WideOpenWest, Inc.

Good morning. My name is Devin, and I will be your conference operator today. At this time, I would like to welcome everyone to the Wide Open West fourth quarter 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, press star followed by the number one on your telephone keypad. And if you would like to withdraw your question at any time, press the pound key. Thank you for your patience. I now turn the call over to Olivia Ponder, Senior Manager of Investor Relations. You may begin the conference.

Good morning, everyone, and thank you for joining our fourth quarter 2022 earnings call. With me today is Teresa Elder, Weill's Chief Executive Officer, and John Rago, Weill'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 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 our 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 that 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 historically reported results can be found in our earnings releases and on our trending schedules, which can be found on our website. We have also included a presentation this morning to complement our prepared remarks. Now, I'll turn the call over to WOW's Chief Executive Officer, Theresa Elder.

Thanks, Olivia.

Welcome to WOW's fourth quarter earnings call. Despite the difficult year for the industry, I'm pleased with our results this quarter, especially our record adjusted EBITDA post-asset sale and the significant progress we are making as we execute our greenfield expansion strategy. In 2022, we began to execute our clear vision for long-term growth with a plan to deliver and a commitment from our board, executive team, and employees to implement it. The key elements of our strategy are based on our three pillars of growth, greenfield expansion, business services, and edge-outs. And these elements are grounded in our commitment to maintain our profile as a low leverage, high growth business. Our total revenue increased more than 1% in the fourth quarter as high-speed data revenue grew nearly 7% from last year. Video and telephony revenue declined 15% and 9% respectively from the same period last year. Our adjusted EBITDA post-asset sale increased over 8% to a record $74.6 million. driven by an increased proportion of revenue from our high-margin, high-speed data business. The adjusted EBITDA margin post-asset sale was 41.3%, also a quarterly record. For the full year, our total revenue declined 3% as a 3% increase in HSD revenue was more than offset by declines in video and telephony revenue. which dropped 14% and 10% respectively. Adjusted EBITDA post-asset sale increased 7% from last year. During the fourth quarter, we lost just under 7,000 high-speed data RGU's, bringing our total HSD subscribers to approximately 512,000. The reduction in HSD RGUs also drove a decline in our total number of subscribers during the quarter, ending the year with nearly 531,000. Our operating metrics for our high-speed data business continue to be strong. For the 10th consecutive quarter, we maintained an average sell-in rate of approximately 87% or higher of our customers purchasing HSD only. with the figure reaching more than 89% this quarter, further driving our core financial metrics higher. Also consistent with past quarters, new customers are buying higher data speed tiers, with approximately 70% taking speeds above 500 meg, including strong adoption of our recently offered 1.2 gig service. This quarter, more than 50% of our base have speeds above 500 meg, which demonstrates the superior quality and reliability of our network and the strong demand for faster and higher speeds. HSD ARPU increased during the quarter to a record $69.30. Our HSD revenue included $2.2 million of previously deferred revenue. Excluding that revenue, HSD ARPU would be $67.90, still a record. The increase in ARPU was driven by a rate increase, which took effect in October, as well as customers purchasing higher data speeds. These were partially offset by the cost of promotional activity during the quarter. We believe we will continue to see HSD ARPU increase as existing customers continue buying higher speeds, and as we add fiber customers in new markets, both greenfields and edge-outs. Our edge-out strategy continues to drive growth, especially in our 2022 vintage, where we passed another 2,000 homes in the fourth quarter and increased our penetration in that vintage to nearly 21%. Our 2020 and 2021 vintages also remain strong, with penetration rates staying constant at 23.5% and 45% respectively. As we've said before, we believe our edge-out strategy remains a strong engine of growth for our business, and the performance in those markets further supports our confidence in our ability to grow quickly in new markets. In fact, we announced in January we are seeing great initial traction in our first greenfield market in Central Florida, where we launched earlier this year and have an initial penetration rate above 25%. We're really excited about our progress and have been expanding construction in additional Seminole County communities while also beginning construction in Greenville County, South Carolina. We will provide more specifics on our greenfield progress on our next earnings call. In addition to our all-fiber greenfield expansion, we've also announced new fiber-to-the-home edge-outs in Alabama, where we are passing new homes and seeing extremely strong reception, contributing to both increased penetration and higher ARPU. And lastly, before I hand the call over to John, To discuss our financial results, I would like to spend a minute recognizing the amazing efforts that our employees across the entire company demonstrate on a daily basis. Launching WOW in new markets, expanding our footprint through additional edge apps, and importantly, maintaining a reliable infrastructure that delivers a high-quality service to all our customers and reflects the strength and dedication of our workforce. WOW continues to be recognized as a great place to work. For the fifth time in a row, we have been named a best and brightest company to work for in the nation, as well as in Atlanta, Denver, and Detroit. To conclude, we are executing our strategy and growing our business. We're particularly excited about the initial returns in our greenfield markets and new fiber edge outs. The core aspects of our strategy remain strong. Our edge outs continue to increase our penetration rates. Our greenfield expansion is making real progress. And importantly, we are doing all of this with cash from operations, thereby enabling us to maintain our low leverage profile. Now I'll turn the call over to John, who will go over our financial results in more detail.

Thanks, Teresa. We're very proud of the hard work and execution of our team this year. Through a challenging macroeconomic backdrop, we delivered solid financial results with record-setting adjusted EBITDA post-margin asset sale. This quarter, we brought new offerings to the market such as WOW Mobile and 1.2GIG and made further progress on our greenfield initiatives. Before we get into our fourth quarter and full year financial results, I'd like to comment on the updated adjusted EBITDA term. The SEC released updated guidance on the use of the term pro forma. Due to this change, we are now referring to pro forma adjusted EBITDA as adjusted EBITDA post-asset sale. In the fourth quarter, total revenue improved 1.2% to $180.5 million. reflecting a 6.6% increase in high-speed data revenue and a 14.5% and 8.8% decline in video and telephony, respectively. HSD revenue included the recognition of $2.2 million of revenue attributed to the network construction requirements completed during the fourth quarter in Valley, Alabama, as part of the Connect America Fund broadband loop. Even though this revenue reflects completion of the Valley build-out project over a period of time, accounting standards limit us to recognize the revenue only upon the completion of the network requirements. On a go-forward basis, we'll realize approximately $260,000 of revenue per quarter as part of the program. Excluding the recognition of deferred revenue, HSD revenue increased 4.4% year-over-year. This increase reflects a $4 rate increase, which took effect in October on a portion of our base, as well as new and existing customers buying higher speed tiers. Most notably, our 1.2 gig speed tier has seen a 100% increase in the number of subscribers quarter over quarter. Our revenue grew $4.5 million year over year, reflecting $3 million of revenue as part of the FCC initiative to reserve spectrum for 5G service providers. Adjusted EBITDA post-asset sale grew 8.1% from the same period last year to $74.6 million, achieving our highest level to date. On a full year basis, total revenue of $704.9 million was down from the prior year's revenue of $725.7 million. The mixed shift in our revenue continued throughout the year, as growth in HSD revenue now accounts for nearly 60% of total revenue. Adjusted EBITDA post-asset sale of $280.1 million grew 7.1% year-over-year, driven by the continued success of our broadband-first strategy. We see the incremental contribution margin grow sequentially and year-over-year to 77.8% as a result of the favorable shift in our base to HSD-only. Incremental contribution margin increased by 4.5 percentage points from the same period last year, which demonstrates the importance of this metric as it is consistent with the strong improvements we are seeing in our adjusted EBITDA margin post-asset sale 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 fourth quarter, our savings equate to $21.4 million. This represents approximately 60% of the $35.5 million we identified for cost reduction over the next few years. We've made tremendous progress on realizing these savings and will continue to be diligent as we manage costs despite the higher inflationary environment. We ended the quarter with total cash of $31 million and total outstanding debt of 752.3 million, which holds our leverage ratio at 2.6 times. We reported total annual capital spend of 167.2 million, which is up 4.9 million from last year. Our core CapEx efficiency improved 1.3% to 18.5% on an annual basis, and growth CapEx increased $18.3 million, as we continue to heavily invest in our future growth and bring fiber to the homes of Central Florida and Greenville, South Carolina. So far, we have seen very encouraging take rates for our new fiber offerings and look forward to providing more data this year. Looking at the right side of the slide, our results for 2022 on levered adjusted free cash flow, which we define as adjusted EBITDA post-asset sale, less capex, increased to $112.9 million, up $13.6 million from last year, primarily driven by the growth in adjusted EBITDA post-asset sale. Last quarter, we announced a $50 million stock repurchase program, as we believe we are significantly undervalued. In 2022, we repurchased approximately 1.2 million shares, totaling $12.3 million at an average price of $10.39 per share. Finally, before we open the call for questions, I'd like to provide our outlook for the first quarter and full year. For the first quarter, we expect HSD revenue to be between $105 and $108 million, total revenue to be between $172 and $175 million, and adjusted EBITDA to be between $65 and $68 million. We also expect HSD net additions to be between negative 4,000 and zero. For the full year, we expect HSD revenue to be between $437 and $441 million, total revenue to be between $703 and $707 million, and adjusted EBITDA to be between $286 and $290 million. The full year adjusted EBITDA includes additional upfront costs related to our greenfield investments. We expect to add between 6,000 to 10,000 HSD RGU's for the year, with the majority coming in the back half of the year as we add more fiber to our home passings. In closing, this was another solid quarter and year for WOW in a very volatile environment. Our conviction in our strategy, growth prospects, and our commitment to our customers and our shareholders hold strong, and we look forward to delivering a bright future ahead. And now we'd like to open up the line for questions.

At this time, I would like to remind everyone, in order to ask a question, press star 1 on your telephone keypad. Our first question comes from Cutgun Maral with RBC Capital Markets.

Good morning, and thanks for taking the questions. I had two questions. I want to ask about first broadband subscriber trends. Can you expand on what's driving your expectations for the range you provided for Q1 coming in at, I think, 4,000 net losses to Flattish? Is it competition, macro, or perhaps churn picking up following the October rate increase? And maybe you could help peel the onion a bit on what's driving your confidence in the implied improvement in the balance of 2023. Presumably, it's growing contributions from the greenfields and edge-outs, but I didn't know if there was anything else to call out. And just on free cash flow for 2023, I know you're not providing specific guidance beyond EBITDA, But any color on the drivers between CapEx, cash interest, working cap would be greatly appreciated. Thank you.

I'll take the first part, Kaipen, and have John pick up with the free cash flow. So we do feel confident, absolutely, in our ability to execute, especially with what we've seen with some trends with subscribers. We still are seeing some uncertainty, certainly, in our forecasting. as we look at fewer movers, interest rates, inflation, some of those things that I think were impacting us in the fourth quarter as well are still prevalent. I do believe though that the wave of those customers that we talked about last quarter that needed financial assistance is largely behind us and have moved through. We are seeing, we continue to do promotions. We did, as we mentioned, a rate increase in the fourth quarter. And that's now behind us. So I think things do look a bit better for the first quarter. Certainly the biggest piece is our customers continue to be very loyal. We do have low churn. And bringing on customers with Greenfield and these new edge-out areas is extremely exciting. That's why we decided to go ahead and tell you about the great success we've already had in the first Greenfield market being at 25% penetration. Now, we can't say that we will always be that fast to get to that, and we'll be adding new homes past, so it will go up and down as the denominator of homes past increases. But we're very, very encouraged by the strong results so far. So that's some caution with the uncertainty in the environment, but also some optimism for what we're seeing as well. With that, I'll turn it over to John to answer the second question about free cash flow.

Yeah. So on the free cash flow, if we could just re-review, what were you asking one more time, please?

Yeah, of course. I was just trying to get a better sense of the maybe components of free cash flow as we turn the page to 2023. You know, you guided to the EBITDA so we could, so we have that, but I didn't know if there was anything more specific around CapEx, any more color around cash interest. I assume cash taxes will still be I'm relatively zero, and I didn't know if there was anything nuanced with working capital as you kind of work through the greenfield process that we should be mindful of.

Sorry for the nuanced questions, but any color would be helpful. No worries. It won't give you too much color. So I think what we'll see is that on CapEx, you're going to start to see the CapEx for expansion change in a big way. So I think you're going to see sort of a shape-shifting of CapEx for 2023 and So more and more money now is going to be spent on growth capex, which includes greenfields, of course. It also includes edge-out activity, and it also includes business services or commercial. So that number is going to get to become a bigger piece of the pie. In the prepared remarks, we're talking about the capital efficiency was, like, down for core and up for growth. So you're going to continue to see that happen. Interest expense, cash interest expense, I mean, we're in a variable interest world now, so it's still going up but going up less. and less big pieces. So we'll have to see where that plays out. And I wish I had that kind of crystal ball to predict it. But even still, we did $110 plus million in free cash flow for 2022. And we think that we'll still be able to generate more than enough to cover cash interest expense and all the capital stuff that we want to do to expand the network. So nothing extraneous there for us.

Perfect. Thank you both. You bet.

Our next question comes from Frank Luthan with Raymond James. Great. Thank you.

Can you just a couple of quick clarifications? Is there any subsidy revenue that you're expecting going forward in the Q1 or the full year guide? If you can give us a little bit more color on the $2.3 million deferred revenue that you recognized. And then how much is left outstanding as of today on the buyback?

And are there any covenants you have restricting increasing that over time? Thank you.

Okay, Johnny, when I talk about the subscriber revenue and that two point, I think it's 2.2 million.

Yeah, yeah. So these are, so on that, these are, these are government type projects and some of the way the accounting rules work, Frank, We can't recognize the revenue until not only the project is completed, but until some of the government says it's completed. So it sits in a deferred revenue box, so we get the whole big influx on that magic day. So that's the $2.3 million, but it creates an ongoing revenue stream of about $260,000 a quarter now that the project is built. And we have those from time to time. Last year we had one with an entity called C-Band, and you'll see if you look at our schedules that we do to accompany the earnings call, We try to bifurcate the graph so you can see that little bump that's caused by that. So that's that piece. And then the second part of your question was on the buyback. So we did around $12 million of buyback through the end of the year. We only started buying back shares in November. It totals $50 million. Excuse me. So we have... Plenty of capacity still to get through the $50 million as we start working it through 2023. There's no general restriction in our covenants that we can't do it. Certainly not at the $50 million level. So we'll see where this takes us. Our belief still is that the stock is undervalued for a lot of people and seems like a perfect time for us to take some back. So that's what we're doing.

Can you give us an update on how much of that $38 million that was available at the end of the year is still outstanding today?

Yeah. So into Q1, we probably did about another $8 million so far.

Okay. Thank you very much. You're welcome.

Our next question comes from Batya Levy with UBS.

Great. Good morning, everyone. This is Chris Verbatia, maybe starting with the competitive backdrop, any shifts in intensity you're seeing from your peers and what impact have you seen from fixed wireless and maybe new fiber expansion in your footprint? And just to put a finer point on your prepared remarks, do you believe you will continue to grow in the legacy footprint going forward or will most of your broadband sum growth be driven by greenfield markets in the coming years? Thanks.

Thanks, Chris. So the competitive intensity, I think, has... you know, ramped up since last year as there are fewer new customers really available across the board. So I think that has been maintained as we're going into the first quarter as well. So there certainly is a promotional activity, and we talked about that as well, that we continue to make sure that our pricing is competitive with others. We generally are a little bit lower than our competition. with higher speeds and great reliability. So that's part of our just brand promise, along with just providing the choice that we do within the marketplace. And that does resonate well with customers. Our churn remains low, so that is very good. We have seen some tick up in the competitors having fiber, as there's been some growth. But we also are ramping up fiber and other technologies Within our footprint last year we launched our 1.2 gig service, which was increasing speeds across our whole footprint. And the take rate on that product has been far beyond our expectations. And what's interesting about that product is that it has not eaten into the growth of our one gig product in our legacy footprint. In fact, both have been continuing to have steady growth. So we feel good about that. So we continue to look at opportunities to grow within our legacy footprint and maintain great service with low churn within our legacy footprint. But we are extremely excited to highlight some of the edge outs and green fields where the growth has been extremely strong and very rapid. So we're seeing customers receptive to the product offerings that we have, as well as with our legacy of great service.

Thank you. And maybe just to follow up, with the initial greenfield markets starting to come online, can you just remind us how you're thinking about penetration in these locations on maybe a multi-year basis? I recognize you cited the 25% in central Florida, but where do you believe you can ultimately get penetration rates in these areas over the long term?

Well, thinking I think way back to when we first introduced our model for greenfield, which of course is funded completely by our own free cash flow, our own operations. we talked about being able to ramp to a 30% penetration in new greenfield markets. And that was over some period of time. We're talking more than a year. So granted that we are starting from a small footprint of homes past, but we are absolutely thrilled with the welcome that we've received from the customers of Central Florida. And ramping this quickly to 25%, we're very pleased with that and encouraged. So we know that these markets will be very accretive for us at 30%, but we don't know what the ceiling is. I can look to some of our edge-out penetration. Some of those vintages are up in the 40%, 45% range. So we feel very good about how our products are resonating in the markets that we've chosen.

Great. Thank you.

Our next question comes from Dan Day with B Reilly Securities.

Yes, morning, guys. Appreciate you taking the questions. So it looks like for the 2023 guidance, you're assuming ARPU, HSD ARPU, roughly flat in the first quarter. I think I'm getting to just under $70. Then for the full year, I think your guidance implies ARPU is about $71. So I would assume it would be above that in the back half. Just wondering what gives you confidence in that ARPU expansion. You talked about Greenfield ARPU maybe being a little bit higher. So if you could just maybe talk about what you're thinking for the differential between like the ARPU and my EC markets versus Greenfield, that'd be great.

Yeah. So, hey, this is John Rigo. So tiering up is still happening. excuse me in in the base business and what's interesting is on the greenfield uh business that we've seen so far folks are coming in at seriously higher uh higher speed tiers so we have a goodly proportion of folks taking three gig offering taking 1.2 gig offering and i'd say the the the low point offering for the greenfields thus far has been 500 meg so it's really driving a higher art proof so that's one reason And the second reason is that continued tearing up of the overall base. I mean, we're at like majority now have 500 meg or more in base business. So we feel pretty comfortable that we can still keep ratcheting up the number.

Great. That's good to hear. And so maybe on the non-recurring professional fees that are added back to just the EBITDA relating to, I think, just integration of M&A and all that, Maybe just directionally relative to 22, where do you think that's going to go in 23? Just any color there would be great.

Are we talking about on the one-time sort of government construction project? There are none for 23. We did them in 22. That was for Valley.

They're being added back to Edith, all right.

Oh, I'm sorry, so yeah, so if it's for Valley, so you build it out, and we'll get about 260 grand a quarter in recurring revenue now that the project is done. The big payment we got was actually for the building of the project, and that all gets deferred until it's completed.

Okay, great. Yeah, that's all I had. Thank you, guys.

Thanks, Dan.

Our final question comes from Brandon Nispel with KeyBank Capital Market.

Awesome. Thanks for taking the questions. I was hoping you could talk about your growth thus far since you outlined that your analysts say, you know, your HSD total revenue and EBITDA growth had been far below your expectations that you had outlined back then. I was hoping you could talk about your confidence in getting back to those targets If at all, and what level should we be looking for if those targets are no longer achievable? Thanks.

Yeah, I mean, I think a lot has changed. As I recall, we did our analyst day, I think it was December 7th of 2021. So a lot has happened since back then with the economy and some shifts that have taken place really across our whole industry. So we definitely are trying to figure out what the appropriate guidance is to give, and we gave you our best estimate in what we put forward for the remainder of the year. And I can tell you we are, like I said, very pleased to be looking at not just greenfield opportunities, but we're excited by the new opportunities we're seeing within our legacy footprint to continue to grow deeper in things like MDUs, but also fill in opportunities and edge out areas with a variety of technologies that are very attractive as well. So yes, we had put out some numbers that we feel good about. We feel good about our ability to execute. And things have changed since December. So in terms of a longer term model, at this time we're giving you an estimate for just this year. John, is there anything else I guess you'd like to add in relation to the numbers from Investor Day?

No, I mean, we're constantly updating. We're going to update the multi-year modeling, Brandon, and we can probably bring everybody to an adjusted place somewhere down the pike. From my initial look, it's not going to change dramatically, but it is going to probably change a little bit. And that's more of a nature of the economic world that we're living in right now.

Great. And if I could follow up just on 23 guidance, I was hoping you could outline with some more detail in terms of what we should expect for new greenfield homes passed.

Thanks.

Yeah, at this point, we're not putting out a number, but I can tell you it's going to ramp significantly this year. A lot of the groundwork has been laid in 2022. everything from what we needed in terms of system design and polylining and walkouts and thousands and thousands of pole attachment permits and all of the things that go into a construction build. So much of that work was done in 2022 and I'm so proud of the team for setting us well up for growth in 2023. So more to come and we will in future calls be providing more detail on Greenfield We wanted to give you a taste of what we've seen in the first five or six weeks that we've been adding new customers on so that you've got a taste of how excited we are. So more to come.

Thank you.

There are no further questions at this time.

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

All right, thank you, and thanks so much for joining us this morning, and thank you for your continued interest and support of WOW. Have a great day.