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WideOpenWest, Inc. (NYSE:WOW)
Q3 2019 Earnings Call
Nov 1, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to the Third Quarter 2019 WideOpenWest Incorporated Earnings Conference Call. [Operator Instructions].

I would now like to turn the call over to Mr. Lucas Binder, Vice President of Corporate Development and Investor Relations. Mr. Binder, please go ahead.

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

Thank you, Keith. Good morning everyone and thank you for joining our third 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 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 will 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 transaction-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. We've included a reconciliation of reported adjusted EBITDA to transaction-adjusted EBITDA in our earnings release and trending schedule available on our website at ir.wowway.com. Unless otherwise noted, references to transaction-adjusted results discussed in this call, these results are adjusted to include the impact from acquisitions and exclude the impact from dispositions and exclude the impact from Hurricane Michael and associated insurance settlement.

Now, I'll turn the call over to Teresa.

Teresa Elder -- Chief Executive Officer

Thanks, Lucas, and thank you everyone for joining today's call. We are very pleased with the operational execution reflected in our third quarter 2019 results. We saw positive HSD RGU additions; organic HSD RGU additions; solid Edge-Out subscriber growth, our best Edge-Out homes passed expansion month in our history and continued growth in transaction-adjusted EBITDA. Total subscribers grew 7,800 in the third quarter of 2019. This represented the best quarterly subscriber growth in six quarters. HSD RGUs grew by 10,200 in the third quarter, the best HSD RGU growth since the first quarter of 2018.

Organic HSD RGUs also grew in the third quarter, adding 7,900. Total subscriber churn remained consistent with the year ago period, which had been our best third quarter churn on record. As we exited the second quarter, we noted that connects have returned to expected levels, coupled with continued execution on our retention efforts, we were able to drive the strong operating results seen in the third quarter. Edge-Out compacts [Phonetic] grew by 14,000, which included our best month of growth in Edge-Out homes passed in the company's history. Edge-Outs added 1,900 subscribers, which was the best growth since the third quarter of 2018. Several recently launched Edge-Out nodes continue to demonstrate rapid adoption, reaching double-digit penetration within a couple of months of launch.

Third quarter 2019 total revenue of $285.4 million was down 2.1% year-over-year. The decline in total revenue was driven by lower subscription revenues, specifically a $12.9 million or 10.8% decline in video subscription revenue. This was partially offset by HSD subscription revenue growth of $11.2 million or 9.4%. As we have discussed, the focus on our customers has been the hallmark of our transformation efforts. And this has been why we continue to provide a compelling video offering for customers who want linear video. At the same time, while we are not happy to have declines in the subscription revenues, the mix shift toward HSD is accretive to the business.

Additionally, notifications to customers will be going out this month that we are implementing a rate increase on out-of-contract video customers, effective December 2019. The reason for the acceleration into the end of the year is to better match ongoing programming increases that will take effect at the start of 2020. Third quarter 2019 business services subscription revenue grew 5.2% year-over-year. We remain encouraged by the potential of our commercial business and expected to continue to contribute to our overall growth.

Third quarter transaction-adjusted EBITDA of $110.4 million was up 3.5% on a year-over-year basis. As we have discussed, 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 resonate 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 our industry. Our investments in our employee training, compensation and benefits are yielding strong results.

During the third quarter of 2019, we saw our employee voluntary turnover decline by 5 percentage points versus the third quarter of 2018. We also saw our employee Net Promoter Scores remain at the high level we achieved throughout 2018. We also remain focused on removing bad volume from the business, which we define as unnecessary calls or truck rolls [Phonetic] We've highlighted this in the past, but the increased penetration of Whole-Home WiFi has begun to drive a discernable decline in service calls.

Network improvement initiatives through decreases in outage events and driving down outage times have reduced calls throughout the year. Additionally, customer premise equipment retirements, and removal of legacy boxes from our network have had a similar effect. This is an area we will continue to focus on throughout the rest of this year and 2020. The launch of our 200 meg [Phonetic] speed tier has been highly successful and the adoption continues to accelerate. We are particularly pleased that the preponderance of the adoption within 200 meg speed are coming from 100 meg buyers, opting to take higher speeds and driving higher ARPU.

Whole-Home WiFi and our online channel wowway.com are making excellent strides as growth drivers of the business. We have expanded Whole-Home WiFi throughout our footprint and have added features and functionality to the online store, which continues to be developed and deployed. We saw strong subscriber growth in the third quarter and have continued to see solid October connects. The shift toward November and December will likely see more tempered connect behavior, consistent with our seasonal expectations.

Churn was stable in the third quarter and our investments in the business contributed to the continued growth in transaction-adjusted EBITDA of 3.5%.

Now, I'll turn it over to Rich.

Richard Fish -- Chief Financial Officer

Thanks, Teresa. For the third quarter of 2019, we reported total revenues of $285.4 million, which were down 2.1% on a year-over-year basis and net income of $11.2 million. As Teresa mentioned third quarter 2019 transaction-adjusted EBITDA totaled $110.4 million, which was up 3.5% on a year-over-year basis and transaction-adjusted EBITDA margin in the third quarter increased 38.7%. This represents an improvement of over 200 basis points on a year-over-year basis, as a result of the beneficial margin impact from growth in HSD RGUs and ARPU increases, business services subscription revenue growth and lower operating expenses. As of September 30, 2019, total subscribers increased by 7,800 or 1% over the June 30, 2019, total subscriber count. In total, net HSD RGUs increased by 10,200 or 1.3% from June 30, 2019.

Subscriber activity for the third quarter of 2019 represented a solid return to growth for WOW as the HSD RGU net change during the quarter included organic HSD RGU additions of 7,900. Business services subscription revenue totaled $34.7 million in the third quarter, a year-over-year increase of $1.7 million or 5.2%. As Teresa mentioned, Edge-Outs continue to be a growth driver and we expect to continue to see momentum in this footprint expansion initiatives into the future. 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 66,600 new homes passed and current penetration now stands at 27.9%. The 2018 Edge-Out nodes have added 30,100 new homes passed, penetration continues to ramp, which is now at 16.6%, and the Edge-Out nodes, we just started during 2019 have already added 28,200 new homes passed at this point. We continue to see great opportunity in our Edge-Out projects and although we do expect to see some variability in both the pace of investment and the penetration percentages across both individual projects and yearly vintages because each project has different cost to build characteristics, all Edge-Out projects that we've decided to pursue have attractive ROI opportunities and are expected to be highly accretive.

Capital expenditures for the third quarter of 2019 totaled $63.4 million on a reported basis. Of that amount, $2.0 million was incurred toward the completion of the Chicago fiber project, which is substantially complete as of the end of the third quarter. Excluding the capital investments attributable to the Chicago fiber project, transaction-adjusted capex for the third quarter of 2019 totaled $61.4 million, of which $16.5 million was incurred in transaction-adjusted strategic investments. Excluding those $16.5 million of transaction-adjusted strategic capital investments, transaction-adjusted capex totaled $44.9 million or 15.7% of total third quarter 2019 revenue.

And finally with regard to liquidity and leverage, as of September 30, 2019, we had $9.3 million in cash on hand, outstanding debt totaling $2.324 billion and $224.5 million of undrawn revolver capacity. We continue to see sequential improvements in net leverage, which came in at 5.35X as of September 30, 2019 on a trailing 12-month transaction-adjusted EBITDA basis, which was down from the previous quarter of 5.37X at June 30, 2019.

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

Questions and Answers:

Operator

[Operator Instructions] We will take today's first question from Frank Louthan with Raymond James. Please go ahead, your line is open.

Frank Louthan -- Raymond James -- Analyst

Great, thank you very much. Looking at the success with the data, can you give us some idea of how many homes have the Whole-Home WiFi? And any thoughts on adding maybe some lower-speed tiers and like that to get some additional penetration? And then the follow-up, is there other -- is there any footprint rationalization you would consider maybe to help with delevering and so forth? Thanks.

Teresa Elder -- Chief Executive Officer

Thanks, Frank. To take your first question on Whole-Home WiFi, we really don't break out specifically the amount of sales that we get on Whole-Home WiFi, but what I can tell you is that we continue to see growth in the take rate with the HSD product and the Whole-Home WiFi product really helps us drive down those calls to the care organization and truck rolls. So, it just plays a key role in, I think, helping the whole customer experience as well as our bottom line. In terms of the speed tiers, we do also have the 100 meg product, and we feel like the mix of products that we have for our customers is quite good and we continue to always evaluate our products and what our customers need. With regard to your question about the footprint, we like the markets that we have and we always are looking at where things can work opportunistically, but I feel very good about the footprint that we have and how we're driving our customer growth.

Frank Louthan -- Raymond James -- Analyst

Okay, great, thanks very much.

Operator

We'll take our next question from Zach Silver with B. Riley. Please go ahead.

Zachary Silver -- B. Riley -- Analyst

Okay, great. Thanks for taking the question. I wanted to first start with the rate increase on the video side, and I understand that's to get ahead of some programming escalators coming at the beginning of next year. Charter, who you have quite a bit of overlap with, just raised HSD prices for a non-promotional pricing. And I'm just wondering, is this something where you guys could see some ARPU growth from a price hike and HSD? Are you sort of holding off on that at this time?

Teresa Elder -- Chief Executive Officer

So, yes, we decided to go ahead and take the video increase in December to get ahead of the programming increases that take place at the first of the year. With regard to high speed data, I think, we always make sure that we are value-priced compared to our competition. So, we look at both our rack rate as well as promotions and discounts in the market. So, we continue to evaluate that. At this time, we don't have plans to increase our HSD pricing.

Zachary Silver -- B. Riley -- Analyst

Okay. And then on the big sort of net HSD subscriber growth in the quarter, which accelerated meaningfully from the year ago period. You said that it was -- Teresa, you said it was sort of a mix of churn and also connects, but that would imply that connects are up pretty substantially year-over-year. And I'm just wondering if you can give us a little bit more detail on maybe what's working, what's going on, maybe in the competitive landscape, that's helping drive the higher connect volume?

Teresa Elder -- Chief Executive Officer

Okay, great. And, yes, you're correct. We are seeing improvement, both on the connect as well as continuing to maintain the record lows that we had on churn. So, I think, there are a number of things that are taking place. In general, I'd say the competitive environment really hasn't changed materially over the last few quarters. We of course are focused on our retention and save activity, but the rate increases that our competitors have put in place across the board help offset some of the challenges that we've had to do in terms of discounting. So, that's a good thing, but we continue to, I think, benefit as well from improved sales processes from the collaboration between our field, our marketing and our sales force and the continued growth of our website wowway.com. We make rolling improvements to that on an ongoing basis and that has become an even larger percentage of our total sales.

Zachary Silver -- B. Riley -- Analyst

Got it. Thank you, Teresa. And then maybe just a quick one for Rich, just on working capital, looks like it increased pretty substantially year-over-year. Just wondering if you can walk us through what's driving that? And also if you guys are still expecting positive free cash flow for the year?

Richard Fish -- Chief Financial Officer

Yeah, the working capital inside the quarter, really on a year-to-date basis is from, attributable to bringing down some accruals that were related to that had [Phonetic] been put up previously from 31:00 [Indecipherable] that are no longer needed, excess accruals. From a free cash flow standpoint, we still -- the guidance that we put out as it relates to free cash flow for the balance of the year was positive. We still believe that we'll be right there.

Zachary Silver -- B. Riley -- Analyst

Great. Thank you.

Operator

We'll take our next question from Batya Levi with UBS. Please go ahead.

Batya Levi -- UBS -- Analyst

Great, thank you. On the high-speed data, you mentioned that we should expect some seasonal slowdown in connect in the fourth quarter, but do you think that we're still on a good pace to show year-over-year growth in high speed data adds? And then second, can you provide more color on what percent of the video base will see a price increase and how that would compare to the last one that you took and maybe just to balance that with programming cost, it came down sequentially this quarter, what drove that and what kind of price increase would you expect there?

Teresa Elder -- Chief Executive Officer

Okay, thank you for the questions, Batya. So the first question regarding HSD and the seasonal slowdown for the fourth quarter, that's just really across the whole industry. Third quarter, of course, is our strongest as we have the back to school push and many people are moving into new homes. So we still believe and we'll reiterate the guidance that we gave last quarter on HSD net adds, between 10,000 and 20,000, I think we'll be at the high end of that, obviously from the strong results of the third quarter and we believe that our results for the full year will probably be at least comparable with the great growth that we saw last year as well.

In terms of video, I don't think we've put out the number in terms of how many video customers will be impacted by this or the percentage increase on that, but needless to say what we do that for is to try to cover the programming increases that will be coming the first of the year. And then on the --.

Batya Levi -- UBS -- Analyst

Thank you.

Teresa Elder -- Chief Executive Officer

Okay, go ahead.

Batya Levi -- UBS -- Analyst

No, I was just going to follow up on the sequential decline in the programming cost.

Teresa Elder -- Chief Executive Officer

It's an increase, I'm sorry, in the programming cost, as of the first of the year. You mean the revenue, the video revenue?

Batya Levi -- UBS -- Analyst

The programming cost in the quarter looks like it trended down, was that more a function of video subscribers coming down or were there any true-ups? Is that the good base to think about in terms of the escalator that we'll see next year?

Richard Fish -- Chief Financial Officer

Yeah, Batya that is primarily driven by volume as video subscribers are trading [Phonetic], we experience the volume reduction associated with the programming cost primarily.

Batya Levi -- UBS -- Analyst

Okay, thank you.

Operator

We'll take our next question from James Ratcliffe with Evercore ISI. Please go ahead.

James Ratcliffe -- Evercore ISI -- Analyst

Good morning, thanks for taking the question. Two, if I could. First of all, on the HSD side, the last call we talked could be [Phonetic] about system changes in 2Q and the impact that had, did that, those essentially push any of those connects into 3Q? So should we really be looking at some sort of 2Q plus 3Q as right [Phonetic] versus last year sort of a block? And secondly, can you talk about your thoughts around becoming a sort of a centralized hub for the increasingly fragmented OTT services, the same way that clearly some of your competitors are looking at being a platform, even for customers who don't take your video service? Thanks.

Teresa Elder -- Chief Executive Officer

Thanks, James. So yes, we had some system changes that we certainly feel impacted the softness of the HSD connects in the second quarter, I do think third quarter was a stand-alone, very strong quarter on its own, and some of the changes that we made in the systems are really benefiting us now. So, I would say, I feel quite good about the third quarter even on its own. Second quarter certainly was quite soft and we saw momentum even coming out starting in June. For your comment about being a centralized hub for OTT services, I really believe that WOW has positioned itself well for many years to be in exactly that position, we were the first operator to have 1 gig services in over 95% of our footprint, we had very early days established a different relationship with Netflix to put the content closer to the customers, so that we routinely are in the top rankings of Netflix ISP viewership, so that it looks much better on our services the digitization is just very crystal clear with Netflix. So we feel very good about our ability to provide streaming services and we believe customers come to us specifically for that. So it's definitely something that we encourage and I believe that with the Whole-Home WiFi product, it's just an excellent customer experience. So we definitely embrace those changes.

James Ratcliffe -- Evercore ISI -- Analyst

Thank you.

Operator

We'll take our next question from Brandon Nispel with KeyBanc Capital Markets. Please go ahead.

Brandon Nispel -- KeyBanc Capital Markets -- Analyst

Great, thanks for taking the question. I guess as a follow-up to everybody else's questions, can you give us a sense of -- I guess, I'll just try in a different way, what percentage of total customers are out of contract related to the video increase? And then just on Edge-Out, can't help but look at sort of the 2018 and '19 vintages by active days and compare them to 2016 and 2017, maybe help us understand why penetration rates are so much different for the different vintages? And then the last one, can you give us a sense of just what percentage of your customers are taking 200-megabit and the 100-megabit products? And maybe just average speed tier overall would help us understand sort of where the business is at in terms of driving customer tied to higher-speed tiers? Thanks.

Teresa Elder -- Chief Executive Officer

Thanks, Brandon, for all the questions. I don't really think we have those percentages to talk about in terms of the total percentage of customers that are out of contract on the video side. Lucas, anything you want to add to that?

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

I would just say it's -- the cohort that is eligible for a rate increase continues to shrink as more people kind of are on contract and their typical rate increase would coincide with the timing of when they -- when their contracts expire. So the -- those are eligible continues to shrink, but it is probably one of the smaller cohorts that we've done in the past, but it is still a decent number of people who are out of contract, who will get that rate increase. However, throughout the year, there will be others who will get their rate increased timing with if you joined in August and your contract was up in August, then your rate increase would happen in August. But for those who are eligible, they're going to -- they're going to receive the rate increase on December 1.

Richard Fish -- Chief Financial Officer

And Brandon, this is Rich, on your question about the Edge-Out penetrations. We actually are not concerned by having different penetration rates across the annual cohorts. And the reason being is that we continue to see great opportunity, virtually I would say in an unlimited sense, as we move and we evaluate the next individual projects. The actual cost to construct the network expansion projects that we're looking at that are Edge-Outs, every one of them is quite different. And the -- and with specifically with regard to the cost of the network too basically extend over to that new community. Some communities can be aerial, some must be underground, the density of the homes inside of the community that we're building to could vary greatly. So there are multiple, multiple variables that go into the project cost analysis. Certainly penetration is very important one as it speaks to clearly, the revenue opportunity that we've garnered, but you could have low penetration rates on a relative sense looking at one cohort to the next, but still have the same return opportunity if not greater, all dependent upon the cost to build characteristics. So we do not believe by any stretch of the imagination that we are reaching any sort of limit as it relates to Edge-Out opportunities. Third quarter as Teresa mentioned in the remarks was really the most significant quarter that we had as it relates to adding homes passed, and we continue to, as I said the -- almost full opportunity -- full range of opportunities to continue to expand into the future.

Teresa Elder -- Chief Executive Officer

And Brandon, I'll go ahead and answer your third question just by saying 100 meg continues to be our most popular. We do have certainly some legacy customers that are at speeds below that. But what we continue to see is that the take rate of new customers continues to move to the higher speeds and we also are encouraging and having a higher take rate of those customers taking Whole-Home WiFi, both of which increase the ARPU and enhance the customer experience. And, I think, this is once again another way that really underlines how we are so well positioned to take advantage of the growth in OTT services.

Brandon Nispel -- KeyBanc Capital Markets -- Analyst

Great, thank you.

Operator

We'll take our next question from Kyle Evans with Stephens. Please go ahead.

Kyle Evans -- Stephens -- Analyst

Hey, good morning. We've been circling that video price increase on this call, and I'm going to hit that horse a few more times. How big is that increase on a percentage basis and then what are your expectations for video churn based on prior increases? And then I have a few follow-ups as well.

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

So, Kyle, it is Lucas here. As far as the specific amount, it's one's guess [Phonetic], Teresa has emphasized it's meant to match the increases in costs. So, we can draw our own conclusions, but we're not going to specify the amount. With regard to how it's taken and what is expected as a churn, I would just note that when we put the rate increase in February, we actually had a pretty good stick rate. We've -- I think we

matched it [Phonetic] very much around the costs that are incurred, and that's what's passed along, don't expect any material change in our churn rates than we've been experiencing thus far. Obviously video is under pressure from a number of other factors and it's not just from rate hike, but we don't expect any different a spike in churn as a result of this.

Teresa Elder -- Chief Executive Officer

Right. The big difference is that we're taking it in December versus in the first quarter like we did last year,-or this year rather, 2019.

Kyle Evans -- Stephens -- Analyst

Got it. And then just a few more high level ones on TV. What are you guys doing to that bundle or what could you do to that bundle to make it more durable? How much lower is HSD churn when you have that RGU as a video customer and then how should we think about kind of fully loaded margins on the TV side, I know we can see kind of the gross margin on it, but help us kind of think longer-term on a three to five year basis on fully loaded margins? Thanks.

Unidentified Speaker

Yeah, I don't think we give projections out that far. What I can tell you is that we still have something over 40% of our new customer acquisitions are looking for a video service in addition to the HSD service. So we continue to follow and listen to our customers and provide service for them that they enjoy. So we look at the churn on a variety of ways. I would say, we are managing both the HSD only as well as video churn very tightly and work hard to retain the customers across the board, and that has shown continued improvement in all of those processes. Anything else on that area, Kyle?

Kyle Evans -- Stephens -- Analyst

No. Thanks.

Teresa Elder -- Chief Executive Officer

Okay. Thank you for your questions.

Operator

It does appear we have no further questions. I'd like to return the floor to Teresa Elder for closing comments.

Teresa Elder -- Chief Executive Officer

Thank you, everyone for joining us this morning, and we continue to appreciate your interest in our business and your support of WOW. Have a great day.

Operator

[Operator Closing Remarks]

Duration: 34 minutes

Call participants:

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

Teresa Elder -- Chief Executive Officer

Richard Fish -- Chief Financial Officer

Unidentified Speaker

Frank Louthan -- Raymond James -- Analyst

Zachary Silver -- B. Riley -- Analyst

Batya Levi -- UBS -- Analyst

James Ratcliffe -- Evercore ISI -- Analyst

Brandon Nispel -- KeyBanc Capital Markets -- Analyst

Kyle Evans -- Stephens -- Analyst

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