WideOpenWest, Inc. (WOW) Earnings Call Transcript

Hey, good afternoon, everyone. For those who don't know me, I'm Grant Joslin on the telecom equity research side here. And today, I'm joined by Teresa Elder, the CEO; and John Rego, the CFO of WideOpenWest. Thanks so much for joining us today at the 23rd Annual Credit Suisse Communications Conference, Teresa and John.

This year has really flown by so far, and we're getting close to the midpoint. As you look at the second half of the year, what are your biggest priorities?

Well, I think the priorities for the second half of the year are really just to continue to execute and execute in a big way. As we see, the whole economy start to emerge from the pandemic. We're doing lots to help our small business customers as they reopen their businesses. We also are looking forward to, hopefully, a return-to-normal seasonality, especially in the third quarter as students actually go back to their colleges. And for us, as employees of the company, we're actually going back to a hybrid work model. We've reduced our commercial footprint, and we're going to have a different way of working that I think takes the benefits of the flexibility while also having some of the benefits of having team brainstorming and meetings that work better that way. So we're looking forward to a strong second half.

Great. So John, you've been at WOW! for about a year now. And hopefully, you're starting to meet some of your team in person. What surprised you about your time at the company so far that you maybe didn't fully appreciate from the outside?

Yes, I'm coming up on my 1-year anniversary in 2 weeks. So it's hard to say this, but I haven't met a single person in person yet in the whole company. That's about to change. When we open our doors in July, I'll be flying out to Denver to meet my boss and my peers and the folks who work in the finance department. But more seriously, I came out of just before this, a company that was helping content providers sell video inventory when the video is watched on a connected TV or an IP-based TV. And so we spent a lot of time looking at the cable industry and gloating because of all the cord cutting. What I didn't really understand then, but I do understand now is that, yes, well, cord-cutting is real, and it's really happening. It's the TV cord getting cut. Not so much the HSD cord getting cut, quite the opposite. And so there's a far more robust business as we get into this, this conversation, we can talk about that in the numbers and what it means and what broadband first is all about. And that's 1 thing that was really positively surprising for me. The other thing was, when I step into a new company as a CFO, and I inherit my department, it's not often that you get to inherit a group with like this level of professionalism and the sort of commitment to excellence. And I was really, really bold over at what I got handed this time, which is not usually the case. In fact, it's never the case. And it just floors me. I'm a guy that wasn't very excited about letting people work from home unless like the cable guy was coming or your kid's sick or something and these folks are on a way to make it work. They've been extraordinarily productive. And again, I haven't met anybody yet, but I feel I know everybody. So it's just kind of a bit of a fascinating year. But as I look at the cable TV cord cutting with the majority of folks keeping the high-speed data cord cutting, it is an absolute game changer in the business, and we'll talk more about that in a bit. So That's what I've found so far.

Yes, we'll definitely be digging into that. Before we get there, you guys have already given guidance for 2Q '20. So I think investors have a pretty good broad idea of what you expect for the quarter. But I was wondering if there are any fine points to call out, any sort of core comp issues to the sort of biggest social distancing impacts in 2Q '20?

Yes. I think a lot of folks, ourselves included, found that we were beneficiaries of the pandemic. More people needed broadband who didn't have it. More people -- I'm one of those people. I had 3 kids in college, they all came home to do their colleagues, so we had a tier up to a higher speed tier, and that's something we saw. So I think many folks in our industry sort of benefited strangely from the pandemic and because of that, many folks in our industry are saying, you know what, 2020 was unusual. 2019 is the better comp to measure this year off of. I think we're in a different place because we just sort of unleased broadband first conceptually in 2019, we're sort of like a hybrid, like we're on fire and now and we're still growing. So I think you have to look at both of them. I think in terms of raw numbers, 2020 is a great comp. And we'll use that to benchmark for 2021. I mean in -- if you take the midpoint of our guide for Q2, we're talking about growing HSD revenues by 13%. So that's pretty impressive. Even though we're comping against the pandemic year. I think the 1 that will be a little bit maybe 2019 was the better comp is the actual HSD net adds. I mean we've got a very, very generous amount of ads in 2020 because of the pandemic. And whilst we're still growing, not quite at that pace. But it's rolling into the numbers, anyway, with the financial numbers. So we feel good about the quarter with 2 weeks ago. I can say that. That's the best kind of a look back 2 weeks ago. But yes, nothing unusual. Business is doing well. And 1 thing that's fascinating to me is that what we saw a lot of and it was very accretive to our ARPU is that not only did folks who not have HSD want to go get it, but folks who had it were tiering up. And then folks who tiered it up, all of a sudden, we're taking a look at like the Whole-Home WiFi product. And so we saw like a 500-basis point pop in ARPU and just see ARPU in the course of the pandemic year. And from my own personal experiences now that I'm up to in my own home, the 1.2 gigabyte offering, I doubt I'll ever go back even when everyone goes back to campus in September. And I think a lot of people feel that way. So it's fundamentally shifted the business in a very positive way. So we're sort of oddly beneficiaries of the pandemic.

Yes. So kind of beyond the permanent increase and the importance of broadband for all of us with remote work and school and play and promote investor conferences now. I'm wondering if it has also given you guys an opportunity to change how you run the company. So in what ways the company is different now than it would have been if the pandemic could have never happened.

Well, absolutely. There's many things that we did because of the pandemic, but we were already on the trajectory towards that. So fortunately, we were well prepared for the pandemic. Perhaps John has just talked about, and you've reinforced. It was certainly a big year for us as more and more people came into broadband who had been there before and then taking higher speeds, using more data and more and more taking products like the mesh network product of Whole-Home WiFi. But we also changed the offerings that we had on how they interact with us. So our self-install kits are available to customers who have high-speed data now. At the beginning of 2020, only about 30% of our customers availed themselves of that option. By the end of the year and into the first quarter, it's 80% that are doing their own self-installs. They prefer it's easy. They don't have to wait for us, although we're really good about being on time. But it really has been a win-win for the customers and a win-win for our business. We also are rolling out more and more easy ways for customers to interact with us remotely, whether it's online account management, live chats, reinforcing some of the benefits and upgrading our websites and streamlining some of the back office things just to continue to make our network reliable and making sure that we're very easy to do business with. So all of those things are here to stay for our customers. Internally, we certainly, like I said, are doing more of a hybrid work model and making our footprint for our offices more efficient.

Okay. So 1 of the key debates I'd like to dig into a little bit is whether WOW! endurably gained penetration, even just kind of a little bit each year. On one hand, your service leads the industry in satisfaction and the pricing is really compelling. But on the other hand, as you often say it's a challenger brand, and so you've got to fight for each customer that you want to win. So how do those 2 things add up? Can you kind of durably keep penetration moving in the right direction?

Absolutely. I believe that's what we've been proving in. So it's not just what I say but look at the actions of what we've been doing. We've had something like, I think, 8 quarters of subscriber growth. So we continue to drive up subscriber growth. Even as video subscriptions are down, we're hanging on to those customer relationships and keeping their Internet service and then adding other ancillary products on top of that. In addition, it's not just the new customers coming in the door, but it's continuing to delight the customers that we have. And we're very pleased with our low churn, be it in the voluntary churn, which is extremely low. So I think some of the lowest I've ever seen in my career throughout the industry as well as nonpaid debt and the bad debt portion is very low. Customers have really seemed to prioritize paying the broadband bill. And then we also have made sure we have programs out there like participating in the emergency broadband benefit of the program for customers.

Great. I think the next area that kind of goes hand-in-hand with that is competition. So competition question part 1 is, how competitive is the market today? You've got competitors that are giving away streaming video free with broadband or cash credit cards as an incentive for sign-ups or wireline, wireless bundles. So does your packaging need to evolve to counter that? Or do you have everything you need already?

Well, I think our numbers and our results would say that we're very effective at competing. So we feel good about the offerings that we have, how we put together promotions. One of the things that I think is a benefit to us is that we don't have a mandatory bundle to get the very best pricing. We really listen to our customers and are empathetic with them about how they want to enjoy video. And if they want to go straight to streaming and have our high-speed Internet service, we're not going to disadvantage them on the broadband pricing. And I think that helps us quite a bit. With that said, we are always evolving and listening to our customers and rolling out new products. So more to come. We always have more to come. And I think in our DNA for the last 21 years as a challenger brand we've always been competitive and always been trying to see what we need to do next to remain competitive. And I think customers appreciate that.

Great. On the second part of the competition question, investors have really lately been debating the incremental competitive threat from fiber and from fixed wireless build-out. So do you expect a lot of new fiber in your footprints? Or do you generally already compete with both fiber and cable providers? And how much fixed wireless do you think will be coming?

Yes. We don't have a lot of fiber-to-the-home overlap within our network. I would say because we already as the second or sometimes third provider in our markets, it's already pretty competitive. So it wouldn't be the most compelling case for people to come in and invest in new fiber. So for example, we can still compete up against a lot of DSL properties for some of our competition. In terms of the fixed wireless, once again, I think that is primarily for areas that are more center and denser population than some of the areas we serve. It is also an opportunity for us from a wholesale perspective with some of the backhaul contracts that we have. So right now, we do it as much as an opportunity and we're keeping an eye on it for the future. But right now, we feel great about the technology we have and how we serve our customers. So it has not been a huge issue or certainly not one that we can't do well against.

Great. So WideOpenWest has just started a usage-based billing pilot in 1 market about 2 weeks ago. Was that pilot designed to get the really heavy users to put the brakes on their usage or to get them to consider up-tiering or to kind of rightsize pricing for those heavy users. And with the caveat that it's very early in your 2 weeks in anything noteworthy that you've learned from that pilot so far?

Well, it is early on. So I can't say we have a lot of learnings yet. Really the thought of introducing it there is as a trial and in no way do, we ever want to limit customers' usage. So it's not about limiting customers' usage. I think it's really about listening to the customers leveling the playing field so that those customers who aren't using many terabytes of data per month aren't having to subsidize those who are. And our competition in that market also does usage-based pricing and the way we are pricing it is actually much more competitive and I think a little better alternative for customers. So we are just at the first phase of that, where we're letting customers understand what their usage is because they may not have known before. And then after they've gotten a chance to see that and maybe think if they want to adjust their plans, then we'll look at -- start charging them in the future months. We'll still give them a bit of a grace period as they figured that out. So we're really easing into it and trying to be very receptive to what customers want as we move that direction. So it's a trial to see how it goes in that market.

Great. Well, I'll definitely be listening in to hear future updates on that. We're starting to see the industry take the first tentative steps past 1 gigabit in some cases. So how big a task is upgrading your networks to offer faster than 1 gigabit speeds? 1 gigabit is definitely more than enough for most consumers' needs today, but could a faster product be compelling for an early adopter or [ technify ] your customer now or soon?

Well, thanks for saying that. You're right. Our products absolutely meet all the needs of our customers right now. And we do have a 10-gig product for our business customers if there are some needs that are out there. And we have built our network so that we really can over time, if there really is a need for some kind of consumers' plans there are much higher speed than that. We have a path to do that, where we don't have to tear up the sidewalks or the streets. We have the evolution with reclaiming bandwidth with what we're doing with our IPTV and our streaming services to reclaim bandwidth, which will help us also the evolution to DOCSIS 4.0. And honestly, today, already our technology group is trailing higher speeds in our labs. So should the demand be out there, we're ready to do it, and it is a natural evolution. We're always planning ahead for that. But right now, consumers are happy. And the speeds that we are providing are what they need.