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

Yes, there's more work that we need to do. So I think when I joined, I said we're looking at our pricing packaging and our strategy holistically end-to-end. And step one was, hey, we've got this relationship with T-Mo, with our MVNO. I'm excited about -- I looked at the agreement, I was excited about it. We have this mobile solution in our portfolio. We needed to get it -- bring it to the forefront, and that's what Optimum Complete does. That being said, we need to continue to evolve our base management strategy, and we're looking at how do we continue to drive value for our base. And so part of it is bringing mobile to those consumers. Part of it is speed upgrades and fiber. And that strategy is going to continue to evolve as we go forward.

This product, like most cable offers, Charter's offer very much the same, has a pretty sizable step-up after the first year, and that's become the norm. What kind of churn rate do you go in expecting with that kind of a package? And it seems like if -- I think you've said in the past that only 10% of your customers are paying the rack rate.

Right. Yes.

Certainly, there's more than 10% of your customer base that is in the maturity cohort of past their second year, which suggests there's kind of a lot of cycling of promotions and that sort of thing. Is -- what have you learned about pricing? I remember you were saying that you were taking a look at pricing. What have you learned about pricing that says -- is it still the best way to go to market with upfront promotions and step ups? Is it -- is there an everyday low-price alternative strategy? I'm wondering how you kind of think about addressing the market.

Yes. Well, I've learned that we do something very different than the industry. I'm used to just very systematic step-ups that take you to rack rate. We have a much more sophisticated model that is basically optimized to maximize ARPU retention as well as optimize for churn. And so this is a model that I'm looking at very closely. And I brought Marc in, in the last couple of months, and we've been in the industry for a long time. And so we're looking at how this needs to evolve going forward, to be quite transparent, because it is a bit different than what I've seen historically, not right or wrong, but just different. And so as I think about ultimately, we want to drive subscriber growth, revenue growth, cash flow growth, we need to look at what's the right approach going forward. The step-up piece -- in the research folks want to know -- they want transparency. They want to know what's going to happen, when it's going to happen. And so a bit of what we're doing with Optimum Complete is providing that transparency in terms of year 1, year 2 and making sure that folks understand what those step-ups look like. But we are looking at...

And it's fair to say, even in that case, even after the step up, it is still lower pricing than your competitors are offering?

Right. That's right. But for the existing base, we need to look at, hey, how does the step-ups work going forward, and we're going to evolve that base management strategy quickly.

So I want to stay with the wireless piece now for a second. Your peers have talked about mobile offload as a strategy that could really improve margins. You're on a different contract than -- for your MVNO contract than your peers. But you were, in some ways, first to market, and you could argue that -- and I think more than just argue, I think objectively, you're best positioned to offload of anybody with an aerial plant, as you said, and with much higher density. Talk about that and how you think the offload strategy is going to evolve over the next few years?

Yes. So I think for mobile, there's kind of Phase 1 and Phase 2. Phase 1 is we must drive volume, and there's just low-hanging fruit. The 1.2 or 1.3 line should be well north of that. We should be selling accessories. We should be selling insurance. We need to be delivering units on par with those in the industry on a quarterly and annual basis. And so we're going to go do that. We're going to make that happen. I'm also excited about the offload strategy. I think there's a huge opportunity there. We walked in -- I walked into this situation where we've got 2 million hotspots in the East in terms of opportunity there. We did a very successful pilot with Sprint in terms of a proof of concept with AirStrands that ultimately, shift in strategy, wound down. But as we look at our long-term plan, our long-range plan, meaning year 2, 3 and 4, we view that as an opportunity to continue to improve the margin profile. I'll just answer the question now in case it was in your mind, today, mobile is profitable, whether in the bundle or standalone, but there's opportunity...

At the gross margin level?

Yes. But there's opportunity to drive that even further with offload.

It's -- I think the optics of mobile margins are always complicated by the fact that cable operators are still in that early growth phase.

Right.

But do you -- can you say anything about when you expect that business to become net margin positive so that it's contributing even after customer acquisition costs?

We have some work to do in the long-range plan, and I think we'll be able to kind of figure all that out sooner than later. But -- and that will influence kind of timing as to how we start to drive the offload as well as drive some of the near-term opportunities that I mentioned.

So now let's go back to broadband, everybody's favorite topic.

Yes, of course.

Let's think about the 2 footprints separately because in the East, it's primarily fiber competition and less fixed wireless. In the West, it's more of a mix. I'll come to fixed wireless in a second, but what are you seeing from Verizon FiOS in particular in the East and then AT&T, Lumen in the West. What's different about competing in those 2 markets against fiber? And what kind of success rates are you having for win-back?

Yes. So as I look at a mature fiber overbuilder -- fiber provider like Verizon, they've got the full portfolio of products. And so for us to compete most effectively, we have to have quality and we have to have the right value proposition. And we have to give people a reason to change. And so that's why we're driving hard into symmetrical speeds and multi-gig speeds and 8-gig launch next year. And we're investing heavily in the quality of the experience so that we can bring to bear a full portfolio that provides the right level of quality and the right level of value. And as I mentioned, we're optimizing our sales culture in retail and we're continuing to drive door-to-door so that we can -- as the jump balls are not as prevalent year-over-year given that moves are down, we need to create those jump balls. And I think we now have the quality in terms of experience and the value proposition to be able to go do that. And so that's all about driving execution and also continuing to drive yield in our inbound call center.

So the jump balls comment is sort of a win-back approach, right?

Right.

It's playing offense. How much are you playing offense versus playing defense? Are you trying to win back customers from Verizon or from AT&T and Lumen in the West versus trying to retain customers that you already have and prevent them from leaving to go to fiber?

I mean we're equally focused on both. I mean if you look at our priority, we've got gross adds and retention. And on the retention side, we're continuing to drive -- again, making sure we're not giving people a reason to leave. Making sure that we're delivering best-in-class network, best-in-class product, best-in-class service, and then optimizing our retention offers so that we can hold on to the customers. So it's like asking me which of my daughters is my favorite. And I'm not saying -- they're both my favorite for different reasons. What do I -- more focused on gross adds or churn? As an operator I want to keep all my customers and I want to win all the jump balls.

What's the fiber overlap going to be, do you think? Or what is it now and what's it going to be in each of your 2 footprints?

The East fiber overbuild has slowed down a bit. It's in the 70% to 75% range between Verizon, and we have a smaller overlap with Frontier. West has continued to increase. When we started, it was more in the 12.5% range. Now it's 25%. I can see it getting up to 40% plus. And so those are both dynamics that we're working in terms of competitive landscape.

And I know -- I get this from my clients all the time is trying to see if they can understand what the differences are once somebody has been -- once you've been overbuilt in terms of the differences in ARPU, the differences in customer lifetime value and churn rates and that sort of thing. Can you share anything that says...

I mean it's no secret. There's a step down in terms of penetration rates, in terms of ARPU, increased churn. The opportunity for us is that we just have to go on the offensive. And stepping into this role, I'm just much more used to, somebody announces they're coming into your territory, we're not waiting around. We're taking action. We're driving a proactive strategy to make sure that we're shoring up the base, and we're making sure that we're competing at top performance. So that is a strategy that we are now employing going forward where, one, we're going back to areas where we've been overbuilt to be able to bring to bear the full product portfolio. But going forward, as the footprint continues to increase, we need to be much more on the offensive.

Is it -- I think, at least my understanding is it's always -- it's typically the first 4 years or so after a new competitor enters a market where most of the activity happens. And then it tends to reach something like an equilibrium. Is that about right that -- so which would say that in those 75% -- 70% to 75% of the East that's overbuilt, that there's not a ton of market share shifting going on anymore? Is that a fair characterization?

Yes, I think so. I think there's been -- I still view there to be opportunity in terms of making sure that we're delivering best-in-class customer experience, best-in-class in terms of value proposition. And so in the East, that's really what we're focused on and figuring out how we drive win-back. In the west, I think for many of these markets, it's early days. And so we have an opportunity to really ensure that we're putting our best foot forward so that we're driving and maximizing our share of the broadband penetration.

And now let's talk about fixed wireless because that's the other thing that's always on every investor's mind. I think you said you see fixed wireless in about 40% of your footprint, which is probably a bit less than most of your peers because Verizon doesn't offer fixed wireless in FiOS areas. You've got so much FiOS overlap in the East. What -- so what is that difference, that 40%, if I were going to break it down in East and West? Is it 60%, 70% of West and 40% of East? Or is it -- because of T-Mobile, is it reasonably ubiquitous in the East and still common in the West?

Yes. That was funny, I was just asked this question. I think it's more concentrated in the West. I mean T-Mo is in the East in that portion that isn't fiber overbuilt in particular. But we're seeing the competition, both in the East and the West, and we're now activating our go-to-market to respond accordingly. And we think that Optimum Complete allows us to be able to deliver a great value, whether you're in the East or the West because, one, if you look at our gig symmetrical, mobile converged offer, it's still a better value than T-Mo's fixed wireless bundle. $25 a month, $300 a year. But now you're talking about having a solution from us that has faster speeds, more reliability and a better value.

And are customers -- do you get the sense that customers are starting to come back? Or are you starting to see any churn? Everybody is always fascinated with trying to see early indicators of how the fixed wireless base is maturing. Are you seeing customers that you're starting to win back at this point?

I think it's early days. I know that as we looked at the results, the growth rate that we've all seen has started to level off a bit. I just look at our base. I don't think it's that unique in terms of average consumption of 600 gig. We've got some geographies that are 750. We've got users using 1 terabyte. Top 10% are using 2 terabytes. And so as I look at usage at those levels, I think a fixed solution is the right solution. And so I imagine that folks are maybe giving other solutions a chance. And then I think that there's going to be opportunity to win back customers.

I would guess that fixed wireless probably has a longer runway in rural where the network is generally less -- the wireless network is generally less congested. Is that your expectation, too, that you'll continue to see the West see fixed wireless after it sort of run its course in the East sooner?

I think so. I think in some of these rural areas, I think -- as I look at these fixed solutions, I know that over penetration ends up causing a problem, and so in terms of the network. So I imagine that they'll continue to focus on areas where maybe the fixed solutions aren't as prevalent. But as they come into our footprint, we need to be on the offensive driving our go-to-market strategy.

I want to transition to the business segment because it's -- it maybe gets a little bit less attention. You've seen some -- I mean you've been in -- especially in the East, you've been focused on the business segment as a company for a lot longer than most of your peers. And so it's a more mature and slower -- I think people, therefore, would expect it to be slower growth. But I'm wondering what you're seeing competitively because there were clearly some pressures there in the business segment. Is it that the East, in particular, just doesn't see a lot of -- or is seeing much less new business formation? Or is it just a more mature and competitive market?

Well, the growth has been flattish. I mean the competitive landscape is similar. We've got fixed wireless now that's offering solutions in the B2B space. We've got the fiber competitors. As I look at the B2B business, our growth has been flattish as well. But I do think that there's tremendous opportunity. As I look at how we evolve our product portfolio and how we really drive -- there's opportunities for growth. I come from a space where we had -- we were driving and seeing significant growth in the B2B space. And I think that's on the back of driving ARPU by driving a richer product portfolio beyond just connectivity. There's also -- I'm also excited about the opportunities to partner with Lightpath. We've made investments in Boston and Miami, and it's going to take a little bit longer for those go-to-markets to mature. But the competitive landscape is similar to what's on residential, but I do think that there's opportunity to drive growth.

And on the -- in the West region, where it's not -- you said the competitive dynamics are the same, but your market share, I would think, is meaningfully lower in the West. Is that right?

Right, right. So we're more mature penetration in the East. I do think similarly in the West, we have opportunity to have a broader product portfolio. We have an opportunity to go up market a bit more in terms of mid-market solutions. And so it's very early days. We are going to be bringing in some new leadership in that space to help us build and drive that business.

And finally, one last growth area for you and a lot of your peers has been edge-outs in the rural market. Presumably, most of those are a West opportunity, not an East opportunity. Maybe you can throw in the DOCSIS 1 upgrades as sort of an analogous part of that. Given the stresses in the credit markets and your balance sheet, do you anticipate that you're going to be able to continue to grow the number of homes passed in the portfolio at the same rate that you have? And is there an opportunity to participate and beat? Or is that hard to do given your balance sheet at this point?

No, we feel good about we're going to deliver on 150,000 new homes passed this year, and we're bullish on continuing to maintain that level of growth and investment. I've been traveling through the West, and there's a lot of exciting opportunity there. We look at BEAD and some of these other subsidy opportunities opportunistically where it makes sense as it's tangential, synergistic with our footprint. But we do have a portfolio of opportunities this year, and we're accelerating. We've already delivered on 40-plus thousand new build in the first quarter, and we're going to continue to drive that.

Is -- so can that become 2% growth in your footprint -- sorry, in homes passed as a sustainable number? Because that's pretty solid growth for a mature footprint. But I think Charter is up around that level. Comcast not quite there yet. You've been up around 2%. Is that a sustainable growth rate for homes passed?

We're putting our long-range plan together right now and I'm looking at what that opportunity looks like year-over-year, to be fully transparent. I'm learning the footprint and looking at opportunities. I don't want to put something out there and then I show up in -- somewhere in Texas and realize that the opportunity isn't there. But we're going to be disciplined and aggressive about it.

Got it. So as I sort of wrap up here, I mean, the obvious question that everybody is struggling with is about growth. It is -- whether that's unit growth, there are -- or pricing growth, there are still -- there are 3 businesses that have the shot at growing. It's your broadband business, which is primarily stabilizing net adds and growing ARPU. It's the business services business of at least getting some measure of growth. And then it's wireless. Is that -- is there a path to growth there that says this gets the company to overall growth? And when do those pieces fit together so that Altice USA is a positive growth company again?

Yes. I wish I could come here and give you a silver bullet or talk about something super sexy that's going to solve all of this. But what I preach to the team every day, and it's probably going to drive them crazy, but I'm going to say it, but maniacal prioritization and disciplined execution. And we are going to deliver best-in-class products, best-in-class service, best-in-class value. And that is going to drive us to grow.

And where does video fit in that story? And video is for everybody, obviously, a headwind to top line growth, but is it a headwind to margins and to profitability, I mean? Or is it a product where the losses are largely painless because you don't make any money on it anyway?

Well, being -- our declaration of being a connectivity company, broadband and mobile first kind of helps us think about video and where that fits in. And it fits into the portfolio to help us drive those connectivity businesses. We don't want to lose money on those businesses. And so there is some work that we need to do to continue to optimize and ensure that we're passing through costs at the right levels at all different tiers. But I think people are watching more video than ever. And so we are going to have platforms that allow folks to be able to consume video in the way they would like to consume it. And so that's the strategy that we're building because I do think, overall, it needs to be in the portfolio. And so whether that's traditional video solutions -- we have 50% plus consumers that still have video. I mean we're attaching it only much less, more like 24%, 25% on gross adds, but folks are still looking for video. I do think there's opportunity to help people navigate all these options, maybe make it simpler in terms of having one platform, having simplified billing. And so these are the conversations we're starting to have so that it fits into the portfolio. But you're right. And it was I think about how do I grow revenue? We're focused on household revenue, and how do I grow margins and EBITDA, we're focused on driving that through our connectivity solutions.

And last topic that everybody loves is capital structure. So with the rise in interest rates and cost of capital, what's the right leverage ratio for your company? And now that you've pulled back on expansion of the fiber program in the West, is your -- as capital spending and capital intensity comes down, is your predilection to say I want to use that to reduce the leverage of the company? Or is it I want to buy back equity and keep the leverage at the levels where we are today?

Yes. Those are conversations that Marc and I are having in terms of -- we've done some work in the refinancing space. We feel good about being able to over the next couple of years. And so we'll look at continuing to optimize that as we go forward.

If we can wrap up again on convergence. What's the right asset mix for a converged company? Is it all in-house? I constantly hear the story about eventually you need owners' economics on the wireless network. If I'm thinking 5 -- looking out 5 years, what's your asset mix look like? Is it still a company that has offload but is primarily a fixed line company with some offload? Or is ultimately there are going to have to be some convergence of wireless and wireline networks?

It's a great question. And I think those are, again, opportunities for us to evolve our strategy. We're bullish on our fixed network and driving our strategy with fiber and having a best-in-class fixed network. We're bullish on driving mobile and our go-to-market and driving and growing mobile. And then we're going to look at opportunistically the opportunities for offload, and then we'll consider what more do we want to do from there.

But fair to say that, that 25% of customers who want to bundle today that if I'm looking out 5 years, that's going to be a much higher percentage that think of connectivity as operating across both fixed and mobile. Is that your assumption?

Right. That people will continue to look for, I think -- I mean even the 25%, I mean, if you look a few years ago...

It was 5. Yes.

Yes, it was a fraction. And so I can't imagine a world where that goes in reverse. I think people are now starting to think about connectivity in the home and out of the home. I do think that having a best-in-class fixed network when you think about that solution set is the key, which we have, and we're going to continue to invest in. And then I do think being able to provide best-in-class connectivity out of the home, leveraging today, our MVNO, but then also augmenting that via offload strategies is going to be able to provide ultimately the best converged in-home, out-of-home experience.

All right. Well, that's a great place to end it. I want to thank you for spending the time with us today. And I look forward to doing this again next year and seeing your progress.

All right. Thank you. Appreciate it.

Thank you.