gives that certainty to customers of what their bill would be over time as an option. So I think all of those things that we did competitively have helped us both on the top end of the sales funnel with Connect as well as continuing to light our customers which is why we're seeing very strong low churn, so very low churn. And then the third question I believe you had was around HSD ARPU and we are pleased that we see ARPU up on a year over year basis.

Speaker 2

I believe on the last quarter, the ACP did have a bit of a pull on our ARPU as we tried to place those customers who are especially cost conscious into appropriate pricing and of course the $30 subsidy went away. But in general, we are always balancing customer growth, churn with EBITDA and the revenue and

Speaker 1

ARPU growth. So I think I addressed the 3 questions.

Speaker 5

Yes, that's helpful. Thank you.

Speaker 2

Okay. Thanks, Batya.

Operator

Our next question comes from the line of Frank Louthan with Raymond James. Your line is open.

Speaker 6

Great. Thank you. Back to the ACP, I think last quarter your guidance was inclusive of ACP losses. Just wanted to clarify your 35,000 loss for Q3, does that include ACP losses or does that not include them and exclude if you didn't include them, do you think you would be positive? And then I'm sure you won't don't want to discuss about the deal, but could is there a time frame that this is that the deal is under?

Speaker 6

And are you able to accept competing bids at the time? Are you actively looking for them as part of the process? If you can give us any color on that, that would be great.

Speaker 2

Okay. So on the ACP, really our guidance last quarter was very much a guess because we didn't know what was going to happen with the dynamics of ACP. If you think about, just a quarter ago when we were reporting, we really didn't know what the plans were or how it might filter out. So that was a guess. So I don't think our guidance for the Q2 fully encompassed what might happen with ACP.

Speaker 2

We've now started to see how our transition plans for those customers are working and we've seen the amount of customers who are struggling and getting into non pay status. So the negative 3,000 to 5,000 that we're guiding to for the Q3, I think is better informed by what we've learned from the last couple of months with the ACP program, gone. So last quarter it was not fully in our guidance. This quarter we feel more confident that we have a sense of the impact that it will make. And as for anything related to the unsolicited proposal, we really can't comment.

Speaker 6

Okay. Thank you. But to be so the $35,000 I said that would include ACP losses. Can you give us an idea of what that amount is? Is it more than $5,000 you think you're going to lose or how should we think about it?

Speaker 2

Yes. I think until we get there, I can't break it down in great detail, but I can tell you, we do feel good about how we have been stabilizing the legacy base through, all the things I mentioned with the new simplified pricing and our optional price lock, the churn reduction, YouTube TV, all of those things are definitely having a positive impact on the legacy base as well as the rapid penetration that we're seeing on the greenfield side. So we feel good about those forces that are all at play as well as managing the ACP. So more to come.

Speaker 6

Okay. Thank you.

Speaker 2

Thanks, Frank.

Operator

There are no further questions at this time. Ms. Elder, I turn the call back over to you.

Speaker 2

Okay. Well, thank you so much for joining our call this afternoon, and we hope you have a great rest of your day.

Operator

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.

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Earnings Conference Call
WideOpenWest Q2 2024
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