We are a leading broadband services provider offering high-speed data ("HSD"), cable television ("Video"), and digital telephony ("Telephony") services to residential customers and offer a full range of products and services to business customers. Our services are delivered across 14 markets via our advanced hybrid fiber-coax ("HFC") network. Our footprint covers certain suburban areas within the states of
Alabama, Florida, Georgia, Michigan, Ohio, South Carolinaand Tennessee. At March 31, 2022, our broadband networks passed 1.9 million homes and businesses and served 534,700 customers. Our core strategy is to provide outstanding service at affordable prices. We execute this strategy by managing our operations to focus on the customer. We believe that the customer experience should be reliable, easy and pleasantly surprising, every time. To achieve this customer experience, we operate one of the most technically advanced and uniform networks in the industry with approximately 96% of our network at 750 MHz or greater capacity. Our advanced network offers HSD speeds up to 1 GIG (1000 Mbps) in approximately 99% of our footprint. Led by our robust HSD offering, our products are available either as an individual service or a bundle to residential and business service customers. We operate under a broadband first strategy. Based on our per subscriber economics, we believe that HSD represents the greatest opportunity to enhance profitability across our residential and business markets. We continue to experience strong demand for our HSD service. For the three months ended March 31, 2022, the average percentage of HSD only new connections was approximately 87% compared to an average percentage of approximately 86% for the three months ended March 31, 2021. Customers also connected at higher speeds with approximately 68% of HSD only new connections purchasing 500MB or higher speeds during the three months ended March 31, 2022, representing an 18% increase compared to the three months ended March 31, 2021. During the first quarter of 2022, WOW launched specific greenfield initiatives to build out its network in locations non-adjacent to its existing network and bring its state-of-the-art all IP fiber technology and award-winning customer service to new markets. WOW announced Seminole Countyand Orange County, Floridaas the Company's first two new service areas at a time when the demand for strong-reliable broadband continues to rise.
Key Transactions Impacting Operating Results and Financial Condition
Sale of Service Areas
September 1, 2021, we completed the sale of our Clevelandand Columbus, Ohiomarkets and on November 1, 2021, we completed the sale of our Chicago, Illinois, Evansville, Indianaand Baltimore, Marylandmarkets. We utilized the majority of the total net proceeds of $1.8 billionto pay down outstanding debt in the third and fourth quarter of 2021 and to refinance our credit agreement in December of 2021. The divestitures strengthened our financial position and will help accelerate our broadband first strategy, which includes additional investments in edge-outs, greenfield initiatives and commercial services.
Refinancing of the Term B Loans and Revolving Credit Facility
December 20, 2021, the Company entered into a new secured credit agreement with Morgan Stanley Senior Funding, Inc., as administrative agent, collateral agent and issuing bank (the "Credit Agreement"). The Credit Agreement consists of (i) a new Term Loan B in an aggregate principal amount of $730.0 millionand (ii) a $250.0 millionrevolving credit commitment. The Term Loan B matures in December 2028and bears interest at a rate equal to SOFR plus 3.00%, subject to a 50 basis point floor, and the revolving credit commitment bears interest at a rate equal to SOFR plus 2.75% and matures in December 2026. The Senior Secured Term B loans and Revolving Credit Facility are secured on a first-priority basis by a lien on substantially all of the Company's assets, subject to certain exceptions and permitted liens. 18 Table of Contents
Critical Accounting Policies and Estimates
For a discussion of our critical accounting policies and the means by which we develop estimates refer to "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2021 Annual Report on Form 10-K. There have been no material changes from the critical policies described in our Form 10-K.
Homes Passed and Subscribers
We report homes passed as the number of serviceable addresses, such as single residence homes, apartments and condominium units, and businesses passed by our broadband network and listed in our database. We report total subscribers as the number of subscribers who receive at least one of our HSD, Video or Telephony services, without regard to which or how many services they subscribe. We define each of the individual HSD subscribers, Video subscribers and Telephony subscribers as a revenue generating unit ("RGU"). The following table summarizes homes passed, total subscribers and total RGUs for our services as of each respective date and for comparability purposes, presents subscribers associated with the Company's continuing operations as of each specified date: Mar. 31, Jun. 30, Sep. 30, Dec. 31, Mar. 31, 2021 2021 2021 2021 2022 Homes passed 1,873,900 1,877,300 1,880,900 1,882,100 1,886,000 Total subscribers 528,000 530,500 531,600 532,900 534,700 HSD RGUs 504,900 507,900 509,500 511,700 515,000 Video RGUs 178,800 169,300 158,600 150,600 142,000 Telephony RGUs 108,000 105,600 102,400 100,000 97,300 Total RGUs 791,700 782,800 770,500 762,300 754,300
The following table displays the homes passed and subscribers related to the
Company’s edge-out activities:
Mar. 31, Jun. 30, Sep. 30, Dec. 31, Mar. 31, 2021 2021 2021 2021 2022 Homes passed 76,500 77,400 78,000 78,200 78,600 Total subscribers 18,400 18,600 19,000 19,300 19,500 HSD RGUs 18,300 18,500 18,900 19,200 19,400 Video RGUs 7,100 6,900 6,900 6,900 6,900 Telephony RGUs 2,900 2,800 2,800 2,800 2,800 Total RGUs 28,300 28,200 28,600 28,900 29,100 While we take appropriate steps to ensure subscriber information is presented on a consistent and accurate basis at any given balance sheet date, we periodically review our policies in light of the variability we may encounter across our different markets due to the nature and pricing of products, services and billing systems. Accordingly, we may from time to time make appropriate adjustments to our subscriber information based on such reviews. 19
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Financial Statement Presentation
Our operating revenue is primarily derived from monthly recurring charges for HSD, Video, Telephony and other business services to residential and business customers, in addition to other revenues.
? HSD revenue consists primarily of fixed monthly fees for data service and
rental of modems.
Video revenue consists primarily of fixed monthly fees for basic, premium and
digital cable television services and rental of video converter equipment, as
well as charges from optional services, such as pay-per-view, video-on-demand
? and other events available to the customer. The Company is required to pay
certain cable franchising authorities an amount based on the percentage of
gross revenue derived from video services. The Company generally passes these
fees on to the customer, which is included in video revenue.
Telephony revenue consists primarily of fixed monthly fees for local service
? and enhanced services, such as call waiting, voice mail and measured and flat
rate long-distance service.
Other business service revenue consists primarily of monthly recurring charges
? for session initiated protocol, web hosting, metro Ethernet, wireless backhaul,
broadband carrier services and cloud infrastructure services provided to
Other revenue consists primarily of revenue from line assurance warranty
? services provided to residential and business customers and revenue from late
fees and advertising placement.
Revenues attributable to monthly subscription fees charged to customers for our HSD, Video and Telephony services provided by our broadband networks were 93% of total revenue for both the three months ended
March 31, 2022and 2021. The remaining percentage of total revenue represents non-subscription revenue primarily from other business services, line assurance warranty services and advertising placement. Costs and Expenses
Our expenses primarily consist of operating, selling, general and administrative
expenses, depreciation and amortization expense, and interest expense.
Operating expenses primarily include programming costs, data costs, transport costs and network access fees related to our HSD, Video and Telephony services, hardware/software expenses, network operations and maintenance services, customer service and call center expenses, bad debt, billing and collection expenses and franchise and other regulatory fees.
Selling, general and administrative expenses primarily include salaries and
benefits of corporate and field management, sales and marketing personnel, human
resources and related administrative costs.
Depreciation and amortization includes depreciation of our network infrastructure, including associated equipment, hardware and software, buildings and leasehold improvements, and finance lease obligations. Amortization is recognized on other intangible assets with definite lives primarily related to acquisitions. Depreciation and amortization expense is presented separately from operating and selling, general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations. We control our costs of operations by maintaining strict controls on expenditures. More specifically, we are focused on managing our cost structure by improving workforce productivity, increasing the effectiveness of our purchasing activities and maintaining discipline in customer acquisition. We expect programming expenses to continue to increase per Video subscriber due to a variety of factors, including increased demands by owners of some broadcast stations for carriage of other services or payments to those broadcasters for retransmission consent and annual increases imposed by programmers with additional selling power as a result of media consolidation. We have not been able to fully pass these increases on to our customers without the loss of customers, nor do we expect to be able to do so in the future. 20 Table of Contents Continuing Operations Results of Operations The following table summarizes our results from continuing operations for the periods presented: Three months ended March 31, 2022 2021 (in millions) Revenue
$ 174.6 $ 181.5Costs and expenses: Operating (excluding depreciation and amortization) 87.3 98.4 Selling, general and administrative 38.3
Depreciation and amortization 44.4
Income (loss) from operations 4.6 (0.7) Other income (expense): Interest expense (7.4) (31.4) Loss on sale of assets, net (0.4) - Other income, net 8.7 0.6 Income (loss) before provision for income tax 5.5 (31.5) Income tax benefit 0.2 8.8 Net income (loss)
$ 5.7 $ (22.7)Revenue Total revenue from continuing operations for the three months ended March 31, 2022decreased $6.9 million, or 4%, as compared to revenue for the three months ended March 31, 2021as follows: Three months ended March 31, 2022 2021 (in millions) Residential subscription $ 134.3 $ 140.7Business services subscription 27.7 27.3 Total subscription 162.0 168.0 Other business services 5.3 5.6 Other 7.3 7.9 Total revenue $ 174.6 $ 181.5Subscription Revenue Total subscription revenue from continuing operations decreased $6.0 million, or 4%, during the three months ended March 31, 2022compared to the three months ended March, 31 2021. The decrease is primarily driven by a $14.2 millionshift in service offering mix as we continue to experience a reduction in Video and Telephony RGUs, partially offset by a $6.0 millionincrease in average revenue per unit ("ARPU") as HSD customers upgrade to higher speed offerings coupled with a $2.2 millionincrease in volume attributable exclusively to the addition of HSD subscribers. ARPU is calculated as subscription revenue for each of the HSD, Video and Telephony services divided by the average total RGUs for each service category for the respective period. 21 Table of Contents Other Business Services Other business services revenue from continuing operations decreased $0.3 million, or 5%, during the three months ended March 31, 2022compared to the three months ended March 31, 2021. The decrease is primarily due to a decrease in data center revenue. Other Other revenue from continuing operations decreased $0.6 million, or 8%, during the three months ended March 31, 2022compared to the three months ended March 31, 2021. The decrease is primarily related to decreases in advertising and line assurance revenue.
Operating expenses (excluding depreciation and amortization)
Operating expenses (excluding depreciation and amortization) from continuing operations decreased
$11.1 million, or 11%, during the three months ended March 31, 2022compared to the three months ended March 31, 2021. The decrease is primarily driven by decreases in direct operating expense, specifically programming expense of $9.8 million, which aligns with the reduction in Video RGUs between periods and lower bad debt expense, partially offset by decreases in capital eligible expenses.
Incremental contribution is defined as subscription services revenue less costs directly incurred from third parties in connection with the provision of such services to our customers (service direct expense). Incremental contribution from continuing operations increased
$6.3 million, or 6% during the three months ended March 31, 2022compared to the three months ended March 31, 2021. The increase is primarily due to the decrease in programming expenses from $49.3 millionfor the three months ended March 31, 2021to $39.5 millionfor the three months ended March 31, 2022.
Selling, general and administrative expenses
Selling, general and administrative expenses from continuing operations decreased
$4.2 million, or 10%, during the three months ended March 31, 2022compared to the three months ended March 31, 2021. The decrease is primarily attributable to decreases in costs associated with digital transformation initiatives, lower marketing and professional services expenses, partially offset by an increase in stock compensation expense.
Depreciation and amortization expenses
Depreciation and amortization expenses from continuing operations increased
$3.1 million, or 8%, in the three months ended March 31, 2022compared to the three months ended March 31, 2021. The increase is primarily due to an increase of equipment placed into service.
Interest expense from continuing operations decreased
$24.0 million, or 76%, in the three months ended March 31, 2022compared to the three months ended March 31, 2021. The decrease is primarily due to lower interest rates on a lower outstanding principal balance as a result of the debt refinancing that occurred in December 2021, and the expiration of the interest rate swap agreement in
May 2021. Other Income Other income from continuing operations increased $8.1 millionduring the three months ended March 31, 2022compared to the three months ended March 31, 2021. The increase is primarily related to the Transition Services Agreements under which WOW is providing post-transaction continuity of service to the two different buyers of our sold service areas during the transition periods. 22 Table of Contents Discontinued Operations
September 1, 2021, WOW completed the sale of its Clevelandand Columbus, Ohiomarkets and on November 1, 2021, WOW completed the sale of its Chicago, Illinois, Evansville, Indianaand Baltimore, Marylandmarkets. The Company will present these markets as discontinued operations in the consolidated statements of operations and exclude from continuing operations for all periods in which such discontinued operations are presented. Results of discontinued operations include all revenues and direct expenses of these markets. General corporate overhead is not allocated to discontinued operations. In connection with the asset sales, the Company entered into two separate transition services agreements under which WOW will continue to provide certain services to each of the buyers. Under the transition services agreements, the buyers may elect a variety of services, including but not limited to: information technology, network, business support services, etc. The term of the transition services agreements are for 12 months following the closing date, with two optional three month extensions. None of the costs related to the employees, processes or systems that will be utilized to provide the services under the transition services agreements were allocated to discontinued operations. Discontinued operating expenses do not include general corporate overhead or continuing costs related to providing service per the transition service agreements. Certain costs of providing the transition service agreements will continue during the term of the agreements as services are provided; however, upon termination of the agreements, these costs are expected to be reduced. In addition, general corporate overhead costs are expected to be reduced over
a three year period. Results of Operations The following table summarizes our results from discontinued operations for the period presented: Three months ended March 31, 2021 (in millions) Revenue $ 104.8 Costs and expenses:
Operating (excluding depreciation and amortization)
Selling, general and administrative
2.7 Depreciation and amortization 20.5 62.8
Income from discontinued operations before provision for income tax
Income tax expense
Income from discontinued operations $
32.3 Revenue The following table summarizes our revenue from discontinued operations for the period presented: Three months ended March 31, 2021 (in millions) Residential subscription $ 90.3 Business services subscription 9.5 Total subscription 99.8 Other business services 0.6 Other 4.4 $ 104.8 23 Table of Contents
Total CompanyIncome tax (benefit) expense We reported income tax benefit of $0.2 millionand income tax expense of $0.9 millionfor the three months ended March 31, 2022and 2021, respectively. The change to income tax benefit for the three months ended March 31, 2022compared to income tax expense for the three months ended March 31, 2021was primarily related to a decrease in income from operations before provision for income tax period over period, coupled with a decrease in the effective income tax rate, which is the result of windfall tax deductions related to equity compensation and additional research and development credits.
Use of Incremental Contribution
Incremental contribution is included herein because we believe that it is a key metric used by our management to assess the financial performance of the business by showing how the relative relationship of the various components of subscription services contributes to our overall consolidated historical results. Our management further believes that it provides useful information to investors in evaluating our financial condition and results of operations because the additional detail illustrates how an incremental dollar of revenue generates cash, before any unallocated costs are considered, which we believe is a key component of our overall strategy and important for understanding what drives our cash flow position relative to our historical results. Incremental contribution is defined by us as the components of subscription revenue, less costs directly incurred from third parties in connection with the provision of such services to our customers. Incremental contribution is not made in accordance with GAAP and our use of the term incremental contribution varies from others in our industry. Incremental contribution should be considered in addition to, not as a substitute for, consolidated net income (loss) and operating income (loss) or any other performance measures derived in accordance with GAAP as measures of operating performance or operating cash flows, or as measures of liquidity. Incremental contribution has important limitations as an analytical tool and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP as it does not identify or allocate any other operating costs and expenses that are components of our income from operations to specific subscription revenues as we do not measure or record such costs and expenses in a manner that would allow attribution to a specific component of subscription revenue. Accordingly, incremental contribution should not be considered as an alternative to operating income or any other performance measures derived in accordance with GAAP as measures of operating performance or operating cash flows, or as a measure of liquidity. The following table provides a reconciliation of incremental contribution to income from operations, which is the most directly comparable GAAP measure, for the three months ended
March 31, 2022and 2021: Three months ended Three months ended March 31, 2022 March 31, 2021 Continuing Discontinued Total Continuing Discontinued Total (in millions) Income from operations $ 4.6$ - $ 4.6 $ (0.7) $ 42.0 $ 41.3Revenue (excluding subscription revenue) (12.6) - (12.6) (13.5) (5.0) (18.5) Other non-allocated operating expense (excluding depreciation and amortization) 43.8 - 43.8 42.6 7.5 50.1 Selling, general and administrative 38.3 - 38.3 42.5 2.7 45.2 Depreciation and amortization 44.4 - 44.4 41.3 20.5 61.8 Incremental contribution $ 118.5$ - $ 118.5 $ 112.2 $ 67.7 $ 179.924 Table of Contents
Liquidity and Capital Resources
Our primary funding requirements are for our ongoing operations, capital expenditures, outstanding debt obligations, including lease agreements, and strategic investments. At
March 31, 2022the principal amount of our outstanding consolidated debt aggregated to $740.3 million, of which $18.1 millionis classified as current in our unaudited condensed consolidated balance sheet as of such date. As of March 31, 2022, we had borrowing capacity of $245.6 millionunder our new Revolving Credit Facility. We are required to prepay principal amounts if we generate excess cash flow, as defined in the Credit Agreement. Our primary funding requirements are for our ongoing operations, capital expenditures, outstanding debt obligations, including lease agreements, and strategic investments. As of March 31, 2022, we had $190.7 millionof cash and cash equivalents. We believe that our existing cash balances, available borrowing capacity under our Revolving Credit Facility, and operating cash flows will provide sufficient resources to fund our obligations and anticipated liquidity requirements over the next 12 months. We expect to utilize free cash flow and cash on hand as funding sources, as well as potentially engage in future refinancing transactions to further extend the maturities of our debt obligations. The timing and terms of any refinancing transactions will be subject to market conditions among other considerations. As potential acquisitions or dispositions arise, we actively review such transactions against our objectives including, among other considerations, improving our operational efficiency, geographic clustering of assets, product development or technology capabilities of our business and achieving appropriate strategic objectives, and we may participate in such transactions to the extent we believe these possibilities present attractive opportunities. However, there can be no assurance that we will actually complete any acquisitions or dispositions, or that any such transactions will be material to our operations or results. Our ability to fund operations, make capital expenditures, repay debt obligations and make future acquisitions and strategic investments depends on future operating performance and cash flows, which are subject to prevailing economic conditions and to financial, business and other factors, some of which are beyond our control.
Historical Operating, Investing, and Financing Activities
Net cash provided by operating activities decreased from
$77.6 millionfor the three months ended March 31, 2021to $49.4 millionfor the three months ended March 31, 2022. The decrease is primarily due to the reduction in operating income, including the impact from the aforementioned sale, and timing differences of our receivables and payables, partially offset by the decrease in interest paid. Investing Activities
Net cash used in investing activities was
expenditures relating to our smaller footprint following the sales of our
We have ongoing capital expenditure requirements related to the maintenance, expansion and technological upgrades of our network. Capital expenditures are funded primarily through a combination of cash on hand and cash flow from operations. Our capital expenditures from continuing operations were
$42.1 millionand $44.0 millionfor the three months ended March 31, 2022and 2021, respectively. The $1.9 milliondecrease from the three months ended March 31, 2021to the three months ended March 31, 2022is related to a reduction in customer premise equipment ("CPE") and network enhancement expenditures partially offset by increases in line extensions as we focus on expanding our network. 25 Table of Contents
The following table sets forth additional information regarding our capital
expenditures for the periods presented:
Three months ended Three months ended March 31, 2022 March 31, 2021 Continuing Discontinued Total Continuing Discontinued Total (in millions) Capital Expenditures Customer premise equipment(1)
$ 19.0$ - $ 19.0 $ 20.0$ 10.6 $ 30.6
Scalable infrastructure(2) 10.7 - 10.7
11.4 1.0 12.4 Line extensions(3) 4.5 - 4.5 3.7 1.2 4.9 Support capital and other(4) 7.9 - 7.9 8.9 2.5 11.4 Total
$ 42.1$ - $ 42.1 $ 44.0$ 15.3 $ 59.3Capital expenditures included in total related to: Edge-outs(5) $ 1.1$ - $ 1.1 $ 0.8$ 0.6 $ 1.4Business services(6) $ 3.2$ - $ 3.2 $ 3.9$ 1.1 $ 5.0
Customer premise equipment, or CPE, includes equipment and installation costs
(1) incurred to deliver services to residential and business services customers.
CPE includes the costs of acquiring and installing our set-top boxes and
modems, as well as the cost of customer connections to our network.
Scalable infrastructure includes costs, not directly related to customer
(2) acquisition activity, to support new customer growth and provide service
enhancements (e.g., headend equipment).
Line extensions include costs associated with new home development within our
(3) footprint and edge-outs (e.g., fiber / coaxial cable, amplifiers, electronic
equipment, make-ready and design engineering).
Support capital and other includes costs to modify or replace existing HFC
(4) network, including enhancements, and all other costs to support day-to-day
operations, including land, buildings, vehicles, office equipment, tools and
(5) Edge-outs represent costs to extend our network into new adjacent service
areas, including the associated CPE.
(6) Business services represent costs associated with the build-out of our
network to support business services customers, including the associated CPE.
Financing Activities Net cash provided by financing activities was
$5.0 millionfor the three months ended March 31, 2021and net cash used in financing activities was $10.3 millionfor the three months ended March 31, 2022. The change is primarily due to a decrease in net borrowings of $16.6 millionduring the three months ended March 31, 2022compared to the three months ended March 31, 2021.
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