WideOpenWest, Inc.

Hello and welcome to the Wide Open West third quarter 2024 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. And if you would like to ask a question, please press star one on your telephone keypad. I would now like to turn the conference over to Andrew Posen, Vice President, Head of Investor Relations. You may begin.

Good afternoon, everyone, and thank you for joining our third quarter 2024 earnings call. With me today is Theresa Elder, Weill's Chief Executive Officer, and John Rego, 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 laws that 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 just claim 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 afternoon, 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. We have also included a presentation this afternoon to complement our prepared remarks. Now, I'll turn the call over to WOW's Chief Executive Officer, Theresa Elder.

Thanks, Andrew. Welcome to WOW's third quarter earnings call. Before we get started, I would like to say our thoughts go out to all who have been affected by Hurricanes Helene and Milton. I am especially proud of our employees who continue to work tirelessly under difficult conditions to help those who were affected. Most of our customers have now regained service. Although we saw some impact to the business, our network held up extremely well and we do not expect the financial impact on our business to be significant. Since we spoke to you in August, we have made solid progress on several fronts as we grow penetration in our new fiber markets and improve our liquidity to re-accelerate our greenfield fiber expansion. In early October, we closed a $200 million new super priority term loan, enhancing our balance sheet and increasing our liquidity, which puts us in a strong position to re-accelerate our fiber greenfield strategy and continue bringing our high-speed fiber network to a number of new communities as we work toward our goal of 400,000 fiber homes passed over the next few years. Note that we don't have any new information to share regarding the unsolicited non-binding acquisition proposal from DigitalBridge and Crestview Partners at this time. And while we will take questions at the end of our remarks, We will not be taking any questions on this topic. Now I would like to discuss our third quarter results, which included record adjusted EBITDA and significant increases in penetration rates across our fiber expansion initiatives. In the third quarter, high-speed data revenue of $107.5 million decreased 2.1% year-over-year but increased 2.4% from the second quarter, reflecting the impact of a small rate increase, which went into effect in July, as well as the benefits of simplified pricing, which drove ARPU higher. Adjusted EBITDA of 77.3 million was a record and increased 9% year over year with an adjusted EBITDA margin of 48.9%. The significant improvement in adjusted EBITDA predominantly reflects the benefits accrued from continuing to drive efficiency in our business as we migrate our customers off of our video platform and further align our relationship with YouTube TV. During the third quarter, our fiber expansion made further progress as we increased penetration rates across the 2023 and 2024 vintages, and as well in our new greenfield fiber markets. Although the construction on new fiber homes past slowed during the quarter while we secured additional capital, our teams successfully focused on growing our customer base within our new fiber markets. And now that we have improved our liquidity with a new $200 million Super Priority Loan, we are once again in a strong position to re-accelerate our highly successful greenfield fiber expansion initiatives. The penetration rates in our greenfield fiber markets increased more than two percentage points to 17.5%, up from 15.4% at the end of the second quarter, with the growth in penetration being driven by outperformance in our residential business, where penetration rates are above 20%. I'm also pleased to announce that we have begun adding customers in our newest greenfield fiber market, Hernando County, Florida. Our edge-outs also saw strong results again this quarter, especially the 2024 vintage, which increased to 45%, growing over six percentage points. Our 2023 edge-out vintage increased to a penetration rate of 29.7%, which is also a great improvement from last quarter. The 2022 vintage remains strong at 31%. With regard to our HSD subscribers, we lost a total of 4,400 during the quarter. Of that, approximately 1,900 subscribers were lost due to the ending of the ACP program, down from 5,000 last quarter. We added 1,100 fiber HSD subscribers in our greenfield markets and 1,200 in our edge-out expansion markets, which partially offset the drop in our legacy footprint. All in all, we continue to see very low churn across our base. The steps we introduced during the first half of the year such as our complimentary speed upgrades and our simplified pricing plans, which includes an optional price lock, modem included, no data caps, and no contracts, are continuing to benefit our business, especially in our expansion markets. The charts on the bottom half of the slide highlight a shift that reflects the growing success of our fiber expansion strategy as well as the impact of our initiatives to strengthen our legacy footprint. ARPU rose significantly during the quarter, both sequentially and year-over-year, driven by a rate increase that took effect in July, as well as continued success of our simplified pricing strategy, which is showing a particular strength in our greenfield fiber markets. As expected, Our traditional video business declined further during the quarter and has now dropped to 66.3 thousand subscribers, a 34% decrease from the same period last year. We anticipate this trend will continue as we transition to YouTube TV, especially in our expansion markets where customers are increasingly buying the HSD YouTube TV bundle. Our partnership provides a fantastic opportunity to offer more content to customers at a much better value and to capitalize on the shift to video streaming. To conclude before handing the call to John, I want to reinforce the significance of growing our penetration rates and how this is setting us up for continued success. I look forward to re-accelerating our growth and building on this momentum in these new markets. I'll now turn the call over to John, who will go over our financial results in more detail.

Thanks, Teresa. In the third quarter, we reported $107.5 million of HSD revenue, which decreased 2.1% year over year, largely reflecting the decrease in HSD subscribers. Total revenue for the third quarter decreased 8.7% to $158 million, and video and telephony revenue dropped 28% and 9.5% respectively, in addition to the decline in HSD revenue during the quarter. Adjusted EBITDA increased 9% from the same period last year to $77.3 million, with an adjusted EBITDA margin of 48.9%. The growth in our adjusted EBITDA reflects the impact of beginning to more aggressively restructure our business away from our video platform. This change is reflected in integration and restructuring and is presented in the adjusted EBITDA reconciliation in our presentation and earnings release. Costs associated with this restructuring will come down and be subsequently reflected in integration as we continue to execute our broadband strategy and take the costs completely out of the business. 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 68% of total revenue this quarter, up from 63% in the same period of last year. We ended the quarter with total cash of $21.6 million and total outstanding debt of $973 million, with our leverage ratio at 3.4 times. However, on October 11th, we secured a new super-priority term loan for $200 million. This new credit agreement will mature in December 2028, bears interest at the rate equal to SOFR plus 7%. This additional liquidity will enable us to re-accelerate our fiber greenfield strategy as we continue to work toward our goal of passing 400,000 new homes over the next few years. We reported a total capital spend of $40.5 million, which was down $24 million from last year and $10.6 million from last quarter, reflecting a significant decrease in expansion capex. Our core capex efficiency was 18.9% in the third quarter. Expansion capex decreased $22.3 million from the same period last year and $7 million from last quarter, as we emphasized lighting up the homes we've passed and increasing penetration in our expansion markets. In the third quarter, we spent $6.5 million on greenfields, $0.5 million on edge-outs, and an additional $3.6 million on business services. With the closing of the new term loan, we now expect to spend another $10 million in the fourth quarter for greenfields, which would bring our total amount to around $70 million in 2024. We expect our core capex in the fourth quarter to be largely consistent with the third quarter. Our unlevered adjusted free cash flow, which we defined as adjusted EBITDA-less capex, was $36.8 million for the third quarter, a significant improvement from last quarter, driven by the increase in adjusted EBITDA and the reduction in expansion capex. Finally, I would like to provide our guidance for the full year. We expect our HSD revenue to be between $422 and $426 million, total revenue to be between $629 and $633 million and adjusted EBITDA to be between $284 and $288 million. We expect our HST subscriber numbers to be between a negative 19,500 and a negative 16,500. However, that includes an estimate of approximately 6,000 to 7,000 subscribers lost in the fourth quarter due to the hurricanes. and the loss of approximately 6,900 subscribers due to the discontinuation of ACP earlier this year. Thank you so much, and we'll now open up the line for some questions.

Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. If you would like to withdraw your question, simply press star 1 again. Please ensure that your phone is not on mute when called upon. Thank you. Your first question comes from the line of Batia Levi with UBS. Your line is open.

Great. Thank you. Maybe just following up on the recent broadband commentary you provided, 4Q underlying trends excluding the ACP impact and storm, do you expect an improvement to continue? And if you could also touch upon the competitive environment and if we hear from the cable operators with an increased emphasis on converged bundles, is there any change in the activity that you're seeing? And maybe a question on the capex. Where will you end the year with that incremental 10 million capex on the greenfield expansion? And how should we think about the pace of new builds and capex over the next year or so? Thank you.

Great. Thanks, Batya. I'll start on the broadband commentary and then turn it over to John on the CapEx questions. So as John mentioned, ACP for this quarter, the deduction was about 1,900 customers, which is less than we had originally anticipated. That brings the full year impact for us of those ACP customers rolling off when that federal program went away of 6,900. we do not anticipate any more impact in ACP roll-off in the fourth quarter. So we believe that that's done. In terms of the hurricane, we are still figuring out exactly what that impact will be, but we've given an estimate for the quarter of six to 7,000. And that is as we really are understanding which customers are just temporarily relocated because of damage to their home. when they might be coming back. So that one is a little bit in flux as we really continue to work with the communities. And for us, the most significantly impacted market was Augusta. Really, our Florida market has returned in pretty good shape. Still a bit of recovery there, but we're certainly grateful that the impact wasn't worse in that market. So those are the two kind of unusual things and how we're thinking about them for the fourth quarter. So nothing more from ACP and we're guessing six to 7,000 for the hurricane. When I look at the rest of legacy, we actually have seen some very positive trends and certainly on a year over year basis, we're very pleased with the impact of the things that we have been doing. We did the speed upgrades, the complimentary speed upgrades for customers at our lowest two tiers back a few months ago in the beginning of March. And so we think that has really helped drive down churn and increase loyalty among our customers. We also launched the simplified pricing, which is our plans, which don't have like a promotion roll-off These are our everyday very strong pricing that gives customers certainty on what their bill will be if they choose to enroll in the optional price block, which we charge an extra amount for because many customers are taking that option so they have that certainty for the future. We feel those things have increased customer satisfaction, decreased churn, and really helped to stabilize our legacy base. The other thing that we are certainly excited about We've continued to see deepening penetration in our edge outs and our greenfield markets. So we have been cultivating those homes past that we added earlier in the year in this last quarter. And now that we've turned the greenfield machine up again with the influx of the new capital from our debt deal, we look forward to bringing on more new customers as we launch new homes, such as we have in the last couple of weeks in Hernando County. So we feel very good about the trends on the markets that we've chosen and where we're going on the expansion markets. So that gives you a little bit about the two unusual things, ACP and hurricane, legacy, edge outs, and the greenfield markets. So John, do you want to answer the second half around CapEx?

Yeah, but just a capex spending clearly got, and you can tell it from the numbers reported, a little bit slowed down in the third quarter as we were sort of preserving liquidity while we worked on the new debt transaction. We'll spend another $10 million on Greenfield in Q4. That'll bring the Greenfield spend for 24 in at around $70 million. Total capex is probably in the 2.5 to 2.10, 2.05 to 2.10 range. We haven't given guidance going forward next year, but I think the pace of money spent in 2024 is probably what expansion spending is going to look like for the next year or two going forward. So we had a slowdown, but we kind of cranked up the machine again, and that was the predominant reason to go out and raise some more capital.

Thanks so much. Just with that terminal and incremental greenfield capex, how many more homes do you plan to build in 4Q?

Yeah, we don't give that answer, but we can tell you in February when we report. Okay. We're clearly back to building fiber homes again. Okay. And as we learned today from the Ziply announcement, fiber homes are pretty valuable these days.

Okay, thank you. Your next question comes from the line of Brandon Nispel with KeyBank Capital Markets. Your line is open.

Hi, thank you for taking the question. When you guys announced the financing transaction, you put out some financial projections on the business. Can you talk about just overall how we should be thinking about modeling the business in the context of those projections over the next couple of years? If you could focus on the adjusted EBITDA trajectory of the legacy markets and share with us how you see the profitability of the greenfield markets progressing, please. Thank you.

Yeah, so what what what was this John speaking? What we put out Brandon was. Was pretty trajectory of the model that was used while we were out raising the funds. That could be your baseline starting point. One thing that that. that did anticipate was that the money would actually be raised. So I think you're going to have to look at it in that light. We'll give more clarity to what we think 25 looks like when we do next quarter's call. Excuse me. As it relates to Greenfield versus Legacy, so let's take Legacy first. Legacy is still profitable, and Legacy generates a ton of cash flow still and will for the foreseeable future. Greenfield is just getting built. It hasn't hit its inflection point yet. Um, so Greenfield is a, it's clearly a cash negative draw, but we're building, you know, incredible shareholder value by doing it. So it's kind of a, an odd thing. It isn't big enough yet that we haven't reached the point where it makes sense for me to bifurcated and show you a plus B equals C, but I promise you that's how we look at it. So, uh, just not be a little bit patient to give you clarity on 25 on the next call. And if you want to just sort to do some baseline modeling, you can take what was put out on that 8K, which is the same information that the lender saw, and then envision what happens if you put the money raise in the numbers.

Awesome. Thank you.

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

Great. Thank you. Probably can't comment, but I just wanted to see if you can confirm that both Digital Bridge and Crestview are still involved in the in the pursuit for the go private. Have any of them dropped out or has anyone else approached you on the deal? Is there anything you can comment around that?

I guess what we can say is that nothing has changed from our previous updates that we've given you.

Okay, great. That's very helpful. Thank you very much.

concludes the question and answer session. I'll turn the call to Teresa for closing remarks.

Okay. Well, thank you so much. We appreciate your interest in WOW, and thank you for joining us this afternoon.

This concludes today's conference call. We thank you for joining. You may now disconnect your