Optimum Communications, Inc. (OPTU) Earnings Call Transcript & Summary

All right. We're going to get started. I'm Ben Swinburne, Morgan Stanley's media analyst. Please note that all important disclosures, including personal holdings disclosures and Morgan Stanley disclosures, appear on the Morgan Stanley public website at www.morganstanley.com/researchdisclosures or at the registration desk. We're really excited to welcome to the conference actually for the first time, Altice USA, Dexter Goei, who is the CEO of Altice. Dexter, thanks for being here.

Thank you. Thank you, Ben.

You guys reported earnings not too long ago and gave us your outlook for 2020, in particular highlighting an expectation for accelerating revenue growth and accelerating free cash flow growth. Maybe talk about your priorities for the company this year and sort of the key drivers of the guidance.

Yes. I mean, listen, we are very focused on business as usual. I mean our core telecoms business, the Residential cable and SMB business continues to tick away very nicely. As we talked about in Q4 earnings, December was a very strong month, and we've seen those trends continue in the beginning of the year. So the business looks solid and nothing to flag from there. And then we've got these 3 projects that we've been working on for a couple of years, one being mobile, the other one being fiber-to-the-home and the third one being our advanced advertising platform. And so from various stages of development, those are all going to contribute in 2020. We're going to continue to focus on generating increased and better core margins to our business. So our cable margins will continue to increase, free cash flow expectations of growth. And so it's kind of really business as usual with some core projects that we're developing for the longer term.

Great. Well, I want to dive into those in a little more detail, but maybe just talk a little bit about the price increases that you guys implemented late last year, sort of the philosophy around them and how you think those will impact the business as you think about 2020.

Yes. So the first letters, and depending on jurisdictions that we're in, went out at the end of last year, but the first subscribers got hit in the beginning of February, so Feb 1. And so we've now seen the entire February go by, nothing unexpected. We are ready for potentially higher volume of calls. We're not seeing anything unreasonable relative to expectations. And so we're monitoring very closely. Retention is very strong, and we're not seeing an excess of any churn rate. So we had obviously budgeted in our numbers to see potentially a bigger churn number coming. We haven't seen that right now.

Okay. And the yield on that price increase as we think about revenue, I assume that's all baked into the guidance?

It's all baked in the guidance. I mean, obviously, what -- you have the churn numbers that you obviously have to play into, the mix of whether the PSUs are coming disproportionately from video or not, and then what are you spending on retention, all right? So if -- I know there's been some commentary as to how we've built our revenue guidance. I think we just look -- want to see what's going to happen in terms of some of those elements when it comes to price increase. And also as we look forward to potentially a big advertising year, why don't we wait until we see it before altering guidance in any shape or form? So I think we got caught a little bit flat-footed in the fourth quarter with lower political in the tri-state area than expected.

Okay. And I know you just mentioned it, but just to put a finer point, it sounds like the subscriber improvement we saw through the fourth quarter, those -- that sort of momentum has continued here.

Yes. No, absolutely. Broadband adds have been very strong. Video adds are there in and about. So our net add numbers are good on a customer-unique basis. For now, business as usual. We see nothing out there that would concern me.

That's great. That's great to hear, especially in a market that we've seen this week.

Yes, buying opportunity.

Right, exactly. Last point on sort of the pricing discussion before we talk a little bit more about some of your growth initiatives. Your primary -- one of your largest competitors, Verizon, who not presented this morning, implemented some new product pricing and packaging late last year. We talked a little bit about that on your call, but how do you think about the position of Altice's products in the market relative to how they have reestablished or set up their offering?

Well, we spoke about a little bit on our call, which was the mix-and-match proposition, where they're more aggressive on the single broadband and less aggressive on the double-play. In a very high attachment rate for video area like Optimum, that's good for us, where we're cheaper even without promos than the Verizon product. And then on the single-play, we were in promos going into December, going into the beginning of the year where we're effectively cheaper on a single broadband basis with a higher speed, right? So it really will depend as to how we'll react in certain instances, whether we extend promos or not relative to what they're offering, but we have seen nothing on the competitive side on the Optimum. And actually, if you look at the underlying data, which we don't publish anymore, our Optimum results, December, January, February, have been very strong.

That's great. Okay. So let's talk about fiber-to-the-home. It's one of the things that really differentiates your strategy versus others in the industry. You guys, I think, are at roughly 600,000 homes passed. You passed that towards the end of last year, about 12% of your Optimum footprint. Talk a little bit about your outlook to continue to pushing fiber and the response you're seeing with customers to the extent you are productizing and selling it.

Yes. So we will launch our triple-play fiber product in the next 3 months. It's the expectation. And so we're not really -- we're seeing, obviously, we have thousands of single broadband subscribers. Everything that we would expect in terms of performance have been there. And it allows, obviously, our installed workforce to work really closely and get used to that type of an install as opposed to the coax install. The fiber-to-the-home initiative is really driven by a real perspective to the medium to long term. Number one [Audio Gap] OpEx [Audio Gap] to servicing clients to come down significantly because the incidence rates relative to cable are significantly lower. We've seen that in every single one of the other countries that our sister company operates in. And that just leads to lower customer touch points. Secondly, obviously, that one CapEx cycle will lead to a significant reduction in our long-term CapEx going forward as maintenance CapEx and new build CapEx come down significantly. And then lastly, we have a road map of consistent up-tiering of speeds that are available to us, right? So we don't have to wait on a DOCSIS 3.1 Duplex type of technology, which seems to be potentially delayed or pushed out or maybe never coming to fruition. We know that we're 10-gig ready already when we are fiber-to-the-home. It's really a question of the software more than anything. So we kind of take a lot of comfort that even if the initial analysis was really based off of cash flow characteristics, reduction in OpEx and long-term reduction in CapEx, that we know we're going to have a nice revenue product uplift lines for a very long time.

And when we look at the 2019 results or even the 2020 results, do you think we're going to see the benefits of this investment now, even in revenue subs or cost? Or is this still further down the road?

Listen, I think, similar to like the Altice One product, which has pretty much been around for about a good 1.5 years, give us a good year, 1.5 years since launch of the triple-play product to give you some good data. We've been able to already start giving you good data on Altice One in the last couple of quarters. So 12 to 18 months out, so let's talk about it in the middle of next year as probably some early signs. As we start gross adding specifically on 600,000 to 1 million, 1.5 million homes, we start to seeing some real data relating to incidence rates and call center interactions and those such things.

Right, got it. Irrespective of the fiber push, you guys have a 1 gig product in the market, and I think that will be available, I believe, across your footprint by the end of this year.

Yes. Next 3 to 6 months, we'll have it across the entire Altice...

Okay. And that was -- that's not fiber-to-the-home...

No, it's coax stuff, 3.1.

How do you expect that to impact your competitive position? What is the opportunity in front of you guys on the broadband side of the business?

Listen, I think on the FiOS footprint where we're overlapping, it's really eliminating the mind share that FiOS had on 1 gig. And that's a...

A bit of a marketing perception.

It's a marketing perception. Actually, if you look at FiOS ads today, they don't talk about the 1-gig product anymore. And I think we have an opportunity in the non-FiOS areas to have an uplift in revenue. But it's really about making sure that we have a full suite of products, which is commensurate with everyone out there, if not better, as we build out to fiber-to-the-home, which will start providing symmetric speeds up and down and create latency levels in 1-gig plus.

Got it, okay. Let's shift over to Altice One. It's sort of fashionable to disparage the video business these days, but it's obviously a huge part of what your customers use your products for. And you guys are very highly penetrated in video. I think it's about 17% of the footprint.

Yes.

Can you share with us some of the stats around the Altice One customer churn, viewing? What -- where you see that product evolving to over time?

Yes. Listen, it's -- we're starting to see obviously very good data. We're growing our base just particularly on gross adds, not a huge migration effort there at about 2% clip per quarter. So we'll be at 19%, 20% by the end of the first quarter. Two very distinct stats. We're seeing churn rates relative to our legacy subscribers of being 20% better. So approximately a couple of hundred basis points better per year. That's material as it will flow through the numbers over time. And I think it's not at all different than what our friends over at Comcast are with the Xfinity platform. And then secondly, the usage is about 22%, 23% higher of data usage because the WiFi experience and the data connectivity is so much better with the Altice One platform. So that, again, leads itself to lend to potentially those our customers which we'll be upselling by nature given their higher usage.

It makes sense. How many of your 3 million-plus video customers do you think ultimately makes sense to be on Altice? Or does this becomes a bit of a default or...

Yes. It becomes a default on all the gross adds. And as things churn, the whole Altice One experience will be similar on the fiber-to-the-home because they have this gateway technology. So the whole -- that experience we want to continue to have a very good video interface and a better WiFi experience.

Is this a product you guys can improve or iterate on through software downloads or having to go swap stuff out? Is there something over the long term…

Yes. The view would be -- I mean, the one bad thing about fiber-to-the-home is that there is different technology and different setup boxes relative to coax. So those customers who are on Altice One today, who are potentially doing 400 to 1 gig, that want to move over to fiber, we will have to swap that equipment out, right? But outside of that, absolutely, we can update the software.

The only product I want to ask you about that's relatively new, I don't know if there's much to say, is on the Smart WiFi technology that you guys announced, I think, fairly recently. What is behind that? What does that do for your business?

It -- we give it away for free, and it really is a much, much better customer experience in terms of controlling and the throughput of the signal, being able to use 1 SSID code as opposed to multiple SSID codes, being able to move between a 2.4- and a 5-megahertz band seamlessly, being able to monitor what your children are doing and those types of things. So it's a product that's been very successful, particularly in the SMB world. We've been selling it very well. And in the Altice Residential area, we've been giving away a lot of that for free, and we may have a revenue opportunity at some point there as well.

Okay. Let's move on to sort of the next growth driver you highlighted, which is mobile. You guys have come into the market with an aggressive price point. You added about 80,000 customers last year. What have been the learnings so far in your launch? Any surprises that you would call out? And how should we think about this business this year?

No, listen, we're happy with where we are. We're over 100,000 if you just kind of do the forward math relative to year-end. We're kind of clipping 2 to 2.5x faster on launch in terms of penetration relative to our peers and with their MVNOs. So we're pleased about that. It's really just all about continuing to enhance the product and the user experience, which means giving the client more options relative to its financing of handsets, potentially more options relative to an unlimited package versus some other type of package. Being able to manage better certain other things like insurance or international roaming or those types of things are all IT platform-related things that we're working on right now. So it's really business as usual. Nothing has surprised us out there. We obviously would like to be -- continue to be ambitious in that, but not at the cost of a large, large loss, like we're going to be very thoughtful about how we spend our money there.

Yes. I mean it does feel like you guys are managing this rollout, balancing growth and profitability.

There's no secret, which is if you want to get a ton of volume, you're going to spend a ton of money, right? And that doesn't really make that much sense given that you are an MVNO. The gross margins, even though they can be good, are still thin relative to being an MNO. And so we're going to be thoughtful about the capital that we invest there.

What does the Sprint-T-Mobile merger mean for you guys because you obviously have a different position than Comcast and Charter as it relates to the MVNO setup? Or it's all better?

To start off with, the FCC giving us access to 5G makes that very clear. And the DOJ are making it very clear, access to the network in a 7-year deal from closing. We had a deal that, effectively, if the deal is going to close in April-ish, which is what the market is estimating, that was only going to last another 2 and 8 months, 2 years and 8 months. So now we've got 7 years. So we've got time to...

Still hasn't closed.

Still hasn't closed. So I mean, no one's appealed, I think, so far, as I understand it. So we'll see when that closes. And it will -- by definition, we have all of the tools for the long term to think about our strategic position in this market and to be thoughtful about how we deploy our capital.

Yes. I feel like in the wall of worry, 5G has, as a competitor, has really fallen since -- certainly since a year ago. But how do you look at 5G, both as an opportunity for your business and also as a threat long term as 5G home is, in theory, at least deployed?

Well, I mean, listen, as 5G gets rolled out on the new T-Mo network, we'll have access to that.

5G mobile.

5G mobile. So that, in terms of a threat, let's call it an opportunity/threat. I think in terms of a threat itself, I mean, it's been very clear to us since all the hoopla around 5G about 1 year, 1.5 years ago that the actual execution of the technology and deploying it is going to take a long time, right? So there's obviously different strategies amongst different operators, but by and large, it's an opportunity for MVPDs to work with wireless operators, particularly those who want a small cell. And for those who want to go deep into the residential neighborhoods with fiber, good luck, have fun. It's not that easy, right?

Right, right, right. Yes, I thought you guys had a really interesting slide on your earnings deck about the bandwidth consumed by your broadband-only customers.

Yes. I mean we're close to 300 gigs out there, average speeds of over 200 megs. And you kind of sit around and go, everything that's out there, at least in the mobile world on 4G, 4G+, is nowhere close to that today in terms of consumption and average speeds, that by the time there is something that's competitive out there, I think we are multiple steps ahead, at least from a fixed line, the consumer who's going to continue to attach more devices and consume more and want better and better latency. It's going to be, I think, a difficult choice because the price points on a per gig basis, and not that a consumer thinks about per gig, but just even on the absolute numbers, if you think about where 5G needs to price itself, I mean, the return on capital doesn't make any sense, right? So they need to price itself at something that has some type of return characteristic, and the numbers don't work in my head in terms of how to get a return there.

Let's talk about advertising, which is the third one you mentioned. You guys have invested a lot in that business. You've also made some acquisitions. What are the drivers of growth in 2020 that we should be thinking about? And any updates on that business?

Yes. I mean we flagged that political tends to be kind of a $30 million, $40 million improvement on a nonpolitical year, so 30 to 40 basis points in growth coming just from political, and we'll see what happens. Obviously, in the New York tri-state area, which is the big part of our footprint, we have the New York primaries, I think, are the end of April. And we have New Jersey, that's in June. So let's get through Super Tuesday today and then we start seeing some flow coming in there more aggressively as the Democratics start spending.

You want Bloomberg to stay in the race.

We want as many people to stay in the race as possible, right? No one dropped out after Super Tuesday, at least from a corporate standpoint. From a personal standpoint, I've got a different view. And then -- so that's one. Cheddar, I think, is going to add an extra 20-ish, 20, 30 basis points relative to last year since we didn't have a full year. And then it's all the initiatives that we've been doing, right, which is trying to sell more advertising products in market and going out of market with the digital product, with the branded product and even with local inventory if we can get it at good prices. So we are continuing to get better and better at that business, continuing to look to see whether there's interesting things to acquire, to add on with a technology or footprint basis. And we know -- I want that business to be a very strong stand-alone business.

Yes. Are you more interested in buying technology solutions that can help expand that business or actually buying media properties like you've been doing over the past...

Media properties, no. Technology or let's call it inventory real estate businesses, those types of things where you're actually getting inventory could be interesting. I think actually buying media properties, that's not our business. We have a very small niche in news where we've got international, domestic, business and local. That's good enough for us.

Right, makes sense. Let's just move then to free cash flow and capital allocation, M&A. You guys announced a relatively small but relevant cable acquisition. Are there -- tell us about that deal. And are there more tuck-ins like that in and around your footprint that you might be able to get?

I mean it was one of those -- I don't know if you guys have these maps of where all the MSOs are. Well, there was this green piece that was right in New Jersey that was like, "Who the hell are these guys? And why are they still there and no one's approached them?" And so it was just one of those opportunities where we made some regular calls, they finally picked up the phone and we got something done. I'm not so sure there's a ton of those out there. It's an extremely attractive transaction for ourselves and I think even for the sellers as well, but we will look at things like that regularly out there. And as I know, our other friends are doing -- in their footprints are looking at acquisitions. But if we could do one of those a year outside of some of the larger ones that are out there, that would be great.

I presume you would probably only do stuff that's contiguous to your footprint or...

It depends. It depends where the backbone is. It depends on how we can interconnect it. So there will be places -- I mean, do I want to do something in the middle of Iowa when we have nothing that's within 3 hours of that? That's probably tough. But if we are in the same state or on the other side of the state, yes, maybe.

And even in and around the Suddenlink footprint.

Yes, absolutely. Yes, the Suddenlink footprint is where there's opportunities, where there's a lot of local operators who may be tired of significant rising programming costs and NCTC and those types of things and don't have the capital to allocate to big broadband improvements. Those are opportunities for us. A little bit what we're seeing in our New Jersey property. We bought it, the highest speed was really 100 megs. There weren't any significant upgrades in the network in terms of broadband speeds. And then obviously, Altice One, Altice Mobile, fiber-to-the-home will be things that will be coming in the future, which will bring a lot more products and services to that community.

Right. And Service Electric is expected to close...

We just filed this Thursday, so maybe with my government affairs, people are watching, like, say -- this week we're supposed to file. And I think, typically, it's about a 3-month process.

Okay. I want to make sure the audience has a chance to ask you a question, Dexter, but since it is Super Tuesday, I did want to get your -- you guys acquired these cable assets, I guess, Suddenlink before and Optimum later during the Title II regime of the last administration. So you have operated under it and bought these assets under that situation. How do you think about the impact to your business if we go down the Democratic path with the new administration and the FCC reclassifies it back? Does it change anything for how you run the company?

There was no impact on our business during the Wheeler administration at FCC, which under Title II. Obviously, there was a legislation there that allowed them to do something if they so choose to. It was never even brought up with us. So I think in that particular instance, if we get the same type of impact of what Title II was during the Obama administration, that's not going to be anything change of business. And frankly speaking, if you really think about where we're growing our business in terms of ARPU, it's really people up-tiering, right? And so it's not really about price increases on your existing product. It's really about growing our base for new subscribers and as well as up-tiering to higher speeds. And as we roll out fiber-to-the-home and have this really long road map of products for a very long time, we're pretty relaxed about anything. Obviously, you never could be so relaxed with regulators because you don't know what the flavor of the wind would be, but there's nothing that we are thinking about relative to the presidential elections.

Okay. I've got some more questions, but why don't we see if there's a question from the audience for Dexter, if you could just raise your hand and wait for a microphone? Yes, right there.

One of your peers talked about the technological innovations of the sort of dual SIM kind of dynamic switch between the networks as an enabler for those selective mobile overbuild, the cherry-picking areas in your network where proprietary overbuild makes sense. Can you talk about what you can do and planning to do in that space?

Yes. I mean, listen, we, in all honesty, too small to really think about the infrastructure business in mobile. Are there opportunities for us to enhance our gross profit by either being a partner or selectively look at certain communities or areas where we can have some type of infrastructure? Maybe, but a very small maybe, right? I think today, we've got an attractive infrastructure-based MVNO. We've got some work to do with new T-Mo as they start transitioning Sprint clients on to their network. We've got a discussion around 5G. And we've got 7 years to think about our life as a mobile operator before we have to think about something else. So I -- it is not in my capital allocation thoughts to start spending a lot of minute -- money on infrastructure even if marginally we could help ourselves on some roaming costs here and there. But by and large, I'd rather focus on working very closely with our partners and getting better economics or being able to work with them on other ways to help them so they can help us than to think about infrastructure-based capital.

Dexter, speaking of infrastructure, I didn't -- I wanted to ask you on Lightpath process.

Didn't think you would...

Yes, almost, a couple of minutes left.

30 minutes ago.

Any update on that sale process? What's your latest thoughts on that business?

Yes. I feel like I'm a broken record, which is, because we continue to have discussions with some parties, thoughtful discussions, there's no new updates other than to say that if we were to close down the process, we'd tell you. If something were to happen, obviously we'd tell you as well. So it is still alive, and I can't give a probability to it because these are thoughtful and structured discussions. And hopefully, we'll be able to say something 12 months from now or in Barcelona. Barcelona, there you go.

Right. Less than 12 months away.

If we can travel to Barcelona.

It's November.

It's November. Fair enough.

Right. I also wanted to make sure I got in the industry consolidation question. I'm contractually required to ask you onstage, which is I know it's an election year, so probably unlikely, I think, were to happen significant right now, but do you think cable consolidations we see over the next, let's call it, the medium term?

I'm the eternal optimist on consolidation because it makes the most sense. When you really think about overlapping capital decisions between multiple operators that make no sense because they're doing the same thing to each other, that tends to lead to rationality in consolidation, particularly since there's a road map from every other developed country to go quad-play or to go larger in terms of broadband, fixed broadband. So who knows? And by the way, I'm out of the [ prognostication ] type of view as to what type of administration could do what out there and trying to estimate and give a view, right? I think the betting house is closed on that side. So we'll see. I do think -- I think if you ask all our other peers, I'm sure they are up here and you ask these questions, they would like to see consolidation as well, right? I think handicapping that is very, very difficult.

Yes. I mean it did seem that the judge's decision on T-Mobile-Sprint seemed to recognize a lot of the big changes that have happened across the industry in the last several years for what it's worth. So anyway, well, that's about it. We're out of time. Dexter, thanks for being here.

Thank you.

Thanks, everybody.