WideOpenWest, Inc. (WOW) Earnings Call Transcript

All right. Great. Good afternoon. Thanks, everybody, for being here and joining us on the webcast. My name is Frank Louthan. I'm senior wireline analyst here at Raymond James. Pleased once again to have WideOpenWest back here at the conference. Had WOW! and your predecessors here many, many times. So John Rego, CFO here today, for conversation.

So John, why don't we start out. Talk a little bit about who you are, who WOW! is, how you're similar and then most importantly, how you're different from a lot of the others in the cable space that people are more familiar with?

Yes. So we're WideOpenWest, ticker symbol WOW!, I always love that. We're what used to be called cable overbuilder, but we prefer challenger brand right now. So -- we're the -- usually the second or third entrant that goes into a market, we will overbuild in that market. So that makes us a little bit different. I think as far as I know, we're the only public overbuilder out there. There are a few others that are private. I think something very different. We provide, by the way, high-speed data, cable and telephony. So the big 3 things we provide. I think what's different than most of the big guys now is that we made a very conscious decision 3 years ago to focus on high-speed data or broadband. So we give the term a lot broadband first. We lead with the broadband and there's reasons for that. High-speed data is a magnificent product that has 97% gross margins and has really high EBITDA margins. Video is not such a great product these days. It's like a 17% gross margin business, and drives a lot of capital expenditure into the company and drives a lot of OpEx in the business, especially in the area of customer service. And telephony is nice, but more and more folks are sort of defaulting through their cell phone. So the focus was to literally transform the business into a broadband business. So we're doing that with our legacy business, and then we're also doing that with our new builds. So we committed at Analyst Day about a year ago to 400,000 new home passing which we've started. And those will be predominantly a high-speed data fiber business. So that's very different than others. The other thing that's different is in our term at the office, we even have baseball caps that say this Frank, LL, HG, low leverage, high growth. So we were fortunate before the economy took a left turn to sell 5 markets back in 2021. We took the proceeds of $1.8 billion. We paid out a ton of debt. And when I say my prayers are at night, there isn't a time when I'm thankful that I'm not sitting around $2.3 billion of variable interest debt right now. We got that nicely down to $740 million. So it's given us an opportunity to be able to grow the blueprint, grow the plant, grow the business at a time when others are struggling that have significantly higher leverage. So I think those are some big differences. I think -- we're similar in certain regards to Cable One. It's the name we've heard. Cabo, in that they were really the first of the cable players to kind of make this commitment to a broadband first kind of thing, and it makes all the sense of the world when you model it out. So some similarities and some differences.

All right. Great. So 1 of the things I think is really interesting that I get a question from investors all the time is how can you take share from Comcast and Charter and others and so forth. So what kind of marketing tactics do you employ to try and take share? And how do you have success up against those big huge companies?

Yes. So I've been doing challenger brands now for like 25 years. And so with the privilege of being the challenger, you normally have to have 3 things. You have to have the lowest price, the best network and the best customer service. And it's really on those 3 tiers that we compete. I'd say our pricing generally is 10% or slightly higher than that, lower than the big guy that's in the market. We have a fully baked 3.1 DOCSIS network right now in the legacy base. So that is fiber all the way into the neighborhoods. And then it's coaxial cable into the home. So that's legacy network. We can offer 1.2 gig across the entire platform to everybody. And oddly, some of the big guys can't do that right now. And then the third tier, which I think is the most significant and really the crowd pleaser and generates business through word of mouth, it is a little WOW! that has the 22 consecutive J.D. Power, Best Customer Care of the Industry award. So if you call customer service for 1 of the big guys and 1 of the big telephony providers, 1 of the wireless providers, if you enjoy music, that's the call for you because you're going to sit and listen to it for about 30 minutes, until some kid from another country answers and can answer your question if it is 1 of the 10 questions listed on his pre-canned sheet versus we're answering phones in like less than 30 seconds. And our first call resolution is actually significantly higher than I think a lot of others. So we're competing on price, network and I think most significantly, customer care, which breeds a good word of mouth. So the legacy base is actually very loyal. And when we look at churn statistics, voluntary and voluntary, the #1 reason why people would leave us is because they've moved out of the territory. So we have a very, very satisfied customer base. So people tend to like those things that are drawn to them. So that's kind of how we do it. And it's challenging, especially in the current economic environment, some of the big guys are ready to give away the store just to get a customer. Unfortunately, we're not big enough to give away cell phones and free contracts and all of the other stuff. So we have to compete in other ways. And we do that by just offering a superior service at a good price with some good customer Those are the 3 pillars.

So of those price is one that gets a lot of focus, I think, in folks that kind of cover the sector, the consumer product, they're most [ moving ] with this wireless. Wireless is a knife fight on pricing -- and how does -- how much of a factor is price when you talk to your customers why they're looking for your service and come to you?

Yes. So we tend to do best in areas where there is perhaps a single 1 gig provider and maybe a DSL provider. If it's in an area where there's a single 1 gig provider, price is a big factor, and they're probably charging higher than even the rec rate for the service in other areas that they're in. So price is big. The #1 in head of price, I would have to say, though, is a lot of these sort of underserved areas, and these are like major suburbs. They just happen to have only a 1-gig provider. They're so thankful that there's some degree of competition and some place else to go. That's actually a big factor for them. So price is important. We'll always beat the price, at least by 10%. So that's -- especially now in current economic times, that will draw people in who are very conscious about that. And I would say that -- the bulk of our base is certainly not the top 1%. It's the middle class and lower end of upper middle class. And especially in the last year, it's become significant for folks.

Okay. Great. And so walk through is the new greenfield build opportunity that you're doing there, part of your opportunity you got when you sold the assets was to pay down the debt and give you opportunity to do some more growth. Tell us what you're doing there and how that differs from the legacy markets.

Yes. So as I said, the legacy market is HFC, which means it's fiber all the way into the neighborhood and then it's coax into the house. New builds that we're doing, and we've committed to do 100,000 home passings by 2027. That's roughly $400 million of capital. Those are all filled away. So it's funny, people ask me all the time, are you worried about those new [indiscernible] upstarts and I'm like, you mean like, wow, like because that's what we're doing. We took a good hard look at it. We do a lot of planning around it. And so you start at the top of the funnel. So there are 155 million households in the U.S. And like where can we be really successful in historically, if we go into markets where there's again a single 1 gig provider who's probably overcharging and underserving and maybe doesn't have a completely updated network. And perhaps a DSL [indiscernible], we tend to do really, really well there. So we started out by looking at the 155 million households, and we said, well, what should we eliminate to get down to a true TAM for us. So the first thing you do is you take California out because we don't want to do business in California. It's hard to do. But you work your way down, you work your way down. And so there's probably 10 million homes that make like all the sense in the world for us to do. And so we honed in on these first 400,000. And again, we're again, what we're calling Florida right now, which is Seminole County and Orange County, where we sit right now. We've highlighted 158,000 home passings to do there. But what's really interesting about that, there's probably 2 million homes in area. And so 3 conferences from now, Frank, we'll be sitting here. We'll be talking about the greenfield. So I think there's more opportunity that way. And the piece that we also don't talk about is 19% of our business is in commercial. So we have products that we offer to small and medium-sized enterprises. So in the same area with 158,000 home passing, there's potential 12,000 small and medium-sized businesses at our past as well. So that would only be on top of everything that we're doing. So we really try to stack the deck to the places where we're most successful. And we're starting to see that. So we announced on our earnings call that we finished -- we started constructing finally in the fourth quarter of '22. We lit up the first 1,000 home passings in the first quarter, and about 25% penetration in 5 weeks of the first 1,000 so that's not a complete sample size, but it's a pretty good sample size of 1,000 homes. So we were hoping for 30% penetration over 18 months. The whole legacy network is 28% penetrated. So early days, good sign. Coming into a market, we did a lot of sort of introduction to WOW! marketing maybe 4 months before we got here. We actually had an order queue filling up before we were able to service customer number one. So we're really excited about that. Too early to tell if I'm going to hit 25% penetration every time they put another 1,000 homes on. But as a starting point, I think it's really, really good. The other 1 we saw is the 2021 Vintage of Edge-Out. So greenfields are brand-new areas that are not contiguous to our network. Edge-outs when we expand the network by maybe going over 1 more town from the existing network. The [ 2022 ] Vintage of Edge-Outs has already penetrated 45%. So that's fascinating. So if you go into areas that sort of meet that criteria of maybe a single 1 gig provider with a superior offering at a lower price, you build it, and hopefully, they're going to come. So that's for the future. So we're excited about it.

And how many more markets do you think you can announce this year?

I'm not going to tell you. But -- we probably will. At some point this year, announce what the next market is going to be. Clearly, we're doing -- if we're going to do 400,000 homes, and we only have 158,000, there's more markets to do. But it's moving nicely. We got a little bit slowdown in 2022 because of Hurricane Ian. Mercifully, the hurricane didn't touch any of the physical plant. What I touched was literally, our ability to get enough face time with the public utilities who we have to work with to go on their telephone poles to [ drill ] the corner. They were too busy helping people who are in distress, which perfectly understandable. We're back on track in 2023 with the building. So all full steam ahead. If you remember from the Analyst Day, we talked about [ $400 ] million over 5 years. So expansion CapEx is going to be a pretty robust number this year hopefully, by the end of this year, we're talking about a more meaningful number than the [ 1,000 ], and we keep building them. We're building them as we speak.

All right. Great. So let's talk about the economics between the Edge-Out builds versus the greenfield builds. What's sort of the difference there? One, the name of the game and fiber business when you start with the head start with some network there you're hedging out, the other you don't, but just about the differences there.

Yes. So the fiber-to-the-home builds with the greenfields are a bit more expensive. So the number that we've added since the Analyst Day is about $1,050 per home passing. And you can compare that with Edge-Outs, which is around $650 to $750 to build the home. So clearly, fiber-to-the-home builds are more expensive because the equipment is more expensive -- and that's an average. So it's always with a we're talking. Terrestrial builds where we're wrapping up the streets are more expensive and aerial bills when we're going over telephone poles are less expensive. So in the modeling as a blend of both. And I'm not a construction guy, my father was a construction guide. But if you talk about all the prework that goes into coming up with like we're going to build these greenfields, it floors me. We were flying drones -- over the territory of Seminole County to figure out what would be overhead and what would be underground, it's kind of fascinating. When you're doing those blends, terrestrial is more expensive because you're digging up the ground. Aerial is less expense an oddly permitting is easier to get to rip up the streets and harder to get to go on the telephone pole. So it's like all these blend of all these different things. I'm fascinated, -- what do I know? I just assume like we're going to build a Seminole County. It's 1 permit like when the guy worked on my house, it's not 1 permit. It's thousands of permits as you pass through towns and municipalities and counties et cetera, et cetera, et cetera. So a lot of the effort is in the prework. It's almost like the construction is not easy, but it's 1 of the easier parts in the whole mix.

Government adding value again, I'm sure. So what makes 1 more attractive than the other between the 2, there's a cost difference. So an accurate assumption would be, hey, the Edge-Outs are more attractive. But what's -- how do you think about that?

I think about it almost as if 2 disparate businesses that are going to mold into 1 business. So we do know from the legacy base that new additions as of the fourth quarter, and it's been consistent through '22. New adds are coming in, I'd say, somewhere between 85% and 90% of the time, they're only taking the Internet now. So we talk about cord cutting, a lot of video cord cutting and it's generational, right? So my kids are all in their 20s, I mean they don't have video in their house. They have the Internet. And they don't have TVs. They watch movies on their phones or on their laptops. And so when you look at a greenfield market, you're talking about a market that like 95% of the people who come in are only going to take the Internet. How about that? So that means if you're only taking the Internet, you have a lower capital requirement because video is very expensive, and you have less OpEx because believe it or not, the bulk of calls into a [indiscernible] revolve around video, video issues. And they take 25 minutes, 30 minutes sometimes to resolve. 20% of the time you have to roll the truck again to fix the problem. And anyone here who's over 30 years old knows that when your Internet goes down, you shut the modem, you wait 30 seconds and you put it back on, which is what they tell you to do, which we'll tell you to do and then that usually fixes it. And then, then you have a real call. So the economics on a greenfield are different. The greenfield offerings are 500 meg, 1 gig, 3 gig, 5 gig. And Andrew and I were looking at this [ core ] effect. We have people who took the 5 gig. They're running trading floors in their kitchen. I don't know what they're doing that they need 5 gig, but they're taking it and we have to sell it to them. A noticeable number of customers took 3 gig, which is fascinating. I would say the lion's share of folks, the biggest group of folks took the 1 gig and everyone else defaulted to the 500 meg. So putting that aside because of that compared to legacy network where the offerings are 100 meg, 200 meg, 500 meg, and 1 gig. The ARPU, the blended ARPU in greenfields is noticeably by double-digit percentage higher than it is in the legacy base. So you're offering them more speed, they're taking it. And the OpEx to run that as a separate business is lower than it is in the legacy business. So blended together, that should make the overall business better but it gets you back to the concept of broadband first and greenfields becomes broadband most or it's a broadband business. So it's a different business. So that's interesting to us.

Is it just too challenging from a marketing perspective to not sell videos so forth an Edge-Out territory when you're selling it 1 subdivision over or something or why, why couldn't you just eliminate that capital and those products in those areas as you enter them?

Yes. Well, we offer it because we have to -- even in greenfield, we have to offer video because we have franchise agreements, so that's the requirement. If you go to our website, it's hard to find. You have to try that [indiscernible], but we offer it -- and what we do, I mean it gets more expensive. So if you guys know or don't know, each year, every January as a matter of fact, it starts in October, you renegotiate the content rates with all the content providers. And as of the last several years, realizing that they're going to lose their lunch to the over-the-top providers. They keep raising the price of the content, usually by around at least 10% a year. And to do that, we have to raise the price of the video offering to kind of correspond with that. So video gets to the point where it's so expensive, people start to cords even more so. So we offer it. If you go to our website, you won't find video, you have to ask more and more, we're trying to direct people to some of the OTT providers, and it's fascinating. When your video gets to be over $100 plus a month. It's fascinating to people that with 3 OTT providers, you could probably get 95% of what you're getting on that offering and it might be free with commercial or it might be some modest sum of money. So that's the deal with video. The other thing with video is video utilizes the QAM network, which is a bandwidth eater. And so we've been kind of gently trying to get people off of video anyway so we could reclaim the bandwidth, which makes it easier to expand the legacy network. So you've got both things going on. The going forward piece takes care of itself because the next generation just don't want it so it makes a little bit easier.

Yes. Go ahead.

How much you guys taking advantage of [indiscernible] -- sorry, defunding and [indiscernible]?

Yes, not at all. I mean, we're not really in the very rural markets. We're in like middle class and upper middle class suburbs, so we don't qualify. We do utilize the ACP, which is for people who meet certain financial definitions, they can get up to [ $30 ] a month. So it's interesting. Somebody has asked me not to long ago about fixed wireless -- fixed wireless, which we don't see a lot in our markets. But fixed wireless $50 a month for between 35 to 185-megabyte not guaranteed and doesn't work with all streaming services. For $30, you can have 200 megabytes. And if you qualify for that program, you can have it for free. So we don't participate in those programs. We do a few programs from time to time where we'll build stuff under a government contract. We just did one. And so we got $3 million for just building this little piece of network and then you get sort of an ongoing revenue stream. So we are not taking advantage of those who are not in our areas, and those are probably areas we don't want to go to, very rural. So we're -- we have our own formula of where it makes the most sense to go.