WideOpenWest, Inc. (WOW) Earnings Call Transcript

Welcome to the TMT conference. I'm Batya Levi with the telecom, cable, media and communications infrastructure team. Our next presenter is WOW Communications. We have CEO, Teresa Elder and CFO, John Rego with us. Teresa and John, thank you so much for joining us.

Thank you.

Thanks, Batya.

I think I wanted to start off with maybe sort of, as we wrap up this year, what were the some of the accomplishments of WOW? And what are your priorities going into '21?

Well, thanks, Batya. This year has certainly been tumultuous for all of us. We started out the year excited about our broadband first strategy. And that's really embracing the need for high-speed data. Our business is so well positioned for that. We were the first to have over 1 gig speeds in 95% of our footprint. And we really launched the year excited about doing that and offering streaming partners to our customers rather than the traditional video as the only option. So that ended up being a pretty darn good strategy, when just a couple of months later, of course, we were all hit with the pandemic. So our strategies that we have launched at the beginning of the year end up being just perfect timing. As we -- the pandemic hit, then the strategy also focused on making sure we ensure the safety of our employees as well as our customers. So therefore, things like self-installs, which is becoming a bigger priority, had -- was the perfect timing because customers, of course, don't want people in their home as much. And for us, it's a win-win. Our equipment has gotten so much simpler to install. And of course, it's easier to schedule when you're doing it yourself, and it's also better financially for us. And then the third priority of the year, really, has been to keep with the incredible demand from our customers, for not only new subscriptions, but an increase in bandwidth demand, and our network has performed so well so that our customers can be working, learning and having other entertainment from home. And I've been really proud of the company for what we've done on that. As we launch into 2021, it is a bit more of the same in terms of executing on the strategies that we've put in place, so making sure that we can continue to ramp up self-installs, continuing to keep up with the bandwidth, with demand and really focusing on our key competitive advantages that we have for our customers, which is still the renowned customer service of WOW as our primary one.

Okay. That's great. Let's start with the broadband business because that's definitely been the outperforming part of the business. You've already exceeded the net add guidance that you had for last year. And maybe if you could talk about how much of it is the pull-forward impact given the environment? And would you expect the similar trends to continue that we saw maybe more recently?

Yes. We started out the year big. Even before the pandemic, we had one of the biggest Januaries and Februaries that we'd ever seen. So certainly, we're feeling good about the year. And then, of course, everything accelerated as customers needed more and more broadband, whether they were shifting off with their wireless only at home or looking for a better value from some of the competitors that were out there. So we've been very pleased with the results. We've had the biggest year in the company's history in terms of broadband subscriptions. So I think it remains to be seen what happens next. We do believe that this trend towards work from home at some level is going to continue, even as people go back into their offices after the vaccine is out there. I know that as a company, we're planning to do that. So we think there's going to be a higher level of work from home or at least some hybrid approach to that as we go forward, and we're here to meet all of those challenges.

Okay. And when you think about your success this year, would you call it, it was more new customers coming in? Or churn being lower? Or a combination of both?

It's really a combination. That's a great question. For a subscription business, you have to be looking at the top line and the bottom line, what's going in the bucket and what's coming out. And we've always had a focus on reducing churn really since even before I got here, since that falls straight to the bottom line. And you want to keep your customers happy. That's always best. So churn has remained very, very good. But we've also been attracting new customers, whether it's in some of our Edge-Out areas or attracting away customers from competitors as well.

Okay. I think there were some programs maybe to connect -- Keep America Connected Program that changed the trends in the near term. As those are smoothed out, anything that you would call out in the near term that we should watch out for that would determine the change?

Yes. So the Keep America Connected, the FCC pledges we had, it was in the second quarter. And the way that we did that was that we were connecting new customers and they were absolutely paying customers to us. The FCC asked us to not disconnect any customers for nonpayment, which, of course, we didn't. And some of those came back to roost then in the third quarter. So we had a little bit higher nonpay disconnects than we would have in the third quarter without that program. What we've seen though as we've continued to be responsive, especially to school districts, and those -- who need those lower cost programs, is that we continue to have good demand as we've gone into the fourth quarter. So it's hard to say what's going to happen in the future. I think we found a way to, as we always have, to really work with customers who are perhaps credit challenged.

Yes. And I guess as you look at your incumbent footprint, so maybe not Edge-Out, but incumbent footprint, the penetration of broadband is in the mid-20s. Can you talk a little bit about what the opportunity is to improve that? And maybe with the background of what you're seeing from competitors, are you seeing any new rollout, maybe telco pushing more fiber or increasing their DSL speed that's changing that competitive landscape? How are the trends there?

Well, our markets vary since really WOW started out as a challenger brand or you used to be -- call it kind of an over builder. We have some markets where, in fact, we were the incumbent. We had bought some billed Americheck product trees back in the day. So the penetrations there are certainly higher. In the areas where we've always been a challenger brand, yes, we're kind of in that mid-20s area. And as we look at the Edge-Out areas, we have a 3-year plan to kind of get to those same kind of penetrations or higher. So we're always looking at those things. In terms of the DSL and as they move more to fiber or higher speeds, we have a pretty low percentage of some of the AT&T fiber rollout in our footprint. And of course, we feel good about our ability to compete against those as well as Frontier's, CenturyLink a number of places. So certainly, the speeds that we have on our network are definitely a step above what the customers can get from those competitors.

Got it. And I believe 90% of your footprint can get 1 gig lag speed now. Can you talk about what percent of the base is on a higher speed? Or what the new sales coming in at the high-speed level?

Yes. In fact, we just started sharing more information about this at our last earnings call and have a chart on that, that really shows that the new customers coming in were really at more than 80% or at speeds that are 200 meg or higher. So that is a shift over the last many quarters where customers are wanting higher and higher speeds. And it makes sense for the demands of streaming and video conferencing and learning from home and all the things that are going on in the home that higher speeds were. We're also seeing a good adoption of our Whole-Home WiFi product, which is a mesh network, which makes the WiFi node better in your home.

And you did mention that self-install has been increasing given the environment. And I believe about maybe 2 years ago, you've also increased spending on building those capabilities, more digital transactions. And where are we at that point? So in a scenario where the customer wants higher-speed Whole-Home WiFi network build, can they do it themselves?

Yes. That's exactly the kinds of capabilities that we've been building over the last couple of years as we've been transforming the business. So online capabilities and the ability to do some things through an app, for example, on our WOW! tv+ product, those things are really getting to where we had hoped they'd be. I think a prime example that we talk about is 3 years ago, only about 3% of our customers were able to purchase through the online store through our wowway.com website. Now we see that at over 30%. So customers are adopting that. We actually also sell through other channels, of course, as well, more online account management and more flexibility is really what we're all about. And that's a lot of the hard work we've been doing the last few years.

And can you share any stats in terms of what percent of the installs are self-installed now? And how is that compared maybe to a year ago?

It's -- well, I mean it's gone up dramatically, especially with COVID, certainly. And we anticipate even that -- increasing it dramatically more next year. I don't think we've given out actual numbers on it, but just to say it's becoming a substantial portion.

Okay. Sounds good. And maybe if we can shift to video, I know it's more of a focus of broadband-centric product. And you're sort of pivoting away from video, but also you're agnostic in terms of if the customer wants it, you'll be able to provide it. Can you talk a little bit about if that suggests that sort of the shift in cord-cutting or maybe fewer video mix of your business is by design and that should continue? And how would that impact your overall sort of revenue and margin profile?

Sure. I'll start out with a few words and then turn it over to John as well. That is absolutely our strategy here is to really do what our customers want in terms of video. And many customers don't want a pay TV package, but many don't. They're happy with the many streaming services that they have. And unlike some of our competitors, we don't have to push a certain content or bundled package, we really listen to the customers on what they need best and then help them find those services that best meet not only what they want to watch, but also their budget. And that has really been attractive to customers. They view us as a trusted adviser and as we help them through that process and help them get connected. So as of last quarter, I think we said something like 80% of our new customer acquisition is broadband only or broadband with a streaming service. And that's great with us. We're not losing subscribers. We're just shifting what they're taking from us, and that helps the bottom line. So I'll let John talk about that.

Yes. And it's generational too, Batya. I mean, my kids here ages 19, 21, 24, will never have TV. They just won't have it. They will have Internet and they already do have it. But it's one of the things that sort of brought me here was like looking at the company at this particular moment in time, at this particular point in the pivot. And they're like 2 completely different businesses. And it drives everything that would be of interest to an investor or to an analyst in your case, which is the gross margins on TV are sub-20%. They just are because the programming costs are so expensive. Whereas the gross margins for high-speed data are in the high 90s. It almost looks like a software business. The cost below the line that are driven predominantly in -- calls into customer care centers and truck rolls are disproportionately higher on the TV business than they are on the high-speed data business. The high-speed data business is easier for a customer to contemplate a self-installation. In fact, my daughter moved into an apartment in Chicago and I did the self-installation of Internet. It was a big day for me, actually just plugged it in the wall and found the WiFi password then we were good to go. So that drives a lot of cost out of the business. The other thing that happens when TV starts to get diminished is TV drives a disproportionate amount of CapEx into the business. CPE, cost for set-top boxes are significantly higher than they are for high-speed data modems, even some of the things we have to do on the network. So as this pivot continues to happen, the expectation should be on higher gross margin on lower ARPU dollars, we're going to be driving larger gross profits and larger EBITDA and less CapEx and thus more cash flow. So that's kind of what's happening. So we were talking about that before I got here, but I mean we've kind of reached the point. And in Q2 and Q3, the most recently reported, we're starting to see the company now produce levered free cash flow and at least increasing quantities so we could start to see that the pivot's is actually working.

No, that's great. I think, like I said, John, we had been hearing more of WOW being more video agnostic. But with the same sense, we've also seen maybe renewal of some of those programming rights and our thought would have been maybe you decide to drop some channels. So maybe sort of like have that video subscriber churn quicker than the current pace. How do you approach that higher, maybe programming costs and that lower-margin business still being in the overall? Would it be -- I guess, can we see a decision where you're truly broadband-centric and don't really offer video? Or is that going to happen over time?

I think that's going to happen over time. We certainly are aggressive in our negotiations with the programmers, and we're in the midst of some of those right now as we speak. But I can tell you, we also took a video rate increase this year. And as customers called in and said, help me manage my budget, those rate increases are high. We're very empathetic with them about the huge increases that other programmers are putting upon us and them. And that's when we offer them up streaming alternatives. But I think it's going to be an evolution, probably over a couple of years. And certainly, the pandemic has accelerated that even beyond what we had in our original model. But we want to be there. We have a large base of customers, about half of our base, a little less than half of our base still has a pay TV service. And we want to work with them to stay with us and move over and offer the appropriate services to them, too. But yes, all of that evolution is definitely happening.

Got it. And maybe just going back to the broadband business, how do you think about your pricing strategy there? And what -- maybe if you could talk a little bit about what the ARPU upside would be with the sale of higher tiers or selling more capabilities? Or do you believe that you have pricing power where you could -- you do have the ability to increase the base prices as well versus competition?

Yes. We have done some price increases. And in general, I think the industry has remained somewhat stable. There's promotions here and there, especially through -- for like things like K-12 schools that, of course, we need to be responsive on and we are. But in generally, it's fairly stable pricing. We generally price a bit lower than the competition but also rely on other variables to compete on rather than just price. As the customers move up the tiers, it's $10 to $20 more as they move up the tiers. So that certainly increases the ARPU to us. And then we have add-ons like the Whole-Home WiFi product and some other add-ons that we have as well. So that's kind of how it works with the ARPU strategy. And then the longevity of the customer certainly helps and keeping churn low is an important factor so that we're not always having to do new customer acquisition to make all of our numbers, too. So both sides of the equation.

Right. As you look at the churn of the customer, are there any significant differences when you look at broadband-centric customer versus a bundled customer -- bundled sort of broadband and video customers?

Yes, that's been a bit of a surprise to me because I think the traditional view, and I've been in the industry a long time, is that the more bundled, the stickier that the customers are. And now with streaming services continuing to get better and better, I don't know that that's necessarily the case anymore. The key is people want a fast and reliable network that they can really count on. And that's the key variable. And our -- since ours exists, we see really, really good churn rates and high Net Promoter Scores with our HSD customers only as well.

Right. And we say, you have a long track record in the wireless business as well. And when you look at maybe broadband and a potential of fixed wireless becoming as a competitor. What's your view there? Is that -- maybe the concern is not right now, but over 5-plus years, do you think that, that business could be a substantial competitor to broadband?

Yes. Of course, we always keep our eye on it, and that is my old industry, so I have a real interest in it as well. The thing about the network that we have, we have a very robust advanced network that can expand as customers require more speeds over the next 5-years-plus. So we didn't build this network for just this year. We built it for years to come and the ability to continue to grow it at, I think, a much easier and less friction to our customers to be able to grow it. Whereas the 5G networks, they have to build that infrastructure. The cell sites are much closer together than the others, it's disruptive. And so those are all the challenges. I've been there, and I've built out multiple networks. So I know that, that's not easy. We keep our eyes open, and we always respect our competitors and what's coming but right now, we feel very good about the network we have, and I'm glad I'm sitting here where I am.

Right. Yesterday, we had the results of the RDOF auction. And I think the surprise was the incumbents are getting less subsidy money to provide broadband in these unserved, underserved areas and maybe fixed wireless becoming as more of a competitor. I'm not sure if you can talk about this, but have you noticed potential new entrants in your regions that could come up with new broadband services down the road?

Not a lot. We are primarily in some suburban markets and so not as much. We're in some rural areas as well. But no, I don't think we've seen a whole lot of new entrants. We have the traditional competitors that we've had for quite some time.

Okay. And maybe moving on to the business environment. Anything you could share with us in terms of how the current environment has impacted the business segment? And what do you think the growth opportunity is going forward? I think you had been seeing some nice growth rate, which slowed down. Can we go back to the old levels?

Yes. Yes, I agree. We'd like to be there as well. We have a lot of small businesses in our footprint, and they certainly have been hit hard by quarantines and the pandemic. There's no question about that. So we're working with them if they're shifting their businesses to work from home or moving to digital for those that weren't before. We also have a lot of regional hospitals in our footprint that we're working with. We also got some hits on the advertising sales side, which is a huge part of our business. But you think it would have been a bigger year for us, but actually, that's a bit of a challenge. And that's some of John's old business, too. So I'll let him talk a little bit about the ad sales side.

Yes. So when we look at the impacts of COVID on the business, of this year, Batya, we were originally projecting maybe around $26 million would be the hit. And I took that down off for the third quarter. So we're probably looking at like $15 million, $16 million negative due to COVID on the year. And the biggest piece of that, actually, is loss of advertising revenue. So whilst it's not material amount of our business overall, I mean, it is tens of millions of dollars, and it is substantially less than it was because people weren't advertising because there's no place to go. So that's one area that hit us a little bit. Again, that's not forever. I think that advertising is coming back. We saw a little bit of positiveness during the election. So it's over right now. So there will be another election, there'll be Olympics hopefully one day, so there's other ways to get that back. So that's I think one times and things, but I think that's something that will definitely be coming back. We saw a little bit of negativity as well due to COVID with some of our offshore customer care facilities, where we have to close and shut down or travel between points A and B were prohibited. And so we actually had to onshore a lot of stuff that was offshore at a higher cost, so that hurt us a little bit. And there's been a straight back and forth a little bit on the bad debt stuff. So I think all in all, we're sort of lucky to be getting away with only $16 million of damage from COVID. And even in light of that, I think we've had a pretty decent year versus last year. So I think it will be nice to get our vaccines and just get back on the gravy train the way we were, but it looks pretty positive from where I sit.

Right. The $16 million -- I guess, it's roughly the $15 million, $16 million that you have guided for the year, and there wasn't that much of an impact in the third quarter. So 4Q, maybe kind of like that $5 million in part?

Yes. That's $5 million. Yes. And I think it's predominantly going to be still some negativity with the advertising. I mean, advertising is a great business because we're given avail. So it's almost 100% margin. So if you lose it, you lose it right to the bottom line. And the other areas, we're still sort of paying the price for having to onshore some of our customer care. I don't want to overly simplify it. There's like 40 things that go in and out. But the big ones, the broad strokes are advertising care and a bit of bad debt. We got a little bit fortunate in Q3. I mean some of the -- we would really dig it in from what we thought was going to be horrific bad debt experiences, and we did a little bit better than we thought we were going to do. So that helped us out considerably. So all in all, to have all the -- that impact on the year is as good as it probably gets for us.