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

All right. We're going to get started. Good morning. I'm Ben Swinburne, Morgan Stanley's media analyst. And quick disclosure on my end. Please note that important disclosures, including my personal holdings disclosures and Morgan Stanley disclosures all appear as a handout available in the registration area and on the Morgan Stanley public website. And excited to welcome to the conference this morning, Dexter Goei, CEO of Altice USA. Prior to his time at Altice, he spent 15 years in investment banking, including with Morgan Stanley and their media comms groups who are running into lots of former colleagues at the time.

All the time, same people. You were there when I was there.

Yes. You never leave. Dexter, thank you for being here.

I'm really happy to be here. Thank you.

And in person.

In person.

So maybe we should start with some of the sort of strategy initiatives you guys have been laying out to the market really over the last, I don't know, 6-plus months, which is really, I think, designed to reaccelerate growth of the company. So maybe just take a minute to walk us through what your plans are and why you think that's the right strategy going forward.

Yes. I mean -- we've been talking about fiber for the better part of 3 years. We, in our experience as operators in other parts of the world, have seen competition on the fiber side and the fixed line side increase significantly. And we always aspired to get up there and build up as much fiber as possible. And we've been slow in execution for a whole host of reasons. COVID has been one big stop sign in terms of us being able to execute. And as we go into 2021, 2022, we do have the largest overbuilt footprint in terms of our subscriber base, where we've got Fios kind of 2/3 in the East, along with Frontier. And then we have probably about 24%, 25% in our Western footprint. And it is clear to us that getting up and running and having the best infrastructure, which leads to the best customer experience as quickly as possible is the best use of our capital. And so we've announced to accelerate that as quickly as possible. I would have loved to have done this earlier, but for a whole host of reasons, whether it be execution on permits, whether it be us not being able to get our ducks in a row, whether it be COVID, we didn't get there. But this is the right thing for us to be doing and being able to compete. And so the economics make a ton of sense in terms of the return on investment profile. But more importantly, we've created extremely attractive asset value for the long term.

And Dexter, along your investments also includes some OpEx, I think, which is going to pressure EBITDA. You've been very clear about that. As we look out into '23, is it reasonable to assume that we can grow off -- you can grow the company's EBITDA [ effectively there ]?

Absolutely. The goal was to reinvigorate distribution, rebrand the company, address some customer service-related issues that we were dealing with. And make that a onetime investment in many respects. Obviously, there'll be some recurring OpEx on things like distribution and customer service, but that leads to a nice payback over the next couple of years. So the growth comes back in 2023.

And one of the things from the earnings call that investors have certainly brought up with me is that you guys are going to have -- you have this big investment cycle, particularly on the CapEx side, and presumably by 2026, 2025, that works its way through when free cash flow comes back to kind of the levels you've had before. I imagine that's not the goal here.

We want to be higher. Right.

Yes. So how would you describe the opportunity to grow from there based on what you're doing?

Well, I mean I think the whole game is the margin game, right? So -- and focused on gross profit growth. And if we just focus on EBITDA, we've had an EBITDA around on the 4 4 level, we should be able to grow from there, particularly as we continue to drive OpEx lower with the fiber investment. And we think with the product road map that we create by having a multi-gig product across that many homes, you've got real runway to grow gross profit, right? So I'm not going to sit here and predict what we're going to be in 2025, but we should be higher than what we've been historically at our highest.

Got it. As part of this strategic pivot or how you want to describe it, you've also had some management changes. I think you now have multiple roles with the company. Maybe talk a little bit about the structure you put in place, your COO role. And I'd be curious if Patrick is more involved than he was sort of prior to this period.

So I still have the same title. So no one gave me more stripes or more comp for taking up more titles. So I just -- we took someone out of the business.

[indiscernible]

Yes, exactly. Let me take it up with my union labor negotiator. And I think we flatlined the organization in many respects, flattened it in terms of driving decision processes and making it much more team-oriented in terms of all talking very quickly about what are the right things for us to do. So I took over the reins from an operational standpoint during the summer last year, spent 3 or 4 months looking at every single line item in our business, and came up with our strategy. But came up with our strategy -- to your point about Patrick, patrick's very involved. He knows exactly what we're doing on a regular basis. I'm in contact with him more than ever today in terms of the operating side of the business. And he's focused and he's also extremely supportive of all the things we're doing from a capital allocation standpoint. He's like, this business, the U.S. market's going through what other markets have gone through in terms of increased competition. And infrastructure, the best infrastructure and the best technology is going to end up winning. And we believe that. And so he's super supportive. And yes, we're going to go through a little bit of a rocky period in terms of our free cash flow generation. But the payback period is very attractive.

Let's talk a little bit about your network plans. I know you guys have the experience from Europe that I think plays into how you're thinking about things here. But you have lots of different levels of competition across your footprint, even different levels of density. So can you talk a little bit about how you're deploying fiber, kind of where, what the costs are and sort of the thought process in different parts of your footprint?

Yes. So I mean, you can imagine that we're trying to be and allocate our capital where we got good return on investment possibilities. So the place is that we have 9 million homes today. We've announced that we're going to do 6.5 million homes. We'll probably be anywhere between 6.5 million and 7 million with subsidies and new homes built over the next couple of years, which leads us to really kind of driving towards a 70% to 80% of our footprint fiberized. The remainder of it is just uneconomical today, extremely expensive. We have big engineering work or very low density or very low clusters in the West. So we're going to hit everything that we think makes economic sense and do it as quickly as possible. And then there was going to be that 2 million homes probably that doesn't make a lot of sense for us to do out there.

And it sounds like you guys have assessed the viability or economics around DOCSIS 4. And we have Charter, Tom Rutledge tomorrow to talk about their network plans, which I think are a different approach than yours. Why do you think those don't make sense for you guys or maybe it doesn't make us for anybody?

Well -- I don't want -- Tom and all of our peers in Cable N, I think, are doing a great job in terms of what they're thinking about in terms of the strategies. I think we have the latitude to think about the longer term a little bit easier, given our shareholder base. And secondly, we've looked at the DOCSIS 4 upgrade, and we think it's pretty expensive. And so given those cost levels, we think that going to fiber, which at the end of the day, when you're end-to-end glass, you're always going to be better than any type of network that's DOCSIS-related, is the thing to do and it's the best return on investment as quickly as possible there. So our brethren are focused on DOCSIS technology. We really kind of take an outside looking in view, which is assuming we know nothing about telecoms, 99% of the world is going fiber-to-the-home, who are we to think that the 1% of the world is where we should be. And in every single market where we've been operating outside where fiber has competed against another type of technology, fiber has won. So we're going to follow that tried and tested routes here and get up and running as quickly as possible with as many homes.

And maybe one more sort of high-level question before we get into more of the specifics of the business. I wanted to ask you about convergence between wireless and broadband. Again, Europe has seen this happen in significant size and scale over the past few years. How are you guys thinking about leveraging wireless to go to market? Talk a little bit about your MVNO and T-Mobile and sort of how that's evolving?

Yes. So I mean we're in the short strokes, and I've said this for a couple of months now on our agreement, but we should be there this week, hopefully. And so we'll come out with an announcement. We've got a great partnership with T-Mobile. The performance of the network has been fantastic. And so now we're going to be a lot more aggressive here from -- in terms of the acquisitions. You may have seen we've gone out and done kind of a 1-gig product out there for free to attract really on the retention side and new customers and to drive better churn rates on our fixed line consumers. But we're going to absolutely be more aggressive here on mobile over the next couple of years. It's starting now. And as we go into our rebranding exercise with Suddenlink in the second half of this year, we'll be aggressive across the board. So we believe in the double play. We think the economics, with scale, becomes somewhat attractive on a stand-alone basis. But more importantly, it's great in terms of a churn-enhancer relative to our fixed base.

And investors are obviously focused on Altice versus Verizon, particularly with these offers. How does the free mobile, 1-gig plus broadband compare ..

They don't have that offer because they don't do a per-gig product. It doesn't cost a lot because our per-gig price is not that much. So it's really -- as you think about all the promotional stuff that wireless operators or fixed line operators are doing, whether it be gift cards, whether it be OTT, whether it be subsidies on phones, we have the ability to be a little bit differentiated relative to the MNOs on this, which is why we launched that. But in terms of our unlimited package and savings on our unlimited, bundled with a fixed line product, whether it be 300, 500 or 1 gig, we're right in line with the savings on Verizon. I think where Verizon has an advantage and as all the MNOs do, is the ability to play with the handsets subsidies, right? It's something that the cable operators are not doing today.

Yes. Okay. Let's talk a little bit more about broadband, which is obviously investors primary focus in the near and medium term. You guys have passed a bit over 1 million homes. I think across the Optimum footprint, you've got about 6% penetration. What's been the experience thus far with customers and sort of the overall impact of the business from what you've seen? And how do you think about that playing out over the next few years? .

Yes. I mean so we've spent the better part of the last year, 1.5 years, getting all the kinks out of the process on the install process, on the gateways on the WiFi distribution. On single play all the way up to triple play, and we're there, right? So that's why we also know that we're in the right place relative to going out and announcing a big acceleration in terms of our build-out. But we're starting now to actively push migrations that will start now. It'll probably accelerate more in the end of the second quarter, but we're starting to push migrations. And we want to get as many people onto our fiber network as possible because all the stats -- the stats aren't lying, right? So we're seeing 30% less incidence rates. We know that our sister companies are seeing 50% less incidence rates relative to HFC. So that number is just going to keep on getting better as we execute better. We're seeing 55% better NPS scores on fiber versus HFC. We're seeing 6% to 8% higher ARPUs. Some of that may be demographics, but we're definitely seeing people, as they go on to fiber, buying more. And we're seeing churn rates and we're looking at in terms of the survivability of our subscriber, 3% to 4% points better today than HFC. And we know that, that number is -- can get up to like 8% as we've seen in other markets around the world. So we're pushing all the right levers here, and that translates mechanically into better margins, better experience, better NPS scores. And even though we are not predicting revenue enhancement, by definition, it's going to drive revenue enhancement with better NPS scores and better customer experience, right? So we know that it's just a question of execution. We continue to lay the highway in fiber and move people onto that network. And our margins will just -- our margins in the customer experience will just continue to go up.

And we talked or you guys talked last year about the customer losses you saw and how they've been pretty concentrated in the Fios footprint. But you also said on the last call that things have gotten -- so you've seen some improvements there. Any color on sort of what you think is driving that?

Yes. I think we were -- we came in, in September with the change in management, and I said, let's be promotional. Let's make sure that we are getting back mind share from our customers. Let's match what Fios is doing from a promotional standpoint. And let's keep it there. Let's keep the pressure up. And so we've done that up until now. We're in that phase where Fios has moved its price back up. They continue to be very promotional on the double-play, fixed and wireless. But on the single play, just broadband, they've moved prices up. And so that allows us potentially to think about whether or not we start moving prices up as well. So that's really what's happened. And then as are all of our customer matrices numbers have gotten better, the distribution channels are starting to open up. It just takes time. We're going to get back to where we were for the last 10 years with Fios, which was pingponging with them. And by the time we're at multi-gig, which will be at the end of the second quarter, we'll probably, for the first time, have a better product than them on fixed line ever. Now we don't expect to see a lot of subscribers, but it's nice from a branding and a customer awareness standpoint for us to have the best network in the tri-state area relative to them. And then as we move over to the Suddenlink footprint, we're going to be a lot more competitive as some of the smaller guys start waning.

So is that the message to the market that basically the second half of the year is when we should be looking for signs that the strategy is working?

Yes. I think those are the early signs. We'll have, let's call it, 60% of the distribution channels in terms of our targets achieved. We'll have a much better across the board service matrices, which we've seen massive improvements over in the last 6 months already, both in the field and care. And then we've got the products in place. We've got a great MVNO with T-Mo. We've got a multi-gig product that we're launching, and we're going to continue to drive fiber rollout across the board. So we're really positioning ourselves for a nice 2023, right?

And on the fiber build, you guys have talked about $1.7 billion, $1.8 billion of CapEx. How does the cost per passing vary across your footprint?

Optimum footprint, about $600 homes passed. And in the Suddenlink footprint, the high end is $1,000, right? So on average. So we're probably more in the $750 to $1,000 per homes passed there.

Does that include variable CPE once you...

It's not the drop. It's not the install, right? The install costs are costing us $300 over there.

Okay. And I wanted to ask you about Suddenlink. Obviously, there's a lot of focus on Optimum for obvious reasons, but there seems like opportunities in the Suddenlink footprint to grow over time. But how are you thinking about AT&T's plans there? And does that drive, to some extent, where you're spending on fiber?

Yes and no. I think, listen, we want to do, again, fiberize the entire footprint where it makes economical sense, whether AT&T is there or not. I think our priorities may be driven by competitive issues as to where we hit first. But by 2025, we will have done as much as we can in the Suddenlink footprint that makes economic sense for us to do. I think the opportunities continue to be -- we start -- we continue to see good edge-out opportunities. We're targeting to north of 150,000 new homes this year. I think, hopefully, we'll materially beat that number. We are in the subsidy game. We're probably going to announce our first subsidy win in the next couple of weeks here. We expect to be bidding on 500 to 1 million homes, 500,000 to 1 million homes. Hopefully, we'll get 1/3 of those type things. So there's some footprint expansion there. And the stuff that you -- it's not very attractive economics insofar as you're probably spending anywhere from 2,000 to 3,000 homes passed after the subsidy there, but you are the only game in town in very disparate parts of the country that have been either unserved or underserved, right? So the longer-term economics are very attractive there. And so we'll play that subsidy game as much as we can. We're building out the teams. We're bidding regularly here as states get up and running in local communities. It's very complicated because there's rules all over the place in all these different communities, but we'll definitely have those opportunities. So there's a lot of footprint expansion growth in the Suddenlink footprint.

Yes. I was going to ask you about the subsidies because it seems like a whole industry is now turning to this more and more. There are a lot of things out of your control in terms of time-to-market. I mean what's a realistic expectation if you win a subsidy for, let's pick 750, just the midpoint to sort of bring that online over the...

Well, so this contract that we expect to announce in the next couple of weeks, let's call it, they're effectively giving us 4 years to build it out. And it's like 10,000 homes. It's not a big number. But we're going to build it out in the next 18 months, right? So we're going to just do it as quickly as possible. And as you build out, you get subsea money, right? So you deliver the home, you get the subsea money. So you're incentivized to try and get it done as quickly as possible and also prove out that you've got the execution capabilities to do it, so that when you go to the next community, like, listen, I just delivered here this in 18 months, I had 4 years to do it. So we're going to be very focused on trying to deliver things as quickly as possible and way inside the time limits. There are some places who want to do it quicker, though and say, I want to do it within 24 months, and we'll try to beat that materially and do it within 12 months. But these are -- given that they are underserved or unserved markets, the penetration level should be very quick in terms of getting subscribers on board, much quicker than you are in some of these new build areas.

And Dex, you mentioned earlier when we were chatting about market getting more competitive. And I think to some extent, there's a debate still about how significant that increase in competition. But having seen what you've seen overseas, I'm sure you can identify competition. Is there any concern on your end that the convergence trends we're seeing across the business lead to aggressive discounting or even maybe a price war?

I mean you're effectively going to have 2 infrastructures in every big DMA and small DMA across the U.S., right? So you'd expect that across, whatever, 80% in the country, you'd have 2 infrastructures over the next 5 to 10 years. And I think you mentioned yesterday, Comcast went out there and said we're going to get overbuilt by 50% or whatnot. And we already are 70% overbuilt in the Optimum footprint between Frontier and Fios. And in the West, we're at 25%, probably growing to 50% sometime over the next 5 or 6 years. And so you know that this is coming. Do you see aggressive discounting happening? I don't think so. I think the experience that we've seen across the world is you have 2 player markets. It's relatively reasonable in terms of competition. And you see it between us and Fios, we're not doing aggressive discounting for long periods of time. Everyone comes in for a period of time, for whatever reason, start discounting for 3 months, it comes back to normal. So -- and we've seen continued growth -- ARPU growth in both of Optimum and Fios consistently. So there's room for 2 players, and we like that because then effectively, there's no third player who's coming to that market. And as you think about even the mobile guys, they're sitting in terms of their fixed launch strategies, very geographically focused in terms of where they got infrastructure. You don't see AT&T going out into greenfield trying to overbuild some place where they're not today. So I think the competitive dynamics are good. I think you just have to get up and running with the best infrastructure as quickly as possible.

Got it. We don't really ever talk much about video anymore, though it's still a decent-sized business for you, but maybe just talk about your perspective on the business and whether there's opportunities that maybe we aren't thinking about with video, or how do you see the product evolving over time...

I think it's all about the customer experience. Customers, less and less, are adding video onto their bundles. We've gone down to a 30% attachment rate in our gross adds; 3 years ago, we were in the high 50s, and you're seeing that. Our approach is very simple. Is we want to offer the product. We still have a lot of customers who enjoy the product. But we want to make it economical, right? So we're more and more focused on making that economical, both on a gross add standpoint. And on an ongoing basis as we do see programming cost per unit rise, is trying to pass those on to our consumers and make it -- then they can make the decision whether they want a fat bundle or they want to go to a skinnier OTT-type bundle or whatnot. And be very flexible in terms of the ability to do that and have a very good customer reaction, customer service on the care side. So it's a core business still. It creates still lots of margin and good stickiness with our customers, but we got to make sure that we continue to make it economical.

And I know I've asked you this in the past about more structural changes, particularly to your channel lineup and whether there are channels that are just uneconomic and you would drop them. And your answer tend to be when we're not the largest cable company in the market, so we're not going to be breaking the model. But are there circumstances coming down the pike over the next few years that might lead you to change how you think about this business? Or substantially?

I mean -- I think the whole issue is how programmers are thinking about life after affiliate fees, right? And so as they think about...

Are they thinking about life after affiliate fees?

I don't know, right? You tell me. And so that's the whole question. And as they continue to get larger and larger in terms of their rep of channels, you sit around and you try and figure out where is the breaking point in terms of whether or not you need that package of channels or not, right? And today, we're being very thoughtful relative to our customers and providing them with everything, but they've got to pay for it, if that's what they want to do. And so we're trying to be as thoughtful as we are on the financial model. .

Yes, okay. We've got about 4 or 5 minutes left. So I want to talk about sort of M&A and kind of capital structure. You guys have been acquisitive in the past. You've made some advertising acquisitions, some cable tuck-ins. Is that something you guys are focused on right now? Or has that been on more in the back burner...

No, I think we'll continue to do -- to look at stuff. We're looking at stuff all the time. When we look at transactions and acquiring stuff, they all tend to be very accretive. And so we continue to look at that stuff. But our priority today is operational capital allocation. But if we can find something like a Morris Broadband again, we'll do that all day long, right?

And we've seen rates move higher. You guys have got levered -- have a levered balance sheet. I'm wondering how you think about interest rate sensitivity and capital structure, if anything has changed in your view given the rate environment that we're seeing.

Yes. I mean, do we want to term out some of the drawn amounts on our revolver? Question mark. Everything else other than that is in place, and we don't have a refinancing risk on anything until 2025 of any material size. Anything else can get financed through cash flow or through our revolver. And so we've got a really strong balance sheet, and so it allows us really to focus on the operational side of our business and not have to worry about the capital markets. And we'll see where interest rates are in 3 or 4 years. But today, the only thing we can think about is do we go out and term out $1 billion of debt that's on our revolver or not, right? And that's immaterial on a cash flow basis.

And do you think you guys stay out in the market in terms of buybacks and so you get leverage back down? I shouldn't say back down because you actually operate above your 4 to 5 target for most of the...

Yes. I think we clearly want to get to a position where all the KPIs are pointing in the right direction for us before we start thinking about what we want to do from buying back shares or any other type of situation, right? So it's all focused on the operations this year. And assuming what we are seeing already and hope to see by the end of the year is all there, then I think we'll start thinking about what we want to do from a capital structure standpoint.

Okay. So it sounds like you don't necessarily feel like you need to be in that 4 to 5 to get back in the market necessarily?

Today, no. Today, anyways, mechanically, unless I'm injecting a bunch of equity or raising equity to delever, it's just mathematical. We won't be there by the end of this year. But thereafter, we absolutely want to delever.

Yes. Okay. And then I want to ask you about the go private discussion that always comes up with Altice, given just how small the float is -- the free float is at this point. How do you and how does Patrick think about that opportunity, particularly with the stock where it is. Obviously, it's something that mathematically looks interesting, but you guys, I think, have been messaging sort of an operations-first approach.

Yes. I think it's just exactly what I just said 30 seconds ago, which is focused on the business. All that type of discussion will take care of itself if the stock doesn't react appropriately. And if it does react, fantastic for our public shareholders. We want them to make as much money as possible. And -- but it's just really not the focus of the business today, is to sit around and try and figure out whether or not we need to lever up our balance sheet to go private or try and raise some outside capital to do so. It's on the back burner. We've obviously been approached, given that you're asking me in a public forum. Think about all the private forums that people ask me about this all day long. It's just not a subject for today. But it clearly could be a subject depending on what stock -- how the stock reacts.

Right. And I imagine you guys are looking at the same KPIs that we all are looking at in terms of...

Well probably a couple more KPIs than you do.

All right. Well, listen, anything else you'd like to wrap up with before we round it up?

No, I appreciate it. 2 years ago when -- or a little less than 2 years ago, I had COVID. So it's nice to be back.

Absolutely. All right. Well, thank you, guys. Thank you, Dexter.

Thank you.

Thanks, everybody.