WideOpenWest, Inc. (WOW) Earnings Call Transcript
August 8, 2022
Earnings Call Speaker Segments
All right. Good afternoon, everybody. My name is Brandon Nispel. I cover communication services for KeyBanc. This is a 25-minute fireside chat with WideOpenWest. With us from WideOpenWest is Teresa Elder, the CEO. Teresa, thank you for being here.
Thanks for the invitation. Great to be here.
Let's just start. You reported earnings last Friday, and Attunity. For those that might have missed it. Why don't you give us a quick overview of what you reported.
I think it was a solid quarter. We were able to talk about our record EBITDA margin, our record EBITDA. We added 2,200 HSD net adds which might sound modest, but it was more than most of the industry did. So we're quite pleased with that. So overall, we're excited by the results that we shared and more excited about our future.
As you think back on the quarter and how it progressed from like a key strategic priority standpoint, what were you able to accomplish?
Well, certainly delivering for our investors on the key financial metrics was important, the customer metrics of providing those HSD net adds. But we also were able to launch some new products that I think are going to bode well for the future. And we continue to make progress to get ready for the launch of our greenfield markets, which is one of the things we're very excited about for the future.
One thing you didn't mention was that the guidance for 2022, you actually did lower.
We did lower it some.
Maybe walk us through why -- the reasons behind lowering the guidance?
Yes. We held firm on our EBITDA guidance for the year. So we're making sure we're still hitting that number. But we did lower the guidance on our total revenue, our HSD revenue and our HSD net adds slightly. I think it's just a realization that we're unsure of exactly what this economy is going to bring. We believe we're starting to see the return to normal seasonality and some good growth coming, but we want to temper our optimism just a little bit. And so we took that down a bit.
What about on the promotional environment. I think that was one of the things you called out from a promotional standpoint, which actually lowers your HSD ARPU. Talk through us what happened during the quarter that resulted in you being more promotional. And I think the concern from an investor standpoint would be they had to promote more because there is more competition.
I would say we had to promote more because the economy is tight, and so maybe there are fewer customers out there looking for a broadband provider. And so we did strategically offer some promotions where it makes sense. With all the systems transformation that we've done over the last few years inside the company, we can be very strategic and targeted in terms of what we do on promotions. We also have seen benefit in some way to customers managing their budgets more tightly. Customers who maybe with one of our higher-priced competitors are starting to look around and they say, "Where can I get this same or better speed, great reliability and better value and they find WOW!."
Now from being able to turn it on and off perspective, can you give us a sense of like what percentage of your footprint you're more promotional in? Is it the more competitive regions? Or was it sort of across the board? Just trying to understand a little bit.
There is a lot by market and by what's going on there. I mean, we also have a playbook when we're launching into, for example, a new edge-out area. So it really varies. The good news is that we're able to be very precise and not leave money on the table, but still offer a good value compared to all of our competitors out there. So that's important to us. We also did a slight rate increase for a small percentage of high-speed data customers, that really benefited the ARPU growth that we saw in the second quarter.
And I guess, from a guidance standpoint, does the guidance that include more promotional impact from the remaining portion of the year?
I think there's some in that. Although we continue to see ARPU increasing, that really is coming primarily from customers, new customers as well as existing taking higher and higher speeds. So buying into those higher packages and also buying from us things like Whole-Home WiFi. So both those things really are driving higher ARPU. One thing I didn't mention as well is that we are continuing to see really record low churn for both voluntary and involuntary customers.
So I think that everyone question number 1 and 2 and 3 questions that I get is on competition. Maybe give us an update on where you stand from a competitive standpoint in your markets, i.e., like what percentage of your footprint are you the second provider? What percentage do you compete with one other provider? That would be helpful.
Throughout our whole footprint because we are a challenger brand, we go into places where there are other competitors. We're not the sole provider in really any of our footprint. So there's always at least another cable operator there. Usually, there is also a former telco ILEC provider, and the majority of the ILEC is still DSL in most of our properties. We feel like it appears that there is not big fiber growth within our footprint. And maybe that's because we're there creating greater competitive intensity and it's just not as attractive a place to deploy capital for other fiber providers.
Have you ever provided what percentage of your markets, there's 2 or more providers, meaning you, a cable company and somebody else?
I'm sure it will be 90-plus percent.
Okay. So I guess then on the changes from a competitive landscape standpoint, you haven't seen any changes from a fiber to the home perspective?
No, we really -- it's been pretty flat for a couple of years.
Okay. And then I guess on the fixed wireless side, I think the thing that gets investors nervous if we look at Verizon and T-Mobile's numbers, I think they added over 800,000 broadband subscribers through the fixed wireless service. What makes you so confident that that isn't going to be something that comes after your footprint?
Right. I think it's interesting. They certainly have been doing a great job with marketing and they're very loud in the marketplace for sure. We just haven't really seen it show up in a big way in the numbers. And when I look at the offering they have, for the same price, a customer can get from WOW!, a higher speed, more reliable service. So we can compete head-to-head with them, and we usually win those customers. So we're not seeing it as a big competitive force within our footprint. I think perhaps maybe they're targeting more rural, I'm not sure exactly where they're all -- their net adds are coming from. But it hasn't been a big focus. Our competition every day is still primarily the big cable operator.
Just to go out script a little bit. I think it's clear from a consumer standpoint that you're going to offer higher speeds just by the base prices and packaging that you're up. But how do you feel then that you offer more viable service?
I think it's from the experience that customers have with us from referrals. I mean, certainly, the data shows that. I mean when you look at and really read what the fixed wireless providers have, they actually have a disclaimer when you sign up for their services that is saying, don't think that you can do live streaming on a big screen TV. They have that pretty clearly in their written information if you're signing up for that service. Clearly, our customers, we know that in the U.S., over 80% of customers subscribe to some kind of a streaming service and enjoy doing that. So I mean, if they're really reading the fine print, then we know that we provide a much better service and our sales people are good at pointing out all those things.
Good. Let's go into one of your more strategic initiatives around greenfield builds. Maybe give us an outline what have you announced so far in terms of greenfield?
So we're very excited about greenfield. We shared what we were going to be doing on this in December at our Investor Day. Since we delevered the business in such a big way last year by buying down our debt and refinancing, we now have out of the free cash flow from our own operations. We can fund greenfield which we define as launching new markets that are not adjacent to our existing properties. And we've announced that we have 3 markets, Orange County, and Seminole County in Florida, which is 150,000 homes passed and then 30,000 homes passed in Greenville County, South Carolina that we will be launching next year. So far, so good. We're in the midst of our planning and construction and getting the materials in the market, getting warehouses in place, hiring people, it's a very exciting time.
Now what's the decision process like behind selecting these markets? I would imagine you're trying to go and find a market that has the least amount of competition is possible, but help me understand sort of the competitive intelligence and what you go through when you're selecting those markets.
It is a very robust process with a long list of criteria, certainly competitive intensity is towards the top of that list, but we also look at the cost to build the mix of aerial versus underground, the regulatory environment, the access to labor, the mix of residential and commercial. So a whole mix of criteria go into our selection. And we feel very good about the properties that we've announced so far. So generally, it is a footprint where there is one cable operator, and there's going to be an ILEC provider there. Generally, in the markets we've announced so far, there are no fiber providers, but we also compete against those. So it doesn't intimidate us if we do, but we are not seeing that in either of these properties.
No, you've announced 180,000. What should we think that -- what should we think is possible in terms of your ability to build from a new home standpoint over the next 3 or 5 years?
We've announced that through the funding within our own operations, we are going to build 400,000 new homes passed by 2027. We currently have a footprint of about 2 million homes passed since we sold off the properties last year. So it's a substantial increase for us to get to that point.
And from an investor standpoint, I think we're worried about returns. What metrics should we be looking for in order to evaluate the return potential of these projects?
Well, a couple of things that, of course, we're tracking all of our key metrics internally as well. It's the cost to build and then how fast we can ramp up penetration, what the ARPUs look like, and we'll be sharing all that information as we move forward similar to the way we share that information on our edge-outs. So for example, on our most recent edge-outs from 2021, still happens, we're already at 40% penetration. Now that one is especially good. But the first 100 days in for the 2022 vintage, we're already at 14%. So we're feeling pretty good about that one, too.
Okay. What about supply chain? That's typically pretty much every discussion, I think, they've had here. How do you -- do you worry about supply chain impacting this build process?
I wouldn't say we worry about it, we plan for it. We know that it can be an issue. And the issue for us is really making sure that we have the right amount of time to plan for the materials coming in. Back when we announced these greenfield markets in December of last year, we already were buying equipment and getting it on the ships and having come over. So now we have what we need largely in place or coming into the warehouses for the markets that we're launching next year. So we stay ahead of the curve on the supply chain, so we don't have that as a bottleneck. And so far, we haven't in our organic properties or with what we're planning for greenfield. So we just manage it tightly.
Got it. I'll open it up for questions here in a moment.
You talked about the top competition, mostly DSL. It seems like you're getting aggressive trying to put fiber into the home. It seems like you've built out plans are very impressive. Are you seeing -- are you worried about that? Are they getting more competitive over the next several years or...
Great. Do I need to repeat the question? Yes. So for the DSL or the telco builds, we really haven't seen a big increase in the fiber to the home or the fiber overbuilds within our footprint. And my hypothesis on that is, if I were sitting there trying to deploy capital, and I knew I had different markets to go after, I'm going to go just like I'm doing with greenfield, where can I drive penetration fast enough? And put some place where WOW! is already being aggressive and competitive in the market probably isn't the best place to deploy fiber. So we haven't seen -- we see the headlines, but we haven't seen a big influx in our markets now.
I think in other words, do you believe if they were to build in your markets, they would be the third provider and the returns would suffer.
That would be my hypothesis. We know how to compete against them.
Got it. Any other questions? One of the things that I wanted to ask you about, it's probably a better question for John, but you gave us some CapEx numbers for the greenfield builds, you spent $4.5 million this quarter. And the guidance for the year is $60 million and in the model, it's a very wide -- it's hard to get there. So maybe talk about your conviction in terms of spending that amount of money. And -- or is there a reason to believe that you might go slower or faster?
I think we're going to spend it. I really do. And I would not say that lightly because you're right. Sometimes it's hard to spend that much money. But I think we've got it on the right track. I think we have the opportunities, and I think we're going to stick to our plan for this year. We're excited to get these greenfields launched as well as CapEx we're spending on commercial and edge ops. So I think it's going to get done. So we'll see in the coming quarters, who's right.
All right. Mobile. Mobile is a product that you just launched. Can you share with us any stats on the initial launch, initial customer intake? And I guess bigger picture is, how does it fit in your overall strategy?
So I'm excited that we're in the mobile space because our largest competitors, Comcast and Charter have that as a key part of what they're pushing. We have implemented it in a different way than them. We have it as an MVNO relationship. So we are not having to integrate it as much in operationally as what Comcast and Charter did. So it's important to us because it's important to our customers. And we want to make sure if a customer is looking to bundle our service with mobile, we're there to provide that for them. They've told us they trust us to have this kind of service. So we very rapidly since we decided to do this launched within our entire footprint. It's still early days. I don't think it's ever going to be a big part necessarily of our revenue, but we feel like it's an important offering for those customers who want it.
From the perspective of bundling, obviously, video has obviously been the bundle that cable operators have had. How do you see that impacting churn longer term? Is mobile the new sort of double play bundle?
We'll see. I mean, I think it could be. We think it could be a term reduction extending the customer loyalty play. So we'll see if that holds true. Video, we continue to see cord cutting happen, and we're happy to be agnostic and get customers over to streaming, if that's what they want. And what we've been able to do is be very effective at keeping the broadband connection even as customers cut the cord on video.
One of the things that you mentioned, and I guess I didn't have in my question here. But from a value-added service perspective, I think Whole-Home WiFi has been one that you've taped. Where are you in terms of adoption from Whole-Home WiFi? And what's the difference from an experience standpoint for the customer?
It depends on the footprint of their home, but for customers who have a property where maybe there would be a different experience with WiFi depending on the way that home is built of a heavy concrete or basements or an addict wherever you have your home office, Whole-Home WiFi is a great product. It really extends the network so you get that same kind of reliability wherever you are within the home. It gives you some extra security features. And for higher speeds, we're really now starting to deploy WiFi 6 as well, which is important because that gives you the higher speeds throughout your entire home. It is a great product for us. I think we do see greater customer loyalty and longevity with those customers to take that product. And it is a substantial percentage of the base, and it continues to be very high sell-in. And we don't usually give exact numbers, I'm sorry.
That's okay.
It's an extra about $10 a month.
Okay. Any other questions from the audience? I'll keep going. In terms of long-term targets, one of the things that I think I could give some pushback on is you guided us to 9% to 10% HSD revenue growth between 2021 and 2025. The first 2 quarters out of the gate were sort of 4 and 4, what's the level of conviction in terms of getting back to sort of a high single-digit, low double-digit type of growth rate?
Yes. Well, you pointed out, we changed our guidance for 2022 for 3 of our 4 metrics. But we reiterated our long-term metrics across the board. And we really have a strong conviction to that. And I think the reasons for that are certainly, the excitement we have around our greenfield markets, but also the excitement we have around customers taking higher speeds, a majority of the new customers coming in are taking 500 meg or above. We're seeing higher than we had anticipated take rate for our 1.2 gig service which also has a higher upload speed than our biggest competitors. So that's kind of nice to see. That gives us, I think, great confidence in the future for ARPU growth and as well as the take rate on new services like the Whole-Home WiFi and all of those things. So we still feel good about the future.
Got it. I'll try one more time. Any other questions?
[indiscernible] hypothetical just to sort of get your sense of kind of what excites you or kind of where you see opportunity potentially? Like you had incremental cash today. Would you push more on the refill markets? Would you look at M&A, as you look at capital shareholder returns, global fiber, just where do you see sort of the state of the market and kind of how you see yourself and what you might do with [indiscernible].
So if I had an extra $0.5 billion, what would I do with it? And we love the greenfield markets because we can build new homes passed and generate penetration at what we believe is a much better return than if we did M&A, at least at the kind of M&A crisis where we sold our markets last year, which was 11x and maybe that was a sweet high spot that we were able to sell those in. But right now, we think the greenfield, the edge-outs, the investment that we're making into our growth is the right way to go. We've done buybacks in the past. We are open to those, but we always continue to look at what's the best return for our investors. And right now we think we have a lot of upside opportunity to keep going forward with greenfield.
I show no other questions. So maybe Teresa final thoughts.
I just appreciate being here. We love telling the WOW! story. It's been a challenging transformation of this business over the last 4 years. And it's a great time to be at WOW! and a great time to be providing what we do for our customers who need it so much. So we appreciate the invitation. Thanks for having us.
Thanks for being here. Thanks for everybody joining us.
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