WideOpenWest, Inc. (NYSE:WOW) Q1 2019 Earnings Conference Call May 7, 2019 9:00 AM ET
Lucas Binder - Vice President Corporate Development & Investor Relations
Teresa Elder - Chief Executive Officer
Rich Fish - Chief Financial Officer
Conference Call Participants
Amy Yong - Macquarie
Batya Levi - UBS
Zach Silver - B. Riley FBR
James Ratcliffe - Evercore
Brian Russo - Crédit Suisse
Brandon Nispel - KeyBanc Capital Markets
Good morning, my name is Christa and I'll be your conference operator today. At this time, I would like to welcome everyone to the First Quarter 2019 WideOpenWest Earnings Conference Call. All lines have been placed on mute to prevent any background noise and after the speakers’ remarks there will be question and answer session. [Operator Instructions] Thank you.
I would now like to turn the call over to Mr. Lucas Binder, WOW!'s Vice President of Corporate Development and Investor Relations. Mr. Binder, please proceed.
Thank you, Christa. Good morning, everyone, and thank you for joining our first quarter 2019 earnings call. With me today is Teresa Elder, WOW!'s Chief Executive Officer; and Rich Fish, WOW!'s Chief Financial Officer.
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 laws 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 adjusted EBITDA, transaction-adjusted EBITDA, transaction-adjusted capital expenditures and adjusted diluted earnings per share. While the Company believes 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 and trending schedule to the most comparable GAAP measures as appropriate.
Now I'll turn the call over to Teresa.
Thanks, Lucas, and thank you, everyone, for joining today's call. Through the first quarter of 2019, we have started to annualize the benefits of the investments we highlighted in 2018 with our focus on customer care, sales and marketing and digital transformation. These investments generated returns throughout 2018 and have continued to contribute to the success of WOW! in the first quarter.
Customer churn for the first quarter was the lowest churn in any quarter in at least two years. Lower churn helped us drive subscriber growth of 4,600 net additions and 6,300 HSD RGU net additions during the quarter. In total, HSD RGUs are up 3% over the first quarter of 2018.
For the fifth quarter in a row, organic HSD RGU net additions were positive and we added 5,100 organic HSD RGUs in the first quarter. While growth in subscriber and HSD RGUs was a solid contributor to the business, we also saw a return to positive year-over-year revenue growth.
We implemented our video rate increase throughout February of 2019, which was 2 months earlier than the 2018 rate increase. ARPUs are benefiting from the rate increase and the continued benefit from a mixed shift towards higher HSD speed tiers and adoption of our Whole-Home WiFi offerings. Coupled with the return to growth in total revenues, adjusted EBITDA of $103.1 million was up 7.1% on a year-over-year basis.
We discussed over the last several quarters that the investments in the business we made in 2018 would help to drive an inflection in 2019 and we are very pleased at how this has begun. Since I joined WOW!, our efforts to drive consistency are reflected in our vision: connecting people to their world through the WOW! experience by being reliable, easy and pleasantly surprising every time. In 2018, we did our reps to get fit. Now as we build on and keep doing our reps in 2019, we are moving towards READY, or Reliable, Easy and Always Delight You.
First quarter 2019 total revenue of $287.2 million was up 0.6% year-over-year. First quarter 2019 Business Services Subscription revenue grew 7.3% year-over-year. We remain encouraged by the potential of our commercial business and expect it to continue to contribute to our overall growth.
Our ability to extend our network through Edge-Outs is a unique growth opportunity for WOW. As a result of the Edge-Out initiative, we’ve extended our network by more than 147,000 new homes passed as of March 31, 2019. The deployment of our Edge-Out Homes have been and will continue to be a key driver of growth in subscribers and adjusted EBITDA for WOW. We are very pleased with the first quarter 2019 financial results and the continued execution on churn and subscriber growth. We remain positive on our outlook for the remainder of the year as we continue to drive toward our adjusted EBITDA guidance and a return to growth on a year-over-year basis.
As we discussed during our fourth quarter conference call, we made the difficult decision to rationalize some of our care organization in Colorado Springs and our Chicago area due to reduced call volume. During the first quarter, we have redeployed our resources into our Augusta, Georgia and West Point, Georgia in market facilities with a lower cost structure, while also balancing outsourced benefits.
So much of the success we experienced through 2018 around customer satisfaction and retention is driven by the efforts of our employees and the steps we’ve taken to improve employee satisfaction and engagement. These efforts continue to yield positive results in 2019. First quarter 2019 saw Employee Net Promoter Scores remain at the high levels we achieved throughout 2018.
We also remain focused on removing bad volume from the business, which we defined as unnecessary calls or truck rolls from a customer perspective. The field and care teams under the leadership of our Chief Customer Experience Officer, working alongside our IT organization, are focusing on ways to enable self-care, reduced wait times and drive automation, all in an effort to have fewer unnecessary truck rolls and calls.
We continue to see solid results from wowway.com. The percentage of connects coming through this channel is up substantially from the same period a year ago prior to the relaunch.
Let me now share with you examples of how our teams are successfully working cross-functionally. WOW! has been chosen as the preferred service provider for Clift Farm, Northern Alabama's new urban community in Madison. Clift Farm will soon be transforming into a retail, dining, residential, office, multi-family and medical office space, catering to the growing and thriving community in Madison, Alabama. Additionally, in Ohio, WOW! was recently named a 2019 Top Workplace by Columbus CEO Magazine for the second year in a row, improving our ranking by 15 spots over the prior year.
We are proud of the results posted in the first quarter of 2019. We remain focused on growing and maintaining subscriber relationships and building on our return to growth in adjusted EBITDA.
Now I'll turn it over to Rich.
Thanks, Teresa. For the first quarter of 2019, we reported total revenues of $287.2 million and net income of $8.2 million. The first quarter's total revenues of $287.2 million were up 0.6% on a year-over-year basis, representing the second consecutive quarter whereby we've experienced year-over-year growth in quarterly revenue.
First quarter 2019 adjusted EBITDA totaled $103.1 million, up 7.1% on a year-over-year basis. And adjusted EBITDA margin in the first quarter increased to 35.9%, representing an improvement of over 200 basis points on a year-over-year basis as a result of the beneficial impact from growth in HSD subscribers and Business Services Subscription revenue, as well as lower operating expenses.
For the first quarter of 2019, we added 6,300 HSD RGUs, which included positive organic HSD RGU growth of 5,100, which represents the fifth straight quarter of positive organic HSD RGU growth for WOW!.
As of March 31, 2019, total subscribers had increased by 14,000 or 1.8% over the March 31, 2018, total subscriber count from a year ago. And total net HSD RGUs had increased by 22,000 or 3% over March 31, 2018, total net HSD RGUs, which represents the best annual growth in total subscribers and HSD RGUs in at least 4 years.
Net video RGUs decreased by 8,100 during the first quarter of 2019, which represents the second best quarterly result for video RGUs in the last two years. Total subscriber trends for the first quarter also demonstrated strong momentum with an increase in total subscribers of 4,600 during the first quarter of 2019.
Business Services Subscription revenue totaled $33.7 million in the first quarter, a year-over-year increase of $2.3 million or 7.3%. As Teresa mentioned, we’re excited about the continued success we’ve had in our Edge-Out footprint expansion investments. The Edge-Out nodes we started in 2016 have added a total of 41,700 new homes passed and we’ve achieved 33.6% penetration to date in these communities. The 2017 Edge-Out nodes have added a total of 66,300 new homes passed and current penetration now stands at 27.5% on these projects. The 2018 Edge-Out nodes have added 30,200 new homes passed. Penetration continues to ramp, which is now at 13.9%. And the Edge-Out nodes we started during 2019 have already added 9,200 new homes passed at this point. We continue to see great momentum in Edge-Out projects. And although we expect to see some variability in both the pacing of the investments and the penetration percentages across not only individual projects, but yearly vintages as well, because each project has different cost-to-build characteristics, all Edge-Out projects we've decided to pursue have attractive ROIs and are highly accretive.
Capital expenditures for the first quarter of 2019 totaled $66.0 million on a reported basis. Of that amount, $3.8 million was incurred toward the completion of the Chicago fiber project, which will be reimbursed as element for the final buildout are completed. Additionally, $2.3 million was incurred towards the completion of the repair and rebuild of the Panama City market following Hurricane Michael. Excluding the total $6.1 million attributable to the Chicago Fiber project and the hurricane, transaction-adjusted capital expenditures for the first quarter of 2019 totaled $59.9 million. Of that, $15.1 million was incurred with respect to strategic investments. Excluding those $15.1 million of strategic capital investments, transaction-adjusted capital expenditures totaled $44.8 million or 15.6% of first quarter 2019s total revenue.
With regard to liquidity and leverage. As of the end of the quarter, we had $16.9 million in cash on hand. Outstanding debt totaling $2.329 billion and $220.5 million of undrawn revolver capacity. We continue to see sequential improvements in net leverage, which came in at 5.48 times as of March 31 on a trailing 12 month transaction-adjusted EBITDA basis, which was down from 5.54 times at December 31, 2018. With anticipated year-over-year growth in quarterly transaction adjusted EBITDA throughout 2019, we expect to see leverage continue to decline throughout the year. With regard to our outlook for 2019, we reiterate the guidance we provided during our fourth quarter conference call in March.
As a reminder, we expect HSD RGU growth of between 30,000 and 40,000 RGUs and we expect total revenues to be between $1.155 billion and $1.165 billion. The seasonality associated with subscriber growth is expected to be more favorably weighted toward the second half of the year given the rate increase that we implemented in the first quarter of 2019 and the anticipated uptick in move-related customer churn that we typically experience during the second quarter of any given year.
As the first quarter demonstrated, we expect to return to year-over-year growth in quarterly transaction-adjusted EBITDA throughout the year. And we expect transaction-adjusted EBITDA for the full year 2019 to be between $430 million and $440 million.
So that concludes our prepared remarks. And I'll turn it back to the operator to open the call for questions.
[Operator Instructions] Your first question comes from the line of Amy Yong from Macquarie. Please go ahead, your line is open.
Teresa, I was wondering if you could talk a little bit about competition. And I know a lot of your cable peers have been talking about the past 10 gigs. I was just wondering where you are on that? And then maybe Rich, can you talk through cash taxes and then CapEx for this year and next year?
Thanks, Amy. I appreciate the question. As you know, competition, of course, remains robust, but we really haven't seen a significant change in competitive behavior on the acquisition front. I think as broadband becomes more prevalent, we see competitors take a stronger stance on retention. And that's had some impact on us. But we absolutely remain confident in our ability to gain subscribers because we have such a competitive product set. And certainly, our churn numbers which continue to set records are part of that.
As we look at the speeds that our customers need, we are the first operator who had 1 gig capacity in over 95% of our footprint. And we continue to look at the technology and what our customers need for the future and we'll always remain competitive at a good value for our customers.
Yeah and with respect to CapEx and cash taxes, we expect that total transaction-adjusted capital expenditures for the year will be between $245 million and $255 million. With respect to cash taxes, as you know, the Company has very, very significant federal net operating losses so we do not expect to be a federal cash taxpayer of any significance for many, many years.
As it relates to state taxes, we expect in any given year to spend between about $8 million to $10 million with respect to state income taxes. We do have state net operating losses but in varying amounts. So that's the extent of the cash taxes that we expect.
Thank you. Your next question comes from the line of Batya Levi from UBS. Please go ahead your line is open.
Can you provide a little bit more color on the reception to the recent price increases? What percent of the base saw an increase? And it looks like the video ARPU actually fell on a year-over-year basis, what drove that? And that seems to be the reason over all the driver for residential subscription revenues to be down year-on-year. How should we think about that trend for the rest of the year?
Well, let me talk a little bit about ARPU overall. First of all, the rate increase was not the sole reason that we had a rise overall in ARPU. The data mix of speeds -- we see customers go into higher and higher speeds, which were at a higher ARPU. We also have been very pleased with our Whole-Home WiFi sales, which adds to the ARPU. We continue to look at also the mix of video customers and the packages that they are buying. Rich, did you want to add anything to that?
Yeah. The only thing I would add to that, Batya, is with respect to the implementation of accounting, one of the accounting rules that was effective at the beginning of last year, ASC 606, there is a constant revaluation that is required of packages for customers that take bundled services. And then there is a reallocation according in accordance with that pronouncement. That has the effect for us of moving some of the ARPU dollars out of the video RGU category and moving them into HSD. So, that is a little bit a slight amount of the impact, but that's also kind of in the mix.
Okay. Maybe just a follow-up on that. If we look at it in on an aggregate basis, subscriber revenue per RGU, that growth slowed down a bit. Would you attribute most of that to the video piece? Or how should we think about it going forward?
Well, total subscriber growth on the residential services at, was slightly down on a year-over-year basis. We would attribute that primarily to continued efforts to retain customers, as well as the impact that the acquisition pricing potentially has on the inbound customer relationships. But we don’t expect for there to be significant downside risk in customer ARPU on a full customer basis backed for the reasons, back to which Teresa referred to which is significant growth in HSD related customer ARPU from the uptick of speed taking customers taking higher speed tiers as well as the ancillary revenue opportunities that are provided through the addition of new add-on additional services similar to Whole-Home WiFi and any other similar products.
Got it. Thank you.
Your next question comes from the line of Zach Silver from B. Riley FBR. Please go ahead. Your line is open.
Okay. Great. For Teresa, I think it was particularly notable that churn improved the best in two years even though you had a rate increase in the quarter. And I was wondering if you could talk about, I guess, give some more detail on what is driving that churn. Is it the OpEx initiative that you guys did last year? Is it a less promotional environment? Or is it may be that the broadband subscribers are just staying for longer on, not shifting around as much? That would be very helpful. Thank you.
Thanks, Zach. Yes, we’ve had a very much of a focus on retaining our cherished customers with us. And I think it is all of the things that you mentioned. And that’s why customer tension is such a source of pride for us. We did many initiatives last year in terms of improving our customer service, making our network more reliable, continuing to have packages that our customers feel are good value and provide the services they want and also as we mentioned, launching products like Whole-Home WiFi that makes the broadband experience that much better. So I really think it was a combination of many initiatives we have that are just making our customers happier.
We do see that there is significant retention effort among our competitors as well. So we are especially proud that our customers are staying with us and we are continuing to win on acquisition as well.
Got it. That's really helpful. And then one more if I could. Just on the ARPU question again. I know that you don't give specific penetration metrics, but around the Whole-Home WiFi, I mean, how far along you think you are in getting customers to adopt that product? And likewise, with kind of speeds, if there's any way that you can sort of frame what percentage of customers are upgrading speeds or what your average speed tier is right now? That would be really helpful.
Thanks, Zach. You're right, we don't give out the specific percentages on those. But I can tell you that in terms of Whole-Home WiFi, we feel like this launch has been extremely well received when we launched it last July. We sell into both new acquisition customers as well as our existing base. And the sales and field teams, our technicians that go into the home also do a great job of upgrading our customers to this product. So we sell it at every chance we get. And we also receive virtually no care calls associated with this product. So it helps us on many fronts.
In terms of the speed, we see our customers continuing to move up into packages that are higher than they were before as they have new applications that they want to use. And we bundle our speed packages together with Whole-Home WiFi and video to make it more attractive form. And the customers seem to be responding well to that. So sorry, we don't give specific numbers on percentages or speeds.
That’s great, that’s very helpful. Thank you.
Your next question comes from the line of James Ratcliffe from Evercore. Please go ahead your line is open.
Morning thanks for taking the questions, two on costs, if I could. Can you just give an idea of what the sort of run rates you're seeing on programming cost increases are? And are there any opportunities to manage that in terms of the overall array of channel offerings you have?
And secondly, on the restructuring, you discussed in terms of customer service, have we seen impacts of that on the run rate cost line items? I know we saw them, it looks like there was an increase in restructuring costs in the quarter, I guess that's probably it. And should we expect to see cost benefits going forward and what sort of magnitude? Thanks.
Yes. With respect to the first question regarding programming, I think the right way to think about that on an annual basis is annual increases in the programming rates per subscriber to the tune of 8% to 9% per year. That obviously varies in any given year as those are generally multiyear contracts, 3- to 4-year contracts. So they have inside of them annual escalators as well as after the expiration, each of those agreements are, obviously, renegotiated. But the blended average that you should expect is at 8% to 9% increase over the year.
The second question is with respect to the nonrecurring integration type expenses. There was an uptick in those in the first quarter of 2019, primarily driven from two things. Number one is some of the severance expenses that were carried over from 2018 as well as the second component which was more impactful, is really related to the onetime cost being incurred related to the initiatives to drive operational efficiencies like the optimization efforts that Teresa mentioned with respect to Colorado Springs and our Chicago location.
Great. And just a follow-up on the previous question. With the increases in prices we’ve seen from the OTT video providers and declines in their growth, how does that affect you? Because I could certainly see scenarios where customers who have a bundled one of your competitors and are looking to drop video that you pick up in addition there, say, they’re switching to an over-the-top video product and taking your standalone broadband products. So is the -- what is the net impact to you of those price increases?
I think in general, we are known as a very strong provider of our broadband or HSD product and we welcome customers if they want to bring their own over the top video. But we also provide our own linear video packages as well. So, we have always been friendly to customers to adapt to what they want to do and we make it easy for them to switch to video if they want to add that, or move up the speed to higher speeds if they want to stay with us on HSD. So, we try to really work with our customers on what they want to do.
Great. Thank you.
Your next question comes from the line of Brian Russo from Crédit Suisse. Please go ahead. Your line is open.
Hi. Two follow-ups if I could. The first, for Teresa, on the broadband customers, just looking for a little bit more color there. Maybe you could help us with like maybe, what the most common speed taken by your customers is right now? And then maybe some kind of perspective on how churn is a little different in the profile of customers who take sort of your highest speed packages that would be helpful. And then for Rich. The, one of the questions was on kind of nonrecurring or onetime items in there. Your SG&A expenses were a little bit higher than the prior trends. I was kind of assuming that that’s where some of those impacts showed up. But is that the case or should we think of what you reported in the first quarter as a decent run rate? And then last, for Rich, it looks like you bought back a small number of shares in March. I guess, I thought your authorization was met previously. Can you just update us there and include some thoughts on capital return? Thanks.
Okay. Well, I’ll go ahead and start off here with the questions you had on the broadband customers and churn. So on the broadband customers, I think if you want to talk about the most prevalent speed that we have out there, it would probably be around the 100 meg, just because of the price point on that and for many customers who are checking Facebook and doing email that speed can work quite well.
As customers move up, we see them using more applications and those are very sticky applications, I would say as well, which is the way to talk about reduction of churn and retention as you have many products associated with that. And once again, Whole-Home WiFi I think also is one that just enhances the whole experience and gives the customer no reason to want to ever change.
We also recently launched a 200 megabit tier as well that has been very attractive to customers. Gives them a little bit more speed and takes care of many of their options that they need and that one's been very popular as well. But certainly, we run the gamut of customers who fully utilize the 1 gig offerings as well.
And then with respect to the two questions as it relates to the cost question, you're correct. The expenses that I referred to that are of the onetime kind of nonrecurring nature, we refer to them as integration expenses they actually, you actually see them as a component of SG&A or operating expenses on the face of the Company's financial statements. They were pulled out of those two respective categories and identified separately as the integration expenses.
With respect to the second question, we did not re-buy, repurchase any stock during the quarter. I believe, probably what in a traditional sense, I believe what you're referring to, and you might be seeing as related to the vesting of employee restricted stock units, the Company maintains a net satisfaction delivery process as it relates to those shares that vest, such that the amount of shares that are delivered to the employee that had vested during the period are delivered net of the tax consequence in doing so.
So those shows those shares, show up as addition to treasury stock, if you will, and that's most likely, what you're seeing.
Got you, thank you very much.
Your next question comes from the line of Brandon Nispel from KeyBanc Capital Markets. Please go ahead your line is open.
Hi good morning. Thanks for taking the question. I had a question. It looks like a good amount of the EBITDA dip for the quarter came from video costs. I think you had mentioned that you expected an $8 million to $9 million increase sequentially into this first quarter, But I guess, what I'm wondering is, is it safe to assume that there should not be much of a difference between 2019 video expense trends versus what you've historically seen, that's question one.
Question two, Teresa, is the vision for the Company as you see it to be more of a cable company, i.e., one that's offering the bundle? Or do you see this company focusing more and more on connectivity services such as broadband and business services going forward?
Yes. I'll let Rich answer the video question first, Brandon. And then I'll talk about the vision.
Yes. I think the video cost occurred sequentially. There's an annual increase that coming out of the fourth quarter into Q1 of any given year, programming expenses are pursuant to the programming agreements, the rate increases from the video content providers go into effect January 1. So that is really the primary driver in the Company's cost structure on a sequential basis from 4Q into 1Q. So that’s...
And they were, Brandon. They were flat year-over-year. But some of the other contributors to increase consequentially were, like Rich said, the video cost as well as marketing spend resets as well as going to scroll resets as well. So those are some of the contributors to why we’re expecting some of this -- to what drove this sequential decline.
And Brandon, to your question about the vision. We really view ourselves as a customer focused company that is all about increasing our customer relationships. So we look at the overall subscriber base and how we can keep and grow that subscriber base, whether it is in our broadband or in packages and continuing to offer our customers what they want in a profitable way. So we are not just focused on broadband, although we definitely put that at the forefront of our business. We also offered the video bundles because our customers want those services from us. And we make sure that we offer them a good value for that while also profitable to us.
As you mentioned, we also very much focus on our commercial business as well and see that as one of the key drivers for the future, along with our Edge-Out properties where we can continue to launch into new business and residential services in areas they’re very attractive to us, where customers want an alternative to the incumbent providers. And I think that’s why in the Edge-Out areas especially, we continue to see phenomenal rates of return on those investments.
And we have no further questions in our queue at this time. Mr. Binder, I’ll turn it over to you for closing remarks.
I’ll go ahead and close it, Christa. Thank you so much. We appreciate you all joining us this morning. Thank you so much for your continued interest and support of our business at WOW. So have a great day.
This concludes today’s conference call. Thank you for your participation and you may now disconnect. Have a great day.