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

All right. Well, welcome back. I'm Brett Feldman, Goldman's U.S. telecom, cable and media analyst. It is my pleasure to welcome back to Communacopia, Dexter Goei, the CEO of Altice USA. Dexter, thanks so much for being with us.

Hi, Brett. Good to see you.

Let's jump right into this. So on September 9, you announced that the President and COO of your Telecommunications division had resigned from the company. You have assumed responsibilities for the division, which generates the large majority of the company's revenue. Really just the key question here is why are you making this change now? Does this imply you are not happy with the company's operating trends? And how do you expect this management change to result in operational change?

Yes. I mean, Hakim has been a part of the team for a very long time since the inception on the acquisitions, has been part of the overall Altice Group for several years before that, has done a fantastic job on many different fronts. And particularly, as we put Suddenlink and Cablevision together, was exceptional. I think what's clear is that operating trends have been a little underperforming, underwhelming over the last year or so. And a lot has to do with the principles of what we want to do, which is accelerate growth through increased investment in our distribution networks, in our products but particularly, in our network have been slower than anticipated, literally over the last 3 or 4 years probably, since we launched fiber. And the change is really meant to focus on getting decisions done quicker, being more focused on -- as a firm, across all silos, towards focusing on our growth and our customer experience and our brand and our marketing. And so we thought it was a good time to make that change. And me coming in, that really helps flatten the organization, allows people to have a lot more say in their opinions, and it rises quickly to my attention and be able to react in a much more flexible way. The tenets and the foundations of what we want to do remain the same. The question really is on the execution and the rapidity of what we're going to do and how quickly we want to do it and do we want to accelerate or not. And the buck will stop with me, and I look forward to working directly with the team on this.

That's great. I think we're going to spend time talking about a lot of the growth opportunities you're positioning the company for. But before we do, I was hopeful we can get a little bit more of a status update. You had exited the second quarter confident that your broadband net adds would be positive in each of the third and fourth quarters. Of course, since then, we've seen the rise of the Delta variant. And of course, there's been a number of storms and hurricanes that have moved through your footprint. Can you give us any update on how those moving parts may have impacted your trends in the third quarter and outlook for the full year?

Yes. No, absolutely. It's been a strange year, as many of you have seen and throughout different industries. What's clear is that seasonality and relative comparisons even to 2019 pre-COVID are very difficult this year. And since 2021 was very much predicated on a bunch of assumptions based on 2019 and 2020, things have been a little bit all over the place. You cited regulatory trends, which have specifically impacted us more than our peers because of the strong regulatory regimes in the Northeast, between New Jersey and New York. And so that has created a lot of difficulties in terms of our disconnect policies and how that affects our trends. Secondly, we just got recently hit by a couple of storms, and that's been something that's been regular for the last couple of years in fits and starts, and we're still not out of hurricane season. So we'll see how that goes. I think what's changed relative to Q2 is the expectation really of relative comparisons and expectation of a back-to-normal type of back-to-school type of environment. The back-to-school results through end of August and beginning of September have been underwhelming. It's very, very different than what we saw in 2018 and 2019. 2020, obviously, we didn't really have a back-to-school effect given COVID. So our numbers are going to be negative coming into Q3 in terms of Internet net adds, probably to the tune of 15,000 to 20,000, which gets us to a trend of being flattish to slightly up for the year. Just to remind everyone, in '18 and '19, we averaged about 72,000 data net adds. We did about 140,000, 145,000 last year. So if we end up flattish to slightly up this year, we'll effectively be breakeven over the last 4 years. That is disappointing in terms of our results. It has nothing to do with the excess churn. We just saw much lower gross adds this quarter than anticipated really in the back-to-school area. We're very focused on our products and marketing. As you may have seen, we launched new products and new price points at the beginning of September. Those are getting some traction. So we are hopeful that in Q4, we'll see a back-to-normalized trends and positive net adds. And we continue to be very, very focused on increasing our investments in the network and in our distribution channels.

All right. Well, thank you very much for that update. And obviously, a flattish year is not what you're positioning the company for. So let's talk about what you are positioning the company for. Longer term, what do you see as the primary growth drivers for Altice? What do you need to do from an execution and an investment standpoint to be positioned to capitalize on that as trends begin to normalize?

Listen, I think it's still what we're doing today, right? The question really is about speed and how much we want to accelerate. The foundations of what we've been talking about, which is FTTH in the East and even in the West, edge-outs. Increasing edge-outs and the upgrades in the West are still front and center. The execution of that has been pretty good this year, still probably slower than anticipated, which has affected our gross add trends in Q3 because the delivery of new homes built and upgrades are more trending towards the end of this year as opposed to the beginning of the summer, which we were anticipating. So we're 4, 5 months behind, which bodes well, obviously, for next year, but it doesn't bode well for this year's numbers. But the foundations of the business are still in place. It's a great business. We generate very, very good free cash flow. The question is, how do we want to allocate that free cash flow going forward and the acceleration of our CapEx program, acceleration of some strategic OpEx investments in distribution and products? And that's what we're dealing with right now as we go into budget season as to what it is we want to do. But I think in terms of the strategy, the strategy holds the same where we have a very good product road map. There's natural hiccups in launching FTTH that we're dealing with. We think those will be solved by the end of this year. We've got a mobile road map that we've been talking about throughout this year as our churn numbers have come down. And our partnership with our friends at T-Mobile has been strengthening, so that's well on its way towards delivery in the first quarter of next year. We've got a rebranding exercise in the West as we go to Optimum across the entire footprint. And we've got a distribution investments in retail stores and other distribution channels that we're very focused on also for 2022. So I think the only thing that's different in terms of what we're working on today is do we want to accelerate the network investment side? And if we do, how much and how quickly, right? And I think that's something that we'll be happy to speak about more on our Q3 earnings.

Let's just recap what I think you've already said about your network investment, and please correct me if I'm wrong, but I believe that what you had most recently said is that the current focus of the fiber upgrade is the portion of the FiOS footprint or the Verizon footprint where you compete directly with FiOS. And I believe you have about 3 million homes in that footprint out of about 9 million total across all of Altice, so about 1/3. I think you've already done about 1 million. So I thought the intent is to sort of finish that upgrade that was going to take you through the end of '23, and you'd reevaluate from there. So I guess the question is what are you considering at this point? Or what's on the table in terms of potentially changing that project?

Yes, I think there's -- I think you're exactly right. So we've done about -- we'll be [ done ] 1.5 million by year-end. The question is, do we want to finish that quicker, the extra 1.5 million, as quickly as possible? Are there other parts of our footprint that we want to be proactive with fiber, as people upgrade to fiber and overbuild in certain parts of our network? I think you're seeing that countrywide. And ultimately, we do believe that fiber is the technology, the winning technology going forward as opposed to improvements in DOCSIS technology. And so the idea being if we're focused on driving long-term growth or even medium-term growth where we see KPIs really accelerating in 2023, is should we not make the CapEx investments as quickly as possible, not only in the East on FiOS, but other parts potentially in the East that are not FiOS-related that may be subject to competitive threats, and as well as in the Suddenlink footprint not only with edge-outs that we're going to be building in fiber, but also in terms of looking at strategic places where we want to reinforce our network capabilities relative to potential competition going forward. I think we're going to take a holistic view across our entire footprint and invest strategically over the next couple of years to be proactive on offensive but also be proactively defensive if need be.

Obviously, the whole point of deploying fiber is to get your customers onto the fiber. You currently pass up, as you noted, over 1 million homes, so it will be about 1.5 million homes with your fiber network by the end of this year. As of the most recent quarter, the penetration was still sort of nascent. You were a little over 4% penetration. So what's the strategy for making sure that your existing customers are moving to your fiber product as it's deployed? Is that a significant incremental cost? And then the flip side of it is what does that do positively to your cost structure and your maintenance CapEx structure as you actually get all your customers onto a single network?

Yes, yes. Listen, I think we're -- the thesis remains extremely sound in terms of a return on invested capital for fiber. I think every single fiber operator who's launched from a greenfield perspective is always running into teething pains, particularly on the install process and as well as on the CPE process. We are doing extremely well relative to precedents in terms of time lines, but still have kinks in the system, primarily on the triple-play gateway. So we're not proactively migrating as many customers as we want to. We're being very -- the 1P product is working fantastic. But there still is, as you know, about a 30% to 40% attachment rate on video. And so for those customers wanting video, we tend to push them towards an HFC product still as opposed to a fiber product. We believe that by the end of this year, beginning of the first quarter, that will all be solved, and we'll start reaccelerating our install process on fiber-to-the-home. One of the things which is clear is that technician skill sets on fiber are probably not as honed and as good as it has been in HFC given that the U.S. has been an HFC country for forever. And getting the install times down to levels which are commensurate with HFC just -- it's going to take time, right? The more people get trained, the more people you get more in clusters of connectivity, you'll get the times levels down significantly. HFC gets installed within an hour, probably on average, 45 to 50 minutes. And you can see potentially fiber-to-the-home being 3x longer than that because the drop process takes longer there. But as you start installing more and more and start going deeper, deeper into communities, that will continue to improve. And as technical workforces get their skill sets up and after running and more honed, we'll start seeing improvements on there. Clearly, we're seeing the churn rates improve rapidly on fiber-to-the-home. To your question about OpEx, it's really about all the customer care-related touch points levels, which we're already seeing 30% lower than against HFC. The churn rate numbers are lower. And that's without even marketing aggressively fiber-to-the-home at all. And obviously, as you go through the CapEx cycle in terms of the life cycle, our CapEx numbers are going to come down dramatically going forward as we stop doing mass fiber and really look towards selective upgrades here and there. So the thesis remains very sound. We're very excited. We see the results already in small numbers. And we think 2022 is going to see an acceleration in terms of our penetration numbers.

Got it. You mentioned that as you're reassessing what the right fiber scope of your fiber project should be, you alluded to your edge-outs. You're also looking to do some speed upgrades in the Suddenlink footprint. Most of this is happening in the Suddenlink footprint. I think your last update was that you see an opportunity to edge-out your footprint in Suddenlink by about 150,000 homes per year. Is that still the right target? How could that change based on what you're thinking about doing more expansively with fiber? And then really, the question is, where are you going? Who are you overbuilding these new areas? What gives you confidence this is the right place to be deploying capital?

Yes. I mean, listen. This is what we were talking about in your first question, which is really about the pace and acceleration of capital deployment. 150,000 is a very sound number. Can we do a lot more next year? Probably marginally more, maybe an extra, I don't know, 10,000 to 30,000 more, because it does take a significant amount of lead time to walk out into the communities and the permitting processes that take place. But we clearly are preparing ourselves to be able to deliver 200,000 plus a year thereafter. So a big part of getting 2022 is allocating the resources and capital to be able to drive in 2023 even larger potential edge-outs. And we're very selective in terms of where we are. There are obviously communities that are growing and expanding that are contiguous to our existing footprint are logical ones. There's fill-ins as well that are logical new homes to connect. And then we strategically -- where are we looking at in terms of other competitive areas? So there's competitive areas in terms of overbuilding DSL operators, and that's clear. So those places, we're looking to be aggressively. Just as an example, we acquired in North Carolina, a nice business at Morris Broadband. There's some contiguous assets there that we'd like to continue to grow. Some of it's DSL, some of it's cable, potentially, and we'll look to continue to grow. There are other places that are smaller operators on cable that we will look to be offensive relative to because we have a better product portfolio and we've got a bigger balance sheet and a bigger machine that will allow us to be more proactive. And then there's obviously a lot more greenfield opportunities that we're looking at as well. So it's a handful of a bunch of things in terms of edge-outs, the bulk being new greenfield opportunities, but there will be a small select focus on smaller operators or lesser technologies relative to our fiber that we think we can be productive against.

Okay. And what type of penetration curve are you seeing in these markets and that you're anticipating? Because you generally have already about 50% penetration across your broader business. If you were doing 200,000 homes a year, that's 1 million homes every 5 years. You could get to 500,000 additional subs over time. Is that the right math? Or is there a different curve we should be thinking about?

No, that's the right math. That's absolutely the right math. If we go into more competitive areas, do we get to 50% penetration? Maybe slightly less. But on the average, as you kind of look at the bulk of your numbers, if you're talking about 1 million homes, you probably have 750,000 to 800,000 of those homes that are at 50% penetration and then something less between 30% and 40% penetration of the last 200,000 homes, right? So you're slightly under 50%, but that's basically the math as well. Can we do more than 200,000 a year? Yes, possibly.

In addition to expanding your footprint, there are areas within the Suddenlink footprint that really haven't seen speed upgrades. I think you said there's 400,000 homes that you're already in the process of upgrading to much higher speeds, maybe in some cases, as high as a gigabit. Is it the same math you think about penetration the same way? And then ultimately, how many homes could you potentially upgrade to higher speeds within the footprint?

Well, we've got 700,000 homes at Suddenlink that we're looking to upgrade. As you mentioned, 400,000 homes, about 250,000 will be done this year. Another 100,000 or so will be done next year, and then we'll do the balance in 2023. The reason why it just takes so long, some of them are just real network rebuilds. It's just not an upgrade of speed. It's a network rebuild effort. And some of them, we'll do in fiber and some of them we'll just do in better DOCSIS technology. But fundamentally, yes, we're definitely looking for that 45% to 50% penetration levels in those markets. And those markets, on average, are at about 25% penetration levels. So not only higher penetration, but up-tiering [indiscernible] as well.

I'll come back a little bit later and ask a follow-up on CapEx and financing, but one potential source of financing, either the fiber upgrades or some of the edge-outs could be stimulus, right? We have an infrastructure build that has $65 billion allocated towards the broadband sector. What's your view on how that could be distributed? Or more importantly, under what type of granting mechanism do you think you could potentially materially expand what we just talked about?

Well, listen, I think the rules of the game have all not been established properly. And even when they do get established in some type of form, it's very difficult to see through the weeds clearly right away. It's clear that we are very focused on being a part of the infrastructure plan and taking advantage, where we can, of being very productive with the allocation of capital, being able to co-invest if need be in certain areas. And so that's something that government affairs and our legal department and our Residential business is very, very focused on being prepared to react to. So I can't really tell you exactly what we think we will be able to get, but it will be definitely incremental to what we're doing, right? So we're focused on our own balance sheet with no excess funding, no outside funding and being able to self-finance. We've got a tremendous amount of free cash flow generation. And the whole question is how do we allocate capital here? And we're really looking to allocate capital as best we can here on network enhancement and distribution enhancement.

All right. ARPU growth has been a pretty significant component of your overall broadband revenue growth. It's been driven by a combination of things, speed up-tiering, rate adjustments or some accounting impacts and all of that. What's the right framework for investors to think about broadband ARPU growth going forward? What do you see as the principal drivers?

Well, we've been regularly in that high single digits, putting aside accounting issues. But you're kind of dealing with anywhere between 6% and 9% broadband ARPU growth, half of which has been up-tiering, half of it which has been volume and other things. And so I really think that going forward, the mix is probably similar. Is there some pressure on ARPU growth, given competition out there? I think on a blended basis, definitely. As we go into new markets, as we compete more aggressively with some of our existing competitors, I suspect there will be ARPU pressure on stuff, but good. Good for competition, good for consumers overall and still a very profitable business for us. But I do think there's probably going to be some flattening or slowing down, let's call it, of ARPU growth on broadband.

Okay. So just to be clear, you say pressure, you don't necessarily mean that you expect it to decline? You just think the rate of growth might moderate from what we've historically seen?

I think the rate of growth. I think we're seeing closer to kind of 6%, 7% than more like 8%, 9% right now. So you're seeing a moderate growth. And obviously, you don't want to be pushing through rate increases in competitive dynamics on data. And so I think there will be just a slower growth on a relative basis than it has been historically.

Although you do seem to anticipate, as you just said, that's partly a result of going into areas where you're expanding your footprint a little more competitive. So how should we think about your net adds relative to that historical trajectory of 70,000, 75,000 a year, once you're kind of fully up to speed and running on all of this and we're out of this pandemic?

Well, we're targeting to get to triple-digit net adds by 2023, right? And I can't tell you within what that triple-digit range looks like. It really will depend on what our capital program we decide to do today over the next 18 months and over the next really 32 months, 30 months here and what we want to do from a capital allocation standpoint. But we are going to do the right thing for our business to accelerate growth as quickly as we can and as wisely in terms of our capital allocation as possible.

Okay. Let's talk a little bit about wireless. You've moderated -- you've seen your wireless growth moderate to some degree. Part of that was just waiting until you can move your customers from the Sprint network onto the T-Mobile network. And I think you've accomplished that. So how are you approaching the wireless business going forward?

Well, so we are very satisfied with the rehoming on the T-Mo network. We're in active discussions with our partner on things to do and things we can't do in those types of things. The anticipation is as we get our product portfolio and our rebranding exercise all in place, which should be by first quarter of next year, we're going to really start relaunching mobile. Relaunching is probably not the right word, but launching more aggressively mobile in 2022. So we're not going to guide you at this point to any growth numbers relating to mobile, but the pace is going to quicken materially in 2022.

I noticed some headlines recently suggesting you might be looking to acquire other MVNOs. Can you comment on those?

I mean when the New York Post talks about us, it's -- it clearly is not coming from us. So -- and it clearly is something that's probably not very important, not because the New York Post doesn't know what it's talking about, but it's not really the source of business news out there. So yes, we have looked at MVNOs, but just because we've looked at them doesn't mean we're going to acquire them. And I think we're always going to look at M&A in general as very accretive transactions and to try and accelerate growth. And so there are going to be situations where things look attractive to us, whether it be in mobile, in the advertising space or in the telecom space, and MVNOs is one of them. There could be something interesting, whether it be branding, whether it be distribution, whether it be their agreements with their MNOs out there that we may want to look at and capitalize, but we still haven't found the right one out there on any of those fronts. What we do know is that the 2 small acquisitions we've made in cable over the last 2 years have been unbelievably great successes, and we'll continue to look at acquiring add-ons to those businesses. I know that on our Lightpath side, management is actively at looking to acquire stuff if they can find stuff that makes sense as well as on the advertising space. So we'll continue to use M&A as a tool for synergistic acquisitions, great return on capital and accelerating growth. But specific to your question on MVNOs, that's not something that's front and center right now.

Okay. So you've given us some interesting updates so far. You talked to us a bit about how trends are unfolding in the quarter. You've given us some updated thinking around where you see opportunities to accelerate growth. So I want to see if we can tie this together in a couple of ways. And I'll start with the near term and then we'll talk bigger picture. But you do have some guidance for this year that you would grow revenue and EBITDA. How comfortable do you feel with that based on the update you just gave around third quarter trends?

Listen, year-to-date, I've got a view, obviously, on our quarter -- third quarter. I feel good about the financials in Q3. I guess it's a little early to tell relative to Q4, but I think we feel good about both the revenue and EBITDA guidance for the year on growth.

Okay. And now I want to go to something you alluded to earlier in your statements, which is that you need to make some decisions around whether you should be revisiting how you allocate capital. And if we just sort of think of the history here of Altice USA, you came in and you made a material structural improvement to the margin profiles of the companies you acquired, and that has held. And it's a key reason that this company not only has high EBITDA margins, but very significant free cash flow, as you alluded to. And you have most recently been allocating essentially all of your free cash flow into your buyback program, which I think makes sense based on where your equity has been trading. But it doesn't seem like you're getting rewarded for that right now because your equity continues to trade at that attractive equity valuation. So are you thinking that maybe it does make sense that maybe there is a better path to creating longer-term shareholder value by stepping up these investments, whether it's CapEx on fiber or footprint expansion or maybe reinvigoration of mobile? And if that's the case, what does it ultimately mean for what happens with your free cash flow and your capital returns programs?

So I think, Brett, you're spot on, right, which is the decisions that we're making today over the next couple of months as we get into 2022 are all focused on what do we do with our excess cash flow? And do we accelerate here on the capital program? I can't tell you where we're going to land. It's clear that we will do some acceleration. And is that a massive acceleration or is that a halfway acceleration? I don't know. But -- which means that for excess free cash flow because no matter what, we'll have excess free cash flow, I think we're going to be opportunistic relative to share buybacks and pick our spots, because we just don't know what the size is going to be yet relative to 2022 and really 2023. The big question is, is do you allocate a tremendous amount of capital to your network over the next 2 years because you're convinced about the growth parameters. If the market, for whatever reason, doesn't reward you for what you're seeing, then you've got decisions to be made as to what you want to do with your capital at that point in time. Do you want to relever your balance sheet? Do you want to bring in outside capital to do things with your public stock price? Or if you get rewarded for it, we're very happy that everyone gets reward for. We're all very incentivized to drive the share price as high as possible. So I think we're just going to be opportunistic here as to how we think about excess free cash flow. Our excess free cash flow number today, I can't tell you what it's going to be, just because we're going through the exercise right now of figuring out how much CapEx we're going to spend going forward over the next couple of years.

Okay. Understood in terms of beyond this year, but you do have a target of a $1.5 billion buyback for this year. Is it your expectation you'll complete it? Or is that being reevaluated as well?

I think it's being reevaluated. I think it's fair to say that we've slowed down in Q3 our buyback program and figure out what we're going to do with the excess amount of money that we were going to spend on buybacks and seeing whether we already proactively put that back into the network.

Okay. You made an interesting comment about maybe you should relever your balance sheet. Your balance sheet right now, I think you were at 5.7x net leverage based on how you defined that coming out of the most recent quarter. Your long-term target is 4.5 to 5 turns, and you've said you would expect to get there over time. What would be the types of decisions you might make that would encourage you to relever the balance sheet? And I'll ask you an even more direct question because we get it a lot. Does it make sense to remain a public company? Would you consider levering the balance sheet to take out the float, which is not that significant?

Yes. I mean that was the code. We've got decisions whether we want to relever the balance sheet at some point in time if we're not getting rewarded for what we're doing from an investments perspective, that we really believe in the medium-term results. But I don't think that's a decision for us to make today. I think we're focused, given the management changes, on making sure that all arrows are pointing in the right direction towards reinvesting in our business or accelerating our business, and that's what the focus is going to be over the next 3 quarters. Thereafter, we can have discussions around what to do with our balance sheet, depending on how the market sees us, right?

All right. Well, Dexter, we really appreciate you joining us, for the candor and the transparency. It's always a great talk for us, and we certainly hope we'll be doing this in person next year.

Look forward to it, Brett. Thank you.

Thank you.