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

Welcome to the next session at the 23rd Annual Credit Suisse Communications Conference. I'm Doug Mitchelson, I cover media and cable satellite and telecommunications for Credit Suisse. Very pleased to have with us for our next presentation Mike Grau, Chief Financial Officer of Altice U.S. This will be a keynote format. I've got questions that will probably run the entire session, but feel free to e-mail any questions at [email protected]. And if we have time, we'll get to them. And Mike, thanks so much for spending some time with us today.

Thanks very much for the opportunity, Doug. Always appreciate it.

So you're also halfway through the year amidst of reopening here in the United States. Why don't we start with your thoughts as to how the year's progressed so far? What are your priorities as you look through the rest of the year?

Sure. So in terms of how the years progressed so far, listen, very pleased with our first quarter. I thought we had pretty strong financials. I think we had reasonably strong customer growth, certainly on an as-adjusted basis. I think overall, when you look at our numbers for the first quarter financial or operating, I think we delivered on expectations -- on ambitious expectations with one notable exception which was cash flow, where I thought we blew expectations out of the water. And that's kind of a continuing narrative from 2020, but it's reassuring to see it continue, of course, into '21. As we've proven to be a very resilient defensive business in what has become a very, very unique environment. And so it continues to be a really strong cash flow business, which, in my role, is extremely comforting, of course. So really pleased with how we've launched 2021, and the first quarter is so important in just sort of setting the stage for the balance of the year. And so I think we're in a solid position in that regard. The current environment, listen, still very conducive to our broadband product, our main product, still seeing a lot of work-from-home, still seeing a lot of remote learning, telemedicine and so on and so forth. So maybe not as robust as last year. But people upgrade on speeds here, they don't downgrade afterwards. We don't see too much of that. So you don't -- we don't have to give it back in it. So the current environment is still very conducive in that regard to our consumer business, our broadband business. Then when you look at some of the businesses we have that were impacted a little more by the pandemic, the B2B space, especially the SMB space and the advertising space, now we're seeing economies reopen, and those businesses are really doing well. And so that's reassuring as well. So really pleased, and I should actually mention as well in terms of how we started the Morris acquisition, which we closed in April, which we're really happy about as well. So a lot of really positive developments financially, operationally in terms of how we've come into 2021, which again does set the stage for the back half of the year and for the full year results. So really very excited about how we're doing so far in 2021. In terms of our priorities for the second half of the year, listen, we have a growth strategy that we've talked about pretty consistently, 3 pillars, right, talking about our fiber build-out in the East, accelerated pace of newbuilds, mostly in our Western footprint and certain plant upgrades in our Western footprint. And I think that's a really solid growth strategy. So the priority for the back half of the year is just execute, execute, execute. We just got to deliver on those different initiatives not only in order to deliver on the second half of this year but set the stage for '22, '23 and what have you. So that to me is where our focus is operationally, it's, again, on those growth initiatives.

So -- and we're going to run through those growth initiatives, but I did want to say a little bit shorter...

A lot of money.

You're right. I do want to stay a little bit shorter term, just to sort of to get started. You noted -- you've noted that 2019 is a good comp for 2021 relative to broadband net adds, and you know a lot of us pay a lot of attention to broadband net adds, even though the first half of '21 is starting a little bit slower. Can you talk about if you're confident about the strength in the second half to get to those full year 2019 levels?

Yes. Sure, of course. Listen, we're very focused on broadband customer growth as you are, right? As you are, as the investment community, it's a primary focus inside of the walls as well. This year is a little bit of a tale of 2 different halves, right? In the first half, we have certain -- we go from headwinds in the first half to tailwinds in the second half is how we're thinking about it. The first half, we have certain headwinds. There's certain seasonal weakness, especially in the second quarter. The regulatory programs and some of the storm-impacted customers from the back half of '20 and even in some of the Texas storms that we saw in the first half -- in the first quarter of '21. So we're having to flush all that stuff out. And so that creates a little bit of a challenging environment. And I actually thought we did deliver pretty well on first quarter customer growth at plus 20 once you adjust for those customers greater than 90. In the second half, I think we flipped the script, right? I think some of those -- the regulatory programs will have flushed out by June 30, I think, entirely. And so now some of the growth initiatives that we touched on earlier, which I'm sure we'll pursue later, they have kind of a cumulative nature to them, these newbuilds, especially when you think about 2020, some of the activities in the construction department, whether it be newbuilds or fiber-to-the-home, I'm not going to say it screeched to a halt, but we did slow down considerably involuntarily just due to challenges in getting permits and work crews out there and what have you. So we're starting to ramp up, right? We actually have ramped up. And so it starts to accumulate, and I think you'll see us start to deliver more new homes to the sales department. We'll release more new homes to our sales department from the edge-out initiative. We'll release more plant upgrades in our Suddenlink footprint. Fiber, we talked about passing 1 million homes earlier this year, and we'll continue to accelerate our fiber build. And so these things start to accumulate and they create a certain momentum. They create more opportunities for gross adds. And so I think you'll see that start to manifest itself into the second half and then again accelerating into '22 and '23. I mean that's the nature of the strategy, it's why we've chosen to go that route. So I think what you'll see in the second half is the tailwinds associated with those growth initiatives will really start to kick in and gain -- we'll gain some traction around that. And that's really what's feeding our confidence into being able to deliver on the second half results. I think we're in a really good position. I mean when I look at how many homes we've delivered versus our own internal budgets and expectations, we're right where we want to be.

And before we leave short term, anything you care to share on second quarter and how it's progressing, whether it's broadband net adds or any other aspect of the business?

Sure. I mean -- so if we talk about the broadband adds first, there are both -- there are challenges and there are positives. In terms of challenges, 2Q seasonality -- 2Q has always been, seasonally, probably our weakest quarter for broadband net adds, and the dynamic on that has been mostly moves into Suddenlink footprint. We have a pretty heavy presence on certain college campuses. And so the students leave campus and all through the summer. We do see some disconnects, which we have to navigate in the second quarter. What we've seen in the second quarter specifically of 2021 is almost an amplification of that. And I think the move dynamic has actually been translated a little more into the optimal footprint than what we're accustomed to seeing. Dexter has talked about this at previous investor conferences that we're seeing a little bit of a reversal of what we saw in 2020 when there was an exodus from Manhattan. From Manhattan, where we don't have a presence into suburbia, everything around Manhattan, we do have a presence. So we benefited from that. We're seeing a little bit of a return to Manhattan. And so we're seeing some move/transfer disconnects in the Optimum footprint more so than what we've seen in historical second quarters. I think that's temporary in nature, and we'll be able to flush that out in a relatively short order, but it does create a challenge in the second quarter as well as some of the other challenges that I alluded to earlier around flushing out the remainders of the FCC Pledge program, the New Jersey Executive Order and some of those storm-impacted customers. On the positive, I will say our retention on those regulatory customers has been better than expectations. It's still a challenge versus not having those regulatory programs, of course. But our retention on those customer programs has been much better than internal expectations. Nonpay churn overall is at historical lows. So we got -- we had some challenges in the second quarter in terms of seasonality and spikes on moves, which I think are temporary. We do have some positives. In terms of financials, revenues remain very -- revenue growth is strong. Cash flow remains very strong, which, again, continues to be very reassuring, of course. I think the challenge in the second quarter in terms of financial results will be on OpEx and expenses. And it's really just a function of tougher comps. You might recall in the second quarter last year, we took a lot of expense out of the business. And we talked publicly about the fact that of the expenses we took out of the business, maybe half was permanent in nature. We did do some reorganizations, but there were some temporary savings in the second quarter as well. We did have -- we closed a lot of stores in the COVID pandemic environment. We did put some employees on furlough. Maybe most notably, we saved a lot on media spending, especially in the second quarter last year when FiOS were very quiet and stopped sending text to people's phone. So we ran less media. It was a buyer's market. We've got great CPMs. So it's a challenging comp from an OpEx perspective, and that does put some pressure on our second quarter results to the extent we're going to look at this through year-over-year lens. It's always a little tricky. We don't manage the business 3 months at a time, but things being what they are, we are required to report results 3 months at a time. And the first benchmark people are going to look at is that same quarter last year. So there are some tough comps around that. As far as the rest of the business, I alluded to it earlier, but we're seeing the New York and Texas markets have reopened. Our SMB business is doing really, really well right now. I think we reported in the context of first quarter results that our March SMB net adds were about the best we had seen in a year, 1.5 years. April and May have continued to be very robust. So we're really seeing a nice bounce back in return in our SMB business. The Lightpath -- the new Lightpath management team, very pleased with the strategy they've adopted and some of the investments we're making in that. That's more of a longer-term play. It's harder to turn that ship a little bit, but absolutely very encouraged by some of the early developments we're seeing there in terms of sales that ultimately become installs, ultimately become revenue. And then the Advertising business, we're running very, very strong. That's probably a combination. We have great comps in that regard second quarter of last year, and then we've just done a really good job. That team has done a really good job on execution.

So appreciate all that. Part of that, you've mentioned a couple of times some of the government programs. Can you walk us through the New York state legislation restricting nonpay broadband disconnects? How you're managing that? What impact should investors expect?

Sure. It's not so different. It's a little bit different, but not so different from the New Jersey Executive Order in that we are essentially precluded from disconnecting broadband customers or actually customers, I should say, for nonpayment reasons in New York state probably through the end of this year. This program only launched May 12. So it's still pretty early days. Hard to say what the ultimate impact will be as far as from an investor perspective. I will say we developed certain muscles in dealing with this. As to the pledge and the New Jersey Executive Order, it's a little different in that we are not allowed to disconnect any services. Wherein in New Jersey, I think we were allowed to disconnect video, but we can't downgrade services. And so we'll use that as a little bit of a carrot or an incentive to try and induce these nonpaying customers to pay. But again, it's too early to say how successful that strategy will be, what that approach will be. But certainly, it stands for a reason that to the extent we're downgrading a video customer to basic and downgrading a data customer, slow some features, they're going to feel that into the extent that creates an inducement for them to pay, we would benefit from that. So that's kind of where we are with that. It will probably cause us -- not probably, it will cause us to kind of continue this bifurcated customer KPI reporting that we adopted in 2020 when we talked about, okay, here is our results as reported, but on a -- we'll also continue to report on an as-adjusted basis, adjusting for those customers who are greater than 90 days who would have been disconnected on a BAU basis, but who remain in our customer accounts pursuant to this program.

Got it. So any benefit from government broadband subsidies for low-income households?

I mean the main program, I think, we're alluding to there is the EBB program, which, again, very early, launched, I think, in May as well. What we've seen today, and I saw some numbers towards the end of last week, only a couple of thousand customers of ours have actually qualified. We -- well, what's surprising to me is the number of customers -- the number of applications -- applicants who were rejected. We've engaged a third-party firm to kind of validate anyone who's applying for that benefit, and we have had to reject a high percentage of them, probably early days learning curves in terms of just insufficient documentation. And then presumably, they go back and they procure that and they come in. But by the end of last week, 3,000, 4,000 customers who were taking advantage of the EBB benefit and had qualified and almost very predominantly existing customers as opposed to gross adds. So I think it could be a retention benefit more than a gross add benefit. But ultimately, it's still in that customer benefit.

All right. We'll stop this...

But smaller to date.

So I wanted to focus on broadband and depth, sort of getting back to some of the things you were talking about earlier, the 3 pillars and especially your growth outlook. It's also central to investor concerns for those who have been on Altice U.S. And so I want to challenge you a little bit. Your broadband subscriber growth has been slower than your peer cable companies. And would you say that through the virtue of your footprint, competitors be more aggressive against all Altice U.S. or somehow relative to execution or strategy since the team took over Cablevision?

Yes. So if we're phrasing this question as to going back to 2016 or what have you, listen, our footprint is different. Our footprint is absolutely different, most notably in the East where we do have -- or at least coming into this thing we call Altice USA, we had heavier penetration and heavier competition in our Eastern footprint with FiOS versus our peers. So that certainly will drive some of our performance if you're going to comp us versus a Charter or a Comcast. I will say when we announced the acquisition of Cablevision in the third quarter of '15, I think Cablevision in that quarter actually reported a revenue decline year-over-year. So we have accelerated customer growth and revenue growth versus certainly the direction that Cablevision was headed when we acquired it. It's almost -- it's 5 years ago tomorrow, actually. So we've done that. At the same time, improving margins and cash flows dramatically. So in some ways, I would argue, we probably outperformed expectations in that regard, but we have not outperformed our peers to the point of your question. We've made a lot of network investment. We've improved the product offering dramatically. When you think about -- Cablevision was offering a top speed at the time, I think, 100, 101 megabits, and we're offering 1 gig in the entire Eastern footprint. We've launched WiFi 6, we've launched Altice One, we've launched mobile. So we've made a lot of investments that, I think, and we talked about and probably we'll talk about some more some of the growth initiatives we're embarking on in a more accelerated fashion in '21 to feed that. I think the only other thing I'd mention, Doug, is we look at that a lot, right? I think our stock is penalized by our growth versus our peers. And so we spent some time looking at that. The one big differentiator I would point out is that I think our peers have done more in newbuilds historically than we have on a relative basis, relative to the size of our respective footprints, and that's something we're looking to fix. We're looking to cure that. That -- it was looking at that, that led us to say, okay, we've settled -- we've migrated all our systems. We've integrated all our companies. It's time to accelerate our edge-outs. And so I think as we start to deliver on that, I think we'll start to close that gap a little bit.

It makes sense. So given all that, I think it's certainly interesting that Altice U.S. is the only U.S. cable company that's upgrading to full fiber-to-the-home. Just last week, it was announced that Patrick Drahi is using a separate company, not Altice U.S., but his own separate financing and to buy a stake in BT. And he noted that is -- because he's a believer in their fiber strategy, it's got a lot of fiber in Europe. I see these competitors build a lot of fiber there as well. So what is it about this technology that Patrick and the Altice U.S. management team sees that will drive long-term value that the market seems to be missing on the investment side?

Yes. You're 100% right. It's very much a part of the Patrick Drahi or the Altice playbook, if you will, is the notion of getting to a fiber network for a variety of reasons. I mean there's a lot of advantages. From a revenue perspective, there's things you can do with a fiber plant that you just can't do with the coax plant in terms of symmetrical multi-gig and other different product offerings. When we look around the landscape, I think it's a clear cut best technology today versus coax, mobile, satellite, whatever your alternatives are. And so that does create opportunity to gain more market share, which, in turn, fuels revenue growth. It does continue. We have a really robust runway for those feature upgrades. We've done a lot in terms of feature upgrades in the last couple of years and had a big jump in that regard in 2020 due to the pandemic environment. At the same time, there's a lot of runway left there, and I think fiber is the best way to monetize that runway. I mean I think we talked in the context of our first quarter results about 10% of our base -- just under 10% of our base is taking 1 gig as of March 31. But in terms of gross adds in areas where fiber is available, it's north of 40% are taking 1 gig. So 90% of our customer base is not yet taking 1 gig and a substantial portion of our customer base is taking 200 and less. There's a lot of opportunity to bring those -- to migrate those customers up the product line and ultimately get them to 1 gig or ultimately with fiber or multi-gig symmetrical. I think you'll see us probably be one of the first to be able to offer that by virtue of this fiber overbuild. So a lot of benefits from fiber from a revenue and customer perspective. I think we also feel that from a build cost perspective, given all the experience that Altice has with this in different venues, that we can leverage that experience. We can leverage our existing infrastructure in terms of conduits and poles that are available to us as well as the fact that such a high percentage of our plant, 80% plus, is aerial. We think we can build this in a very cost-efficient manner versus what maybe what someone else could do versus what someone could do greenfield versus even maintaining and continually upgrade to DOCSIS 4.0 and whatever comes behind that. So I think from a build perspective, we think it's inefficient -- we can do it very efficiently. We've got revenue opportunities. And then there's the OpEx customer service impact, right? The fiber plan is what we would call a passive plant. There's a lot less moving parts than you're going to see in the coax plant, a lot less power, just a lot less instances of failure. It's a much more reliable plant. And so to the extent we can put a fiber plant in place, we're going to see OpEx savings on plant maintenance. We're going to see lower churn. We can do less -- lower customer satisfaction. And then the really big opportunity that we've talked about a lot is just customer interactions. Between field service and phone operations, we spend hundreds of millions of dollars every year on customer service. And to the extent we can reduce those customer transactions as they migrate to a fiber product, a fiber plant, that should translate to material cost savings for us. So I mean there's a lot of reasons to be excited about a fiber plant. There's a lot of reasons that this strategy makes sense versus the alternatives, and that's why we've gone down that path. And it is kind of integral to the kind of the Altice playbook in terms of that regard.

Can you talk a little bit about the go-to-market strategy for fiber? I mean does it evolve as the fiber footprint grows? Should we -- I mean given all those benefits, do you drive penetration harder? Should we think about fiber giving you a chance to win back and remarket some of those FiOS customers that started losing when that's already getting built out back in 2005? Are you at the point where the earlier homes put into service that have taken fiber or were you starting to see a picture of what that consumer behavior and how much they spend and churn rates look like for Altice?

Yes. I mean what we're doing -- in terms of our go-to-market strategy, it's heavily oriented towards the 1-gig product, of course. We added a video product. It was in mid-'20. So now we're offering -- we're able to offer a fiber triple play. We tend to be a little cheaper than FiOS coming out of the gate, at least promotionally in year 1 and then probably come on par with them in year 2. We do think we have the better network. I'm not going to get into the technical aspects of that, a, because I'm probably not qualified; and, b, because it can go on forever. But it is a better network versus the FiOS network in terms of the number of splits and how early in the network the splits take place and where the ONT is locating if your fiber has the ONT outside of the house. We have it in the CPE. So it's truly fiber straight to the set-top box to the modem, to the gateway, what have you. So when you put that all together, I think, ultimately, when we have that ubiquitous fiber network in our recent footprint, we will have the network of choice even versus competing fiber networks, i.e. FiOS. So that creates a really nice competitive advantage for us. I mean for a long time now we have Cablevision and have been swimming upstream, right? We probably had not as good a network as maybe our chief competitor. And we're going to be in a position where we can say we now have the better network. That's a really nice position to be in, and I'm pretty excited about getting there as soon as we can. So in terms of early returns, I think that we are seeing increases in some of our customer satisfaction metrics. We're finding our fiber customers satisfaction metrics are about 25% higher than our coax customers. The customer mass is probably not large enough to talk about some of the other benefits that we will see in terms of truck rolls and customer phone calls. We're seeing some of that, but there's no question that's coming because we've seen the experience that Altice has had with that in France and Portugal. There's no reason that should play out any differently here.

So why don't we dive into the agile strategy a little bit more? Like where specifically are you building? What's the pace, the track record so far? And what's the ultimate opportunity there?

So we're going to do about 150,000 new homes this year, and it will accumulate from there. Maybe we'll go into -- we haven't really embarked on our '22 budget, but I think targeting something 175 to 200 probably makes sense, and then we'll see where we go from there. It's heavily concentrated right now in the Texas area, Dallas, North Austin and some of the West Texas markets. I would say one of the metrics we look at, which is pretty encouraging for us, if you look at the top 5 markets in the country in terms of new household formation, we're in 3 of them. And so a lot of our newbuild activities will be concentrated in those areas. The other thing we've seen with the Morris acquisition is a lot of opportunity to edge-out the existing Morris footprint. And so that should create more opportunity. That's probably more a '22 opportunity. We're certainly embarking on that already. We're starting to do that already, of course, but that should accelerate into '22. So there's really ample opportunity between our different footprints to really accelerate newbuilds and -- at very, very attractive economics.

So you also mentioned and you've been talking about the DOCSIS upgrades and Suddenlink is another interesting driver. Can you size that opportunity in timing and walk through what's changed that's driving management to address those homes now versus the previous?

Yes. I mean I think we've talked about -- there's about 600,000, probably closer to 700,000 homes in the Suddenlink footprint where the network performance is not up to par with the remainder of the Suddenlink footprint, meaning specifically, we're not offering 1 gig. But quite frankly, in a lot of those areas that we're talking about, we're not even offering 100 megs. We might be offering as low as 25, 30 megs. Not coincidentally, the customer penetration in those areas is significantly lower than what we're seeing across the remainder of our Western footprint. So we can go in, in a very cost-efficient manner, bring those areas up to speeds. We'll go after the low-hanging fruit first, of course, the areas that are a little bigger and that are more cost efficient. So we'll do -- we'll start to push up against 300,000 of those homes that we should be able to upgrade and deliver back to sales this year. And that -- again, there's an opportunity then to take customer penetration in those areas up to the balance of where the remainder our Western footprint is. And so that should -- as I alluded to earlier, that should be one of the triggers that helps us deliver on the second half customer growth. I think as to why we're doing this now as opposed to earlier, you can argue we should have done earlier. I don't know that I would push back too much on that. But I do think finishing the BSS/OSS migration in the tail end of 2019 helped us in that regard. 2020, probably not the right year under those circumstances to embark on this. So having gotten a bunch of stuff behind us, I think this is the right time to embark on that. And again, early returns are encouraging, but it's still early days. But we are on pace with our own internal plans in terms of delivering on that.

So a lot of initiatives to drive growth in broadband subscribers. If you look across the footprint, which has a different look and feel than the peers we were talking about earlier, what's your level of concern about competitive overbuilding? And beyond fiber, how you're differentiating your service relative to what you might see coming from fixed wireless, especially as AT&T and Verizon become more focused pure-play telecoms now and T-Mobile obviously have some guidance?

Look, if your question is, is broadband going to become more competitive? Yes, it is, of course. With more fiber overbuilders and with fixed wireless coming, it will become more competitive. I do think we will probably under-index on some of those things for a couple of reasons, 2 different reasons. They've actually got 2 different footprints. In terms of our Eastern footprint, we have FiOS, which has a fiber network in place. We're building our own fiber network. Everyone knows this. It just can't be cost efficient for a third fiber player to come in and overbuild the 2 of us. So I think we're somewhat protected and insulated from a third party coming in and offering fiber in that footprint. And as far as competing with FiOS, that's a game we've been playing to a point since 2005. So that's an environment we're very accustomed to operating in, and we've shown that we're pretty adept in that regard and I think even more so where we have our own fiber plant in place. In our Western footprint, I think -- again, I think we'll under-index. Look, there's going to be more competition. That's inevitable, of course, but it's going to be less than maybe you might see if everything was pro rata or linear in nature in the sense that the Western footprint, there's a lot of rural areas, very low population density. So again, not as cost efficient for someone to come in late in fiber in certainly large segments of that footprint as opposed to other areas of the country. Fixed wireless, I think some of those dynamics I just mentioned apply there as well. And then I just don't know that mobile is -- the mobile technology is accustomed to handling the kind of load that we see from our customers. We talk about the fact that our broadband-only customers are using about 600 gigs a month, and a standard mobile customer uses 10 gigs or less per month. That's a pretty dramatic difference. And I'm not sure our mobile network can handle the data load that broadband-only customers are using and nor do I think they can deliver the speeds that we're delivering. So I think we have a pretty strong competitive advantage even at coax plant, certainly our fiber plant versus any sort of fixed wireless offering.

So let me turn over to mobile. It's another area that you're sort of investing for growth. Altice level prices increases, prices increased at the beginning of the quarter. It levels more in line with peer cable MVNOs. It feels like mobile has had some fits and starts for Altice. Is it about to hit its stride for the company?

I think so. You're absolutely right. I think fits and starts is a pretty accurate description. When we first launched the product, we had some onboarding issues, all the kind of glitches you would expect from a brand-new product launch, especially one of this magnitude. Then we started to hit our stride and then 2020 came along, right? In 2020, one of the impacts I touched on earlier was we closed a lot of our retail stores, very important sales channel for the mobile product. And so we sort of had to slow down on mobile almost involuntarily, but it caused us to kind of take a more critical look at that business. And what we said, the way we're looking at it internally is we need to solve for 2 things before we want to turn the machine back up. One of them is gross profit. We need to bring on customers who are gross profit positive from day 1 who are going to remain gross profit positive. What we've done in that regard is 2 things. One is in the latter half of 2020, we started to offer 1-gig and 3-gig plans to supplement our unlimited plan, including 1-gig and 3-gig plan gives you an element of cost control that you don't have for an unlimited customer. And then second thing, as you referenced in your question, was that we did rightsize some of our pricing earlier this quarter or maybe in the first quarter. So I think we are starting to solve for the gross profit problem. We're no longer taking out customers who are generating negative gross profits. We have some legacy customers in that regard when we came out at very low pricing, they want to make us flash. But the take rates on some of the limited-gig products is very encouraging, somewhere between 60% and 70% of gross adds are taking 1 gig and 3 gig versus unlimited. So we wanted to solve for that. But secondly, we want to solve for all those churn. And what we're seeing is dramatic decreases in churn in our mobile product consistently, certainly quarter-to-quarter, almost month-to-month. At the same time, a lot of our stores are reopening. We're not there yet. We're not fully reopened, and we're taking a look at each store on a case-by-case basis. So does it make sense to having a store in that location? But most of our stores are reopening or in the process of reopening. So I think we're very close to getting to a point where we're saying, all right, I'm comfortable with the gross profit, I think we solved for that. I'm comfortable with churn, I think we solved for that. And that's when we'll turn up the sales and marketing machine again. I think you'll see that somewhere in the back half of 2021.

And do we think about -- maybe it's a little bit earlier for visibility. But if you think about it, Altice probably will be breakeven next year?

I don't know that I would look for it to be breakeven on a full year basis in 2022. I think we'd like to see it be breakeven on a run rate basis as we exit '22. I think that's probably a more realistic expectation.

So let's shift over video. I mean on the back book side, you're probably still quite profitable. Customers that you have, they're probably lower churn. Do you expect to effectively balance serving those customers great video product and great service as the scale of that video business shrinks?

I don't think on a cost per customer basis, I don't see -- I don't expect to see too much degradation. It's a highly variable cost business. The biggest cost of course is program. All the programming contracts are on a per-customer basis or per-subscriber basis. So I don't know that I would see too much degradation in terms of the unit cost of servicing those customers as we talk to see -- as we continue to see, I should say, the volume declines we've been seeing. I think we'll be able to navigate that pretty successfully.

One of the -- makes sense. And then one of the interesting things that has been coming up increasingly in the last sort of year or 2 is the concept of regional sports networks having challenges getting pricing from distributors and now working ongoing direct-to-consumer with streaming offers. You've got quite a taps in the New York area with the cost of the RSNs in this footprint. Any thoughts about RSNs and how they fit in with your video service?

I mean we talk about a lot. I mean the engagement on the heavy sports users, we see about 15% of our video customers are reasonably or heavily engaged in watching the regional sports network. So listen, 15%, that's a lot of customers and they are called fanatics. They are called fans because they are fanatics. They're heavily married to that. As these RSNs start to offer over-the-top services, and you'll notice they're almost the last ones to come to that game for a reason, right, because they're getting such good prices from distributors like us and Comcast and Charter. As they start to offer that, it creates an interesting dynamic for the video consumer. I mean I think we're already at a point where -- to the extent the video consumer wants to assemble their own video offering by buying multiple OTT products as opposed to sell-packaging it, when you put it all together, it's probably more expensive than what we're offering. And meanwhile, these OTT providers have put through a lot of pretty robust price increases just in the last couple of quarters. And now you want to offer -- you want to throw RSNs on top, I'm not sure how compelling it will be economically for customers to migrate from our aggregated bundled product to this kind of do-it-yourself a la carte sort of environment. Having said that, if they do that, we talk about the fact that we're increasingly indifferent to it. I mean video streaming is the largest driver of broadband usage that we see amongst our broadband customers. So to the extent they do that, they become even more heavily dependent, I think, on our broadband product, and we firmly believe we're going to have the best broadband offering in the market by a lot. So I don't think it'll -- I don't think we'll lose that many overall customers. There's always this narrative that as the customer drops video, we're going to lose broadband customers a quarter. There'll be an element of that, but there'll be an element also that our broadband product -- the utility of our broadband product will actually be that much higher than it was previously.

In terms of margin trajectory over time, you obviously did a great job driving margins. The Altice U.S. team came in. And what are the big cost buckets where we'd see investment? Where are the big cost buckets where we might see some efficiencies?

In terms of investment, our biggest investments will be more likely on the capital side than the OpEx side. You could see some temporary investments in media buying, of course, and those kinds of things. But our bigger investments are the areas we've talked about already, newbuilds, fiber-to-the-home, the upgrades in the Suddenlink footprint. I think that's where we've seen investments. Efficiencies, look, we've knocked out a lot of costs out of this business. I think we announced -- when we acquired the 2 companies, 1.1 billion targeted efficiencies, we'll probably close to 1.5 billion now. There are still some pockets available to us. I think the 2 biggest ones that I think of, one is self-install. We really haven't launched that in any way, shape or form and certainly not in any magnitude. We're starting the beta testing. I think some of our peers are ahead of us in that regard. But in some ways, you can derive some benefits from being the second mover, kind of learn lessons from their experiences. So I would look to see us do something in self-install maybe towards the back half of this year, certainly, start to gain traction on it in '22. There are really sizable cost opportunities there. I think the other big opportunity I see in every company our size should be looking at their occupancy and their real estate, occupancy costs and real estate footprint in light of the lessons learned in 2020 about work-from-home and how successful that can be. I've always felt that we had opportunity in our real estate footprint after 2020. I feel that even more strongly. I think those are the 2 biggest cost opportunities. And then there are other things around the edges. We'll continue to fine-tune our phone ops, our custom ops and I should actually not -- I shouldn't short sell the fiber opportunity that we touched on earlier in terms of lessening the customer interactions and the plant maintenance as we migrate more customers to a fiber network environment in the East. So I think those are all the opportunities that exist, and then -- I'm sorry to interrupt, but the biggest margin opportunity on top of all that would just be the continued shift in revenue mix away from video and towards broadband.

Right. You've created a lot of value out of the balance sheet, both lower interest costs and levered equity returns. Is there more to go on the interest expense side? And are you comfortable with leverage where it is, a little bit over 5x?

So yes, there is more opportunity, less than there was a year ago, 2 years ago, but there's still some opportunity. For example, we have some notes maturing in November, certainly the Cablevision notes that we inherited when we acquired Cablevision were not callable. So we have to wait for their maturities. There's one maturing in November. I think it's $1 billion, it's 6 and 3 quarters. So just an example that there is some more opportunity out there for us to continue to drive down interest costs. We've been pretty successful and opportunistic on that, and I don't see any reason that won't continue. In terms of leverage, our medium-term target remains 4.5 to 5x. We'd like to get there sooner rather than later in this environment. Yes, I'm pretty comfortable being at the north end of that range or maybe even right now marginally over the north end of that range given where the stock is trading, given the debt markets and what have you, I think it's a better use of our capital to be buying back shares than it is to be proactively paying down debt. So the goal would be to get there through EBITDA growth and delever through EBITDA growth, which we've done historically. We have a good track record in that regard. Certainly can flip a switch at any time and repurpose our free cash flow towards deleveraging to the extent that becomes necessary in this environment. Very comfortable operating again at the north end or even maybe just over the north end of our stated target range of 4.5 to 5.

So you started out the presentation sort of emphasizing cash flow. I mentioned that a couple of times. I know it's sort of near and dear to your heart. You've successfully driven conversion free cash flow as a percentage of EBITDA from 25% to 35% for 2017 and 2021. So it's sort of a pretty strong improvement. How do investors think about that dynamic going forward, is that the right level? Is there more opportunities to drive it higher? Where is the ceiling for that?

I think there are opportunities to drive it higher, and I think there are probably some headwinds -- well, challenges we'll have to confront in that regard. In terms of driving it higher, again, as we've talked about earlier, I think EBITDA margins still have room. So expanding EBITDA margins should drop down to free cash flow. I think we do have some interest savings that we can still monetize. I think the biggest opportunity is probably reduce CapEx once we're done with the fiber build. I think we have a real opportunity to reduce CapEx to much lower levels than we have today. And the main challenge in that regard is cash taxes, right? I mean we've become a full cash taxpayer somewhere in '21, and that is kind of a new dynamic for us for the most part. So that's the challenge. Net-net, I do think there is room to improve free cash flow margins overall, but those are kind of the moving pieces.

So what did we miss? Any closing thoughts you want to share with us?

No. I mean, listen, this has been very thorough, and I certainly appreciate that I'm being very prepared and we hit all these different talking points. I would just emphasize again, I think we're in a great spot. And what I'm most focused on, I think, is in addition to the cash flow which sustains us is just these growth initiatives we're embarking on. Really want to create a platform in '21 for sustained organic volume-based revenue growth going forward. I think we've shown nice revenue growth over the 5 years we've been in business. It's been a little oriented towards rate growth and less towards volume growth than maybe what we'd like to see. But I think between increased edge-outs, the fiber build in the East, the plant upgrades in the West, a lot of other things we're doing, I think we have a real opportunity to set the stage this year and to then monetize and accelerate it in '22, '23 for real volume-based growth that's sustainable and organic. And then that, in combination, to the extent we can do more bolt-on acquisitions like a Cequel or a Morris, I think we can create a really nice profile for this company and, again, with really strong cash flow all along. So pretty excited about where we are right now and how we're tracking so far this year in that regard.

Mike, thanks so much for participating this year. Really appreciate it. Will be looking forward to doing this in person next year. Thanks, everyone, for listening in. Thanks a lot.

Doug, always great to talk to you. And I do appreciate the opportunity. Thanks very much.