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spk08: Good morning. My name is Rex, and I will be your conference operator today. At this time, I would like to welcome everyone to the Wide Open West Q2 2022 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 would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star one. Thank you. At this time, I'd like to introduce Andrew Posen, Vice President and Head of Investor Relations. You may begin your conference.
spk01: Good morning, everyone, and thank you for joining our second quarter 2022 earnings call. With me today is Theresa Elder, WOW's Chief Executive Officer, and John Rego, WOW's 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 Law 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 or cause actual results to differ materially from our forward-looking statements, please refer to our filings with the SEC, including the risk factor 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. 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. We have also included a presentation this morning. Now, I'll turn the call over to WOW's Chief Executive Officer, Teresa Elder.
spk02: Thanks, Andrew. Welcome to WOW's second quarter earnings call. I'm pleased with the progress we consistently make as we execute our long-range plan as a high-growth, low-leverage business. We continue to grow to HSD subscribers. which exceeded our expectations for the quarter and drove record pro forma adjusted EBITDA and EBITDA margins. We have to balance our optimism for the future with the challenges of the current economic environment.
spk10: However, despite these challenges, which we believe are short-term in nature, our outlook for next year and beyond remains positive.
spk02: For the second quarter, our high-speed data revenue increased 4% on a pro forma basis, while video and telephony revenue declined 14 and 12 period last year. Our pro forma adjusted EBITDA increased nearly 10% to a record 70.6 million, driven largely by the growth in our high-margin, high-speed data business. The pro forma adjusted EBITDA margin was also a record 40.1% for the quarter. Not only are we executing our strategy and growing our business, but our employees recognize WOW as a great place to work. Once again, we have been named one of the best and brightest companies to work for in Atlanta, Detroit, and Denver. and Workforce Research Group, and Florida Trends have named us one of the best companies to work for in Florida. Our employees are one of our main differentiators that enable us to provide exceptional customer service. In recognition of WOW's efforts to continuously innovate to meet the needs of our customers and to close the digital divide, we were recently honored by CableFax, with the 2022 Independent Digital Equity Award. All of these achievements highlight a successful first half of 2020 and future prospects of our broadband-first growth strategy. During the second quarter, we added 2,200 high-speed data RGUs, bringing our total to more than 517,000. With consistent levels of low churn, We once again increased the number of subscribers both year-over-year and sequentially, ending the quarter with 537,000. The success of our focus on adding HSD-only customers is demonstrated by a sell-in rate around 87% for the eighth consecutive quarter. Consistent with the past several quarters, a majority of new customers are buying speeds over 500 meg, and 85% of new customers are buying speeds over 200 meg. HSD ARPU of 6630 is up sequentially and year over year, predominantly reflecting customers purchasing higher data speeds and a slight rate increase that took effect in March. Our edge out strategy continues to drive growth, especially in our 2021 vintage, with penetration increasing to 40%. Our 2022 vintage is off to a great start, with penetration jumping to over 14% within the first 100 days, and our 2020 vintage remaining constant at 23.5%. We believe the performance from our edge out investments supports our confidence in our ability to grow quickly in our greenfield markets. And with regard to greenfield expansion, we officially started construction in Central Florida and are also preparing to put shovels in the ground in Greenville County, South Carolina. These initiatives are progressing well and we're able to fund them using cash from operations without having to increase our leverage. Another key factor in this effort is that we have secured the necessary materials and labor, which gives us confidence in our substantial progress on our mobile initiative and recently announced that WOW Mobile, powered by Reach, is now offered across our... In this tightening economic environment, we're so pleased to add this product to our portfolio, keeping customers connected at a price that fits their budget on a... reliable, no contract, cell phone plan with unlimited talk and text. We believe this additional offering will further enhance customer acquisition and retention while providing a great service that our customers expect and value. Not only strategic growth initiatives, but we have also enhanced our core business with new initiatives to our infrastructure. including the introduction of our 1.2 gig speed tier with 50 meg uploads. For our commercial customers, we've launched our live agent chat option and WOW Business continuity service, which ensures our small and medium-sized business customers always have access to an internet connection. To conclude, I'm so pleased with our second quarter results, which included record pro forma adjusted EBITDA and EBITDA margins. Our team is extremely focused on executing our growth strategy with continued momentum in our current footprint. The growth of our HSD subscriber base, higher penetration rates in our edge-out markets, and progress on our greenfield expansion demonstrates that the pillar of our business are strong. Now, I'll turn the call over to John, who will go over our financial results in more detail.
spk04: Thanks, Teresa. The second quarter delivered solid results despite increased volatility in the macroeconomic environment. We continue to execute on our broad opportunities ahead. In the second quarter, total revenue declined 3.2% to $176.1 million, reflecting a 4% decrease in high-speed data revenue offset by declines in video and telephony which decreased 13.7% and 11.6% respectively. The growth in HSD revenue was predominantly driven by existing customers buying higher speed tiers and a marginal rate increase on our HSD service which took effect in March for a portion of our subscriber base. These results were softer than expected, primarily due to promotional initiatives which helped drive subscriber growth. Proforma adjusted EBITDA grew 9.8% from the same period last year to a record $70.6 million, driving Proforma adjusted EBITDA margin above 40%, also the highest that we've reported on a Proforma basis. We're now very close to the adjusted EBITDA margin that we reported prior to divesting the five service areas last year. On the next slide, We see the incremental contribution margin grow sequentially and year-over-year to 74.8% as the proportion of our high-speed data revenue, which is now 58% of total revenues, continues to climb. I'd like to reiterate the importance of this metric as it represents a strong leading indicator for adjusted EBITDA and free cash flow generation. Now for a progress update on our cost structure alignment following the divestiture of the five service areas. As of the second quarter, we cut an additional $200,000 of cost, bringing our trailing 12-month savings to $16.1 million. This represents approximately 45% of the $35 million we identified for reduction. We ended the quarter with total cash of $49.9 million and total outstanding debt of $749 million, holding our pro forma leverage ratio at 2.6 times. In the second quarter, Our capex from continuing operations decreased by $6.8 million from the same period last year to $34.7 million, partly due to decreased spend on service enhancements and network support in expansion capex. Greenfield construction began to ramp up during the quarter, contributing $4.5 million. Looking at the right side of the slide, our second quarter results for unleveraged adjusted free cash flow, which we define as pro forma adjusted EBITDA less capex, increased to $13.1 million from the same period last year, enabling us to fund our greenfield investments. Finally, before we open up the call for questions, I'd like to talk about our outlook for the third quarter and beyond. With full recognition of the broader economic headwinds we expect to face, we are revising our outlook for the year for HSD and total revenue but maintaining our, we believe these challenges are short-term in nature, and as a result, we are maintaining. For the third quarter, we expect HST revenue to be between, total revenue to be between 171 and 175 million, and adjusted EBITDA to be between 66 and 69 million. We expect HST and 3000. For the full year, HSE revenue is expected to be between $415 and $419 million, total revenue to be between $7 million, and pro forma adjusted EBITDA to be between $281 and $284 million. We expect HSE net ads to be between $12,000 and $15,000. In closing, this was another solid quarter for WOW. We're thrilled about the growth ahead as we continue to make good progress in executing our broadband first strategy. And now we'd like to open up the line for some questions.
spk08: At this time, I would like to remind everyone to star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Frank Luthan. Your line is open.
spk03: Great. Thank you very much. Can you give us a little bit more update on sort of the timing and status of the bills that you're working on now? Are you still progressing on schedule first? And then, secondly, give us an update on the take rate with the wireless product that you've been reselling and what sort of the reaction is from customers. Thanks.
spk02: Thanks, Frank. Greenfield is doing very well. We're extremely pleased with the progress that we're making so far. We're under construction and rolling in our Florida market to start construction as well in the Greenville County, South Carolina market. About everything that we're seeing there. And as we mentioned, we're really thrilled with the kinds of penetrations we're seeing from the targeting of the most.
spk10: We think that's a great predictor. or with Greenfield as well. In the last couple of weeks, enterprise-wide and some kind of service, we view it as a nice to get a discounted bug bill for both. But I wouldn't say it's one of our most core offerings.
spk02: as it is with some of our competitors, it is definitely an opportunity for customers. So to get a discounted bundle with broadband and mobile from WOW, and so we're just kind of starting with toe in the water there. But so far, so good.
spk03: All right, great. Thank you very much.
spk08: Your next question comes from the line of Brandon Nipsle. Your line is open.
spk05: Thank you for taking the questions. Could you maybe unpack the HSD revenue in ARPU this quarter, $104 million to $107 million versus what it came in in terms of HSD revenue at $102.3 million? So hoping to understand better what the driver is for that. And then in terms of the guidance for the year, HSD revenue decreased by, I think, $11.5 million at the midpoint. Total revenue guide was down 3.5. So where are you picking up? some more revenue. Thanks.
spk02: Thanks, Brandon. So we're really pleased to see that HSD revenue is up 4%. And what I like about that, taking the higher speeds from us. I'm thrilled that so many customers are buying 500 meg. A very recently introduced 1.2 gig product has been taking off. It has a download, but 50 meg upload. which is very strong. So that is increasing ARPU as well as, I think, customer satisfaction. I'm pretty excited about that product. So those are some things that are helping us feel good about the continued growth in our ARPU and HSD revenue. But, yes, we did recognize the current economic environment and adjusted guidance.
spk04: Yeah, and I think... Brandon, I mean, the reality of the situation is we've been doing a lot more promotional activity, perhaps, than normal, and that's just to be able to put the subs on, which clearly, versus our competitors, we seem to be one of the only ones who's been able to do that. So those types of promotional activities, they roll off after a quarter or so. So, you know, I think we're setting ourselves up. So that's the challenge right now, and the environment's really tough out there, but we've been able to find a balance where we can still grow EBITDA, still grow revenue, maybe not as much as before, and with some promotional activity, keep growing the sub-base, which will help us in the future. Our real story, by the way, starts in 2023 when we start selling into the greenfield market. So this is sort of a transition year.
spk05: Relative to the midpoint of your guidance for this quarter, would you say that there was $3 million of incremental promotions relative to your expectations this quarter? And then, Teresa, on your sell-in commentary, can you provide some stats on where the 500 megabit or 1.2 gigabit product sell-in is this quarter? Thanks.
spk04: Yeah, so I don't know if you want to talk about the midpoint. We're just out there trying to get these sold. On the other side of the house, I mean, we have probably still one of the lowest churn profiles in the industry, and that's holding up rather nicely. But going out and getting these subs right now is taking a bit of a – and I'm sorry, I'm praying on the – Brendan, on the EBITDA side, I mean, we're very efficiently managing our P&L, so we've got a lot of cost-cutting activity going on, partially due to, you know, getting to the $35 million we identified at Analyst Day, plus everything else we normally do. So it's a business. We're managing the business right now.
spk02: Yeah, and I think to your point, things that I think we're really pleased about is our ability to do promotions is very targeted and strategic so that we're always continuing to be the value provider in the market, but we're not leaving money on the table either. I think multiple times on previous earnings calls, we've talked about some of the work we've done on the billing system and the conversion of systems.
spk10: We have our systems that have given us
spk02: increase speed and agility and that certainly is helping us find and on 500 make in a above we don't give out specific details on that but it definitely is becoming a much larger percentage of our selling as well as across the entire base so we're not only seeing new customers coming in at those it's more than 50% But our base is also upgrading into those 500 1-gig and 1.2-gig services at a rapid pace, which we're very excited about because they really like the service, and our network is just so strong.
spk05: Thank you for taking the questions.
spk08: Next question comes from Dan Day. Your line is open.
spk07: Yeah. Morning, guys. Appreciate you taking the questions. First one for me, you came in a little above the net ad guidance for broadband subs in the quarter and slightly lowered it for the full year. Just maybe if you could talk about what you're seeing in the back half as far as broadband net ads go. John talked about the challenge environment. Just maybe give a little more around that. Is it just like We've heard a lot about move-related insurance being so low that it's tough to get in that ad. Is that what's driving it, or is there something else you're seeing out there?
spk02: Yeah, thanks for the question, Dan. We're really seeing a variety of things. First of all, just overall, the economy, it's difficult for us to predict. So out of an abundance of caution, we're adjusting the guidance some. Inflation is certainly hitting our customers just like the rest of the environment. But in some ways, that's almost an advantage of customers look for more value. And wow is the value provider with that reliability and speed. We also are starting to see some of those green shoots of seasonality returning back to the way that it was. And we'll just see what happens, especially in the third and fourth quarter, especially third quarter is traditionally a fairly good quarter in our industry, as is the fourth. But, you know, we're just trying to read the tea leaves and find out what's happening. We definitely also are enthusiastic about the response that we've seen, as I mentioned, from our new products. and then what we're seeing from our edge-out areas. So that's giving us some good thoughts of what will happen in the future, but also a sober view of what's happening in the economy. And then lastly, everything we're doing with new products, edge-outs, and greenfields, I just want to reemphasize, it's based on the investments that we can make now because of the two transactions we made last year to sell off five markets, buy down our debt, and then refinance our debt. And that is giving us the fuel that we need to grow for the future. So I think that's one of the reasons that our net ads are stronger than most everyone in the industry.
spk04: Yeah. And not to forget, going back to Analyst Day, our expansion capital, our growth capital for the year is $80 million, $60 million of which will be for greenfields. And, you know, anticipated that we will actually get through that number by the end of this year. So we're in growth mode right now as well.
spk07: Awesome. Thanks, guys. And then, you know, we heard some of the larger kind of nationwide cable players talking about the competitive pressures, particularly with fixed wireless, and especially in the recent quarter. Are you guys seeing any competition in your footprint? And if you're not, do you think that has to do with kind of the geography of your footprints and where your specific assets are located?
spk02: That's a great question. Thanks, Dan. I think there's a couple things happening. For one thing, you know, since the day we were founded, WOW has always been about competition, and so we're happy to compete. I think the competitive intensity that we bring to a market might in some ways hold off other competitors in some ways from coming in. So we don't see, I think, as much as what our peers are describing in terms of, for example, fixed wireless activity that's taking place in their markets. We see a little bit of that, but I think the speed and the reliability of the services that we provide Both upload and download is very superior, and our prices are so competitive that we tend to win on those occasions when we do go up against others. In terms of the competitive environment, we're not seeing a significant shift in anything we've seen before. It does appear, I think, some of the fixed-wire suppliers are perhaps more in areas where broadband isn't maybe more rural areas, but we haven't seen a big focus there.
spk07: Great. Well, I appreciate this time, and best of luck. I'll turn you over.
spk02: Thanks.
spk08: Your next question comes from the line of Kipton Morale. Your line is open.
spk06: Great. I wanted to ask about a few different topics. First on margins, great to see that margins are now already near where you were prior to last year's divestitures. As you continue to execute on the HSE growth trajectory and the strategic efficiency efforts, how are you thinking about the margin expansion opportunity longer term, maybe even away from this year? Has anything changed in your view of the margin profile of the business? And just on bad debt, quickly, unless I misheard or misread, it seemed like bad debt expense was actually lower year over year, which is a bit surprising given what we've heard from some of your peers. And so I'd appreciate any color on bad debt, and if there's any incremental commentary you'd be willing to share on consumer payment trends. Thanks.
spk04: Let me take the first couple here. In terms of the EBITDA marginals, fully expect that they will continue to grow. I think it's an important milestone. We were on a growth trajectory prior to the five-market divestiture. We'd hit 40.5%. Even at a margin that we're growing, we're at 40.1% today on a smaller company. So that continues to go. The two largest drivers of that clearly are broadband first, which brings us to a significantly higher gross margin at the top and drives significantly lower operating expenses at the bottom. So that's one of the big drivers. And then the other driver that's going to help that along as we are, as we said during analyst day, cutting ultimately $35 million of stranded corporate overhead out of the business. So no end in sight to that project. So that's going to keep going. So we're very pleased with that. As to the bad debt portion, I think we were very aggressive in the beginning of the pandemic in really beefing up the allowances. We thought we were going to have definitely more bad debt issues than we actually did. And so all you're really seeing is a reversal of a little bit of that in the quarter as we wrote off some people who had more difficult times in the second quarter. So that's the disparity.
spk06: Understood. I appreciate that. And just lastly, I have to ask about M&A. It's the number one. A question that we get from investors, is there anything you can share about whether or not there is an official review in place for the entirety of the company or at least parts of your asset base and any other perspectives on M&A? I think we'd all be curious about that.
spk02: Nope. Really nothing to share. Thank you.
spk08: Fair enough. Thank you. Thank you. Your next question comes from the line of Matthew Harrigan. Your line is open. Thank you.
spk09: I realize this is not terribly germane to your business, but, well, not all that important. But on the video business, it feels like when you look at some of the larger MSOs, you have a slight variance in the HSE number in the market. It goes manic. And on the video losses, people are just inert to whatever video loss arises. I know you approach it more in the context of how it can stimulate your high-speed business, given the growth in data uses you're seeing on the broadband-only customers. But can you talk about that, how that interlaces with your business and how even things like 4K, which has really been somewhat of a disappointment except for the streamers, and ultimately 8K could help your broadband business? Thank you.
spk02: Thanks, Matt. Yes. What we really have always done is be so customer-focused. Once again, since the day we were founded as a business. We know that customers like to use broadband to watch video. They may have a traditional legacy video product, but that's becoming a smaller and smaller portion of our base. I think it's over 80% now of the population has at least one streaming service. And so our network is robust to take care of all of those customers' streaming needs. And as the demand rolls for higher streaming needs, we keep upping the amount of bandwidth that we can provide to those customers. So we try to take an approach of being agnostic on whether our customers want to take a bundled video service from us or they want to put together their own list of over-the-top streaming partners. That's fine either way with us. We don't require our customers to take a bundled service with either mobile or video to get our best prices, and I think that has really resonated well, especially with customers in this tough economic environment who are looking for the best deal. So we'll just always be listening to our customers and go with them, whether it's streaming or 4K, 8K, whatever the future might bring, and our network can hold up to it with its reliability and speed at the very best prices.
spk08: Great. Thanks, Tracy.
spk02: Thanks, Matt.
spk08: Our final question comes from Batia Levi. Your line is open.
spk00: Great. Thank you. Can you please go over again where you see the most impact of macro uncertainty on your business right now? You held EBITDA constant despite the promotional pressure. What does that assume in terms of inflationary costs picking up for the rest of the year? And maybe just a follow-up on if there is any indication for telco fiber building out in your area. Thank you.
spk02: Thanks, Rachel. start and John if you want to weigh in that's fine as well. So on the macro environment, I mean, like everyone, I don't know that we can predict the future, but we certainly are seeing the impact of inflation, some in our costs, like gas in the trucks and things like that. But I think we have always been very focused on cost reduction. Certainly we have been as we've been ratcheting down our overhead with the proportion of sizing of our business relative to the transactions we did last year. We're very tight on our expense management, and you can see that in some of the numbers that we put forward. That's why we feel confident that we can hold on our EBITDA margin for the year and that we've been keeping our long-term targets in place as well. We have been offsetting any bits of the inflation. In terms of how it's impacting our customers, I think for our existing customers, we continue to provide great value. But it also, I think, as you can see from our HSD net ad numbers, it attracts new customers that perhaps have been paying more with some of our competitors to really look at us and say, hmm, here's an option that is as good or better speeds than what I'm getting today at a bit of a better price. So that creates an opportunity for us in the market, and we're trying to make sure we get that message out. The other thing we haven't really talked much about today is the affordable connectivity program. That has continued to go from strength to strength for us. We promote that to all the customers for whom it is an option, for those who perhaps are in financial hardship, and we make sure that we have as streamlined processes as possible. to make sure that they can get onto the service if it's available to them. Those are a couple of ways we're really trying to stem inflation from both the cost side as well as being available to our customers. In terms of the telco overbill fiber, we really haven't seen any increases from what we've seen in the past. Once again, I think as others are being rational about where should we deploy where we can get the highest growth, and generally that's not where WOW is. So I think that has been a bit of a barrier to entry. Anything else that I missed, John?
spk04: No, on the EBITDA piece, I mean, look, we're still growing revenues. Eighty-seven percent of new customers come in are HSD only, which we're at a high 90 percentile gross margin. And while that's going on, that increase in gross profits, we're simultaneously on a cost reduction here. So it's the $35 million we identified at analyst day, plus we've always sort of been cost efficient anyway. So a lot of cost cutting, and we're still growing the business and have a lot of confidence in the e-business.
spk00: Thank you.
spk10: There are no further questions at this time.
spk02: Thanks, Rex, and thank you for your continued interest and support of WOW. Have a great day.
spk08: This concludes today's conference call.
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