WideOpenWest Inc (WOW) 2018 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the WOW! Third Quarter 2018 Earnings Call. As a reminder, I want to advise everyone that this call is being recorded. At this time, I would like to turn the call over to Mr. Lucas Binder, WOW!'s Vice President, Corporate Development and Investor Relations. Please go ahead, Mr. Binder.

Thank you, Cheryl. Good afternoon, everyone, and thank you for joining our third quarter 2018 earnings call. With me today is Teresa Elder, WOW!'s Chief Executive Officer, who will be giving an update on our operating activities; and Rich Fish, WOW!'s Chief Financial Officer, who will cover the financial results.

Before we get started, we need to remind everyone that during our call, we will make some forward-looking statements about our expected operating results, our business strategy and other matters relating to our business. These forward-looking statements are made in reliance on the safe harbor provisions of the federal securities law and are subject to known and unknown risks, uncertainties and other factors that may cause our actual operating results, financial position or performance to be materially different from those expressed or implied in our forward-looking statements.

You are cautioned not to place undue reliance on such forward-looking statements. We disclaim any obligation to update such forward-looking statements. For additional information concerning factors that could affect our financial results or cause actual results to differ materially from our forward-looking statements, please refer to our filings with the SEC, including the Risk Factors section of our Form 10-K filed with the SEC.

In addition, please note that in today's call and in our earnings release, we refer to certain non-GAAP financial measures. Such measures include: revenue, including acquisitions and dispositions; residential subscription revenue, including acquisitions and dispositions; Business Services subscription revenue, including acquisitions and dispositions; adjusted EBITDA; transaction-adjusted EBITDA; transaction-adjusted capital expenditures; and adjusted diluted earnings per share. While the company believes that these non-GAAP financial measures provide useful information for investors, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. These non-GAAP measures are reconciled in our earnings release to the most comparable GAAP measures.

With regard to Hurricane Michael, it is still too early to be specific about the financial and operational impact to the business. As such, all discussions about 2018 fiscal year and fourth quarter outlook do not include the impacts associated with the hurricane.

Now I'll turn the call over to Teresa.

Thanks, Lucas, and thank you, everyone, for joining today's call. Reflecting on the first 3 quarters of 2018, I am excited by the success we've been able to achieve in such a short time. The key indicators of performance across our business are showing improvement, giving us confidence that our strategy is working. That being said, I continue to see significant opportunity to execute against our vision.

Our vision is to connect people to their world through the WOW! experience by being reliable, easy and pleasantly surprising every time. Our leadership team is complete. Employee engagement and employee Net Promoter Scores have continued to hit record highs. Through our people and for our customers and investors, we are transforming our business. The investment in people translates directly to the customer and to the customer experience. The focus on customers has paid tangible near-term dividends and will continue to drive productivity into the future. Customer satisfaction scores have shown marked improvement on a year-over-year basis. And the launch of Whole Home WiFi and the relaunch of our website, wowway.com, have both demonstrated encouraging results.

We have met or exceeded consensus expectations through the first 3 quarters of 2018, notably in adjusted EBITDA and HSD RGU net additions. We know that delivering on our commitments to the investor community is paramount to building credibility and driving shareholder value.

In the third quarter, we added 7,300 HSD RGUs. Importantly, organic net additions for the third quarter were 4,500, the third straight quarter of positive organic HSD RGU growth. Additionally, third quarter and year-to-date subscriber churn were the best subscriber churn for a third quarter and the year-to-date period in at least 2 years.

During the third quarter of 2018, we grew total subscribers by 5,200, the best third quarter results in the last 4 years. Business Services subscription revenue, including acquisitions and dispositions, grew 13.4% year-over-year, representing our eighth consecutive quarter of double-digit growth in this segment.

Our ability to extend our network through Edge-Outs remains a unique growth opportunity for WOW!. As of September 30, 2018, the 2016 Edge-Out Nodes reached 32.9% penetration. And our 2017 Edge-Out Nodes continued ramping well and achieved 26.7% penetration. So far this year, our 2018 Edge-Out Nodes expanded our homes passed by 14,200 and have already achieved 16.2% penetration after an average of only 87 days in the market. The success that we have been experiencing by expanding our network through Edge-Outs continues to manifest in our 2018 Edge-Out Nodes. As an example, in one market active for less than 100 days, we have already achieved almost 24% penetration. As we have discussed in the past, our focus in 2018 is on transformation. We started the year by identifying key investments needed for the business. As the results today indicate, we are well on our way. Our investments in customer care, specifically adding care reps, has had a direct impact in increasing service levels and a commensurate impact on faster call resolution, leading to lower service truck rolls. With an improved customer experience, we have seen lower churn levels throughout the year. As we look back on the last 3 quarters, our investments in marketing have become increasingly effective. Each dollar we spend is more impactful due to lower agency fees, predictive modeling for spend allocation and improved share of voice through out-of-home, radio and TV. Additionally, our direct marketing operational costs have decreased allowance for new and more focused targeting.

We continue to focus on having the right sales organization. Adding residential and commercial quota-bearing headcount has been a focus throughout the year and will continue to be going forward as we have significant opportunity to drive penetrations throughout our markets. Additionally, with the launch of the revamped e-commerce site, wowway.com, we are driving connects through this new channel. The impact has been an acceleration in connects coming through our online store, which is a low-cost sales channel.

In August, we announced that WOW! had been chosen as the preferred Internet provider for Town Madison, a modern urban community being developed in Huntsville, Alabama. Town Madison will include major retailers, restaurants, apartments, offices, hotels and even a new minor league stadium. This is a great example of how our sales, engineering and field operations teams came together to put forth a proposal that won over some of the proposals of our largest national competitors.

At the beginning of the quarter, we launched WOW!'s Whole Home WiFi service. Whole Home WiFi is easily bundled with WOW!'s residential internet services. With Whole Home WiFi, customers can choose from a handful of fast Internet speed options alongside TV and phone packages that are best suited to each customer's needs. The results following the launch have been very exciting, and we have found that our sales, care and field operations teams have all become big proponents of the service and are driving adoption across all channels in the business. To date, we continue to see very few customer care calls around Whole Home WiFi offering.

As I mentioned, we are very proud of the results achieved through the first 3 quarters of 2018. Looking to the rest of the year and heading into 2019, I am excited for the prospect of what lies ahead. We have continued to demonstrate the ability to grow customer relationships throughout the year, driven by low churn levels, but we're not stopping here. We continue to expect adjusted EBITDA to improve sequentially in the fourth quarter and position WOW! to show positive year-over-year transaction-adjusted EBITDA growth. For the full year, we continue to expect our first year of positive free cash flow. Achieving each of these initiatives for our customers, people and investors is an exciting challenge and a challenge that have -- we have been executing against all year long.

Now before I turn it over to Rich, let me provide a brief update on our customers and network in Panama City, Florida, after Hurricane Michael. On October 10, Hurricane Michael hit the Florida Panhandle. Panama City, one of WOW!'s smaller markets, took a hit from the hurricane. Significant planning ahead of the storm kept our head in running and ensured that we had fuel, vehicles and personnel ready at a moment's notice. Crews of technicians are working diligently to restore service to our customers in the region. WOW! recently announced full restoration of service to our customers in the Panama Beach and Inlet Beach areas of our footprint, and we expect to bring up additional customers on a daily basis through the end of November, when we expect that most customers will be up and operational. Delton, Alabama was also impacted by the storm but to a significantly lesser extent than Panama City. Service in Delton was fully restored within days. We remain committed to serving our customers affected by this hurricane. From a business perspective, WOW! maintains comprehensive property and casualty insurance, which includes coverage for business interruption, and we expect the long-term financial impact of the storm to be minimal. So many people within our community have stepped up: from the governmental agencies, our peers, vendors and of course, our employees, all have been there to help people in the Panhandle. To all who have selflessly helped, thank you, and to our employees, especially those in this area, I'm so proud to work with all of you. Now I'll turn it over to Rich to review our third quarter 2018 results. Rich?

Thanks, Teresa. We continue to be encouraged by our progress and are pleased to be able to report this afternoon that we're executing in accordance with our expectations.

For the third quarter of 2018, we reported total revenues of $291.6 million, net income of $30.5 million and adjusted EBITDA of $106.7 million.

Fully diluted earnings per share for the third quarter totaled $0.37, and adjusted diluted earnings per share was $0.40. For the third quarter, total revenues were up 0.1% sequentially over the second quarter of 2018. Third quarter 2018 adjusted EBITDA totaled $106.7 million, which was a 4.4% sequential increase over the second quarter of 2018. And the adjusted EBITDA margin increased to 36.6%, a sequential improvement of approximately 150 basis points.

As Teresa highlighted, we continue to have strong subscriber metrics during the third quarter. We added 7,300 HSD RGUs, which included positive organic HSD RGU growth of 4,500, representing an improvement of 7,900 RGUs as compared to the third quarter of last year. This was the third straight quarter of positive organic HSD RGU growth for WOW!.

Net video RGUs decreased by 7,100 during the third quarter, an improvement in the rate of net video losses of 8,600 or 55% as compared to the third quarter of 2017. Overall, our total RGU performance was the best third quarter result we've experienced in at least the last 4 years.

Total subscriber trends for the third quarter also demonstrated strong momentum with an increase in total subscribers of 5,200 during the third quarter of 2018. Similar to our total RGU performance, this represents the best net subscriber metric during a third quarter period in the last 4 years as well.

Business Services subscription revenue as reported totaled $33.0 million in the third quarter of 2018, a year-over-year increase of $3.4 million or 11.5%. Adjusting for the effect of historical transactions, Business Services subscription revenue, including acquisitions and dispositions for the quarter increased $3.9 million or 13.4% over the third quarter of last year.

As a result of the Edge-Out initiatives that we restarted in 2016, we've extended our network to more than 122,200 new homes passed as of September 30 from these projects. The Edge-Out Nodes we started in 2016 have added a total of 41,600 new homes passed, and we've achieved 32.9% penetration to date in these communities. 2017 Edge-Out Nodes have added 66,400 new homes passed. Penetration continues to ramp and is now at 26.7%. And the Edge-Out Nodes that we started this year in 2018 have added 14,200 new homes passed, have an average of just 87 days in the market and have reached 16.2% penetration.

Needless to say, we continue to be very pleased with the performance of our Edge-Outs. We've been able to identify attractive opportunities to deploy capital and drag growth in the business and the opportunity for continued growth through Edge-Out expansion into the future remains substantial.

Total capital expenditures for the third quarter of 2018 were $80.3 million on a reported basis. Of that amount, $6.7 million was incurred toward the completion of the Chicago Fiber project, which will be reimbursed as elements of the final build-out are completed. We're on track with our efforts to complete that network build and expect that it will be completed during the first half of next year. Adjusting for the effect of acquisitions and dispositions, transaction-adjusted capital expenditures for the third quarter of this year totaled $73.6 million, which included transaction-adjusted strategic capital expenditures totaling $16.6 million. Excluding those strategic capital investments, transaction-adjusted capital expenditures totaled $57 million or 19.5% of third quarter 2018 total revenue.

With regard to liquidity and leverage, at the end of the quarter, we had $27.3 million in cash on hand, outstanding debt totaling $2.322 billion and $234.6 million of undrawn revolver capacity. Total leverage at September 30, 2018, was 5.6x on a trailing 12-month transaction-adjusted EBITDA basis.

As Teresa mentioned, we expect year-over-year growth in transaction-adjusted EBITDA for the fourth quarter of this year compared to the fourth quarter of 2017 and accordingly expect the total leverage will begin to reduce from this point forward.

With respect to our Panama City market, as Teresa mentioned, we have comprehensive property casualty insurance coverage to cover the cost of restoration and repair to our network. In addition to our property insurance coverage, we also maintain robust business interruption coverage that will help to offset the financial impact to our business from the short-term disruption to our customer base. As we expect the vast majority of the approximately 30,000 customers that were impacted by the storm to be restored to service before the end of the year, we believe that the financial impact from Hurricane Michael will be largely isolated to the fourth quarter of this year.

With that being said, it's still too early, however, to be specific about the ultimate impact from the hurricane on our financial and operating results.

We will continue to manage the process closely and provide updates as appropriate. As a result, as Lucas mentioned, all discussions about our outlook for the fourth quarter and the fiscal year 2018 totals do not include any impact associated with the hurricane. As Teresa mentioned, this is now the third quarter of executing against the plan we outlined at the beginning of the year. And consistent with our full year guidance, excluding the impact of the hurricane, we expect fourth quarter adjusted EBITDA to increase over the third quarter and will represent a return to positive year-over-year adjusted EBITDA growth from the fourth quarter of 2017. We reiterate our full year adjusted EBITDA guidance expecting to be at the midpoint of the range.

Total subscriber trends for 2018 and especially the growth for both HSD RGUs and organic HSD RGUs have continued to exceed expectations. For the fourth quarter, we expect to continue to show modest growth in both total and organic HSD RGUs, excluding the impact of Hurricane Michael.

So that concludes our prepared remarks, and I'll turn it back to Cheryl to open the call for questions.

(Operator Instructions) The first question comes from the line of John Hodulik of UBS.

This is Chris for John. You highlighted in the prepared remarks that churn has been a big driver of the broadband outperformance year-to-date. Any color you can give on the gross add side would be helpful. And I appreciate that the release says that you're on track for the adjusted EBITDA goals for the year. Any update you can give on the original guidance you gave for revenue and CapEx?

Okay. So on the sales side, as we've said, we're -- been pushing hard on new sales and new customer relationship connects in addition to retaining those relationships we have. So I think the work that's being done throughout the sales and the marketing organization has been terrific as we've rolled out new products, and we continue to see growth on both the topside as well as making sure that the customers stay with us longer through the churn initiatives. So it's really both and in the organic footprint as well as our focus on Edge-Out.

So as it relates to projections with respect to guidance, total revenue, we expect to be inside of the range of guidance, midpoint of the range that we guided to, which was $1.15 billion to $1.17 billion. I mentioned adjusted EBITDA. With respect to capital expenditures, we expect to be slightly above the guided range, which was $235 million.

Okay, great. And just one follow-up. Now that the customer care investment program is coming to a close, can you just remind us how much of that spend is onetime in nature? And should we start to see that reverse out starting here in 4Q? Or will the bulk of that fall out next year?

Sure, Chris. So as we've talked about in the past, the investment [encares] around rightsizing the organization and making sure we have enough support for the customers heading into the new year and obviously benefit us as we went through the -- throughout 2018. The investments are expected to be ongoing as we find greater efficiency and improve driving call deflection, you can see some of those costs decline. But the investments were expected to be ongoing from this year.

Your next question comes from the line of Zach Silver of B. Riley FBR.

So your results year-to-date suggest that the incremental $25 million in investments are really making a difference. And I was just curious if any of those 3 buckets are contributing more than the other one? And potentially, since you have teams of nice net adds, which are probably correlated with these, is there a chance that you could do more investment in 2019 if you thought that it could -- you could grow off of that?

Yes. Thanks for the question, Zach. I would say, we feel good about all 3 of the buckets of the initiatives, both on the customer care side, sales and marketing and then our digital platforms and our digital transformation as well. We've seen really good improvements across the board in all of them. I would say, as we look forward, we're looking at how we can continue to optimize each of those platforms and initiatives and do things even more effectively. That's why we wanted to call out some of the efficiencies that we've gained from the marketing side with better targeting and clearly moving some of the sales customers like to buy online through the wowway.com website, and that's a lower-cost channel, so that's certainly a good thing as well. So we're feeling good about those initiatives.

Got it. And then just a quick follow-up. We noticed that, I think, some of your pricing in the third quarter was -- I think you had kind of priced some things a little bit more cheaply, but you offset that by adding the Whole Home WiFi. And can you -- is there any detail you can give around whether that -- those sort of maybe promotions drove the upside in the quarter or the good results?

Yes, Zach. There was some diminution in ARPU on a sequential basis due to really the changing mix in our business, speaking to video, moving to HSD, certainly a different ARPU profile. The changing mix, however, given the relative profitability of the 2 services, changing mix, however, was one of the drivers that allowed for an increase in our gross margin by almost a full percentage point on a sequential basis. So we will continue to derive benefit from additional add-on value-add services like Whole Home WiFi. That will certainly be a big part of the story going forward. But at this point, the volume is still very much in a ramp mode.

Your next question comes from the line of Rachel Arrowood of Macquarie.

This is Rachel for Amy Young. Two quick questions. One, there's been a lot of focus on margins this quarter in cable, actually, your growth initiatives [drop] up. Do you think you can close the gap with peers? And then secondly, can you just comment a little on the competitive landscape and what you're seeing in your footprint?

So Rachel, just to repeat the questions, the first one is, there's been a lot of focus on margins and whether or not we can close the gap relative to our peers. And the second question?

About competitive landscape, and just what you're seeing in your footprint?

Sure.

Okay. Well, why don't I take the competitive one first, and then I'll let Rich follow up on some of the margin questions. Yes, we have competitors in our markets, and I think examples like Town Madison shows that we definitely can compete and be successful. One thing that we find is that customers really love to have choice, especially with a value provider like ourselves with the product that is so solid in the marketplace. We feel very good, especially with our HSD product. Our speeds, 1 Gig network and the Whole Home WiFi product, especially, on top of that. So we remain confident in our ability to win and retain those customer relationships.

And on the margin question, I would say the answer is, we do feel confident in our ability to continue to become more efficient and bring additional cost out of the business, inefficiencies out of the business. But it really is -- the way that we see it as coming really from kind of 2 sources. The first is being at the margin, gross margin itself, and that really is a continuation of the beneficial impact of the changing mix in our business. And the move from video services over to HSD services, that would be augmented by additional ARPU enhancements from additional products and services that we're able to move into the customer buying to enhance ARPU. Below margin, it really gets back to -- into our back-office cost structure. It gets backs -- it gets back to, excuse me, the -- really, the fundamental premise of the investments that we were making in our digital transformation investment bucket. Certainly, we believe that one of the benefits from those investments is an enhancement to the customer experience because that's the type of interaction we feel like an ever-increasing percentage of our customer base wants to -- how they would choose to interact with the company. The other benefit, however, is that every one of those initiatives has the added financial benefit and the operational benefit of interacting with our customers in a much more efficient manner than what might have otherwise been the case where we are simply interacting with our customers through the primary communication vehicle, which is on the phone through one of our call centers. So anything that is available to our customer base that we're able to develop allows the customer to build care, self-information, et cetera, et cetera, all represents opportunities for them to get the information that they're looking for but in an unbelievably cost-efficient manner because we're not on the phone [with them]. So we're really -- like I said, the push for margin expansion is really across the full kind of stack of kind of our financial results.

Your next question comes from the line of Brian Russo of Crédit Suisse.

A question for Teresa. I realize the year isn't quite over yet. But as you look out into 2019, I was hoping you could highlight what some of the -- what some of your priorities for the business might be.

Thanks, Brian. Yes, as we look into 2019, we really want to continue to execute on the vision that we've set in place. We don't see a dramatic change. We feel like the vision that we have to connect people to their world through the WOW! experience is working well for us. We're going to continue to do that. I think we have plenty more execution to do. We're excited by continuing with Edge-Outs from the strategies we have. We're not in a position yet to operating guidance for 2019, of course, but we're excited about the future, there's no question.

Your next question comes from the line of James Ratcliffe of Evercore.

This is Vikash Harlalka for James. Just a quick question on the CapEx. When we look at CapEx, excluding the Verizon build and the Edge-Out, it's been running at around 19.5% of revenues for the -- for like 2 consecutive quarters. Is that a good run rate going forward?

Yes. Thanks. It's a great question. And as you said, we -- when we look at our CapEx, we really parse it into the 2 components that you mentioned, the first of which is strategic, which represents the growth opportunities. We believe that these represent highly accretive opportunities for us to deploy capital in high-growth situation. The best example is certainly Edge-Outs. But it would not be necessarily limited to Edge-Outs, in that investments in the customer experience, et cetera, could potentially fall into that category. The -- what's left over is -- without a name, I'll just refer to as baseline, excluding the strategics. As we think about that, that is a percentage with respect to revenue and a capital efficiency that we think that we will continue to become more efficient as time progresses, as we continue to grow and achieve an element of scale so that we expect the subset of CapEx to become more efficient over a period of time.

Your next question comes from the line of Brandon Nispel of KeyBanc Capital Markets.

Teresa, one for you maybe on strategic competitive. Can you maybe help us understand what actions you guys might take if competitors, say, Comcast, Charter, or AT&T get more competitive marketing their services in some of your markets? And then maybe can you give us a sense of how many households you believe are going to be passed by AT&T Fiber as they build out some of their markets? Then Rich, just question on Panama, how do you account for subscribers that might have lost service during the storm? Is that going to be a disconnect and a gross add? And then just maybe help us frame the level of subscribers. I believe it's about 2% of your base. Yes, I'll leave there.

Great. Thank you so much, Brandon. So I think we have 3 questions there. So on the competitive front, yes, we see varying degrees of competition by market. In some markets, it's very robust. I would say, one thing that I love about the size of WOW! is that we are very agile and nimble, and our marketing team and our sales team is, too. And once again, we just really feel that we can compete and win in those situations. And one of the things that continues to help us is WOW's! brand health and how customers love choice in a marketplace. So that has done well for us. We provide good value for the services that we offer, and I think that really resonates with the customers. As to your question about the homes passed by AT&T, I would suggest you have to ask them. We don't have any kind of estimate on that. So you'll have to ask them how their homes passed are going. But we're feeling great about our plans for Edge-Outs and the way we've rolled out our 1 Gig services.

Yes, and with respect to the question on Panama City, I think, really, the accounting for the fourth quarter will be relatively straightforward. In that certainly, as we said, we had approximately 30,000 customers that were impacted by the storm. It occurred on October 10. As of today, we have approximately half of our customer base that was impacted has already been restored and will be committing to building. And the expectation is that the balance of the customers will be back in service by the end of November. So the accounting in -- we report fourth quarter results in March, there would be a period for -- during the quarter where we are obviously not billing our customers for the time that they were out of service. So there would be a diminution in total revenues. We will still be incurring certain elements of cost that are not purely variable associated with the reduction of revenue. And we will also be incurring additional expenses that would fall into the [category] -- expenses needed to accelerate the restoration and repair of the network. So the business interruption coverage is the one specifically that we'll attempt to -- the real purpose of the business interruption coverage is effectively to provide a claim to the carrier, which essentially speaks to restore the company's cash flow to what would have been absent the claim as compared to what the cash flow actually was and ultimately was. So approximately, the difference between the run rate P&L going into the moment before the hurricane hit serves really as a baseline for purposes of calculating what the business interruption claim will look like. That is a process that will take a period of time to assemble the claim information and work through that with our carrier. And then we would receive a reimbursement under the BI policy that would effectively when those cash -- when that cash is received, it would be recorded back in, in, essentially, the line items where it was -- where the claim was experienced. So generally, the accounting would be a reduction to the expenses that we incurred much that received with -- fundamentally, as it relates to the BI coverage, at least would be received and would be a positive addition to the company's adjusted EBITDA. That is most likely to occur, certainly not in the fourth quarter, just given the time frame that is needed to administer the claim. That is certainly most likely to occur into 2019.

That's super-helpful color. And then maybe just last question. On progress of wowway, can you tell us what percentage of gross adds are coming through the online channel now?

Yes. We're encouraged by the growth that -- since we relaunched it in late July, it's really performing well. We really don't provide details on the percentages that are coming through this. But I can just tell you, I think it's really an improved experience over the prior website we had. And we like it because it's a low-cost channel, but mostly we like it because it seems to be a preference for a certain segment of our customers, and we want to make things easy -- reliable, easy and pleasantly surprising for those customers. And it seems to be hitting that mark.

There are no further questions. Thank you for your participation in today's call.

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concludes the call. You may now disconnect.

Thanks so much. We appreciate you joining us this afternoon. Have a great day.