WideOpenWest, Inc. (WOW) Earnings Call Transcript

Great. If you can take your seats, we're going to get started. It's the last session of the day and of our side, Telecom and Media, I'm Batya Levi with the telecom team, and our next presenter is John Rego, Chief Financial Officer of WideOpenWest. Thank you so much for joining us, John.

You bet.

I thought we could start off with -- since we're getting to the end of the year, what you're focused on looking into next year, your top priorities and the strategy?

Sure. Sure. It's a great way to start. So we, like everybody else, just went through the 2023 budget cycle, which was oodles of fun. It's always fun, but this was an especially fun one. So we were very fortunate in 2021 to really sort of clean up the balance sheet. And so as you know, we sold 5 of our 19 markets. We did a substantial delivering. We took down $1.5 billion in debt. We took our leverage down from 5.5x to 2.5x. And the whole reason to do that really was to shrink, so we could grow into the new business. So we're very, very focused in '23 on growing the blueprint of WOW! So WOW! is currently in 14 markets, and that is classic 90% fiber and the rest is sort of HFC, so coaxial cable into the home. But the growth trajectory is in 3 phases. So the biggest one of all is greenfield. We actually started building them in June of 2022. The first -- first of the markets will be able to be lit up and start to being sold into in early 2023, so in the first quarter. So growth is very much on our mind. Those are all fiber-to-the-home all the way. The other areas of growth are -- was traditionally always sort of edged out our network and expanded our network. And then the third area of growth, which really kind of got hit a little bit in the first 1.5 years of pandemic is commercial. So most people don't realize that 19% of our business is commercial, these are small and medium-sized enterprises. So in the early days of the pandemic, couldn't get construction crews out to work, couldn't get salespeople to go into the buildings and nobody was in the buildings anyway. So we're starting to see a little bit of a return to that. We're certainly back in the Edge-Out business, but the focus and we always do is to grow the business. And we would not have been able to do that. I wish I could say we were prescient and we were geniuses to think '21 is the year we should do this massive balance sheet cleanup and delevering. We got a little bit fortunate on that, a little bit lucky. But that is the big focus of the company. So we're all in on the growth.

So let's start with what's going to drive that growth, broadband is a big component of it. You recently updated the guidance, and you suggested there is a little bit of a headwind on -- from macro pressure, involuntary churn. Can we go through those pressure points, are still sustaining or?

Sure. Yes. I think that's great. I'm very thankful that '22 is almost over. It was a challenging year. It was a challenging year for everybody. So we see it in a couple of different places. I think the first part is that there is absolutely for WOW! and for even the big folks that we compete with, there's been pressure in '22 on gross connects. So we absolutely see that. There's lots of reasons for that. I think it's more global macroeconomic, some of it makes sense. In our case, on the earnings call, we specifically called that moves, movers. So movers is not the majority of our gross connects, but it is an important part of our gross connect. So rising inflation, rising interest rates, doubling mortgage rates in the course of the year, we saw less folks move into the territory, which means less jump balls where we can go get customers. So that's the bad side of it. But there's a good side of it as well. It means less people moved out of the territory. So sort of that voluntary churn and the #1 reason for churn at WOW! voluntary churn historically has been people move out of the territory to the non-well location. So we saw these sort of 2 things working together, a great pickup uncertainty. So that was really a big headwind and we confronted it. So if we looked at August, September going into the end of the third quarter, I'd say gross connects were down considerably. They were down low double digits from where they were a year before. That's the bad news. The good news is it's gotten better. It's still less, but it's less worse. How about that?

So that was August, September.

Yes.

Can you give a little sense for October, November?

Yes. So it's starting to turn around a little bit, becoming a little bit less worse. So that's one piece we saw, but everybody saw that. And I think in the first half of the year, we saw a disproportionate amount of like promotions being offered, especially by the big folks. I mean, some of the big guys were offering $500 gift card, modem for a year, and we're the smaller player. It's hard for us to sort of play that game just to try to get things going. I think mercifully, sort of that excessive promotional activity has abated somewhat. I think folks are saying, let's focus more on our financial statements. And that's why the big guys, and I won't name them, but pretty much a calling for flat to slightly negative to marginally positive for 2022. So we all felt that. So that's the legacy base. We still have an opportunity to grow the legacy base. So growth is certainly embedded into the plans for 2023. I promise you not at the level of 2020 and not at the level of even 2021, but we should still see that grow a bit. And we have ways to do that. So particularly edging out -- and edging out is one that's really important to talk about. If one looks at the 2021 vintage of Edge-Out builds, we're 45% penetrated already. And the pandemic forced you to like kind of think of things differently and look at things differently. And we've got really sort of laser focused on where do we do the best, what makes the most sense, what's the biggest bang for the buck? So we sort of changed from this mentality of let's just go pass all of the single-family units, and we really consciously try to pass more multiple dwelling units. So for sort of the same CapEx of the passing, you get 20 shots on goal in the apartment building versus one. So that's been very helpful. And historically, we are a competitor, we're the challenger brand, as Teresa likes to say, some call that the over-builder, we always have to compete. And by the way, we always have to compete against the biggest people in the industry. That's who the competition is. And so this gives us an opportunity to do that a little bit more. So we're excited about that. On the commercial build, I'd say, 2020, even 2021, it was okay, it was kind of flattish. We're starting to see people go back to work. Especially in your industry, you all have to go back to the office now. But in a lot of other places, we're starting to see -- even I'm going back to the office. So it's a -- mercifully, the office is about 50 feet from my house, so I'm excited. But -- so you're starting to see a little bit more return to that. So there's more opportunities to exceed. We're not disproportionately growing the commercial base, but it will grow a bit. So we're excited about that. And then the third is the greenfields. And what's important about the greenfields are, and this is like classic WOW! We went through a massive sort of selection process and where do you build these things? So everybody knows, there's 145 million residential households in the United States, but where do we do really, really well, historically where have we done well? Why are we doing so well with the '21 vintage of Edge-Out? And so we find that if we go into an area that has perhaps a single 1 gig provider, perhaps a DSL provider who we love, and we come in behind those folks, we do really, really well because what we find is that if there's a single 1 gig provider, a couple of things are probably true. One, they're probably charging more than the rec rate for the service anyway, so they're charging more. They're probably more likely than not having completely upgrade of the network. And as we know, for anybody who likes to listen to music, the customer care is terrible. So you wait and you wait and you wait and you wait. And so we come in with pricing that's generally 10% to 15% below what the big guys charge. We have a fully upgraded on the legacy base 3.1 DOCSIS. The greenfield builds are all fiber all the way. So it's going to be far superior to what they're offering. And we're the little company that happened to win the '21 consecutive J.D. Power Awards for customer care. So if you don't like music, then call our care, in the 30 seconds you talk to human being and maybe you get the problem solved. So those are kind of the ways we do that and compete. So we're trying to stack the deck for success. So I'm happy and excited to say we broke ground on greenfields in June of 2022. And the first ones will be ready to sell in the first quarter. So we'll see if we can prove out the thesis. And I think those are the kind of transformational things that WOW! have to do to kind of get people woken up again. We were having this conversation before. When the big buys do really well, we get bludgeoned. And when the big guys do really poorly, we get bludgeoned. And then when we come out and do something transformational and really prove the story again, like the massive delivering on the market sales and all of a sudden, people stand up and say, "Hey, wait a minute. That company is kind of undervalued and maybe it's time to jump in on that." So that's the plan. So it's growth. Growth is the '23 story. We're excited about it.

You shared a lot of interesting tidbits in there. I just want to dig in a little bit more. First, on the competition part, the incremental promotions that you mentioned, they started to offer, the big guys also, has that continued through the quarter?

It really started to stop in the third quarter. So folks are starting to do less of that. And that was good for us. We can't compete with a $500 gift card and free modem for a year and clean your car and all of that stuff that they're offering. So we competed in the way we could compete. So their $500 gift card was our $100 gift card, but folks are starting to do a little bit less of that. That's important because it drives straight to the financial statements. The way the accounting works, and I practiced as a CPA for 15 years, those are negative revenue, right? So that's negative revenue, which means diminishing ARPU when you do that. And so you have this sort of balance, do I want the sub, do I want the revenue and the EBITDA? And what's the right balance for that? So we started to see the big guys really sort of pull back on that. And many of them came out with, again, with flat growth, slightly negative, slightly positive. And we're going to be flat on the year, as you know. So it's the same kind of concept for us. So that's the deal.

And the -- in terms of the markets that you are in, you mentioned a big cable guy and potentially just a DSL provider. And you have said that you haven't really seen fixed wireless competition that much. I wonder what that is because it's definitely a theme where T-Mobile is talking about it, Verizon ramping up access. Is it just in your area, you don't see them at all or it's not…

Yes. So I think part of it is the characteristics of what a WOW! market is. We are predominantly in the suburbs. So we're in the suburbs, where there is 1 house every 1,000 feet versus all of the gear, the equipment, the towers that have to go in, maybe make sense more in a city environment. And where I live in Princeton, we don't want tower. So it's we have the worst cell service and nobody wants the tower. So -- we just don't see them as much. We wish we would see them because if you think of like the classic sort of fixed wireless offering for $50 a month, you'll get somewhere between 35 meg and 185 meg. We'll tell you what you get depending on the time of day, day of the week, day of the month. I have too many people in the neighborhood who are using [indiscernible] as well, and we're ready with the counterpunch for that. So that's $50 a month. For $10 a month, we'll give you 50 meg dedicated. For $30 a month, we'll give you 200 meg dedicated. It's going to work, you can stream everything. Oh, by the way, if you qualify for ACP, that's free. Or maybe you take 500 meg for $20 with the ACP. So we have a very, very competitive offering to that type of service. But the companies that are out there selling that are pushing them through like massive marketing spends. And so either way, we'll take it because once you have that kind of service, 6 months later, when you realize how completely dissatisfied you are, then we'll come in and that's how we get customers, by the way, one of the ways.

And what about the telco fiber builds. So they are -- I mean every company is in a different stage, but it's definitely coming. And you do have a big overlap with AT&T's…

We do. Yes, I would say that we see in our markets average, probably 50% is fiber -- big Telco's, 50% DSL still, and we love DSL because it's -- and it's still funny how you're -- when I first met you many, many months ago, like, I'd be so happy to get DSL rather than dial the EarthLink number, the thing that I had. So we can pick those off all the time. And interestingly enough, and my friend Olivia out there did the research for me this morning, we're not seeing any big fiber builds in the existing 14 markets at the moment, any new fiber builds. That doesn't mean they won't come or this hasn't come yet. The other thing we look at is, well, with the greenfields, we did this big down selection. There's a 145 million homes, how many of them make sense for us to build? And I know you'd love to get your hands on my greenfield model, but I'm not going to let you. So it's -- but how do the 145 million homes become like 5 million to 10 million that are really great for us with sort of a single 1 gig provider, a DSL provider, a high concentration of areas where we can do the build aerial on telephone poles, which is less expensive than terrestrial, where we're digging up the ground, all of that. So in the predominance of markets that we're going into with the greenfield build, we will be the first all-fiber entity that goes into the town. So you're competing against probably a large incumbent cable company, who's got 80%, 90% fiber and then it's HFC, and here you're coming with this all fiber build. And then you've got a lot of DSL as well. So in that environment, we should do really well, looking at the 2021 vintage of Edge-Outs with 45% penetration. And I'm not here to sign up for 45% penetration. But historically, in those kind of markets, we penetrate pretty quickly, pretty fast. It wouldn't be unusual at end of year 1 to maybe hit a 20% penetration rate in those kind of markets. And I think, again, that's the sort of transformational thing that helps people every once in a while stand up their way, there are these guys out there, the competitor brand, the challenger brand, the over-builder. That's the kind of stuff that we do. So we're pretty excited about it.

So there are different cohorts that we could think about. Overall broadband penetration is 27%, but some of the newer vintages -- well, like the recent builds, you've reached to 45%.

Yes.

How should we think about the overall -- maybe what's the opportunity within the legacy footprint?

Yes. I think that's fair. So firstly, 29%, I'm going to pick it for my 2%, but it changes by the day. So that's an average, right? That's an average across 14 markets. Really we have markets where we're over 50% penetrated and we have markets where we're below 29% penetrated. So our expectation is that the legacy base is going to surpass 30% penetration, and we'll get there. But the penetration expectation on the new build is higher than that, it is higher than that. So the conditions we've tried to stack the deck should be really perfect for us to get there. So we're still picking them off. We're still getting them, the Edge-Outs communities and sort of model many multiple dwelling units, many [indiscernible] that's the new model, that's the go-forward model. So we think that we can keep inching that. So I'd love to see the overall penetration of legacy to surpass 30%. I think we can certainly get there. And I think we can certainly surpass that on the fiber-to-the-home builds.

I'm going to pull one question up to now because you mentioned the greenfield network build, which is important. You had laid out targets to build about 400,000 new passings by '27. This year was very slow, very limited. Why was that? And how can we kind of like think of pacing into '23?

Yes. So the plan for this year, this year '22 was to do 60,000 homes, so basically 60 million. So the way this starts is identify the homes -- and this is fascinating because even though my dad was in the building trades, I purposely never worked with him, so I didn't really know a lot about it. You will be shell-shocked to go build out Seminole County, how many permits that actually -- so Phase 1 is identify engineering work, blah, blah, blah, get the permits, get ready to go, but we actually broke ground in June. And so the expectation was an acceleration of capital spending, which would take us to the full 60 million, which was planned for this year. We're not going to hit that number. We're going to hit substantially more than you saw at the end of the third quarter. For us, the big issue this year was Ian, Hurricane Ian. So mercifully, and we have plant in Florida already, the hurricane didn't hit any of the areas where we're doing the greenfields, it didn't hit any of our legacy areas. What it hit was the ability of large public utilities like Duke Energy to focus on what we needed out of them when they were trying to like get people out from underneath the hurricane. So it slowed things down a little bit. So when we took the 2023 budget to the Board, and we'll talk about this on earnings, whatever didn't get spent this year, I'm rolling it to '23, plus we're doing the '23 build. So we're going to catch it up. So by the end of '23, we should be in exactly the same place. We have 10 disparate national construction companies that we work with that do this work. They have the capacity. And I'll just put more on them. We'll get to the same place that we were going to get to anyway. Yes.

So you have the labor already kind of set to bring you to that deployment. What about sort of other dynamics with macro conditions, supply chain, energy problems?

Yes. I wish I could suggest some sort of special geniuses or impressions. But when we knew we were doing the greenfields, our supply chain folks literally bought 2 warehouses full of gear and fiber that sits in Florida right now. So there are just tens of thousands of miles of glass sitting on those warehouses. That was all bought. We did see with supply chain issues that you could still get what you need, but it's slower. So what might take 6 to 8 weeks at one point was up to 40 weeks. So fortunately for us, the '23 orders went in months and months ago. So I think we'll still keep pace with it. Inflationary impact on things like glass hasn't been significant. The other good thing is when you have sort of these longer-term contracts with 10 disparate construction companies is the pricing was set. That doesn't mean they're not going to come knocking on the door for a little bit more either way, but so far so good with that. So it hasn't been a big headwind for us. The interesting thing about the greenfield model, which is like a terabyte and has over 60 disparate inputs that go into it, what it would imply, our IRR is in the 20-to-30-plus percentage range, which is still good. So if you change in a big way one of those factors. So it's not 20 to 30, it's 18 to 28, they're still like solid, we would do them in a heartbeat. So, so far, so good, but we'll have to watch it. We'll have to watch it. Inflation does have an impact on the '23 budget cycle, by the way. So I was forced to try to become an economist overnight and try to guess what I think that might look like. And we can -- I know you had [indiscernible] we can talk about it, but it's -- yes, it's there.

So in terms -- by the end of '23, what could be that incremental home passings that could come out?

Yes. So between the 3 markets announced thus far, so it was 2 in Florida, one in North Carolina, in total, that's about 150,000, 180,000 homes. So we would hope to get through a goodly portion of those by…

End of next year.

End of next year, yes. And getting them and passing them is 1 and then selling them and lighting them up is 2. So -- but we're going to be concurrently selling and building at the same time, and so which is going to start to waterfall it.

So what kind of delay do you have from passing to connect or marketing in that neighborhood?

Yes. So one of the interesting things about greenfields are that they don't have to be on the periphery of the network. So we're going to places where people may have never heard of WOW! So even the builds, we have -- half of our company is in the Southeast. We have a lot of properties in Florida, but Seminole County is like 250 miles away from the closest market that we have. So baked into the numbers is sort of like this upfront marketing spend like introduction to WOW! and here we are. So yes, it's in the cost that's in the model, and it works its way through the IRRs. So there is some incremental marketing that we have to do to sort of introduce ourselves. I would tell you that where the announcements have been made and the towns that know we're coming, there's a lot of excitement, there's a lot of inbounds for preorders because these are places where there is 0 competition to a degree.

Right. There was incumbent cable provide.

Yes. And so people are like, wow, I might have a choice, and it might be less and it might be faster. So we'll see how that plays out.

Can you share the mix of who we're going to bump into in those markets?

You're going to see Charter, you're going to see Frontier, you're going to see them all. You won't see Spectrum. We're not going -- they're not -- I don't think they're in the Southeast, but yes, you can see all the big guys.

And the typical DSL provider would…

Typical DSL provider and it's fascinating, the young woman who heads up my financial planning, she lives in a very sort of remote mountainous area of Colorado. So her only choice is DSL. So like when we have like the Zoom meetings and stuff, you see her, you don't hear her, the voice gets blurred. So she's chomping at the bit for us to greenfield the mountains of Colorado, which I don't think that's on the table, but maybe.

Yes. And just I guess your experience has been in the first 12 months, you typically get 15% to 20% penetration.

Yes.

Any differences in these new cohorts that you're -- you scoped out that you're going to build in?

No, similar. Similar. So I think, firstly, we're the challenger brand, we're the over-builder. So with the benefit of being the challenger brand, you have to have 3 things consistently. You have to have the lowest price, you have to have an equivalent or better network, and you have to have stellar customer care. And if you have those 3 things, you can probably take some share from people. And we're not afraid of competition. I mean that's all we've ever done. We've never been the incumbent. We're always coming into the market and trying to sell into it. So it's a little bit of a different business model. We don't have that benefit of incumbency.