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WideOpenWest, Inc. (WOW) Q2 2019 Earnings Call Transcript

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WideOpenWest, Inc.  (NYSE: WOW)
Q2 2019 Earnings Call
Aug. 02, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, welcome to the Second Quarter 2019 WideOpenWest, Incorporate Conference Call. [Technical Issues] My apologies, we have a slight technical difficulty. [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. [Technical Issues] Mr. Binder, please go ahead.

Lucas Binder -- Vice President of Corporate Development and Investor Relations

Hi. Thank you, Heidi, and apologies for the feedback there. Good morning, everyone, and thank you for joining our second 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, transaction-adjusted capital expenditures excluding transaction-adjusted strategic 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.

Teresa Elder -- Chief Executive Officer and Director

Thanks, Lucas, and thank you, everyone, for joining today's call. As we look at our business through the first half of 2019, I want to just spend a moment on how we think about the WOW! Business and how we are positioned for the future. Broadband is vital to our customers and prospective customers. There is limited substitution risk and we're able to leverage the long-term value of our fiber and our hybrid fiber-coax infrastructure that we own and operate.

WOW!'s HSD product as our lead offering presents continued ARPU growth opportunity. This is evident through our tiered speed offerings and associated mix shift toward higher speeds, additional product enhancements, such as Whole-Home WiFi, and continued pricing discipline across the industry. Traditional video continues to be a less meaningful portion of the business as our product mix shifts to higher-margin HSD. However, this does not mean video is irrelevant. Our data shows video consumption is actually rising. It's the way customers consume video that's changing. Often when a customer doesn't have linear video, their Internet usage rises significantly because video is now being consumed over the Internet. This shift in behavior drives our commitment to offering our customers the ability to have a full access to video, however it is presented. And this is our pledge to IP.

Our second quarter churn numbers continue to set record lows. Second quarter subscriber churn was the best for a second quarter in at least two years. Our approach to keeping our loyal customers was reinforced in the second quarter when Cablefax awarded WOW! the Top Ops Independent Customer Service Award for exceptional service across our 19 markets. HSD RGUs are up 2.4% over the second quarter of 2018. For the quarter, total subscribers declined by 1,200 and HSD RGUs remained relatively stable, while we made major systems and operational changes that are now benefiting the business.

Additionally, WOW! is in a unique position to grow its addressable market. Our Edge-Outs represent a compelling return on investment for our capital deployed. Edge-Outs in markets with lower planned penetration also have lower cost to build with returns as attractive at higher penetrated markets. However, we still track and push toward higher penetration. For example, one of our 2019 Edge-Out markets already exceeds 20% penetration, and some of the additions toward the end of the second quarter are ramping very quickly. As a result of the Edge-Out initiative, we've extended our network by more than 152,000 new homes passed as of June 30th, 2019.

Second quarter 2019 total revenue of $289.7 million was down 0.5% year-over-year. Second quarter 2019 Business services subscription revenue grew 5.2% year-over-year. And we remain encouraged by the potential of our commercial business and expect it to continue to contribute to our overall growth. I'm proud that in the second quarter, we continued to execute on our transformation plan. Second quarter adjusted EBITDA of $108.9 million was up 6.6% on a year-over-year basis. As we have discussed over the last several quarters, the investments in the business we made in 2018 have helped to drive an inflection in 2019.

WOW!'s vision, connecting people to their world through the WOW! experience by being reliable, easy and pleasantly surprising every time, resonates through all of our interactions. Over the last year, we have continued to make investments in our people to ensure we can attract, develop and retain the best talent in the industry. Our investments in employee training, compensation and benefits are yielding strong results. During the second quarter of 2019, we saw our employee voluntary turnover drop below 15% on an annualized basis, which represents an almost 8 percentage point improvement versus the second quarter of 2018.

We also saw employee Net Promoter Scores remain at the high levels we achieved throughout 2018. Further, WOW! was recently recognized by the National Association of Business Resources as One of Atlanta's and Chicago's Best and Brightest Companies to Work For. We know employee satisfaction and engagement directly impacts our continued success around customer satisfaction and retention. These efforts continue to yield positive results in 2019 with low voluntary employee turnover, high employee Net Promoter Scores and our lowest second quarter customer churn in years.

We also remain focused on removing bad volume from the business, which we define as unnecessary calls or truck rolls. The field and care teams under the leadership of our Chief Customer Experience Officer, working alongside our technology organization, are focusing on ways to make sure we wow the customer in every interaction. We continue to see solid results out of wowway.com, our website that allows customers to buy online.

The percentage of connects coming through our lowest-cost channel is up over 400% from the same period a year ago prior to the relaunch. Throughout the quarter, we have continued to see a shift toward higher-speed broadband tiers. The recent launch of 200 meg has been growing quickly. Whole-Home WiFi and the online channel, wowway.com, are making excellent strides as growth drivers of the business.

Additionally, Whole-Home WiFi and other products continue to be a positive for the customers and our Company, meaning that we get very few, if any, trouble tickets for this product and churn for customers with this product is low. Once again, churn set new low records in the second quarter, the investments we made in 2018 and the systems and operational changes we made last quarter all contribute to margin expansion and solid 6.6% adjusted EBITDA growth in the second quarter. I remain confident and excited about this business.

Now I'll turn it over to Rich.

Richard E. Fish -- Chief Financial Officer

Thanks, Teresa. For the second quarter of 2019, we reported total revenues of $289.7 million, which were down 0.5% on a year-over-year basis and net income of $9.4 million. As Teresa mentioned, second quarter 2019 adjusted EBITDA totaled $108.9 million, which was up 6.6% on a year-over-year basis, and adjusted EBITDA margin in the second quarter increased to 37.6%. This represents margin expansion of over 250 basis points on a year-over-year basis as a result of the beneficial margin impact from the growth in HSD RGUs, increases in ARPU, business services subscription revenue growth and more efficient operating expenses.

As of June 30th, 2019, total subscribers had increased by 11,200 or 1.4% over the June 30th, 2018 total subscriber count and total net HSD RGUs have increased by 17,700 or 2.4% over the June 30th of last year. Subscriber activity for the second quarter, which across the industry is seasonally the weakest quarter in the year, was relatively stable as the HSD RGU net change during the second quarter of 2019 was a slight decrease of 400 RGUs, which included organic HSD RGU declines of approximately 800. Net video RGUs decreased by 9,900 and total subscribers decreased by 1,200 during the second quarter of 2019.

Business services subscription revenue totaled $34.3 million in the second quarter, a year-over-year increase of $1.7 million or 5.2%. As Teresa mentioned, we remain excited and committed to our Edge-Out footprint expansion and continue to see momentum and opportunity for this initiative into the future. The Edge-Out nodes that we started in 2016 have added a total of 41,800 new homes passed and we've achieved 33.5% penetration to date in these communities. The 2017 Edge-Out nodes have added a total of 66,500 new homes passed and current penetration now stands at 27.5%. The 2018 Edge-Out nodes have added 30,000 new homes passed. Penetration continues to ramp, which is now at 15.3%. And the Edge-Out nodes we recently started during 2019 have already added 14,300 new homes passed at this point.

We continue to see great opportunity for value creation in our Edge-Out projects. And although we expect to see some variability in both the pace of the investment and the penetration percentages across both individual projects and the yearly vintages, because each project has different cost-to-build characteristics, all Edge-Out projects that we have decided to pursue have attractive ROIs and are highly accretive.

Capital expenditures for the second quarter of 2019 totaled $61.7 million on a reported basis. Of that amount, $5.7 million was incurred toward the completion of the Chicago fiber project, which will be reimbursed as elements of the final build-out are complete. Excluding the capital investment attributable to the Chicago fiber project, transaction-adjusted capital expenditures for the second quarter of 2019 totaled $56.0 million, of which $11.7 million was incurred in transaction-adjusted strategic investments. Excluding those $11.7 million of strategic investments, transaction-adjusted capital expenditures totaled $44.3 million or 15.3% of second quarter 2019's total revenue.

With regard to liquidity and leverage, at the end of the quarter, June 30th, 2019, we have $13.0 million in cash on hand, outstanding debt totaling $2.317 billion and $229.5 million of undrawn revolver capacity. We continue to see sequential improvements in net leverage, which was 5.37 times as of June 30th, 2019, on a trailing 12-month transaction-adjusted EBITDA basis, which was down from 5.5 times at March 31st, 2019. With anticipated year-over-year growth in quarterly transaction-adjusted EBITDA throughout the remainder of 2019, we expect to continue to see leverage decline throughout the year.

And finally, with regard to our outlook for the remainder of 2019, given the lower-than-expected HSD RGU addition through the first half of the year, we are adjusting our full year guidance for HSD RGU growth and total revenue.

We now expect full year 2019 HSD RGU growth of between 10,000 and 20,000 RGUs and total revenue to be between $1.145 billion and $1.155 billion. We affirm, however, the existing full-year 2019 guidance for transaction-adjusted EBITDA, transaction-adjusted capital expenditures and positive transaction-adjusted free cash flow.

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] And your first question in the queue comes from the line of Frank Loosen with Raymond James. Please go ahead. Your line is open.

Frank Louthan -- Raymond James -- Analyst

Great. Thank you very much. So I wanted to, just looking more broadly on from a strategic perspective, I can appreciate the success that you've had in certain markets where you have edged out. But clearly, there continue to be some subscribers that are leaking out on the other side. The stock remains undervalued and has for quite some time. Have you considered any other options to create some value, either selling off some of the assets that maybe a private investor would appreciate the cash flow characteristics, where it's harder in a public market, or possibly taking the Company private itself to try and create some additional value?

Teresa Elder -- Chief Executive Officer and Director

Well, we remain very optimistic about the Company and the growth. And honestly, we feel good about our churn rates, the growth that we have. We did a number of things in the second quarter that impacted some of the connect side of the growth. But generally, we always look at a variety of strategic alternatives, but we feel good about the markets that we serve and are committed to those markets.

Frank Louthan -- Raymond James -- Analyst

Okay. Thank you very much.

Operator

Your next question comes from the line of Batya Levi with UBS. Please go ahead.

Batya Levi -- UBS -- Analyst

Thank you. Can you provide a bit more color on what drove the weakness in broadband growth this quarter beyond the seasonal impact? And what made you change your expectations for the full year? And also it looks like SG&A has ramped quite a bit in the first half, part of it is getting ready the systems and operational changes. Is that the new run rate going forward? Is there a portion that could come off? And what are some of the changes you are making to go back to broadband growth?

Teresa Elder -- Chief Executive Officer and Director

Okay. Great. Thank you so much. In the second quarter, we made some major systems changes. And it was really the underlying systems that support our care organization, online as well as inbound sales and our dispatch organization. Those major system changes required us to retrain many, many of our people. And that impact softened the growth in HSD as we went through those changes. However, I am pleased that we made those changes both operationally and from the systems side. And we feel very good about the momentum coming out of June with the new systems that we have in place.

I'll turn it over to Rich for the SG&A portion of your question.

Frank Louthan -- Raymond James -- Analyst

Yes, Batya, thanks. I think the way that we look at that is on a combined basis, putting opex and SG&A into a combined pool and evaluating the efficiency of the back-office relative to the total revenue. So we see, on a year-over-year basis, total opex and SG&A expenses in the second quarter of 2018 relative to the current quarter, 2Q of 2019, is actually coming down pretty dramatically. We see about 200 basis point reduction in the percentage of opex and SG&A as a percentage of revenue. And that really is reflective of the initiatives that we spoke about in the past and the investments in our business that we have made in 2018 to be able to position the Company for growth. So we do believe that we are getting much more efficient, which is one of the reasons why we are able to, on the same period on a year-over-year basis, look at margin expansion at the very bottom from an EBITDA margin perspective of anything EBITDA growth in that -- growth in EBITDA margin over the year-over-year period of approximately 250 basis points.

Batya Levi -- UBS -- Analyst

Got it. Maybe just one follow-up on the competitive environment in broadband. Is the slowdown mostly related to taking a pause and retraining? Or have you seen an increase in the competitive environment?

Teresa Elder -- Chief Executive Officer and Director

It really is the shifting that we made internally in the business. We feel very good about our ability to compete in the market. I think we have a very compelling product set that always competes well. And our churn continues to be a source of pride since we really cherish the customers that we have as well. So we feel very good about our ability to compete in our markets.

Batya Levi -- UBS -- Analyst

Okay. Thank you.

Operator

Your next question comes to the line of Brian Russo with Credit Suisse. Please go ahead.

Brian Russo -- Credit Suisse -- Analyst

Hi. Thanks. Just two questions. The first is, I know the NCTC just renewed with Viacom in July. And I wanted to confirm if the programming cost that you reported don't reflect that deal because of the timing or wasn't sure if you've kind of done your own deal outside of NCTC. And then for Rich, I just wanted to ask a broader question sort of about the conversion from adjusted EBITDA to free cash flow. You're on track to grow EBITDA this year and have positive free cash flow. But as we think about sort of next year and into the future, is there anything structurally that would prevent continued EBITDA growth from translating into free cash flow growth? Thanks.

Teresa Elder -- Chief Executive Officer and Director

Okay. I'll take the first portion of that regarding programming and handed off to Rich again. So on the programming costs, we, of course, are a member of NCTC, so we could opt into that if we wish to. We also are one of the largest members, so we can negotiate on our own if we choose to do that. So it's not a reflection of those programming cost in our current financials.

Brian Russo -- Credit Suisse -- Analyst

And the question with regard to free cash flow into the future, while we are certainly quite a ways away from finalizing a budget and putting out guidance for next year, to answer your question, no, we don't see anything that is in the business that would preclude our ability to have an increasing free cash flow profile to continue to delever the business, not only working the numerator, but also the denominator of the question. So we feel confident in our ability to continue to grow the business, which will result in improving EBITDA as well as doing that in more capital-efficient manner that will allow us to look forward to increasing our free cash flow growth as well and reducing net debt organically. So to answer your question, no, there's nothing systemic or systematically in the business that would preclude that sort of kind of top side view of the next couple of years.

Terrific. Thank you both.

Teresa Elder -- Chief Executive Officer and Director

Thanks, Brian.

Operator

Your next question comes from the line of Kyle Evans with Stephens. Please go ahead.

Kyle Evans -- Stephens -- Analyst

Hi. Thanks. Most of my questions have been asked and answered. On declining video ARPU, is that discounting across the base? Is that churn of some of your higher-priced subs? Or is that just cord shaving?

Teresa Elder -- Chief Executive Officer and Director

Yes. Go Rich [Phonetic].

Richard E. Fish -- Chief Financial Officer

Yes. Happy to answer that. Some of the discounts, when you look at -- or the diminution in ARPUs on a quarter-over-quarter basis actually is the result of the reallocation of revenues for bundled customers inside of -- the ASC 606 requires a periodic quarterly reallocation of total customer revenue among the three service categories that each customer takes. So while there was a -- on a -- if you think about it, there was some amount of the diminution that was attributable to the reclassification of those revenues from a 606 standpoint as well.

Kyle Evans -- Stephens -- Analyst

Got it. But if you strip out the 606, anything else moving that number around, or is it all 606?

Richard E. Fish -- Chief Financial Officer

No. It was -- that was just an element of it. Everything that you described [Technical Issues].

Operator

Excuse me, my apologies. We have a slight technical difficulty. Can you hear me now?

Richard E. Fish -- Chief Financial Officer

Yes.

Operator

Okay. Would you like to resume the Q&A? I can give instructions again as a reminder.

Richard E. Fish -- Chief Financial Officer

That was just me and I got kicked out.

Kyle Evans -- Stephens -- Analyst

[Technical Issues] Hello?

Lucas Binder -- Vice President of Corporate Development and Investor Relations

Is that you?

Kyle Evans -- Stephens -- Analyst

Yes.

Lucas Binder -- Vice President of Corporate Development and Investor Relations

Okay. We're back. So Rich, I know we lost you when we were talking about the 606 response.

Kyle Evans -- Stephens -- Analyst

Right.

Richard E. Fish -- Chief Financial Officer

So the change -- the total change on a year-over-year basis, as I was saying, is a combination of what we call baseline changes, which are all of the actual impacts to ARPU that are driven by the changes that we make in our business as it relates to customer acquisition pricing, promotional activity, etc, that we effect, etc, etc. As we look at video ARPU changes on a year-over-year basis, we actually had an increase in video ARPU from the second quarter of 2018 of approximately $0.50 to $0.60 per video RGU. That was offset, however, by the reallocation of revenue out of the video component to other service components principally down into data that reflects the application of ASC 606. So it's a combined impact of those two items. And I hope that answers your question.

Kyle Evans -- Stephens -- Analyst

That does. Thank you. One last quick one. It's kind of an iteration on an earlier question. You beat our adjusted EBITDA number on the quarter on lower cost. And I'm just looking at that opex line and wondering how much flexibility you have in the second half of the year there. What are the big component pieces that moved in the quarter on the sequential decline and just how we should think about that looking forward?

Richard E. Fish -- Chief Financial Officer

Yes, we continue to believe that we have great opportunity in that particular line item. One of the mantras that we live by on a daily basis is the one that Teresa mentioned, which is continuing to be aggressive and focused on driving bad volume out of the business, which is certainly very expensive, where we are taking calls from customers that quickly handled off of our digital platform or digital self-care platform. A lot of root cause analysis as it relates to what drives service calls and truck rolls, etc. So, we feel like we have -- are really only just scratching the surface as it relates to the opportunity to continue to be more efficient in our back-office cost structure, which will obviously be a positive driver for us on a go-forward basis. As it relates to EBITDA growth and improving -- continue to improve the existing trajectory on improving EBITDA and margins.

Teresa Elder -- Chief Executive Officer and Director

And Kyle, one other thing, I guess, I am very proud of as well is that our network just continues to go from strength-to-strength. The reliability of the network also means there are fewer disruptions for our customers, which, of course, also means there are a few reasons for our customers to have to call. So we continue to be very proud of how the network performs as well as our people who have a strategy of really being one and done when we do have to fix or install something in a customer's home. And I'm very proud of the technicians who are in our customers' homes every day and the great reports [Phonetic] they get from our customers.

Kyle Evans -- Stephens -- Analyst

Great. Thank you.

Operator

Your next question comes from the line of James Ratcliffe with Evercore ISI. Please go ahead. Okay. Your next question comes from the line of Brandon Nispel with KeyBanc Capital. Please go ahead. My apologies. Brandon, please go ahead.

Brandon Nispel -- KeyBanc Capital -- Analyst

Yes. Thanks for taking my question. Teresa, I guess a question strategically for you. With all the changes going on in video, why even focus on video at all? And why not just be a very low-cost leader in broadband to drive penetration?

The second question on Edge-Outs, as we look at the different vintages and compare the days that they've been in the market, the 2018 vintage is well below the 2017 vintage and same thing with the 2019 vintage over the '18 vintage. Why is that? And what do you need to do to drive penetration in those vintages? Thanks.

Teresa Elder -- Chief Executive Officer and Director

You bet. Thanks, Brandon.

First of all, on broadband, we absolutely do lead with broadband. That is our key product. And I believe our network is extremely well positioned. Our relationship with our customers is strong. And I believe we priced in a way that gives great value to our customers. We have seen year-over-year a doubling of customers at the higher speeds of the broadband product, so 500 and 1 gig [Phonetic]. So our customers come to us for those high-speed great broadband products.

And we also see that when customers don't have a linear video product, their usage is much higher since we know that, that's really where they're consuming their video is on broadband. And our aim is to continue to make that easier and easier for the customer. And that's really our commitment to IP. We do still have a significant portion of our customers, new and existing, who like those video linear products, and we serve those markets well. So it is not a product that we lead with, but we are definitely addressing what our customers want. And we see more shifting to the broadband product. And we are extremely well positioned to serve those customers well.

So we agree with you and once again feel good about how we compete in that marketplace. On Edge-Outs, it's natural that over time, the penetration is going to grow. So the oldest Edge-Out markets continue to grow their penetration. And we will over time see the other ones continue to increase their penetration as well. One of the things that we look at beyond just penetration is the overall IRR or the return on each of the markets. And as you can imagine, the investments in some Edge-Out markets are different than others. For example, if it's an aerial build versus underground. And we can have as strong as a return as a higher penetrated market if it's a lower cost to serve.

So we look at all of those variables, while we continue to push for penetration in our Edge-Out areas. And as I mentioned, we're very pleased to see some of the even 2019 vintage, some of the individual markets are at 20% already. So we look really at the return market-by-market, penetration is a significant variable, but not the only one.

Brandon Nispel -- KeyBanc Capital -- Analyst

Okay. Thanks for taking the questions.

Teresa Elder -- Chief Executive Officer and Director

You bet. Thanks, Brandon.

Operator

[Operator Instructions] And there are currently no further questions in the queue.

Teresa Elder -- Chief Executive Officer and Director

All right. Thank you so much, Heidi. We appreciate all of you joining us this morning, and thank you for your continued interest in our business and your support of WOW!. Have a great day.

Operator

[Operator Closing Remarks]

Duration: 42 minutes

Call participants:

Lucas Binder -- Vice President of Corporate Development and Investor Relations

Teresa Elder -- Chief Executive Officer and Director

Richard E. Fish -- Chief Financial Officer

Frank Louthan -- Raymond James -- Analyst

Batya Levi -- UBS -- Analyst

Brian Russo -- Credit Suisse -- Analyst

Kyle Evans -- Stephens -- Analyst

Brandon Nispel -- KeyBanc Capital -- Analyst

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