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

Good morning. I'm Phil Cusick. I cover the Com Services and Infrastructure space here at JPMorgan. I want to welcome CEO, Dexter Goei, of Altice. Dexter, thanks for joining us.

Good morning.

Excellent. Just to start, the U.S. seems to be more open almost every week. Can we start with an update of what you see from your business and consumer customers?

Sure. I think it's obviously rapidly going back to business as usual across our footprint across 21 different states in various different sizes in them, and places depends on where we are. I think that we're seeing certain trends, which probably some of my peers are seeing as well. Nonpaid disconnects are doing better. Movers in the second quarter tend to be higher than usual. I do think there's a repositioning of a, let's call it, there I say a post-COVID moment as people try and figure out where they're going to be coming into the summer and into Labor Day. So where we see heightened movers during the second quarter, typically with universities in the Suddenlink footprint. I do think we're seeing higher movers in general than what we historically see as people reposition themselves ahead of the summer. But by and large, we're on track. We continue to see that we're -- we expect to see a pretty decent pickup in the second half of this year and feel good about our targets for full year, right? I think, similarly, with the SMB side of the world and the B2B side of the world, that has been a nice acceleration of our business, where we've seen for the better results -- our best results for the past couple of years, in the last couple of months as businesses reopened, as installations become very active and people getting ready for a full reopening of the country. So business is usual. Ups and downs always, every day, but nothing really to flag right now.

Aside from the sort of seasonal departures from university students, is a pickup and movers is good for you? Some of your peers are much more aggressive than they were a couple of years ago.

We -- I think we benefited very strongly from a move out of metropolitan areas during COVID last year, particularly, if you just think about the Tri-state area as people moved out of the city and moved to the surrounding areas around the city. That was very beneficial to us. So I do think we're seeing some reversal of that on the mover side. But I don't think we are seeing anything in particular relative to competition right now that is out of the ordinary.

Okay. Okay. There's also been a lot of consolidation news in media in the last week or 2. You've owned and not different media assets over time. How do you think of consolidation today across distribution and content? And does that providers of video getting bigger change anything for you over time?

Well, I think it's a good question. I think it's a net positive for us. I think that our customers, broadly speaking, are moving to an over-the-top direct-to-consumer type of model in terms of how they're viewing their content. And larger players with a more full package of offerings on the direct-to-consumer side is good for our business because it focuses our customers on -- instead of 6 or 7 or 8 different choices on something a lot smaller that, in many respects, replaces a video consumer that is less and less valuable to us and allows us to focus primarily on our broadband product, allows us to be a partner for content on a direct-to-consumer basis as opposed to way a partner on a linear basis. And we'll, I think, dramatically improve the economic trends of our business from a cash flow standpoint. And so today, there is a still a back and forth between us and the content providers on renewals. And I think that, that equation is shifting because there's such a focus on the direct-to-consumer type of offering. And all of our partners are providing direct-to-consumer offerings. But for us, you either want a consumer that's going to be a long-term video subscriber, that's a profitable subscriber or you don't want a video subscriber that's under 3 years, right? And those are the ones that are shifting towards the direct-to-consumer offerings, and that's good for us. It's beneficial to our economics. It makes our priorities very clear in terms of where we focus our capital allocation and our efforts. And so people getting larger on the consolidation front in the media space is good because it will allow our consumers to focus on those types of offerings and allow them for the alternative outside of the fat bundle package from cable. Because that business model, as I've said historically, is unsustainable. We are continuing to get skinnier and skinnier economics on the video, which also takes a large part of our capital allocation and efforts internally to focus on, and that's something that's we're seeing a shift in, which is good for our business. So I think that -- sorry, go ahead.

I was going to say, you'd argue, the fewer, larger DTC customers accelerate the departure of customers from the -- maybe the marginal customer from the linear payer ecosystem.

That's right. And that's a good thing. I still think we still see less churn amongst our more profitable consumers on the video side, and those are very profitable. And then the least profitable, which is really -- you can see it in our attachment rates, our attachment rates on gross adds continue to fall, and that's a good economic equation for us.

Are you actively encouraging customers to seek out direct-to-consumer options? Been following, talk about your bill and you sort of point out how they can save money?

No. No. I think what we are focused on more than anything is rightsizing our business to make sure that every customer going forward or existing customer is margin positive, right? And I think you've seen some of our peers smaller or even larger on the telco side, really give people the optionality on video consumption, but at a positive margin type of equation, right? I think that's where bundle economics are starting to disappear in many respects. And rate increases across the footprint of ourselves and our peers in the MVPD world are going to continue to accelerate, I think, so that we rightsized our businesses for those customers that are skinny margin or negative margin, and those are typically customers that are under 3 years and tenure. And that will force people to make the choices at that point in time.

Sorry, are there content categories that are sort of coming up and very clearly not economic for you? Suddenlink went through the process of dropping Viacom years ago and was sort of the highest profile dropper of Viacom. Are we getting back to a time when some of your relationships just don't make sense to have in the bundle anymore?

Well, I can't be that prescient on a call like this, but I can tell you that, yes, of course, we're going to revisit every equation. Every single one of our partners effectively has a direct-to-consumer offering, right? The one who -- the one category who doesn't today are RSNs and that's their business model in many respects. But that business model, I suspect is going to have to change as well. And so I think we're going to go through, I would call, the next 2 or 3 years where you probably see some -- a big transformation in the MVPD world as to how we partner with our content providers, right? Because it's not sustainable for us to continue to see price increases every year with viewership falling, not only subscriber counts fall on the video side, but overall viewership in ratings of the content providers fall as well, right, at least from a linear standpoint. They may be seeing and catching those types of viewership's in -- on the direct-to-consumer offerings they have. But in terms of linear TV watching, that continues to be affected. And so you can't fight the trend, you have to accept it and then figure out how to adapt from a business model standpoint. And we think that's a good thing.

Yes. As you negotiate with programmers, and I don't know what's coming up next, but does access or distribution of the DTC product start to come into the conversation in addition to just putting their channels in your regular bundle?

Yes. Of course. It's clearly part of the equation. Either -- if you're particularly the smaller direct-to-consumer and content providers, they look to the distribution platforms, the extensive distribution platforms of the MVPDs to help them push their product, right? And so that becomes one of the front and center discussions in every single one of our renewals, either because that's something that we want to do or it's something that they want to do or it's collectively something that we both want to do. And I think that's going to become the norm, right, which is -- it's part of the package to the extent that the linear packages are less of a focus than the direct-to-consumer package becomes more of a focus and vice versa, depending on which side of the aisle you're on.

Okay. And what about fixed and mobile convergence? We've seen a pretty consistent theme of that over the last couple of days at the conference. And you saw that in Europe before you came over here. What's your view on that convergence today? How does that change the business over time?

Well, I think I've been pretty consistent that I've been a big believer that convergence has to happen. Now from an organic standpoint, it's happened naturally, which is every single, I think, telecoms provider, MVPD or telco or wireless are focused on a double play of broadband, right, fixed, and wireless. And so you're seeing, obviously, the MVPD is going into the mobile world, and you're seeing the mobile operators focused on infrastructure buildouts on fixed. And so the convergence is happening. I think the question is, does consolidation accelerate convergence? And I'm a big believer that it should, because the synergies are just so massive from an operational, from a capital allocation standpoint that they should, putting aside regulation and whatever administrations we have in place. The logical thing is to accelerate convergence through consolidation. But I think that's the natural plan. We just spoke about video, which is less of a priority for the entire telecoms sector. And what's going to be the priority or what is already the priority is broadband, both fixed and wireless. And that bundle is important.

So it seems like that's important from a carrier standpoint. Everybody sees growth in the other players backyard. But from a consumer standpoint, all I've ever seen of fixed and mobile convergence value is in discounting. So aside from that, what value can you put in front of the customer to say, I really need to have all my services from one company rather than just paying $10 or $20 or even $40 less on my bill?

I mean you're right, which is the initial stickiness of the convergence comes through discounting. But when you think about that the national mobile carriers are somewhat ubiquitous in the same service, whether you're an MVNO or an MNO, it's all about the stickiness of your customer going forward. So the life cycle of your customer increases. We will see whether it's substantially or marginally, but somewhere in between there by having both services with you. So if you have to discount to attract that bundle, so be it, because the life cycle, and it's a much more profitable life cycle than not. So I think that there -- the consumer doesn't sit there and say, I need to have both from one provider. But I think once he does have both from one provider, there's very, very or there's less need for him to ever churn away. And the churn then becomes really focused mostly on movers because the MVPD world or the fixed line side is not national, but the mobile side is. And so depending on what you're doing from a mover standpoint, that's going to trigger a potential churn event. But outside of that, you may stay a very loyal customer for a very long time in your neighborhood. And so that's good for ourselves. And I think it's good for the industry in general, to see a lot less churn, which is wasted economics in many respects.

Right. A much higher cost for me of moving from one carrier to another is to have more products in one place.

That's right.

And so what is convergence, whether it's in fixed and scale in cable or between fixed and mobile, what does that mean for Altice? Can you derive their both convergence on your own? Or scale on your own? Or do you need someone else to sort of come in and make an offer?

Well put question. Listen, we have never shied away from consolidation, whether we're on the front foot or a receiver of a phone call. And so I think we'll leave it at that, Phil, which is, we realize that we're not one of the largest players out there. And we believe that it makes sense for consolidation to occur. So whether we make a phone call, or someone calls us, I would suspect that we would be receptive to either of those types of alternatives at the right time. And so I think we will -- I would highly doubt that 5 years from now if there's an active wave of consolidation amongst fixed players in the next 5 years that we're not part of that.

Okay. Well, at your current pace in 5 years, you wouldn't have a float left compared to what you're buying at pace today. So does this need to be sort of a gradual process? Or does it make sense to come in and take the company private in the meantime to capture more of the economics if there is consolidation.

Listen, I think we're -- it's clear that at least from our perspective, maybe not from the market's perspective that we feel we're undervalued on a relative basis to our peers, when you really look at the bottom line and free cash flow yield or capital per share and those types of things. And secondly, that the private market today is valuing cable companies and fiber companies a lot more than public markets. And so there's a lot of arbitrage and value between what's -- where we trade on today and where we could potentially participate in consolidation going forward. That's not to say that we need to do anything today. I think we're very focused on the organic growth of our business. We've got a very strong capital allocation plan going forward relative to our network. And we'll see what will happen going forward. But your math isn't wrong, at least at the current pace that we're buying back shares. At some point, yes, there's no more float.

Yes. In terms of over time, Patrick owns more than half a company. You're a substantial owner of the equity. Do you and he want to get bigger in cable? Do you want to own more of the company? Or do you want to take the cash out and sort of move on to something else?

I don't know how to answer that. Today is Tuesday, we'll see what Wednesday comes. But I think what's fair to say is we're fully aligned with shareholders. And so if shareholders today would like to sell at whatever, $37, then sell at $37. We think the company is worth a lot more than that today. I think that if I were to speak to Patrick, about what his longer-term views about wanting to be in the U.S. I think he would say, he would -- he expects to be in the U.S. for a very, very long time, right? So I don't think there's a -- there's no need, let's say, for any cash to redeploy somewhere else. I think there's a story that's a strategic long-term story in the U.S. for us to follow. And what steps and what form that take -- we'll see. Would we sell the company to redeploy that into another asset in the U.S.? Maybe, right? But would we participate as shareholders into consolidation? Sure, depending on what the end format looks like. But what's clear from our standpoint historically is that, I think we're open to any type of solution as long as we believe that there continues to be value creation to occur going forward.

Okay. In the meantime, you bought a little Service Electric and Morris Broadband recently. Are there more deals to be done like that? It seems like there's a lot of competition for just about anything that comes up in U.S. cable?

Yes. I think -- listen, I am -- we're -- in the absence of doing something larger, there are a bunch of these smaller assets that keep on percolating up. It tends to be -- we tend to get things very quickly on our radar screen that are somewhat contiguous to where we are. Particularly, as the larger players, and I think we include ourselves into that, start accelerating on the edge-outs. Smaller operators are proactively now reaching out and saying, listen, before you overbuild us what about thinking about buying us out and saving yourself a lot of time there. So I suspect -- I'm hopeful that we could do a lot more of these because they're very accretive for us. But some of these players have been around for 40 years plus and don't ever see the reason why they should sell, even though terminal values may be falling for them if they get overbuilt. So I think it really is case-by-case, but there are plenty of these smaller players who are starting to emerge. And I think you're going to see a very rapid consolidation over the next 3 years for some of this, let's call it, under $500 million in value type players that will be coming out. And hopefully, we'll be part of that at the right price, at very accretive multiples.

Okay. You mentioned edge-out and you've started to spend a lot more money on growing your footprint in the last couple of years. Is -- you didn't participate much at all in the rural, the RDOF program last year. Has the view on that changed? And how do you think about the Biden infrastructure plan, if that really does drive a lot of rural expansion, you've got a lot of sort of pretty sparse areas around you in the Suddenlink footprint. Does that become more interesting with another infrastructure plan?

It's not going to surprise you, Phil, but we're super disciplined on capital allocation decisions, right? So when price levels on RDOF $5000, $6000-plus up to $10,000 of homes passed, even with subsidies, it's very difficult to sit there and understand why those economics make sense. Yes, maybe from an equity value perspective, somebody assigns some type of incremental terminal value to us because we have an additional subscriber here or there. But that's not -- it's not good business, right? And the other thing that we learned very quickly is that the guys running XL's spreadsheets on the RDOF have no idea what it is to actually build-out in a very rural mountainous area. And they're running their calculators and our algorithms. But when you actually get there and you actually check it out and I think you're seeing some of our peers who won RDOFs in size across the board, realize that it may not be $6,000, $7,000, $8,000 homes passed after subsidies, but it may double because, not only is the cost of fiber and just the hard elements rising, but the cost of human capital is rising as people are focused across the country, rolling out things. And I think people's maths in many respects are wrong, in terms of the ultimate cost of some of this rollout. So we will play in these types of options as much as we can when the economics are right. So with the Biden infrastructure plan and with potential municipalities rolling out, using some of the capital to roll out infrastructures, we'd love to be part of that if it made sense to do that. But we're going to be very disciplined here on the cost of rolling out more homes passed. It makes more sense for us to buy back shares at some point.

Does it matter if that's administered by the FCC? Or if money is passed down to the states and sort of run through a variety of plans? Does it matter for you?

Ultimately, it doesn't. I do think it's probably fair to say that money in the hands of local or federal governments to actually own and operate and deploy infrastructure on commercial terms, has been historically a bust. And so I think that whether it goes to the FCC on the federal side or goes to local communities, that capital is always better in the hands of operators, professional operators than it is in the hands of municipalities trying to build subsequent scratch. And so I think that wherever this money ends up going forward, I think that the private community will actively try and get their hands on those dollars and avoid having governments start deploying networks themselves because that typically has not been a very good equation.

Okay. Affordability has been a big theme in the last couple of days as well. And we had the emergency broadband benefit launched a couple of weeks ago for however long it lasts, have you seen any impact from that yet?

Not really. I mean the awareness is not there amongst consumers yet. And so it's something that we were quite proactive, particularly with nonpaid disconnects. Do you qualify for the EBB, if potentially you do qualify for the EBB, here's the process to it. And you could get a good subsidy here for your product. I'd say we're in the thousands of people who have signed up to the EBB through us. And mostly existing customers. So very few new customers out there proactively using the EBB to sign up to a new service. So I think it's early. These types of programs need a lot of awareness, need little friction in terms of being able to execute it. But we'll see. I think it's fair to say it's had 0 impact on our business today.

Okay. Could that offset some of the new New York regulation, I know they've argued from cutting off what video and broadband recently?

That's true. It started, I believe, on May 12, if my dates are correct, which -- so we haven't yet seen the impact yet given that we're just May 24 today or something like that 25. But we will start seeing some impact probably in the next month as people are supposed to get disconnected but can opt to not ever get disconnected or we cannot disconnect them. And so I do think you're right, which is, at that point in time, using the EBB or using E-Rate, the other program, the other federal program has potential subsidies to helping people. I think we'll come to the forefront there.

Okay. New York state kind of follows New Jersey here that been going through this disbarring you from cutting people off. Is this something that more states are going to do? Is there momentum building there that you need to push back on?

I don't know. We're not seeing it anywhere else right now. Obviously, the neighboring states in the Tri-state area tend to follow each other, particularly in New York and New Jersey, in the way the PSC and the BPU behave in many respects. I think it will be interesting because New Jersey, the executive order, which got extended into 2021, but in 2021, we've had 0 impact. But in 2020, we obviously had some impact at the height of COVID and rolled through continuously through to the end of the year. In New York, we're allowed to downgrade services, right. That's not prohibited. If somebody does not want to get disconnected or cannot be disconnected, right. So he doesn't want to pay but doesn't want to get disconnected. That person could be downgraded. And so I think it will be interesting to see how our consumers actually utilizing this to their advantage to take advantage of a freebie or is there real economic hardship here that really is driving people to not pay, right? And I think that's where it's too early to tell. If they're in the height of the executive order in New Jersey, we see that same impact in New York, it's significant, right? Because we typically have 6,000 to 7,000 around that type of number of nonpaid disconnects per month in the state of New York. And that could have a real impact on the business if those people are not disconnected and are having a free ride because typically, someone who nonpaid disconnects comes back, right, and starts paying again or settles up its balance. Now we'll continue to accrue balances on people, but those we don't accrue after 45 days. And so we're going to have some revenue impact at some point, right?

Okay. We're running out of time, but I wanted to hit a couple of other things. One is you're asking a couple of weeks ago about margins, which is something that always interest me. And you pointed out rightly that a lot of the margin expansion in this industry has -- then because of video to broadband mix shifts. But I wanted to ask, we were -- our few years from the acquisition and your integration of Suddenlink and Cablevision. You've had a lot of margin expansion. But excluding the broadband from video mix, is there margin to be taken here? Is there more cost to be cut? Or we really reliant on both business transformation toward broadband and pricing to push margins higher here.

I think the short answer is, yes, there's still margin to be taken outside of just pure mix shift. It's not just mathematical. Putting aside that the whole programming cost dynamic may change, which is going to obviously -- if it's to our benefit, that's going to significantly help margins because that is a big number. But more importantly, as you see with the infrastructure build-out, particularly on FTTH, we're very focused on reducing customer touch points because of better service and better customer satisfaction. And so we already see the early signs of 30% less customer touch points amongst FTTH customers. Now it's very small. I think we've got less than 40,000 customers on FTTH today, but that's increasing every day and so it's something that we'll probably have a better view on speaking about 12 months from now and give real data to you. But as you start reducing customer touch points, that's a big chunk of our cost structure. Call centers and field ops are a big, big chunk of our cost structure. And not only do you see less customer touch points, but if you increase customer satisfaction, you see less churn, right? And so that has been always the reason why we started off doing FTTH because we had seen that paradigm shift going from a not so good network in cable or in DSL to a much better network in FTTH and how that helped the cost structure and the customer satisfaction. So we're going to continue -- we're going to accelerate even our FTTH deployment because the early signs are showing exactly what we thought, the reason why we did it in the first place. And notwithstanding, obviously, that, to your point about mix shift, is our product pathway going forward with FTTH. We're going to be, hopefully, 10-gig ready in next year, right? So that's going to be that another generation difference in terms of being able to upgrade over time. More than half of our customers today only take 200 megabits or less. And so we still have a continued mix shift there, not just in terms of prioritization of broadband, but in terms of higher-margin products, more and more -- providing more and more gross profit as people upsell. So I'm very bullish on margins in general. I don't know what swing it may take, given that the programming side is such a big part of our direct costs today. But I do think that we're getting into those first few years where you could imagine that our gross margin actually is going to start improving year-over-year as opposed to -- yes, I think we've seen a consistent decline of 30 to 50 basis points per year over the last 4, 5 years, which we've had to makeup in OpEx and then sell, right? And so if the gross margin...

The real quick, you've talked about confidence in accelerating broadband in the back half and almost a hockey stick as we come out of the second quarter. What gives you the confidence that we're going to see that broadband growth? And then we'll let you go?

Well, I think it's really about going through this transition of COVID to post-COVID, where it's very hard for us to tell what's happening, but we've been seeing for a couple of months, accelerated moves out of footprint, and that's not going to happen consistently over the next 6 to 7 months. I really do think it's a repositioning right now of households. Secondly, we've got a delivery schedule, which we're on track to do in terms of upgrades. 250,000 of the 400,000 of priority upgrades in Suddenlink footprint are getting delivered. We're on track on edge-outs. We're on track on FTTH and Optimum. And so and the third and fourth quarter, tend to be better quarters. So if you -- if we're back to, let's call it, back to 2019, we've got the weirdness of a transition between pre- and post-COVID behind us through the second quarter. And on top of it, we've got deliveries of infrastructure coming in nicely over the third and fourth quarter. I think mathematically, it all makes a lot of sense, and we feel good about it.

Good. That's good place to leave it. Dexter, thanks very much for your time.

Thank you.

Thanks, everybody, for joining us, and we'll see you soon.

Speak soon.