Despite running into unexpected hiccups from a rate hike and fiercer competition in the second quarter, WOW is aggressively pursuing growth again by pushing its hybrid fiber-coax (HFC) network deeper into its existing markets.
Fresh off its spring IPO and its sale of a Chicago fiber network to Verizon Communications Inc. (NYSE: VZ) two weeks ago, WideOpenWest Holdings LLC (WOW) is now using the nearly $600 million in combined cash proceeds to pay down debt and accelerate its "Edge-Out" strategy of expanding its network to areas adjoining its current service territories. In the first half of the year, WOW extended its edge-out nodes to 34,700 new homes passed, after extending the nodes to 40,300 homes passed last year. (See WOW Doesn't Wow Wall Street and WOW to Sell Chicago Fiber Network to Verizon.)
Now the sixth-largest US cable operator by revenue with 776,500 total customers across its 3-million-home footprint, WOW sees these adjacent areas as the most promising prospects for growth because it can selectively target them and doesn't need to spend gobs of capital integrating them into its systems, as it would need to do with cable assets that it purchased. Speaking on the MSO's second-quarter earnings call with analysts on Monday, WOW CEO Steven Cochran said company executives view edge-out builds as "inexpensive acquisitions without integration expenses." He noted that these builds cost less than $2,500 per customer, making them a relative bargain.
With its edge-out network builds last year, WOW boasts that it has now signed up 29% of the 40.300 households passed as customers, while it's signed up 15% of the 34,700 new homes passed this year so far. As a result, the cableco has added 16,800 new customers in its existing markets over the past year and a half. "Our results have exceeded past performance as well as expectations," Cochran said. "Our edge-out investment continues to be a compelling opportunity."
Despite this low-cost expansion of its footprint and customer base, WOW did not enjoy a strong second quarter. In the traditionally weak spring period, the MSO reported shedding 15,800 video, 2,000 broadband and 7,600 telephony revenue generating units (RGUs). Overall, the company lost 3,600 customers, reflecting the fact that many subscribers still take more than one service while an increasing number of customers are dropping or snubbing video to go broadband-only.
On the earnings call, Cochran blamed the lackluster results on a video rate hike in June that spurred customer churn as well as greater competition in its markets from such other major cable operators as Charter Communications Inc. , which has heavily rebranding cable systems it inherited from Time Warner Cable and Bright House Networks. Although WOW is generally viewed as a traditional cableco now, it started out life as a cable overbuilder and still competes against such large MSOs as Charter and Comcast Corp. (Nasdaq: CMCSA, CMCSK) in its prime Midwestern markets.
Due in large part to these sub losses, WOW saw total revenues dip to $297.5 million, down 1.6% from $307.5 million in the year-ago period. Further, net income fell to $5 million, down from $14.2 million a year ago. While the results sent the company's stock price swooning a bit yesterday, it has since recovered today.
Yet WOW officials generally expressed satisfaction with the company's financial results, after raising $356.5 million through the IPO in May and another $225 million through the sale of its Chicago fiber network to Verizon earlier this month. The company has used the IPO proceeds to pay off all its 10.25% senior unsecured notes, wiping $60 million of annualized interest payments from its books, and plans to use the fiber network proceeds to further pay off debt.
"We were able to monetize our network at a much higher valuation, and we'll still be able to sell SMB services on it based on a wholesale agreement with Verizon," Cochran said. "The deal improved both our liquidity and our leverage and allows us to think of the rest of our business."
— Alan Breznick, Cable/Video Practice Leader, Light Reading