WideOpenWest, Inc. (WOW) Earnings Call Transcript

[ Welcome to ] WideOpenWest, John Rego, CFO; and Andrew Posen, Vice President, Head of Investor Relations. Thank you for joining us today.

Thank you.

So I want to start out more broadly and the top levels. Obviously, the macro environment is shifting quite drastically in some cases. How do you feel the company is positioned for growth and what potentially could be a slowdown next year or heading into next year?

Yes, it's a great question. So I think -- well, first, the full disclosure. I am 61, so I was there I was there in '87, I was there in '92, '93, 2000, 2008. So this shall, too, shall pass. It brings us challenges. We have the good fortune about 1.5 years ago to work with our bankers from Bank of America. And we had this interesting idea that we were going to sell some markets. So we sold 5 of our 19 markets in an effort to substantially delever the company. So when I joined the company about 2.5 years ago, we had about $2.1 billion in debt. We were 6x levered. And with the help of our banker friends, we sold the 5 markets. We generated $1.8 billion. We kept most of that, it was very tax efficient. We paid down $1.5 billion in debt and brought our leverage down to 2.5x. And we did that for a couple of reasons. One, 6x leverage is a lot for a small company. Even if it's an infrastructure company, we're public not private; but two, we needed to shrink the company a bit so that we could grow the company. And so the whole idea behind that was taking my cash interest down from $130 million a year to $30 million a year, it would give me a lot of -- a lot of capital to grow the business. So that was part one of the project. Part two of the project is, well, how do we grow the business now. So we've engaged and we've started on what we call greenfield. So we are building out about 400,000 incremental [ holes ]. They're all fiber, so fiber to the home all the way. Greenfield versus legacy in that they don't have to be on the periphery of our network, we can build them anywhere. The first builds were announced to be in Seminole County, Florida. We broke ground in June, and we will be online selling into those markets starting in probably January. So poised for growth. So that was a big, big move for the company. So we grow in 3 different ways. So historically, we've grown with the concept of Edge-Outs. So Edge-Outs are when we built on the periphery of the network. So maybe go one [ town ] over. The other way we grow, and we don't talk about it a lot, is we have a commercial business. 19% of our revenue is from small and medium-sized enterprises. So we can certainly -- if we pass them, we can go in and try to sell them and build them. But the biggie, the big kahuna here is in the greenfield builds, all fiber. We went through a massive down-selection process. There about 145 million households in the U.S. that you can go after. And we sat there and said, "Well, where do we tend to do best?" We tend to do best -- and again, we're the overbuilder with the challenger brand. So we're usually #2, #3 into a market. We tend to do best in markets where there's a single 1 Gig provider and perhaps a DSL provider. So part of this downselect was to look for those kind of places where we've historically penetrated. Our penetration across the entire network is about 28% on average, but there are markets where we're 50% penetrated, in markets where we're 40% penetrated. So we try to like replicate those. So we're pretty excited about it. So that's the growth plan. So the growth plan is commercial continuing to Edge-Out. But the big kahuna is going to be in these greenfield builds. And those are all fiber. The rest of the network is Fiber to the Neighborhood, Fiber to the Node and then it's HFC into the home, and that's 3.1 DOCSIS across the board, and we offer 1.2 gig across the entire platform for legacy base and there will be lightening faster speeds on the fiber build as those come into play. So that's the plan, and we're sticking with it. Doing the deleveraging and being able to fund that from the free cash flow generated by the business, I think, was really good for us. So we're guns a-blazing, so that's what we're doing.

Kind of a follow-on, but when you think about how the position -- the company is positioned now versus over the last 2 to 3 cycles, how are you better positioned in ways that are worth highlighting? For example, you've mentioned -- you obviously divested some markets. So what were [ that led to those ] decisions? And how does the company look relative to those other cycles?

Yes, so significantly better. The company went public in 2016 and -- 2017, sorry, and we weren't there yet. And Teresa Elder, our CEO, came in about 6 or 7 months past the IPO, and she had the daunting task of like ripping apart the operation. So the entire network was rebuilt for 3.1 DOCSIS. All of the operational stuff you would wonder about, world-class customer care, all of that stuff was done. So Andrew and I got to come in after all that was done and take credit for it in meetings like this. So we'll talk about it. But the company was far better positioned and doing well. I think most companies in our business had a great year in 2020 oddly. I find that after 30 years, and I'm so old that there was no internet when I started. I didn't even have a computer when I started. But every once in a while, people forget that the internet is like really important, then they remember again. So they remembered in 2000, myself included with three college kids came back home and my wife and I are working and all of a sudden, that 100-megabyte isn't really doing it for us anymore. So we had to scale up. So we're in really good shape. The network is completely rebuilt. It's solid. We've got world-class customer care and we're in the situation -- unique situation where we're building for growth now. And a lot of folks are talking about fiber builds, some of the incumbents and stuff. What they're not telling you is they're overbuilding themselves. So they're overbuilding all the DSL properties that they ignored for many moons. They're overbuilding the stuff that maybe isn't quite up to snuff on the DOCSIS side. So we got that part done. We were fortunate. So we can set our eyes towards the future.

Great. And obviously, competition is a big theme right now in broadband. Can you talk about your high-speed data net adds, talk about competition and how you are going to drive growth and retention?

Yes. So I think -- and I get asked this a bit, economy has been a bit challenging. There's good and bad in everything. I think the difficult part for I think many folks in the industry is that they're starting to see [ investment rates ] come down a little bit from what they've historically been. Some will say that's because of fixed wireless or some will say that's because of fiber to the home. We're not really seeing that. So taking them one at a time, fixed wireless. I won't name names, but one of the large providers of fixed wireless offers for $50 a month, 35 to 185 meg. I guess it depends on what day of the week it is or time of day it is. And if you scroll down, it will suggest that not all streaming services might work that well with the service. So that's their offer. They've got a big marketing budget and they're doing well selling that offer. So 35 to 185. So for $10, we'll give you a 50 meg and for $30, we'll give you 200 meg and it works all the time, and you can stream on it. So that's our proposition at a lower price and with world-class customer care. So we are competitors. We're the overbuilder. So every -- since the existence of the company, we are the second or third player in the market. We have to go head-to-head with [ Frontier ], Charter, AT&T, all of them. So it doesn't really phase us because that's what we're used to doing. I think a challenge in the economy that helps you, hurts you is general economic conditions, makes it difficult for folks to go out and get new gross ads. And part of that is with inflation rates which then necessitated increasing interest rates, which then necessitated increasing mortgage rates, means that the volume of people moving their homes has gone down. And quite frankly, that's not the only way we get customers, but it is a noticeable chunk of customers come from people moving home. They move in the blueprint and then we go out and sell them. So that's the bad news. The good news is, instead it's having a positive impact on churn because they're not moving out of the network either, because they're not moving homes. So -- but again it's challenging, it's challenging. Hand-to-hand combat every day.

Great. The guidance that you had provided at the 3Q call, do you feel it's still achievable? And you did touch on this, but can you talk about the impact from inflation on growth and subscriber additions?

Yes. So again, I think when we started the year, where we end the year, it -- certainly things have changed a bit. We think we could still grow the business. We grow it right now, putting greenfields aside. The biggest driver of growth rate now would be in these Edge-Out builds. And so the 2021 visage of Edge-Out builds have 45% penetration at this point. So we can sell it to them. Again, we try to make conditions the best for us. And again, single 1 Gig provider, maybe a DSL provider, we're going to go and we'll do really well because for the privilege of being the overbuilder, we have to have the lowest price, the best network and the best customer care. We have to convince you that we have that. And if we do that, we'll be successful. So you'll be a customer for a really long time, but it is daunting. So business is definitely off a little bit for everyone, ourselves included, but I think we could still grow the business for sure. Moving into the greenfield bit, which really starts next year, I think that's a different animal because you're going into a market that has maybe a single player who's probably charging higher than the rack rate for the service, probably hasn't upgraded the network and probably isn't giving the greatest customer care because they have to. They don't have any competition. And in that scenario, we tend to do really well. So that's the plan.

And on the earnings call, you had mentioned that the ROI looks solid for many of the projects. So it seems the cost for fiber build are still manageable. So any commentary around that would be [ great ].

Yes. The way we're talking about it here and then there's the 30-terabyte model we have back in the office [ where ] we need to create that, but there are probably 60 disparate inputs that go into that build-out model. We sometimes get good fortune in our lives. So one -- I wish I could say it was some sort of genius, but I think it was good fortune. The gang was so in on doing the greenfield builds that there are literally two warehouses that are filled with materials that will take us through a year, that were done before anyone was talking about inflation or supply chain issues, and we've got that going for us. Supply chain impacted a little bit going forward because orders that would take historically 6 to 8 weeks could take 40 weeks. But again, mercifully, our 23 orders were in already a long time ago. So I think we're in good shape there. Because we're the overbuilder it meant we've been building since day one. So we do that with an in-house staff, but we also do that 10 different construction companies that we're into long-term contracts with. So we're pretty locked in on pricing. That's not to say someone isn't going to come hat in hand and asking for a little increase because their wages went up, but so far, so good. The model is pretty fluid. The IRRs on greenfields are pretty high. And so even if costs ticked up a little bit here or there, it's not going to make a dramatic difference. So that's what we're looking at.

Great. And then can you just talk about mobile partnerships, the addressable TAM, customer retention and your strategy around that? Because we're seeing that from some of the other players as well.

Yes. So we did a deal last year or earlier this year with an entity called Reach Mobile. Reach Mobile is really just a reseller of the Big 3's mobile product because we didn't have a mobile offering. So some people would call that an MVNO, we'll call this on an MVNO light. We're basically just offering mobile to those that want it. It's becoming an important aspect of the bundle. That's kind of gone through its testing phase and we're going all in on [ war ] with the mobile offering. So you -- there's no mobile bundle at the moment, you might see us start to do that. So folks are starting to do that. We just hope we're not reaching a point when people start doing ridiculous things, but we can offer it at a good price and we'll do that. Interestingly enough, and this was as of late, the company made a conscious decision about 2.5 years ago to go for broadband first. So we're a cable company. It used to be TV first. That kind of got flipped on its ear. And interestingly, 90% of all new customers who come to us only take the high speed data offering. And we're fine with that, we're fine with that. If you look at the three principal offerings of a company like ours, which is video, phone and high-speed data, high-speed data is like a 90-plus percent gross margin product and has substantially less operating cost than the video business does. And you can measure that in calls to the customer care. We're all smart enough to know that when the Internet gets sketchy, you shut the modem, wait 30 seconds, turn it back on. If you call us, we'll tell you to shut the modem, wait 30 seconds and turn it back on. If you have a video problem, that's a different animal. That could be a 25-, 30-minute phone call and 20% of the time we're going to roll a truck go fix the wire you kicked out and you're not fessing up to on the call. So it's a little bit of a different animal. So when you look at legacy business, which is kind of moving more towards -- in legacy business right now on a revenue basis is something like 62% high-speed data. 90% of new customers are only taking high-speed data. And if you look at that in terms of what we're going to build with the greenfields, the expectation is that 90-plus percent of the new customers will only be taking high-speed data. And so you have legacy business that has like a 40% EBITDA margin right now and growing to brand new business being built, which is going to have EBITDA margins substantially higher than that because you're not going to have all the video. Video is very expensive to provide predominantly because of the cost of the content that you show.

Can you talk about any potential cost savings that you could take out if need be, timing, cost to achieve and would -- how could we think about that in the context of your margin?

So different from telephony companies I've done in the past and the other cable company they worked at many moons ago, we're structured differently. A lot of those entities have sort of individual markets, which are little fiefdoms with the GM and a little financing, et cetera, et cetera. We are very centralized. So everything pretty much gets run out of Denver where the company is headquartered, except for Andrew and I work in the Princeton, New Jersey office. But for 2 years, we've zoomed in. Now we have to fly there occasionally, but that's fine. So when we sold the 5 markets being centrally run like that, we kind of identified at that point about $35 million, let's call it, stranded corporate overhead that had to be cut out of the business. So we set a 3-year horizon to do that. I'm happy to say we're well ahead of schedule. As of the third quarter, we were 126% of the target for 2022. So we'll be done with that by the end of 2024. It's a bit of a science. It's surgery. You don't want to like crater the business just to cut the cost out. There are certain costs that you'd love to cut today, like you call Microsoft and say, "Hey, I had 2,000 employees, now I have 1,500. Why don't you let me out of the 500 licenses?" And when they tell you, "Well, in 2 years, when the contract expires, we will talk to you about the new ones." So there's stuff you have to wait, stuff you can do. But I think we've had good success, good success with doing that, and we're laser-focused. We've always done that. We've always tried to be efficient with the cost structure, but you put a target on your head and you have to go get it. So I think we're making progress with that.

Great. And then you touched on this a bit, but can you talk about your capital allocation priorities and how that could shift in a more difficult macro environment and/or b, as the cost of capital is going up?

Yes. So we're fortunate. I mean -- and of course, I knew it at the time that we came up with the idea. But to do the big delevering and to take what used to be $100 million going to cash interest expense and have that available for growth was just like a godsend. So right now, the capital allocation plan is to grow the business and grow the business by building these fiber networks. So nothing's changed. We'll have the first real proof point in the first quarter when we start to sell into them to see if they meet our expectations. Our expectation is that they will meet our expectations. So that's where we are right now. The delevering was massive. Even with interest rates rising, it's still completely manageable and we still have enough cash flow coming out of the business that we can realize our dreams that way. We did announce a buyback on the last call. That's a more surgical buyback. It just struck me that the whole cable sector kind of got a 50% valuation smackdown. And when I sit there, even with my most draconian DCF, I can't get to that number. So at these prices, certainly looks like a good buy to us. So we're doing it rather surgically. So that's kind of the oddball out, but we're all in on the growth of the business right now.

Got it. And then just can you outline your cash liquidity position? Do you think it's sufficient? And again, as we kind of move into next year, what could be some of the catalysts to kind of shift your allocation?

Yes. So for a company our size, we have literally $50 billion of cash on of the books, we are cash flow generating. We have an untapped line of credit for another $0.25 billion that's never been tapped. So again, I think we're in really good shape with that. So I'm not losing sleep over that -- sleep over of things, but not the liquidity position right now. And again, it was an idea we had to do the delevering to kind of fix things, to fix a valuation of the company, to get more of that cash to be working for the company and doing the growth and stuff like that. And I think the timing was perfect. And I would say that we were fortunate to have Bank of America lead us through that M&A project that we did, which was my first meeting this morning with that gang. So we hit the market at exactly the right time. I think if we tried to do that transaction now, we'd probably be very challenged. But we got lucky.