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

I think we're live, Jessica. No? Yes, there we go. All right.

Okay. Well, welcome back, everybody. We're thrilled to have Altice USA here with us. We've got Dexter Goei, Chief Executive Officer, on a very eventful news flow time period.

So Dexter, you recently made an aggressive bid for Cogeco in which you entered into an agreement with Rogers to sell the Canadian assets while you would retain Atlantic Broadband. Can you tell us what precipitated this and why now?

Well, I think it's very clear that we have always put a high priority on attractive M&A. And so as you know, that is not something that comes along every day, and it's not something that you can plan for either. And so the opportunity came to us as we got introduced to Rogers here. Rogers obviously has a big focus and -- on Canada, no interest in the U.S. and vice versa. So perfect partners, and it's just a question of timing. We just came off the 2 best quarters of operational performance between Q1 and Q2 in all our KPIs. It's not a question in any shape or form of us needing to do anything, in particular. It's just that you need to be reactive in M&A situations, and this was a perfect opportunity for us to be reactive.

And now that the -- I hope I pronounce this correctly, the Audet family. I'm not sure it's a Audet or Audet. But now that they've rebuffed the initial offer, what are your next steps? And what gives you confidence you can succeed in convincing them to sell?

I think this is something that I should refrain from talking about given how public the situation is and we're dealing with 3 different public companies, but all to say that we're working. This is a marathon, not a sprint. And we're committed to trying to come to an endgame, right? I think from our standpoint, that's very simple, which is we'd like to get -- be able to acquire the U.S. assets. I think our friends and partners over at Rogers, not only would like to consolidate the market in Canada, but just as importantly, they have a large stake in that company that is effectively dead money from their standpoint because it's been there for a very, very long time, and they'd like to be able to sort out their situation one way or the other. So we're going to be committed, as we mentioned publicly, to continuing this process and this project, and we'll see where it ends up.

Can you talk at all about what type of synergies you can obtain with the Atlantic Broadband assets?

Well, as you know, they're in 11 states up and down the East Coast. So geographically, somewhat of a perfect match for Optimum footprint. And we've got 2 states outside of the tristate area, which are on the Eastern seaboard, which is West Virginia and North Carolina, right? So that entire Florida to main footprint that they have is geographically pretty contiguous. Obviously, we like cable. We like traditional MVPDs. So it's all the things. And size matters in our space for the technology investments, for the infrastructure investments, for the content costs and for all of the amortization, the operational cost of the business. So it's pretty straightforward in terms of the synergies. They're in every single line item across the board. And it's very much -- the footprint very much looks like a smaller Suddenlink in terms of the business, the competitive landscape and the growth profile. And that business today is kind of a 50%, 55% EBITDA margin business for us at Suddenlink at Altice USA, and we bought the business when it was doing 40% EBITDA margins. So we think that there's room to grow those margins and to continue to grow the top line through all the things that we bring as a larger company.

All right. And if you're unable to acquire Atlantic Broadband, what is plan B? Will you use the proceeds from like after you repurchase shares? Delever or pursue another target? I mean are there any other cable assets that you think might become available?

Well, so plan A all the time, Jessica, is to the extent there is attractive M&A, we'll always prioritize that. So we will always be looking at stuff out there. And to the extent that we find a target that we find very attractive for whatever part of our business we are looking to grow, then we'll use those proceeds for that. But assuming that doesn't happen because M&A is fraught with low probability to success depending on what the asset is and who the seller is and what the process is, yes, we will look to buy back more shares and even maybe delever our balance sheet. I think it really just depends on the opportunity when that thing closes and what we're thinking about doing.

As you mentioned, Altice has managed really -- very well through the COVID crisis. You had a great first quarter, great second quarter led by record demand for broadband, tremendous free cash flow growth in the second quarter. So aside from the potential acquisition that we just discussed, can you talk about your goals for Altice for the remainder of 2020 and into 2021?

Well, I think it's really continuing on the operational performance that we've shown in the first and second quarter. Every single heavy-lifting project in our traditional B2C business has been done, and it culminated with a little bit of a bumpy BSS/OSS transition in September of last year. But that's way past us, and so we are continuing to drive and focus on the operational organic business today across our entire footprint and including our B2B business and our advertising business. And so that is the priority, continue to drive better free cash flow margins, grow revenue. We're on a very nice momentum now given our KPIs in the second quarter. We're going to run into a rate event also in the next 6 months. So -- but it's really about driving top line growth and getting the operating leverage of all of the OpEx synergies we've had. And as you may have seen, we implemented in the second quarter a sizable OpEx reduction. About 9% of our nonprogramming OpEx came down year-over-year. 60% to 70% of that $50 million [ cuts ] is permanent. And a small subset is not permanent, and that's really just furloughed personnel and some reopening of stores, more than anything. But the momentum couldn't be stronger. We reiterated our guidance in the second quarter. We feel super comfortable about hitting that guidance across the board. That's what we see today. From everything we see today, the business couldn't be going stronger than that. So it's continuing that. I think in terms of projects themselves outside pure operations, we're focused on continuing to grow our edge-out strategy, and so we typically have done 50,000 to 70,000 new builds in the Suddenlink footprint and about 20,000 to 30,000 in the Optimum footprint a year. And these are new builds ready for service as opposed to new builds lots because we -- when we account for things, we often account for lots, but those aren't actually ready for service but ready for service properties. And we're looking to expand that, right? So we talked about the upper end of that in the near term, getting to hopefully 150,000 -- or 100 -- maybe 125,000 to 150,000 in the Suddenlink footprint. And always, the Optimum's footprint's about 20,000 to 30,000 a year, right? So on a cumulative basis, we're going to pretty much try and double our agile strategy in the next year or so. We also have continued the FTTH project. As we were off-line, we were talking about how the Hamptons have been fiberized completely, and we're looking to launch that commercially very soon. We think that's going to be an unbelievably successful product as people particularly having had trouble with their upload speeds, and that is just a limitation in engineering implementation on the coax plan. And so we think that people -- as Zoom calls and video calls continue to be the norm, they're really going to be driving for much more higher-performing network and customer experience, which is fiber, which is significantly better than coax. And then finally, we have 300,000 to 400,000 homes out of 3.5 million on the Suddenlink footprint that need upgrade. They have been orphaned assets in the middle pretty much of nowhere, and we're going to upgrade those assets to provide much better broadband services. Probably sacrifice some video subscribers to free up more capacity on the network. Those are 10% to 20% penetration assets because our broadband speeds are like 10 to 25 megabits on those. So as we start providing multiple hundred megabits of speeds in those areas, we think we're going to drive penetration on a nice pace. So there's a focus on driving our top line given all the things we've done from a margin standpoint, and so we're seeing a lot of opportunities to drive volume. And the investment in FTTH, as we've spoken about historically, is going to continue to drive OpEx costs lower and eventually drop our CapEx budget down significantly.

Great. Can you give us any color on trends that you're seeing so far in the third quarter as well as efforts to retain subscribers who are part of the Keep America Connected pledge and the New Jersey Executive order requirements? Although, New Jersey hasn't yet lifted its state of emergency yet?

No. Yes. So the unwind of the FCC Pledge obviously has an impact on our subscribers because we're going to see some churn numbers by definition there as people run into hardship issues. But we have been very thoughtful about our retention efforts, creating payment plans depending on what the circumstances are, doing more than that. But the success rates in retention have been very, very good. We also have what we call the Altice Advantage, which is the school program for -- and then in that case, also, we are doing a very good job given that, that ended. As people went back-to-school, we're starting to convert a lot of those people who are getting free Internet into paying subscribers. And so even though we see an unwind and kind of a little bit of a jump of churn given the FCC Pledge in the third quarter, our numbers are suggesting that we are going to do at least as well as last year from a broadband subscriber basis, if not better.

Okay. So the COVID crisis has accelerated the trend to work from home, as you just said, or school at home as well, which is helping the residential business. And I'd imagine with the help seasonality, at least at ease, I think that less people would go on a seasonal plan. But can you talk a little bit about what's done on the commercial, the small- and medium-sized business? What have you made? Have you made any adjustments to your commercial business as a result of COVID? What are you seeing on that side of the business?

So even more on this side, we've been very on the front foot in terms of payment plans, stay warm, trying to downgrade services during the pandemic as the shutdown occurred so that they could keep their services and not paying -- pay very little for them. And then as they reopen, reupgrade them to their existing services. And so that -- those programs have been very good as everyone committed to what was a difficult SMB performance quarter. I'll tell you that in July and August, we had outstanding install numbers, in line with our budget numbers, our real budget numbers as opposed to our reforecasted COVID numbers. And so I'm cautiously optimistic that we've turned the corner here based on what we see today, excluding a major shutdown again on that business. That business is doing very well today. I'd tell you better than expected for that way relative to where we were in the second quarter when SMB was having a lot of problems.

And what -- in your market, what is your market share for SMB?

Well, we have -- in the Optimum footprint, we have the dominant market share, 70% plus there. So it is something that is -- we are the small business provider out there. And in Suddenlink footprint, it just depends on the footprint where we are. And that's why we see continued very, very strong growth, even double-digit top line growth historically in the Suddenlink footprint as more businesses open in certain states, particularly where we've got a large presence in Texoma area. That's flourishing well from a business standpoint. And we're seeing a lot of activity in terms of new penetration, new connects.

Okay. And you talked a little bit -- we'll just switch here to cost. You talked a little bit about expenses that have come out of the business and how much has come out of OpEx. Some of it -- most of it permanent, some of it temporary. But just how it changed your -- the way you're thinking about investing in the business at all? Is there anything different in terms of your network management strategy?

No. Listen, I think I highlighted our big CapEx projects. On -- and the other big bucket, obviously, is customer premise equipment. We made a big investment in the Altice One platform on the video side, and we'll continue to enhance those offerings and the customer experience. But I think we're now launching our fiber triple-play blocks, which is the network is ready but we're just about launching the actual box itself. And that's -- so we're going to go through a slow burn until all the kinks are out and before we start doing a heavy marketing on our fiber product. But outside of that, those are the capital projects that we spend our money on. We're not going to change anything relative to that. We've gone through all of our technology-related big investments, software, BSS/OSS, those types of things. I will tell you we're making a small investment in a state-of-the-art reservation system so that our headquarters are having hotel space there for employees, so we're going down to a nonpermanent cubical-and-desk outlook. Probably 6 or 7 of us will be able to keep our offices, including myself. But everyone else will have to go through a reservation system for safety reasons just as much as spacing issues. So that's $1 million. But all the heavy lifting has been done in terms of capital-intensity projects outside of the network things I talked about. Then capital usage after that is buybacks or acquisitions.

Interesting. So most of your employees will work from home? Is that...

Most of our employees today in our headquarters basis, we're not forcing anyone to take public transportation. So there will be some days where they're mandated to come in, and we'll have to figure out the way to get them in safely. And we'll try and rotate certain teams, or certain divisions will rotate their teams internally. But it all goes through a reservation system, where -- as you may have seen, you have -- if you're not having been back in the city for a while, we have our logo on top of the former city building now. And so that's our building, and we will be renovating the old city floors right now. So in the next foreseeable 6 weeks as we're renovating, everyone is -- from a corporate headquarters is working at home. We still have Bethpage, as you know, which is the historical headquarters. And so our operational teams are still there, and a lot of people are going in person since a lot of people actually live in around the area.

Right. So obviously, presidential election year. And the current front-runner may, we don't know, may have a more heavy-handed regulatory approach. What are your major concerns as it relates to increased regulation under a potentially new administration and also FCC leadership?

Sorry, Jessica, my -- I just got the a notice that my laptop was about to go dead. So I'm going to give you a less -- sorry if I'm -- the lighting is not as good, but I have to find...

That's okay.

Listen, it is the single biggest risk in any industry, is regulation. We can only base our expectations based on precedents or new rhetoric. So the precedent is that the former democratic government enacted Title II but did not use it per se. And we have not heard, at least from this team today, any advanced rhetoric on regulation, right? So let's see what happens, but I'm always optimistic that free flow of capital incentives to invest capital is the primary objective here from our telecoms regulators and telecoms in general. So we'll see where that takes us.

Right. Okay. Let's move on to broadband. How do you view the overall competitive landscape for broadband right now, particularly in the Suddenlink footprint, where you've captured increasing share? Have competitors responded in any meaningful fashion?

Well, our biggest competitor in certain parts are some former FiOS assets, but those are owned by Frontier, and Frontier has gone through their issues there. And then on the other side, AT&T is the builder in many of our areas, and it's more of a Charter competitor than it is a Suddenlink competitor. So yes, AT&T every now and then wakes up and does a big promotional push and does it. But we compete, price, product, service. We're holding our own. We've continued to hold our own. We've seen AT&T regularly come in and out of promos, and we're not sounding any alarm bells.

All right. Where do you think that broadband penetration can go over the next 3 to 5 years in your footprint?

Well, listen, what's been interesting is the growth that we saw in the first and second quarter with great KPIs. 20% of our activity came from the FiOS footprint, which is about 30%, 35% of our entire footprint of the Altice USA asset base, and we're seeing a lot less activity there. But we saw outsized activity in the non-FiOS zones in, as you know, living on the east end. And in the east end, there's not only beach houses, but there's a real community that's there of locals and a DSL market, which fundamentally has been completely overrun by broadband providers because it is something that is required as a whole tool in order to be able to operate efficiently in this economy, in this country. So we saw and we continue to see good penetration of what we formally thought were never quarters. They were either DSL people who would stay on it because they didn't really care about the speeds and performance of their business. Or secondly, wireless-only homes that have pivoted back to needing a fixed broadband connectivity there. So we continue to see -- overall, our penetration levels are 50% of our entire footprint. But in the FiOS zones, you would expect the overall penetration to be 85%-plus given it's ourselves and FiOS. But in the non-FiOS zones, there's no reason why we should not be able to pick up 10 percentage points or more in penetration. Obviously, there's competitors in certain areas that are also entrenched whether it be AT&T or Frontier or mom-and-pop broadband operators in certain areas. But we continue to see the ability to drive penetration nicely in the Suddenlink and the non-FiOS zones of Optimum.