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

Yes. I mean, I think we clearly are going to be focused on self-install for HFC to start off with. Definitely, as we start getting more and more volume on the footprint and getting a lot more of more homes pass connected, we will definitely look to do a fiber to the home self install. The opportunity for us is we do 1.1, 1.2 of gross adds a year, 1 million. You kind of sit around and say, you've got $100 per install type thing. And so that's kind of the opportunity is $100 million or so of OpEx. Obviously, it's going to be staggered over a long period of time. But it's real money. It's real money. And more importantly, the consumer is being educated to handle things a lot more on their own. That's the whole pull-forward on the digitization of our business, and also households are becoming smarter with technology and younger with technology, all very good attributes for being a lot more self-sufficient. So our entire cost, field service and customer care, is about $800 million to $900 million. So that whole nut is what we're targeting with fiber to the home and self-install with other digitization initiatives for us to kind of continue to push on those customer touch point costs of about $800 million to $900 million.

Yes. And maybe just last point on the fiber stuff. As we think about your market share trends against in different parts of your footprint, I mean, earlier this year, I think you gave some really interesting color on how you were growing in sort of what you would call noncompetitive versus competitive footprint. Is that still a pretty wide range? And as you build fiber, particularly in those FiOS markets, is that going to -- can that really accelerate net adds because that's really where you're facing the toughest competition?

Yes. We believe so. For sure, right? Today, we're in the ping-pong match with FiOS, by and large. I think that the third quarter...

Meaning trading subs.

Trading subs really on moves and voluntaries who got bad service, ones who've moved to the other or saw promo from one and moved from one to the other. We are seeing incremental penetration, but it's not massive, particularly. It's really new build-oriented because those are the wealthiest parts of the Tristate area that we cover, are those 3 million homes. So that's where the activity is on construction. But we think we've got -- we hold our own today in that ping-pong match. We're net add positive every year in the competitive zones with FiOS. But we think that from then on, we have now a much more competitive product relative because, today, we have an inferior product, let's call it, and that we will be able to market something out there that's going to drive volume to us in those zones. So really excited about it.

Okay, cool. One last one on sort of the residential product side that I -- well, before we turn to mobile. Everyone is a little less focused on video these days than they were when you guys certainly went public a few years ago, but Altice One is a product that you guys have pushed out to a decent percentage of your customer base. The video marketplace is changing rapidly. What are you guys seeing among your Altice One customers? And is this still something that you guys are focused on that you think can help drive long-term value in your customer base?

Yes. I mean, listen, we've always talked very much along the lines of our colleagues at Comcast on their Xfinity product of really having a box that would enhance the customer experience, give it a lot more optionality, have a good look and feel, have a very intuitive remote control and improve the stickiness of that customer. So it's clear we're about -- at about 25% penetration right now because it's really about gross adds. And a lot of our gross adds, as you do know, the attachment rates on gross adds for double play and triple play has come down significantly in the entire sector, which is really driving that acceleration in losses. But we've seen definite churn benefits, 20 to 30 bps per month type thing, 2% to 3% for those video customers who've got an Altice One product. So it's definitely paid back in spades, and it really has helped our NPS scores relative to product and the experience of our products.

Okay. The other big initiative on the product side of late has been on the wireless front with Altice Mobile. That business sort of launched, and then we got -- we had COVID. So you sort of had to dial that back a little bit. What's your expectation for the growth of that business as we head into '21, just given all the moving pieces around wireless?

Yes. Listen, we're going to -- we've been pretty consistent, which is we understand the volume benefits. It's interesting to see top line grow like that, but it's not very interesting and pleasant to watch us lose money. And so we really want to focus on finding that balance. So we went out with a volume strategy, to start off with. We made a lot of noise. Those are not very profitable customers, given the price points on unlimited and that usage continues to grow. So it's really about trying to get our different offers and product portfolio right. Well, we've launched the 1 gig product -- or the per gig product, sorry, that our peers have been very successful with. That's been very good. We're looking -- we moved to a $40 unlimited package, and we're going to look to even probably increase that unlimited so that we find some middle ground where you see a lot of operators are in that 3 to 5 gig for $30 type range point and just really focus on profitable customers and holding on to profitable customers. And if we continue to provide good service and we continue to push penetration levels, ultimately, we'll start to see some retention benefit at a fixed line. But by and large, we're big believers in, first, running a very profitable business and getting to free cash flow breakeven as quickly as possible. I suspect that, in 2021, we'll still be losing money, and 2022 will be the year that we'll try to breakeven.

Okay. And you guys, with your Sprint and now T-Mobile MVNO, I believe, have a better economic model from a wholesale cost point of view as Comcast and Charter. But you essentially -- it sounds like you've taken your pricing and your packaging up to their levels or thereabouts. Is that all accurate? And if that's the case, I'd imagine, you've got a better unit economic model per customer profitability than they do. I don't know if I'm getting that right, but it sounds like that's...

No, listen, I think that's right. I mean, from what I hear, I'm obviously not certain on any of that. And -- but we just don't think for our footprint, we should be spending a huge amount of OpEx to continue to push volume, right? So that's probably where we differ from our peers who threw a lot of money at the launches and threw a lot of money at the continued advertising. I see advertisements all the time for Spectrum Mobile, and they're seeing good top line growth from it, but the profitability numbers continue to be -- have been challenging over the years. And given we're just smaller than they are, we'd like to be focused a lot more on trying to get the profitability quicker. So we probably will not have those types of volume numbers, but ultimately, we'll get to free cash flow positively sooner.

Okay. I know you've probably gotten this question more times than you care to admit, but around 5G, which I think, from my sense, when I talk to investors, is probably the last sort of major concern about competitive pressures now that Google has sort of walked away from fiber and I think the regulatory thing is under control. Give us your argument that 5G fixed wireless is not something we need to be worried about as we model out net adds for Altice, Charter and Comcast, but particularly Altice over the next 2 to 3 years.

Yes. I mean, listen, I think we're not anticipating any impact from 5G. I think we've spoken, you and I, and I think everyone in the industry has spoken, particularly on the cable side, that the cost of rolling out 5G, whether you're on a fixed millimeter wave type product or even a mid-band strategy, requires a lot of capital and relies on a lot of cooperation in the mid-band strategy from MVPDs, right, to small cell up. So first and foremost, the rollout is a challenging one. It's very, very costly, and it's going to be slow, by definition. Secondly, the product in itself, however attractive it looks like in a lab and how it even may operate in certain areas of the country, today is not showing any reliability patterns of any significance. And we continue to grow our megabits downloaded per month -- or gigabits, sorry, download per month, exponentially every year, right? So we're doing -- we're up at 20%, 25% clip. I think our single-use data users are up to almost 0.5 terabit, and our average usage is about 400-ish, right? So it is something -- sorry, 300-ish. So it is something that is going to continue to grow. And when you are being throttled on 4G unlimited packages at 50 gigs, do you really expect someone to forgo their fixed line product in order to, in the near future or even in the medium future, go to a product that, by definition, is probably going to try and throttle them? It can't be, if that's the case, a replacement for fixed line, particularly with what's been going on in the last 9 months. I'd say it's very difficult [indiscernible]. Look, if Morgan Stanley would give you guys all 5G phones to do a conference over it, then we've turned the corner.

Right. Right. We'll get back to you on that. Yes, I hear you. I don't think anyone's really arguing -- or for the most part, that 5G is a better mousetrap than fiber or even HFC. I'm wondering though, Dexter, when you think about pricing your broadband service, particularly for stand-alone broadband, do you think at all about creating a pricing umbrella that T-Mobile could come in? And even if they're going for some maybe more price-sensitive, lower-use customer, they still -- you still want to protect that flank a bit. Do you think about that at all?

I think that's right. But if you've seen -- you know what our pricing levels are across the industry. And you look at the ARPUs mobile, which are $45 to $50 and unlimited single lines are like $60 on average. And so you look at our $45 product, I'm giving you 300 megs. And I'm giving you at $35 today, 300 megs on fiber, up and down, right? So very difficult to see how 5G is not just an extension of 4G in many respects, where the return on capital from a true revenue enhancement is challenging. Maybe there is -- maybe every consumer will just say I'm going from 4G to 5G, and I'll pay $10 more. But that price level of $45 plus $10 is more expensive today than my 300 megabits on promo, fiber to the home.

Yes. No, I got it. Makes sense. Okay. We've got about, I guess, 6 or 7 minutes left. If you have questions for Dexter, please fire them into the chat, and I will make sure we relay them to Dexter. Maybe just hitting on a couple of more things before we run out of time, Dexter, I want to ask about advertising. Another part of the business that I'm sure we were sitting here in April, we thought who knows where the bottom is. I think you guys think it will be flat to grow for the year, something in that zone. Maybe you could talk about the trends you're seeing in the business. And also, you guys have made acquisitions in this space. I think it's an area that you like. Do you think you'll do more? Is this an area you're trying to get a little more scale in?

Yes, absolutely. I mean this has always been a sector. When we bought our businesses, we're about doing $300 million, $350 million of revenue. This year, we'll be north of $500 million. I don't know where it will end up, but it will be it will be growth relative to last year in a pandemic year. That, in itself, in the advertising space is probably Herculean announcement that we're going to do growth relative to last year, even though we had a real shutdown for 4 to 5 months in the advertising sector. So the momentum is there. Obviously, the political season has helped everyone. I mean, if I can recall Charter's results, I think they were up 20% or something like that, 20%, 25% in advertising, but x political down 11% or something like that, right? So the political has had a big shift in it. But we're optimistic for next year that, again, will be flattish, even though we're going to lose about $50 million, sorry, of advertising revenue due to political but that we'll be able to make up that $50 million of revenue by someone else. And that's because, to your point, we've made selective acquisitions in technology and product in order for us to offer a larger suite of things. And we've invested heavily, as you know, in our news product, News 12, Cheddar and i24. That's going to help us also provide more inventory to us and where we're seeing real good viewership patterns at News 12, which is much, much higher than last year, and that makes a lot of sense. People are at home a lot more. But the Cheddar numbers have been fantastic as well. The traffic has been very, very strong. So again, we're cautiously optimistic that it's a business that has enough tools in its shed to provide [ data ] forward, and we'll definitely look at investing in other platforms or technology or inventory to the extent we find interesting.

Okay. That's great. And then on the sort of capital allocation front, as you guys have been buying back the stock aggressively, you're going to get some more proceeds shortly. You often talk about wanting to make acquisitions. Nothing's for sale. Obviously, you've decided that, that wasn't going to stop you from at least trying. But do you think that we will see Altice find acquisitions over the next couple of years that you'll be able to pull the trigger on? I mean, Service Electric is not immaterial. It's not massive, but what does the landscape look like?

We'd love to do one Service Electric a year, if not a handful. There continues to be a handful of things that are on our plate that we're looking at closely. And out of NDPD land, we'll look at things in wireless and in advertising, to the extent those things are attractive and very synergistic to our business. The best use of our capital always has been M&A. We've shown tremendous returns out of this. We think the Service Electric business is going to be more like a 4x acquisition. And that was -- we closed in June, right? So that's a very, very quick turnaround in terms of what the opportunities are. And it's not just the cost integration of the business. But on Service Electric, we put in 3 or 4 more salespeople and the penetration levels have gone up. It's just -- it's a sleepy asset, hasn't been worked. And the customer base hasn't been managed. And we also found 3,000 to 5,000 more homes we can build out. So tiny acquisition, but very material when you look at the fine print. So we'll look at doing that. In the absence of finding M&A, I've been very consistent that our stock, we find very cheap. We're trading at double-digit free cash flow yields. That's not immaterial when our debt -- our subordinated debt between 3.5, 4x and 5x is trading in the 3s, right? So that delta continues to actually get wider because our stock historically has not reacted to that relative value. And interest rates keep on getting better and better in terms of the depth of the high-yield market. So when you're dealing with something like a 800 to 900 basis point differential in yields, it's very difficult to not want to buy back more shares at these levels. So we'll see what we do. We haven't gotten the green light yet from the PSC on it. I believe we're on the docket today, and we either get a green light and can move forward or we'll have some subsequent comments that we need to react to. But once we close and have the money, we'll be effectively figuring out what to do with our proceeds other than deleveraging or buying by itself.

Yes. And there's obviously been a market conversation about larger M&A in the U.S. cable industry. You guys and Charter come up quite a bit. Do you think that the sort of antitrust backdrop under a democratic administration changes anything from that conversation?

I think when it relates to us, no. It's really about 4 million broadband subscribers, 4 million, 4.5 million. So it's not a massive number. So you'd expect someone like a Comcast or Charter to be able to acquire us. And we're clearly about maximizing shareholder value. So that's not something that we would completely put off the table. I don't know if today is the right time, given where we think the stock is today and how undervalued it is, but we're patient, as you know. So I think on the larger M&A, industry-defining M&A, I don't know. I think this year and last year took us all out of the prediction business. Nothing made a lot of sense relative to our initial reactions. You would think that we would go back to something that's more predictable. You'd assume that probably or it's a low bar, right? Something a little bit more predictable than what it is today. I do think that if broadband, particularly on the 5G side, was super important to roll out as quickly as possible, then a fixed to mobile type transaction, 2 large players would make a lot of sense. It would make that deployment of 5G materially. There'll be a tremendous amount of synergies. We can make that as maybe one of the closing cushions to do x more of that. And so maybe that is something that you would think could be better for it and that could be accepted by the regulators. I don't think there's a broadband definition that still needs what, today, 4G versus cable, they are separate industries. So maybe that gets through there. Listen, I think on the media side, as you know, it's a crap shoot to figure out what's going to happen with a lot of the content guys out there just in terms of, I think, a desirability for scale but -- a desirability for scale, but at the same time, the eyeball numbers are shrinking.

Right, right, right. All right. Well, listen, we got through a lot. There's a lot to talk about. We appreciate your time today, Dexter. Stay safe. And thank you, everybody, for joining us. Appreciate it.

Thank you, Ben. Thank you again. See you soon.

Okay. Take care.