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

So you mentioned the investment you're making in fiber. How do we think about the pace of your fiber deployments from here? And really, the question is, when are we going to start to see the impact of that in your financials, whether it's in subscriber numbers or margin numbers or even capital spending?

Yes. I think, listen, we had an obvious slowdown in capital spending this year, both on the edge-out as well as FTTH due to the pandemic. We're trying to catch that up. But when you stop the machine, it's not -- it doesn't automatically switch right back on from one day to next when you're doing those types of CapEx rollouts. But the anticipation is that 2021, we're back to normal and increasing our build-out of FTTH. The goal really is we're at about just under 1 million homes ready for service today on FTTH. We've got 5 million homes to build out. We'd like to do that over the next 3.5 years. And so it really accelerated that pace on an average of 1 million a home. We'll probably do a little bit less than 1 million next year and then a little bit more than 1 million going forward. I think it's probably fair to say that good stats in terms of incidence rates and in terms of ARPU impact is probably sometime towards the back end of next year. We've just gotten our triple play FTTH box. So we're just about to start launching that and campaigns on that to try and drive [indiscernible] share and awareness, very high-profile areas like the Hamptons. We've built it out this summer, and so we're looking to commercialize here at the back end of Q3 and going into Q4. And given that it's a full house in those areas right now, we expect to see some good activity out there, which will be very meaningful, particularly for the financial community since a lot of people are out there, they'll be able to see that. It's training our technicians, really, on installs because it's a completely different install process than coax. So there's going to be some teething pains for sure, but we're super excited by the opportunity here. We've got a meaningful amount of footprint with 1 million homes now. And as we get to that 2 million homes by, hopefully, by the end of next year, close to that number, we'll start seeing some better stats, and we'll talk about it. But all of the evidence that we've seen in other companies and our sister company in Europe in terms of the performance of it has been very, very good, and we expect to see very good material results from a free cash flow standpoint. And today, I see there's a very attractive revenue opportunity.

How do you think about the long-term financial profile of this company as it becomes a nearly all-fiber, broadband-focused growth utility? I mean you've already noted that your Suddenlink footprint, which is actually reasonably underpenetrated, has higher margins and higher broadband ARPUs. What do you think of as the long-term rate profile? I'm talking about the end of fiber, so you're beyond that?

Well, I mean, listen, we're talking about penetration levels, I think, in broadband that are, over the next 5 years, are probably going to at least target mid- to high 80s, going to the 90% levels in very dense areas of the country. We're trending towards that. And there continues to be a very nice runway of growth as people switch over from DSL-like types of products to a true broadband, high-speed broadband fixed line. I think the ability to drive ARPU through upselling of speeds continues to be a massive opportunity. For us, 2/3 of our subscribers continue to take 200 megabits or less, and we continue to grow our amount of downloaded speeds. I think we're in the mid-400s right now materially, quarter-over-quarter and year-over-year here, which is driving the desire for consumers for higher speeds, right? So we're providing 1 gig effectively almost across our entire footprint as is most of our cable peers. But then a quick question is really about upload speeds. So we're going to be providing on 2/3 of our footprint, 1 gig up and down. And the ability to go up to 10 gigs up and down off our existing footprint, that's going to drive a material runway for revenue opportunities as people continuously are using more and more devices, and more and more applications require better performance. And so I do think that the fast forwarding, putting the video product aside is -- every single one of our customers is doing a 1 gig up and down, 5 years from now and probably doing speeds that are even higher than that with applications that continue to be newer and newer applications. The enterprise and the B2B side of the businesses are continuing to require more robust performance, and so we're really optimistic about the runway. We don't see any slowdown -- expected slowdown here in the near future.

I want to talk briefly about video. Your business is seeing the trend of cord cutting, just like all other pay TV distributors. How do you think about the pacing of this going forward? Have you seen any change now that we're starting to get some normal programming, particularly sports back? And then just how do you think about helping customers pivot into streaming? Some of your peers have started to provide streaming boxes, for example.

Yes. I think just taking your second part of your question first,. That clearly is a focus of ours is either a skinny OTT bundle that we provide ourselves or enabling access to OTT platforms through our smart box. Or looking for either an Apple-based or an Android-based platform to flight. I think all of those are things that we do, and we already have a very good relationship with Apple and the Apple TV box, which allows for access to lots of different OTT streaming apps out there and as well as an Altice now fat bundle. The whole question really is it's driving something of a skinnier basis out there. And I think, listen, I think the numbers are very clear across our entire industry. I think we were a little bit of an outlier for the last couple of years as we were launching new products. And we had demographics that were very particular to us, which allowed us to slightly outperform the market in terms of video ads. But I think everyone right now is probably dealing with the same dynamic, which is the attachment rates on gross adds has come down materially, right? People are not looking for the cable bundle on its -- onto the gross adds. We've lost probably 20 percentage points on attachment there. And since we're doing about 65%, 70% of our subscribers are doing bundles historically, that's a material shift, although it's a material shift that's very positive from a cash flow standpoint. So there's a natural selection that's occurred, which has been very good, I think, for cable as well, which is the older subscribers, very loyal subscribers who like their cable bundles are pretty profitable customers for us today. And the least profitable money-losing ones for the first 3 years, plus, are no longer subscribing, which is really driving our ability to focus primarily on the broadband product obviously offer video options. But those video options that we offer are much more profitable video options for us than taking 3 years of losses on a video gross add today. So we like this dynamic because it's shifting the priorities. It's alleviating some of the angst around rising programming costs. And I think it's shifting the way the entire sector is thinking about content and whether or not we need to be providing every single channel out there as opposed to something that's a lot more curated.

Yes. I actually have a follow-up question on that because if you think about your content relationships, those large media companies are increasingly making that content available for free, in some cases, through their own ad-supported streaming products. How is that influencing the dynamic of your discussions with them when you have to think about renewals?

Listen, I think, by definition -- and every content partner of ours is different. But by definition, it changes the dynamics a little bit because the availability of their unique content is now available on lots of different types of platforms, whether it's part of a vMVPD, whether it's part of their OTT direct-to-consumer app, whether it's part of our fat bundle or our skinny bundle, all of those play into the way we're making decisions today. And by the way obviously our content partners are thinking about their decisions as well. But at the end of the day, we all know where this is heading, which is something of a much more curated video experience for each and every consumer. And most of it's going to be IP-based, on an OTT type of a platform with cable having -- there's always going to be room for the fat bundle for the foreseeable future, particularly with a focus on live local sports and live local news are really the drivers of those fat bundles today. And the economics of those fat bundles when, on a relative basis, you're getting more for your buck by going with a cable bundle than any other option out there. But people are going to choose more and more with their feet and with their thumb in terms of how they choose the content they watch. And we all need to adapt, right? So I think our discussions with our content partners are much more balanced today because at the end of the day, we all realize that consumers are starting to react and choose things, and we need to provide it to them. And we both, ourselves and our content partners, need to help each other provide that for them.

I want to spend a little bit of time talking about your wireless business. You launched Altice Mobile last year right around this conference actually. I remember getting my free SIM card at Communacopia when we actually could do this in person. And you've already added 144,000 subscribers in a reasonably short period of time. How are you measuring the success of the product from here? Is it subscribers? Is it EBITDA? Is it some lateral benefit like broadband churn?

Well, given that the sample is still small, it's very difficult for us to measure, let's call it, broadband churn today. And I do think we still are running into product upgrades, with marketing upgrades and changes that are driving some teething pains in the process in general. So we have to be able to focus on profitability and balance that with volume as our primary drivers. I think we've been very clear. We don't like to launch businesses that are eternally loss-making just because it can help on churn because fundamentally, the best way to probably help on churn is to make sure the network is state of the art, fiber-to-the-home and reduced incidence rates and make sure that the entire experience is better. That's probably the first and primary churn reduction tool as opposed to adding on a bunch of services, which are, let's call it, not necessarily game changers. It just happens to be that you've got more services with someone. And so it's harder to disconnect all your services at the same time. So we're focused on profitability. And we'd like to make sure that by 2022, we're a profitable business. We launched -- this is our first full year of launch 2020. We flagged that we could lose upwards of $100 million of EBITDA. I hope that's going to be less this year. And then next year, it will be less than that, and then the next year after that, we will be profitable. We're looking at ways to accelerate our path to profitability. There's lots of different ways to do that. So we're actively looking at it, whether it be organically or nonorganic. And so that is always going to be our focus, is to drive to profitability on a stand-alone basis as quickly as possible. So that's good. Sorry. I just got interrupted.

It's live TV here, right?

Exactly.

Your 5-year MVNO that you had with Sprint has converted into a 7-year MVNO with T-Mobile. Could you just give us an update in terms of where you are of provisioning customers on the T-Mobile network and reaching an agreement to access their 5G network?

Yes. So we continue to have a very good dialogue with T-Mo. They've started to migrate a bunch of their Sprint customers onto the T-Mo network. We have -- there is some -- a desire by T-Mo as they move into, I think, a new BSS/OSS system to try and do a larger migration of everyone at that point in time, which I believe is towards the end of this year. So we're all working through those dynamics. We're already roaming on T-Mo. So primary provider being Sprint, and then it roams on the T-Mo network. So that's all working and making its way through here, and we look forward to a very long-term relationship with T-Mo here. There's a lot of things we can do and help them as they think about their 5G strategy, help them densify their network materially as they go with the mid-band 5G strategy, which we think is going to be the most successful one but is going to require help from the MVPDs, of which obviously we're one of them.

Got it. We have a couple minutes left, and I want to make sure we touch on 2 businesses that did see a degree of headwind as you moved into the lockdown phases. The first one is your Business Services segment. About 15% of your revenue comes out of serving businesses. I know that you've recently highlighted that you've seen some improvement there. I was hoping you can just give us an update in terms of what the operating performance in that segment of the company is looking like right now?

Yes. We -- as everyone saw, particularly on the SMB side, the enterprises hung in there nicely, although because it is a lag period of time when enterprise on installs were [indiscernible] installs are independent but the order flow was good. We had a very poor second quarter as everyone went to lockdown, and a lot of small businesses effectively downsized or went into hibernation. But as we came out of lockdown in the end of the second quarter going into the third quarter, June and July -- sorry, July and August have seen very, very strong install rates, good sale numbers. So I think we're back in business. And so we continue to see an acceleration in our growth numbers on SMB, particularly. So there's nothing to flag outside of that. We're back to a degree of normal business. We are beating our budget numbers, which is unheard of because of the pandemic, but it's really a catching up of the lack of installs during the second quarter is really accelerating in the third quarter. I think on the advertising side, which is the other business that got hit quite hard in Q2, we are -- have reforecast our business, and optimistically, would like to try and get to flat to slightly down relative to last year is the target. That would be a Herculean effort, given how far off we were in Q2. Today, we're pretty much flat year-over-year on an 8-month year-to-date basis, which is very reassuring, a couple of million dollars behind maybe. And as we go into political in the next 2 months, hopefully, we'll be able to accelerate and hit our intended new targets here of trying to be flat to slightly down. So again, cautiously optimistic. The B2C business is doing better than ever. The SMB business is back to normal, and advertising is catching up on a very poor second quarter here. But catching up with the help of the elections should be beneficial. So we feel good about every single part of our business today in terms of the trajectories that we're moving towards.

Well, that's a great place to end this. Dexter, thanks so much for being here with us, and I hope to see you in person next year.

Thank you, Brett. Take care.