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

Good morning, everybody, and thanks -- or good afternoon, rather. Thanks for joining us. I'm delighted to introduce Nick Brown, EVP of Corporate Finance, Corporate Development at Altice. Nick, thanks so much for joining us. I really appreciate it.

Thanks, Jonathan. Thanks for having us.

So to kick things off, I wanted to focus most of the discussion today around fiber and what you guys are doing with the fiber upgrade. I think there's a tremendous amount to talk about in terms of operations and subscriber trends and financials. But you've hashed those out in a lot of detail in other forums. And I don't think the fiber strategy and what it delivers for you is well understood by the investment community as it could be. So starting there to set the stage, just a quick reminder of what's the objective? How many homes? By when? How many in Optimum? How many in Suddenlink?

Sure. So today, we have just over 9 million total passings across Optimum and Suddenlink, and we're targeting to get to about 6.5 million homes by 2025. So about 4 million in the Optimum tri-state area around New York, and about 2.5 million around in Suddenlink in the west part of our footprint. So that should get us to about 70% of our entire company fiberized in the next 2 years.

Yes. And so you're one of the only ones doing an HFC replacement in the U.S. Why fiber rather than upgrading the HFC the way that Comcast are and Charter are with 1 gigahertz, 1.2 gigahertz upgrade, followed by DOCSIS 4, et cetera?

Sure. I'm just taking a step back, Altice on a global basis, particularly, our sister companies in Altice Europe, have managed every type of network technology you can imagine across both cable HFC, fiber-to-the-home, mobile. So I think we have a lot of experience here in understanding what the future evolution of the DOCSIS networks looks like. And actually, when you dig into it, when you're moving towards 1, 1.2 gigahertz, 1.8 gigahertz as you're describing, you have to keep driving fiber deeper and deeper into the network. And actually in France is a good example where they eventually took fiber the building, N+0, node plus 0 and it flies between the network. And actually, they're now going through a process of upgrading to FTTH. So actually, the FTTH end-to-end glass network that we're deploying here in the U.S. for us is pretty much the end state, the logical end state of a coax network upgrade anyway. And when we look at the cost, and we have spent a lot of time looking at whether it's mid-split, high split, full duplex type DOCSIS 4 upgrades. It's actually pretty similar in terms of the costs that we're spending today to get the fiber to the home. So for us, it's a bit of a no-brainer not to go straight there. And also, we see a lot of benefits in going fiber-to-the-home versus continuing down the DOCSIS half. And so we want to get those benefits, bring them forward a few years that if we were to continue down the DOCSIS path.

And Nick, the benefits are what? It's a faster product on fiber? It leaves you in a better position competitively? Is that the -- you're spending a little bit more maybe than going the DOCSIS route for a better product? Is that what it comes down to?

That's part of it. I mean, certainly, you've got a time-to-market advantage and you'll have a marketing advantage in having a higher speed that you can offer to customers versus legacy technologies. And we have seen in markets outside the U.S. where fiber has been present and normally beats other technologies in terms of share growth adds, net adds, however you want to look at it, lower churn dynamics, et cetera. And so that's one aspect of it. But there's actually real significant cost savings we can get over the network. If we go to fiber that we can't achieve on the DOCSIS plant, which relates to significant customer and network operation cost savings. So today, right now, for example, we have a lot of technical incidents on the coax network that cause the customers to have to call us to see what's going wrong or that we may have to send engineers to go and fix issues with the outside plant or within the inside the home, the network that's inside the home. And so for us, when you go to fiber-to-the-home, you take out all the active pieces of equipment, in particular, which is normally where things may go wrong, and the coax itself sometimes can have issues. You end up with a much more reliable resilient network service and just a much better customer experience. And that's how we then end up with a situation where we expect significantly lower churn on our customer base as we migrate people towards fiber.

Got it. And so there -- it sounds like on the OpEx side, there are 2 different components of savings. One is it's a lower cost infrastructure because you've got no active elements, less power. The other is it's a more reliable infrastructure. And so you've got lower churn, lower trouble tickets, lower cost of care. When you put those 2 together, what are the OpEx savings that you would get from -- I guess we can look at it 1 of 2 ways, either on a per home basis for homes that you upgrade or in aggregate across the 6.5 million?

Probably easier to look at it on an aggregate basis. So today, outside of programming cost, customer network operations cost in the way I'm describing make up the majority of the remaining OpEx. So that's the sort of bucket of addressable potential savings. And so you're talking in the order of hundreds of millions, not tens of millions of dollars in annual savings on the OpEx side. And then on the CapEx side, we should discuss how effectively not needing to augment capacity on the coax plant all the time and keep going down that DOCSIS upgrade path of driving fiber deeper, upgrading all the active equipment, means that you can actually structurally reduce your CapEx as well materially.

So hundreds of millions in OpEx, can you narrow that a little bit for us in terms of sort of how many hundreds of millions? And then on the CapEx side, I guess the easiest way to think of it is what would the -- when we get to the end of the upgrade process, what sort of business as usual CapEx could be for Altice?

Sure. I mean just on the OpEx side, I think you're talking more low hundreds rather than high hundreds of millions. We haven't got that larger total OpEx base for it to be at the other end. And then I think on the -- sorry, the second question was on the CapEx side, yes. So that if you just look last year, for example, ex-fiber, we were close to $1 billion, and we think we can get below that because that also has a lot of that type of maintenance CapEx spend I was referring to. So actually, they're the buckets of savings we think we can address. It's easy to see, just on a like-for-like basis, how we can drive CapEx below $1 billion longer term. That's certainly a number we've spoken to in the past. And then I think the question of where we land exactly may depend on how fast we're going to things like new homes still construction, which is another bigger piece of our total CapEx. But that's much more growth oriented. The more new homes we build, the more new customers we should expect to gain.

Got it. And so if we took the new build CapEx out of the equation, where would CapEx land in that...

Ex that new build, ex that sort of coax maintenance-type spend, ex-Lightpath, which is our fiber enterprise business, you're looking closer to $0.5 billion.

Right. Okay. Got it. Got it. Okay. And then the -- so the savings that you get -- so you've got sort of 2 benefits. One is a better product. The other is savings in OpEx and CapEx. You put those together and what kind of return are you getting on a cost of $500 million to pass a home with fiber -- sorry, $500 to pass a home with fiber, another $500 to connect it?

Yes. So that $500 is close to what we're spending today in terms of our cost to pass in the Eastern and the tri-state area. That $500 to connect that would include CPE on our side as well. So it's about $300 million on labor, just to be clear and then the rest may be on CPE to get to that type of level. For us, I just want to talk to some of the benefits we're already seeing and where we think that can go to. When we look at our fiber customer base today versus our cable coax customer base, we're already seeing 6% to 8% higher ARPU levels with fiber. We're seeing churn on an annualized basis running 4 -- 3, 4 percentage points better. And we're seeing NPS for that fiber customer base 55% better than on coax. With technical incidents on the fiber network, some 30% lower than what we see on the coax today. So that's all the right early indicators that we're going in the right direction with this. When we look at Europe, where we've seen fiber upgrades where Altice Europe has done fiber upgrades, you're seeing 40%, 50% lower technical incidents on the network. You're seeing churn 8%-plus better, and you're seeing that type of ARPU benefit as well as you're driving more customers to higher speeds. And so you're seeing those benefits flow through in the financials now as well. So I think for us, a great start, but there's a long way to go to keep get executed on these benefits.

Got it. And so Nick, one of the areas that we faced skepticism from investors is around the cost of $500 to pass. And we sort of back-checked what you spend on passing homes up until now. And it's not far off that $500. But what skeptics will say is you've sort of probably upgraded the densest portion of your footprint so far, and that cost is going to go up over -- as you get out to less dense portions of the footprint. Why is $500 the right number for you when it's sort of closer to $1,000 for most other guys?

Sure. I mean I think you need to be careful to look at whether you're considering a cable company like us going to fiber or be looking a DSL operator, legacy upgrading to fiber. It's a slightly different starting point. But for us, I think we have -- as you said, if you look at how much we spend on fiber, we've built close to 1.5 million homes now as I speak to you today in terms of what we constructed and spent just under $800 million. So it's around that $500 -- just over $500 on homes passed on average. As we go through the rest of the tri-state area around the Optimum footprint, we expect to see keeping that sort of $500 to $600 range. Yes, there's some less dense areas around Optimum and yes, there is a bit of labor cost inflation you've got to account for. But we're pretty set at that level given we've done a lot of the back-end fiber upgrades at the head ends, et cetera, or the back bone, fiber rings, et cetera, around their footprint. That's pretty set on the Eastern side of the footprint. And then we've estimated for the West in our legacy Suddenlink footprint, that cost can range between $500 to $1,000 per home pass is what we said. And I think that's really to do with what you're suggesting, which is it's a lot less dense than what you're seeing around the New York tri-state area. They're sort of longer fiber lengths that we have to roll to customers' homes. But we feel pretty confident in those numbers today.

Got it. And given the benefits that you've spoken to, cost savings, better product, why not do it to 100% of the footprint? Is it just because you don't need the better products in the remaining 2.5 million, 3 million homes because it's not competitive? And the cost savings on their own aren't enough to justify the investment? Or is the economics in that remaining 2.5 million homes, 3 million homes just a lot worse because they're less dense?

So across both Optimum and Suddenlink today, it's about 80% aerial. So there's another difference to sort of legacy DSL prices. I know some of the bigger guys are more or less 60% aerial. So that would be another difference in cost. So a lot of the other areas underground were buried cable, which would be a lot more expensive for us to upgrade. So we're basically addressing all of the obvious aerial areas, some underground, which is a bit cheaper for us to roll out the fiber. There are a lot of rest where it may require civil works or a lot more digging of the roads. That's just more expensive, and we're not currently targeting those areas. I think, especially with the amount of subsidies that's coming through from federal government and state level, there's going to be pockets where we can actually upgrade some of the rest, some of the other 20%, 30% of our footprint, I think we could use subsidies to upgrade. But because we haven't got visibility yet on how much of those subsidies we're going to win, we can't commit yet to how much of that will go be able to address.

But Nick, aren't you providing more than 100 megabits per second everywhere? How would you be eligible for subsidies?

Just to remind you, in Suddenlink, for example, there's about 400,000 homes that still have the 100, 150 megabit speeds. So that we've been going through a process of upgrading these type of homes. So we did 300,000 last year. we're targeting another 100,000 this year to get up to 1 gig or 400 megs at least in these areas. But we're still left of residual 300,000 which are more in these unserved -- underserved areas, as I'm describing. And so that's the type of area where we may be able to get some subsidy support.

Got it. So this is a little bit of an unfair question, but it's the one I get asked every day in the context of this project for you guys, which is given the benefits that you've spoken about, why are Comcast and Charter and even some of the other smaller guys going in a different direction? Why -- what's different about how your analyzing the situation that leads you straight to fiber-to-the-home and the rest of the guys in the U.S. going down a DOCSIS path?

I think part of it is our experience in other very competitive markets where you've seen operators upgrade to fiber earlier than what you've seen here in the U.S. is part of the answer to your question there. I think also Altice's experience and our sister companies of upgrading ourselves to fiber and seeing the type of benefits I've been describing and understanding what those economics look like. And also developing at scale machines that can build fiber-to-the-home at the lowest possible cost. So I think we understand and what it looks like, what the returns can be, what the costs are. I'm not afraid to make a multiyear investment earlier than some others. So I think that's part of it. The other side of it, I think, for the U.S. specifically is we already faced a lot of fiber base competition relative to others. When we bought Cablevision in particular, about 2/3 plus of the footprint was overbilled with Verizon FiOS. And actually, as a starting point, we only had 100 megabits per second broadband speeds for the business we acquired facing FiOS offering 1 gig. Now we do have a 1 gig offer to compete with FiOS, but we're very focused right now on taking that to multi-gig later this year and establishing superiority versus our main fiber-based competitor. So I think the starting point has also been different. And we see that there's an easy upgrade path to get to fiber. So our view is why not get on with it.

And is part of the difference in the analysis between you and them in Europe, the starting point for your infrastructure is in a different place that you've got sort of a bigger investment to make if you were to go down the DOCSIS path than they do?

I don't think that's true. I mean the vast majority of our network today is 750, 850 megahertz. And our sort of cascades of a number of amplifiers and nodes is pretty similar to our peers. And actually -- because we took the vast majority of our networks to DOCSIS 3.1 in the last few years, it's pretty up-to-date across the CMTS and amplifiers, et cetera. But as I said, if you compare coax versus fiber, for us, we've got about 0.5 million active components in the network. And you have to upgrade almost all of those every time you do one of those DOCSIS upgrades. And even if you don't -- if you have up-to-date amplifiers as we do, you still have to change the filters at the amplifier level to be able to manage different frequencies that are flowing through the amplifiers. And so it's pretty labor-intensive every time you go down this path. Whereas in the fiber wall for us, the equivalent is about 1,000 to 2,000 pieces of equipment that you need to upgrade to go to next generations of fiber technology as we're doing this year as we're moving towards XGS-PON. So I think it's just a lot more scalable, a lot more future proof in our mind and a lot more cost effective to move the future broadband technologies.

Okay. So that's a benefit of the upgrade that you're doing, I think, that's probably lost on the investment community. It's just the scalability of the platform that you're moving towards compared to the platform that you've been on historically. How should we think about the -- so I think that sort of scalability benefit is something that's going to pay off over a decade or over sort of multiple decades as we go through all of the upgrades that follow the upgrades that the industry is looking at over the course of the next 2 or 3 years. How much of -- I guess, 2 questions. Is that the right way to think of it? And how much of the sort of the return math that is driving the move to fiber now is driven by payoffs that are sort of very long-term in nature?

I think you get the returns a lot quicker and you see the advantages a lot quicker than that. I mean, I mentioned one of them already. By this summer, we're going to have everywhere we have fiber, the ability to offer multi-gig symmetric services. So fiber is a technology that's available today at scale at a reasonable cost. It's not in field trials. It's not been tested. It's proven across multiple markets at a reasonable cost. So we built our network on GPON-based technology originally. So we're already offering 1-gig symmetric speeds to customers. The XGS-PON upgrade that I mentioned is as simple as putting line cards in the head ends or at the optical line transmitter level or distribution points, which basically multiplex or add additional wavelengths to the existing fiber infrastructure. And future PON-based upgrades are very similar, adding other multiplexes or adding other modules, which can basically add capacity or more wavelengths to the same fiber infrastructure. So we're doing all the heavy lifting now in overbuilding ourselves with fiber end-to-end from the back part of our network to the customer's home. But all the future iterations of PON-based technology is super simple and super cost-effective to roll through the network. And that's just a step change difference to what we've been dealing with on the DOCSIS side, where as I mentioned, you've got 0.5 million plus active components that you have to upgrade. And that can also be quite invasive where you have to basically take down the parts of the network at different times as you do in the upgrade, whereas we're actually doing a full parallel network upgrade, which doesn't disrupt service for anybody who's on the existing cable plants. It's also like from a practical standpoint, a better customer migration process.

Yes. So I actually want to draw that out a little bit, Nick, because I think I've been thinking of it in the context of 2 benefits, and there are really 3. So the sort of the 3 benefits are: number one, you've got a better product that you deliver into the market. It helps you compete, drives higher ARPU, higher penetration than you would have otherwise. Number two, is there OpEx and CapEx savings from running a passive all fiber network, and we've sort of run through those. And then number three, and it almost seems like a discrete benefit is the future scalability of the infrastructure. You're able to improve the capabilities of the infrastructure much more quickly and cheaply than you would have been able to do under a DOCSIS infrastructure. And so maybe the way we can sort of think about that is in the context of ongoing OpEx -- sorry, ongoing CapEx. So the -- we talked about getting CapEx down to $1 billion on a business of usual basis with footprint expansion less than that without footprint expansion. Maybe in the context of thinking about it in terms of CapEx to revenues as -- what does it look like for fiber infrastructure versus what it would for DOCSIS, where every 3 or 4 years, you have to go through a fairly major capacity upgrade on the DOCSIS infrastructure versus this more scalable infrastructure on the fiber side?

I think you're thinking about exactly the right way, which is those 3 discrete sort of buckets and opportunities. I mean the network I'm describing where upgrading today is 10-gig capable. So easily symmetric multi-gig speeds this year. We have a path in the industry, and we are working actively on going to 40 gig to 80 gig to 100 gig. And the cost of doing that is a fraction of what it would take if we were just continuing to go down the DOCSIS path and it's not even clear that 40 gig, 80 gig, 100 gig is on the map for DOCSIS today. And so I think that's definitely a real benefit. On your capital intensity question, I mean, for our business, we're driving under $1 billion of CapEx annually. That's less than 10% of our -- in terms of capital intensity today. And so I think you've got cable peers running anywhere between 14%, 15%. If you look on a global basis, closer to 20% of sales in some cases, and just perpetually upgrading the cable plan. And I think you've got many, many more years of that type of capital intensity, if you don't do this upgrade. So for us, bringing forward the fiber upgrade today, means we can get to the other side of this CapEx investment quicker and see that sustainable reduction in our capital intensity, which is going to flow through for us in terms of free cash flow benefits.

Yes. Got it. And so the first benefit, which is having a better product. How do -- how should we think about sort of folding that into a model? Like what would penetration be if you were to stick with HFC as opposed to going to fiber? Sort of what would penetration be in sort of scenario a, an HFC plant versus scenario b, where you've upgraded to fiber in the terminal state, like 5 more years out?

Sure. It's probably easiest just to think of penetration in terms of market share where we compete against different operators. So today, where we compete against FiOS is our biggest competitor, it's roughly 50%, 50% market share to date. Now obviously, before FiOS build out their network, penetration in the market share was a lot higher than that. But we're at a point now where I think we can stabilize our market share against FiOS. It's only been in areas in the last couple of years that we overlap. In fact, we've lost customers actually, everywhere else, we've been growing customers. Across Suddenlink, for example, we've been growing. And non-FiOS areas of Optimum, we've been growing customers. And so I think in the first instance, we stopped losing customers to FiOS and actually, we have a better network service and a fiber mobile bundle as competitive, we think we can actually win back market share from them. In other areas, we typically have higher market share, where we don't compete against fiber-based competitors. So that would be some of the non-FiOS areas of Optimum. And then in Suddenlink, we today face 20%, 25% overbuild with fiber-based competitors. So you can imagine our market share in the other areas is higher than that where we've got an upgraded cable comp. And so I think for us, if we're facing DSL or maybe fixed wireless competition, we can comfortably be running 60%, 70-plus percent market share or penetration. And then I think in the other areas where we may be facing fiber and especially where we have a bundle, we want to do better than 50%.

Got it. Got it. So I think the -- like hearing you talk through all of the benefits of the upgrade has been really helpful, Nick. But it seems like we've been talking about this project for a long time. It's first -- you first started talking about the upgrade back in 2017, and it was meant to be done by sort of this year or next year. Given the benefits that you've spoken to, why haven't you guys moved it faster? What have been the bottlenecks and the challenges that have made it take longer than you had initially anticipated?

Sure. I mean, the first real world, actually, we've come across that we've spoken a lot about in the past is permitting. Just trying to get -- turn away for the local authorities to give us permits particularly around the New York area has been delaying us quite a bit. And we feel like we're on top of that now. We've got hundreds of thousands of applications in so that we've got a steady stream of permits coming online, allowing us to build at the type of pace that we're getting up to now. I think another bigger issue was the pandemic actually because we effectively had to shut down our machine for the best part of the year, and you can't ramp up back to the same pace immediately. And so that's set us back as well, and we're just starting it back to full pace right now as we speak to you. And then lastly, I think it's worth mentioning that we've had a lot of other transformative projects that we've been working on the last few years since we've owned these businesses, whether it's the full integration of Suddenlink and Optimum, launch of our mobile service, RSS, BSS integration, there's been a number of other competing priorities. And I think it's fair to say we would like to have been further along now with the fiber than we are today. But it's very much a focus of the entire organization right now to execute on the plan we put forth to get to that 70% fiberized level in the next 3, 4 years.

Got it. And so last question for you. When you initially built the plans to do fiber-to-the-home back in 2017 or 2018, fixed wireless broadband wasn't a feature of the market and it is now. We've sort of seen the ramp in net adds at Verizon and particularly T-Mobile over the course of the last couple of quarters. How does that impact the return that you expect to get on the investment? So we sort of spoke about you're splitting the market 50-50 with FiOS, but the reality is it's not really a 2-player market anymore. What's the portion of the market that you think that fixed wireless broadband captures? And how does that impact the returns on investing in fiber?

Sure. I mean again, unique to our footprint, given our overlap with FiOS, they've explicitly been targeting other areas with their fixed wireless product. They're not competing in some states. So actually, we're insulated from at least one of those players across a wide part of our footprint and don't have to worry too much about that product as a third competitor because they're not competing against themselves in the New York tri-state area. For T-Mobile, as the other major fixed wireless player, across other areas of the U.S. I mean they're effectively from what we see marketing of 50 to maybe 100 megabits per second speed product for around $50. We're offering $200, $300 -- sorry, 200, 300 megs plus type speeds for similar price levels. So it's just pound for pound not the same. And we're not seeing customer loss or a drop in -- significant drop in gross share -- gross ad share where we compete against them today. I think this is a much bigger threat for legacy DSL operators as it is at that type of price level. And maybe they take some of the share of DSL customers in the market. But for us, we're very much focused on fiber is what we think the best technology out there today, and we think we can take on any competitor on that basis.

Got it. Nick, we're out of time, but this has been really great. Really appreciate your insights today. Thank you very much.

Thank you. Thanks, Jonathan. Thank you.