WideOpenWest, Inc.

Good morning. My name is Chris and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Wide Open West fourth quarter 2021 earnings 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'd like to ask a question during this time, simply press star then the number one on your telephone keypad. To withdraw your question, please press star one again. Thank you. Andrew Bozen, Vice President, Head of Investor Relations, you may begin. Andrew Bozen, Vice President, Head of Investor Relations, you may begin.

Andrew Bozen, Vice President, Head of Investor Relations, you may begin. Andrew Bozen, Vice President, Head of Investor Relations, you may begin. Andrew Bozen, Vice President, Head of Investor Relations, you may begin. Andrew Bozen, Vice President, Head of Investor Relations, you may begin. Andrew Bozen, Vice President, Head of Investor Relations, you may begin. Andrew Bozen, Vice President, Head of Investor Relations, you may begin. Andrew Bozen, Vice President, Head of Investor Relations, you may begin. Andrew Bozen, Vice President, Head of Investor Relations, you may begin. Andrew Bozen, Vice President, Head of Investor Relations, you may begin. Andrew Bozen, Vice President, Head of Investor Relations, you may begin. Andrew Bozen, Vice President, Head of Investor Relations, you may begin. Andrew Bozen 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 and 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-K filed with the SEC, as well as the forward-looking statement 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 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 historical reported results can be found in our earnings releases and our trending schedules, which can be found on our website. I'll turn the call over to WOW's Chief Executive Officer, Teresa Elder.

Thanks, Andrew. Welcome to WOW's fourth quarter earnings call. In addition to our press release and quarterly trending schedule that are available on the investor relations page on our website, we've also included a presentation to complement our prepared remarks. This past year has been one of the most consequential years in our company's history, and we finished the year with strong results driven by further strength in our high-speed data business. We sold five service areas at a combined multiple of 11 times, used the proceeds to significantly lower our debt and leverage ratio, received ratings upgrades from both S&P and Moody's, and we refinanced our debt. In addition to strengthening our financial position, we also made substantial operational improvements in our business that added to our already strong customer experience. The number of self-installs continues to grow. We further improved the way we serve customers and enhanced the overall efficiency of our business with the successful consolidation of our billing system into one system. Clearly, we accomplished a lot this year. Now let's dive into the results. For the full year, our high-speed data revenue, which is now 55% of our total revenue, increased more than 11% on a pro forma basis, offsetting a 13% decline in video and a 12% drop in telephony revenue from last year. Our full year pro forma adjusted EBITDA increased nearly 9% to $261.6 million. driven largely by the growth in our high-margin, high-speed data business. The pro forma adjusted EBITDA margin was 36% for the year. The metrics in our high-speed data business also continue to show strength. During the fourth quarter, we added 2,200 high-speed data RGUs. up 37% from the last quarter, bringing our total number of HSD RGUs to nearly 512,000. With consistent levels of low churn, we once again increased the total number of subscribers to 533,000. we have maintained a sell-in rate of approximately 87% or slightly higher of new customers purchasing our HSE-only service for the sixth consecutive quarter, which we view as another great indicator of our broadband-first strategy's long-term success. Whether it's the growing number of connected devices, increased streaming of video and gaming, or working remotely, the importance of broadband and access to a high-quality network continues to increase. As a result, customers are requiring higher data speeds. In the fourth quarter of 2021, once again, 87% of new customers purchased speeds of 200 meg or higher, with a majority of those buying speeds above 500 megs. HSD ARPU of $65.60 increased 2.5% from the same period last year and was in line with the third quarter's HSD ARPU, adjusting for the $2.9 million of deferred revenue that was included in last quarter's revenue. The year-over-year increase in HSD ARPU predominantly reflects customers purchasing higher data speeds. Our edge-out strategy continues to deliver growth in homes past and increasing penetration rates. Penetration for the 2019 vintage increased to 19.6%. The 2020 vintage remained solid at 20.6%. And the 2021 vintage increased to 30% this quarter. We are especially pleased about the growth of our 2021 vintage, which continues to show strength as we increase the number of homes passed and increase penetration. This is a great indicator for our core business, demonstrating the opportunity for growth and highlighting our ability to grow penetration quickly in future greenfield markets. Over the past few years, we have transformed our strategy, launching broadband first to meet customer demand and grow our margins. And this past year, we transformed our financial position by divesting five service areas, generating $1.8 billion of gross proceeds, which we used to significantly lower our debt and deliver the business. At our investor day in December, we presented our strategy for growth, including details for our plan to increase the number of homes passed. With our significantly lower leverage, we are now able to grow our footprint in non-adjacent greenfield markets that have less competitive intensity. And we're able to do this with proceeds from operations without having to re-lever the business. A few weeks ago, we announced that Seminole County, Florida will be our first greenfield market expansion. This morning, we announced our second greenfield market in Orange County, Florida, where we will be investing approximately $40 million over the next few years and plan to reach more than 40,000 homes passed. Combined, these two investments in Central Florida represent an exciting step forward for WOW as we expand in new non-adjacent greenfield markets, bringing our advanced multi-gig fiber technology and award-winning customer service to approximately 100,000 new homes across our growing footprint. This week, we also announced a new partnership with Reach Mobile to offer customers the option to add wireless service with WOW Broadband, which will be branded WOW Mobile powered by Reach. This represents our entrance into the mobile market, providing our broadband customers additional flexibility to stay connected on the go through a reliable, no-contract cell phone plan with unlimited talk and text. As I said at the very beginning of the call, we accomplished so much this year. The focus and commitment of our employees to our customers was particularly evident, which is why I am so proud of the accolades that we received in recognition of that. In 2021, we were named one of the best no-contract Internet service providers by CNET. and the best and brightest companies to work for in the nation, as well as in Atlanta, Chicago, Denver, and Detroit. To conclude, I am so pleased with the continued execution of our broadband first strategy and the progress we've made in strengthening our financial position following the divestitures. We have been doing the hard work of transforming the company and executing our strategy. We now have set the stage for our future as a low leverage, high growth company through self-funding greenfield build, edge out and further driving penetration in our organic footprint for both residential and commercial customers. We are able to win through our people who have built the WOW legacy of customer centricity. WOW is a challenger, and we are better positioned than ever before reflecting on our ability to deliver fast, reliable, and affordable broadband products and services to new and existing customers. Now I'll turn the call over to John, who will go over our financial results in more detail. John?

Thanks, Teresa. Well, we've talked about transformation and our broadband first strategy a lot this year, and we really follow through. In 2021, the majority of our revenues were from high-speed data at 55%. This directly translates to the margin improvement that we continue to report. We've completed the sale of five service areas at an 11 times multiple, allowing us to de-risk our balance sheet and close on a new SOFR-based credit facility. Now let's look at the fourth quarter and full year results. As mentioned on the prior quarter's earnings call, we've updated our trending schedule and presentation on a pro forma basis to reflect the new WOW. As a reminder, due to GAAP accounting rules, our income statement includes a required column for discontinued operations to reflect the impact of the transactions. Note that these figures only reflect those items that are immediately identifiable as being associated with the service areas that we sold. The revenue numbers in continuing ops exclude the full impact of the divested service areas. Operating expenses that are part of the transaction services agreement remain in continuing operations but are netted out in pro forma adjusted EBITDA as the reimbursement for those expenses are included in other incomes. In the fourth quarter, our total pro forma revenues decreased 4.7% to $178.3 million compared to the same period last year. HSD revenue increased 5.1% to $100.5 million in the quarter, partially offsetting the decline in video and telephony revenues, which declined 15.4% and 11.1% respectively. The outperformance in our HSD business, as well as realized cost savings, contributed to the growth in pro-former adjusted EBITDA margin in the fourth quarter, which increased more than 170 basis points from the same period last year to 38.7% on a pro-former adjusted EBITDA of $69 million. On a full-year basis, total pro-former revenues were $725.7 million, down slightly from prior year's revenue of $730.2 million. The next shift in our revenue continued throughout the year as growth in HSD was up 11.2% from last year, offsetting the reduction in our video and telephony revenue, down 13% and 12.1% respectively. The growth in HSD revenue is attributed to several things, including the increase in ARPU, reflecting customers' demand for higher speed tiers through upgrades and sell-ins, coupled with further growth in HSE RGUs, which increased by 12,900 this past year, slightly below 2019, which we believe is the right comparison. Our incremental contribution margin increased in the fourth quarter to 73.4%, up significantly from 68.2% in the fourth quarter last year. This is consistent with the improvements we are seeing in our pro forma adjusted EBITDA margin. Following the divestiture of the five service areas, we committed to aligning our cost structure to be commensurate with the new WOW. As of year end, we have cut $5.5 million out of the business, which represents approximately 15% of the $35 million we identified to be reduced over the next few years. These reductions in our cost base are primarily from a decrease in headcount, which is evident in SG&A, as well as costs that are being incurred as services related to the TSAs as part of our divestitures. The latter are also reflected in our SG&A as we continue to incur the expense but are reimbursed for those costs, which are presented in other income. On an annualized basis, we are well on track to realize 2022's expected cost savings. Now I'd like to spend a few minutes talking about our current debt leverage ratio and balance sheet. On November 1st, we completed the second of two divestiture transactions and subsequently received credit rating upgrades from both Moody's and S&P, reflecting our lower debt level. In December, we refinanced our debt, closing on a new credit facility and tightening our cost of capital by 75 basis points. We ended the quarter with total cash of $193.2 million, and total outstanding debt of $752.7 million, resulting in a pro forma leverage ratio of 2.7 times, adjusting for cash held for taxes related to the transaction. On a pro forma basis, we reported fourth quarter total capital spend of $36.1 million and total annual capital spend of $162.3 million, down $9.1 million from last year, consequently improving our total capital efficiency by 1.1%. The improvement is primarily due to decreased spend of CPE previously pulled into 2021 in preparation for supply chain delays offset by investments made in our network. Additionally, including this morning's press release regarding Orange County, Florida, we have now announced two greenfield markets, Seminole County, Florida, where we plan to invest at least $60 million over the next two to three years, and Orange County, Florida, where we plan to invest at least $40 million over the same period. Combined, we will be bringing our advanced fiber technology to more than 100,000 homes. This puts us well on our way to the target of 200,000 homes. We expect that these initiatives will drive our expansion capex for the year to approximately $80 million, which is slightly higher than our expected annual average that we presented on Investor Day. In total, taking into consideration the additional expansion capex, we anticipate that our total capex for 2022 will be approximately $215 million. We're excited to be able to make these investments directly from the cash generated by the business. If you look at the right side of the slide, we've included a new metric, unlevered adjusted free cash flow, which we define as pro forma adjusted EBITDA, less capex from continuing operations. This year's fourth quarter results of $32.9 million reflect an increase of $13.8 million up significantly from $19.1 million in the same period last year. We believe this metric presents cash generated by the ongoing business and provides a clearer comparison to prior periods. We'll continue to use this metric throughout the year as a proxy for free cash flow. Finally, before we open the call for questions, I'd like to talk about guidance. Last summer, we removed our guidance following the divestiture of the five service areas. Now we have provided pro forma historical statistics and financials and presented our strategy at our investor day in December. I'd like to reintroduce guidance and provide our outlook for both the upcoming quarter and the full year. For the first quarter, we expect HSE revenue to be between $99 and $102 million. total revenue to be between $171 and $174 million and adjusted EBITDA to be between $65 and $68 million. We also expect HSD net additions to be between $2,300 and $2,700. For the full year, we expect HSD revenue to be between $427 and $430 million, total revenue to be between $708 and $711 million and adjusted EBITDA to be between $281 and $284 million. We expect to add between 14,000 and 17,000 HSV RGUs for the year, with the majority coming in the back half of the year. Our guidance across all of these metrics is in line with the long-term targets we presented in December at our investor day. In closing, we're thrilled about the upcoming year and the growth ahead as we continue to make good progress in executing our broadband first strategy, building on our momentum, and delivering strong results. And now we'd like to open up the line for questions.

Male Speaker 1 As a reminder, if you would like to ask a question, please press star then 1 on your telephone keypad. The first question is from Frank Lelfen with Raymond James. Your line is open.

Frank Lelfen Great. Thank you very much for taking the question. You mentioned the additional CapEx that goes into the investments. Can you characterize any OpEx that you're going to make for the Greenfield investments And then can you comment on the wireless announcement you made earlier this week? What sort of penetration do you think you can get ultimately out of that product? Thank you.

Great. Thank you, Frank. I'll go ahead and ask John to answer the part about CapEx and OpEx, and then I'll take the wireless.

Yeah, so the CapEx, Frank, is coming in this year. It's growth CapEx of 80 million. But remember, the growth CapEx also includes edge ad activity and commercial activity. So it's not just Greenfield. The Greenfield CapEx will probably start to really come into play towards the back half of the year. As well, in terms of the OpEx question that you asked, there's not a significant amount of OpEx that's created at this phase. There'll be a bit, as we get towards the back end of the year, a bit of incremental marketing expense as we go into areas where WoW might be not well known as we are in our service areas. Expect more as we go through the next quarter, and then you'll start to see some of the funds rolling through in the back half of the year.

Yeah, Aaron, thanks for the question on mobile. We announced yesterday that we are launching Wow Mobile powered by Reach. And for us, it's really a service that our customers trust us to provide, and we're thrilled to have the partnership with Reach, who has our same kind of standards of quality of service. So we're excited to be working with them. For us, it's less a driving share or a penetration. It really is having that offering for customers who want to take the great experience of broadband on the go with them. And we think over time, it really will help us with furthering our relationship with customers and deepening that ability for customers to never want to churn from us and We think it makes a lot of sense. So it's less about targets and how deep we drive the penetration. It's just always having the things that customers expect from us, and we can provide in a very straightforward way. So we're excited about it.

All right, great. And just to clarify on the Orange County announcement, I assume that's you're targeting areas that are more adjacent to Seminole County, not necessarily across the entire area there in Orlando?

Yes, we're not going into the really the kind of city in the metro of Orlando. We're really looking at some of those northern suburbs that kind of match the characteristics that we look for the most. And we're very excited to be going into both Seminole and Orange County.

All right, great. Thank you very much.

The next question is from Dan Day with B Reilly. Your line is open.

Yeah. Morning, guys. Thanks for taking my questions. Two-part question here first on the greenfield. You know, I think maybe the most common question I get from some of the more skeptical investors out there as far as fiber to the home greenfield, you know, they point to some of the, I guess you could call it relatively poor historical performance of you know, the fiber overbuilders of the past. So just maybe first, if you could talk about some of the key things that have changed over the last, you know, call it 5, 10, 15 years, as far as construction costs for fiber to the home, and then, you know, also value to the consumer. And then at the investor day, second question, the 30 to 40% IRRs you're targeting for Greenfield CapEx have you know, maybe you could just share anything you can on what might give investors confidence that those are achievable, whether it's, you know, being as underpinning your cost per pass assumptions, marketing spend, penetration ramp, anything there that you could give would be great. Thank you.

Okay, why don't I take the first half and then I'll turn it over to John for the IRR question. So thanks for the question, Dan. You know, I look at our own experience with edge outs and really the whole history of WOW have been going into new markets as a challenger brand, building out a great alternative technology, building our brand and driving great penetration. We have 28% penetration across our entire organic footprint. And we've shown you the recent vintages of edge outs and how we continue to drive strong penetration. And so this is our playbook. This is what we know how to do across the board. It's in our wheelhouse. We have always been a builder and constructing new areas. And we have a very robust process through which we have chosen certain markets where we think consumers are really looking for a new choice and a new alternative. So we feel very confident in that. Combined with the analysis that we did to say that for the new greenfield markets, We feel fiber to the home is the right technology. It costs a bit more up front, but we feel over time with the maintenance and some of the operational elements of it, it makes a lot of sense and will allow us to drive a deep penetration. So I can't speak to what anybody else has done, but this is exactly the playbook that WOW does, and we tend to tell you what we're going to do, and then we go do it. So, John, you want to talk about the IRR part?

Yeah, so just so you know, Dan, our greenfield modeling is massive, and it has over 60 inputs, and I think everything that's on a cross-functional basis across the organization was well considered. But some of the key considerations in that, or one of the most key considerations is, well, what penetration levels can you hit? And quite frankly, we think that we are going to hit penetration levels in greenfield markets that are substantially higher than what we have overall. So, you know, overall for the entity, it's about 28%. But that being said, we have markets where we're significantly higher than 28%. And so when we pick greenfield markets, we're specifically looking for markets that have perhaps only a single one gig provider and perhaps a DSL provider. And when we are in those types of situations with our existing business, we tend to penetrate quickly and significantly higher than the average. And that's what gives me some confidence about the IRRs.

Great, thanks. And then just a quick follow up, just any timeline to maybe the first Greenfield customer, you know, later this year, early 2023, anything on that? And then just can you confirm if there are any other fiber to the home options in Orange and Seminole County today or any of the LECs out there, you know, have plans to pursue fiber to the home in those counties?

Yeah, I guess to the second half of that question, I mean, we can't speak for what competitors are doing, but where we're planning to go absolutely fits the criteria that we have. So we feel confident in our ability to succeed and offer customers great choice.

Sorry, I mean, we'll be building down in the second half of this year. Expectations are first Greenfield customers on board in early 2023. Okay.

And we're already doing work, obviously, in both counties.

Yeah, I appreciate the color, and I will turn it over. Thanks for your time.

Thanks, Jim.

The next question is from Matthew Harrigan with Benchmark. Your line is open.

Thank you. I was curious if you could comment on the current environment you're seeing for broadband pricing and whether it's just a downward bias exerted by T-Mobile and In particular, I know you didn't think that was having much impact during your investor day. And how would you arrange your assessment of your pricing power relative to any cost pressure? I mean, I've got the TV on right now. I'm seeing people in a bomb shelter in Ukraine. So I can imagine what we're going to be looking at as far as further in the supply chain. Is there anything that gives you pause in terms of pressure on your margins in terms of having not quite as much room on pricing versus some cost pressure that may have been somewhat unanticipated given everything going on? Thanks. Sorry to get a little moralistic there, but it's kind of an ugly morning.

Thanks, Matthew. Appreciate the thoughtful question. You know, I would point to the ongoing strength of our ARPU and growth that we've had in high-speed data. Clearly, we always have as part of the WOW philosophy that we provide high speeds, a reliable network, the legacy of this great customer service we have, all for a good value. And so we offer good pricing to our customers But it's that blend of all of those things together that I think really makes us successful. So I point also to the strength of our continuing growth of our subscriber base and our high-speed data RGUs up 37% over the previous quarter. So I know that we always are competitive with the full rate of services that we offer. We have not seen any significant impact from any – any certain competitor, I think the whole market continues to be pretty strong. While I would also have to say there still are some uncertainties in the market from COVID and such and just the economy in general that we continue to all in the industry grapple with, where it's difficult to predict some of the seasonality that we traditionally had as a cable industry. so that's why we think although we're seeing continued um growth in our business and quarter over quarter growth uh we think that this year's maybe a little bit more back half uh focused in terms of your question on supply chain uh we actually are in a very good position with equipment and everything we need for the organic business and the growth we're seeing there Plus, we have gotten ahead of the curve and the buying process for our greenfield markets. So we have months ago already gotten what we need to launch the markets and do what we need to do to meet the plans that we're setting out for you. So we got way ahead of the supply chain issue. So we're feeling like we're in a good position. Thanks for the question.

Thank you. Great, great timing in those asset sales, and good luck with the Novo build.

Thanks.

The next question is from Brandon Nispel with KeyBank Capital Markets. Your line is open.

Okay, great. Two questions. John, on the EBITDA margin guidance, it's just shy of 40% this year. Can you help us understand what's embedded in there in terms of corporate overhead expenses and expenses related to the new mobile service? Then maybe following up on that last question for Teresa, what gives you guys the confidence to guide to HSD net ads this year? Can you maybe help us understand what you're seeing in terms of gross ads and churn? Thanks. Let me do the first one. So I think you're talking to how are we doing with cutting out corporate overhead like we suggested we would do at Analyst Day. I think we're on track. to keep doing what we're doing. And I would say by the end of 2022, we'll have gotten about $11.5 million out, and then more will come after that. Part of it ties into satisfaction of the TSAs, which we should be done with by the end of the year, and then it really will expand since then. To the mobile question, the impact on our GNA is de minimis. Okay, this is an MD&O sort of light Most of the heavy lifting will be handled by the NB&O partner. And this is something that we're offering to our customers, which we think will be impactful in reducing churn and giving them a bundle that they can live with. So impact should be de minimis.

And to the second question, Brandon, really on HSD, we have continued to, I feel, perform quite well. We're seeing strength across all of our channels. In fact, our close rates are actually very strong and close to some record highs. I think customers are looking for that equation of value with the speed, reliability. and the trusted partner for customer service as well. We also are seeing some nice growth in our commercial and small business area, kind of returning to some of the pre-pandemic levels. We really focus on local markets and see some great opportunities there. And, you know, I just see that we're kind of continuing that cadence of growing our subscriber base in our organic markets. Plus, I'm pleased with the strength that we've seen in our edge out areas and know that, you know, for the future, greenfields are going to be quite strong, too. On the other half of this side is really all the work that we do every day to retain our loyal customers and keep that churn at a very low level. So just a couple of points there. Clearly, last year we participated in the EBB program, the Emergency Broadband Benefit. That is now morphing into the Affordable Connectivity Program. We have about 10,000 customers. who are availing themselves of that plan. That's up about 2,000 from the last time we reported on that. So for the customers who are able to qualify for that, clearly that helps them significantly. It still is mostly the existing customers as opposed to new customers, but we feel that's a good program, and the ACP program offers that flexibility for even more folks. We see mobile as another element that will help customers be able to get their bundle of connectivity needs through us, and we think that will also continue to keep us at those low churn levels. along with just the reliable service, which is always so important. So that's why we feel confident in the numbers that we're putting out there, which I think are strong numbers. So we feel good about that.

Thank you. We have no further questions at this time. I'll turn the call over to Teresa Elder for any closing remarks.

Thank you so much. And thank you all for joining us this morning. And we really appreciate your continued interest and support of WOW. Have a great day.

Ladies and gentlemen, this concludes today's conference call and webcast. Thank you for participating. You may now disconnect.