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

Well, welcome, everybody. Thank you for sticking with us this afternoon. It is a pleasure, I think, to welcome to the first time to our Communacopia plus Technology Conference. Dennis Mathew, the Chairman and CEO of Altice USA. Dennis, thank you so much for being here with us.

Yes. Thanks for having me. Happy to be here.

All right. Well, let's jump into this. I would like to sort of hear leaders of their businesses talk about their priorities. You've been CEO for about a year now, and your team has been pursuing a fairly significant repositioning of Altice USA, including some targeted areas of stepped up investment and a refreshed go-to-market strategy. We're going to spend some time today discussing the operational steps that you're taking to drive better results. But before we get into that, I was hoping you can maybe frame the cultural transformation that you and your leadership team are driving in Altice.

Yes, absolutely. And the cultural transformation is what is going to allow us to drive the operational and go-to-market transformation. When I started I made it clear to the team that we are going to elevate employee experience as a priority. And we're going to elevate customer experience to be a priority. Once we lay these foundations, we'll be able to drive growth. And so what does that mean? From an employee experience perspective, I'd like to quote Simon Sinek when he says that "leaders want their teammates to wake up feeling excited and motivated. They want their teams to feel physically and emotionally safe during the day, and they want their teams to feel fulfilled at the end of it." And I'm like, yes, that's what I want. I want that every day, rinse and repeat all the time, but then how do we bring that to life? And so from an employee perspective, we're driving communication. So people know what's happening, why it's happening. We're listening to our teammates so that we can understand the challenges and the issues and the frictions that they're dealing with. And then we're supporting them in terms of career growth and recognition and appreciation. And so we have been maniacal in driving an employee experience culture that will allow people to operate at their best. As part of that, we're bringing in some new leaders. And so 35 new VPs and above have joined the team, and we're going to continue to bring in the right people from all across the industry that can deliver at the highest levels. Just last week, we announced we have a new CTIO, Luciano Ramos, as well as the new Head of Field operation, Nate Edwards. They both come with nearly 30 years of background from companies just like AT&T, Liberty Global, Rogers, and they're going to come and continue to help us drive this transformation. We've also put in place a regional leadership team to help us act more locally and drive our local go-to market. And so this cultural transformation is pivotal to helping us transform this company.

Do you feel you've reached the point where you have the resources and the organizational alignment necessary to execute this business plan? Or still some things you got to get done?

There's still some evolution in terms of the leadership team that we're making. And so now that we have Luciano in place heading up our technology org, and Nate heading up our field org, there's some incremental upgrades in terms of talent and getting people into the right spot and so that's a bit more work that needs to be done. But we are excited about the evolution that we're already seeing. And we do believe that we have the resources to deliver best-in-class customer experience, drive digital transformation so that we can ultimately get back to broadband growth and drive top line revenue and subscribers and do what it takes to win in the marketplace.

Right. I want to get to all of that. But before we do, I want to ask about something you disclosed on your call. Specifically, you noted that Altice had replaced its Chief Procurement Officer and the company is reviewing its supplier and vendor relationships. And you paused some capital spend until you complete this investigation. I'm wondering if you have any updates on this internal review and where you are in terms of onboarding new vendors?

Yes. Brett, I mean, we're on a journey of transforming every element of this organization. And so I was already in conversations with Jennifer Yohe, who we appointed as the Chief Procurement Officer, even weeks leading up to all that transpired. And so that's why we were able to name her so quickly and worked with her for years at Comcast, and so we're excited to have her. And she's helping us provide a perspective on all elements of governance in terms of vendor selection, vendor appointment, oversight management. The good thing is, I have nothing new to report today as we continue that investigation. I already made folks aware that we were pausing the capital deployment and fiber construction so that we could reevaluate those partners that we had. And we have new partners that we're actively onboarding and we're confident that we'll be able to resume that fiber construction in the near term.

It is a pretty key initiative for the company, the fiber upgrade. A question we get is just based on some of the incremental competitive pressures that you've seen in the broadband market, whether it's coming from telco providers deploying fiber in their footprint or the success that we've seen with fixed wireless, which I think has been stronger than a lot of people initially guessed it would been, how does that factor into the sense of urgency you have around deploying fiber? And what's your view on how critical it is to have a fiber -- literally a fiber branded product in the market?

I think in the East, where you have a mature fiber provider like Verizon, I think it's mission critical. You have to have the best products, you have to have best quality, best value. And so having the fiber network that we're deploying, which is literally with XGS-PON, the best technology that we can deploy, we're excited to be able to bring that to bear. I've seen where if we are competing against the mature fiber overbuilder, we need to be able to present the right value proposition and be able to drive our go-to-market and tell the story of the power of fiber. So that's why we do think it's important to continue on that journey. But then when I look at other parts of the footprint, I do think that we have other tools in our toolkit to be able to win. And so that's why we've said that we're going to continue that build in the East. And once we have the new vendors chosen, we'll continue to drive that strategy forward. And then we'll continue to deploy a host of tactics in the West so that we can continue to drive our go-to-market there as well.

Great. There's a number of benefits to having fiber. You touched on some of them. It's not just how the product performs with the consumer. It's also how it performs on the back end. So lower OpEx, lower maintenance CapEx. And so all of that should continue to show up as you drive deeper fiber penetration. But as of the second quarter, you only had a little over 9% penetration of the fiber product. What are you targeting over the medium to long term? And how do you think about the desire to sort of push that to reach out proactively to customers to incur the cost to do it versus waiting for them to say, I think I'd like to try this?

Yes. We have tremendous opportunity here from a gross adds perspective. We're still making some system and process changes to even just ensure that we're offering fiber every single time somebody in the fiber footprint calls us. And just by those changes, we're seeing improved fiber gross adds. And so there's a whole host of benefits in terms of NPS, in terms of ARPU. We're seeing $10 to $20 incremental on fiber versus HFC. We're seeing contact rate benefits, service visit benefits. And so we want to continue to drive it from a gross adds perspective. And then from a migration perspective, we really need to evolve our base management strategy. So -- inside baseball a little bit is that, that doesn't exist today. And so we are building customer lifetime value model that will help us manage the base much more strategically going forward, not having a one-size-fits-all. And that way, we can have those conversations with customers and talk about upgrading them in speed, upgrading them in mobile. And what we're finding is that when we're selling the value properly, people want gig and multi-gig speeds. And so that will start to become part of our cadence going forward, and we think retail is a great venue for that because 90% of the traffic coming into retail is our existing base, and we have an opportunity to sell them faster speeds than mobile.

Are you finding that when an existing customer goes through the upgrade, ultimately, they are spending more with you. So in other words, they're not just less likely to leave but you can see some immediate benefit through their relationship?

Yes. We are seeing a $10 to $20 ARPU lift, but we're also seeing significant improvement in NPS. And so it benefits across the board.

And what about the cost of upgrading existing customers? Have you been able to chisel into that so that there's a broader swath of customers where it would make sense to make that investment?

There's more work to do. We're definitely operating more effectively, more efficiently in the install process, but there's more work to do there. We think that there's more efficiencies, and we're looking at how do we make sure that we're running that drop efficiently, that we're getting it installed in the home more efficiently. Some of it is just really ensuring that we're holding ourselves to the standard of quality that we would expect and making sure we're providing the right training, providing the right tools. And so we're excited to have Nate join. He's got almost 30 years of experience and already identifying opportunities for us to evolve and be even more efficient as we move forward.

With regards to bigger picture, with regards to the fiber investment, you previously said that CapEx associated with this would begin declining in 2025, then we'd see a much steeper fall off in 2026. I'm wondering if you've evolved your thinking around that, either because you've had a pause right now around the procurement and supply chain review or maybe just things you've learned since you've been on board about where it makes sense to spend money and maybe where you can find other efficiencies?

Yes. I think we're close to having some of these new vendors on board that can help us restart the construction. I think next year, we'll be back in that 500,000 to 1 million range and then continue to drive that forward in '25. And so I do think that there may be an opportunity for us to get the bulk of that build done by that point in time. We are looking at how we continue to optimize how we deploy fiber. We're looking at the opportunities within MDU versus -- that's a few to really ensure that we're monetizing that build as quickly and as effectively as we can going forward. And so we're committed to the strategy. And I believe in the next few months, we'll have that construction continue and we'll continue to drive it forward.

I know we're still looking to gain more visibility here, but any early thoughts on how you may be positioned to get funding out of the B program?

We're looking at it closely. We -- prior to B, there were some other programs that we did submit bids, and we were able to win, and that construction will start next year. We're weighing that against some of the new build opportunities that we have. So we want to drive 150,000 to 200,000 new build a year, most of that happening in the West. And so we'll have to weigh the return on that new build that we're finding and edge out organically versus some of the B opportunities. And we'll deploy the capital where we think we can get the most return.

You've been pursuing a lot of initiatives that ultimately should have positive impacts on your broadband subscriber trends. You're doing this in an environment where all cable companies have seen some deceleration. Some of it's because there's a bit more competition. Some of it's just because there's fewer household moves. It also seems like seasonality is not quite as predictable as it's been in the past. Any update that you can give to us in terms of how you're seeing the business progress, your subscriber trends progress as we move into the second half of the year?

Yes, absolutely. It sounds like on the last call, I gave some feedback on Q3 that was apparently the most confusing ever. So I'll be a bit more clear that as stated in Q3, we expect it to be better year-over-year and then also sequentially better. And the good news is that July and August have been better. And so we continue to expect the subscriber trends for the quarter to be better as I have stated. And so we're seeing...

And so -- because there were some losses in both of those periods. You're basically saying that the loss has improved both sequentially and also on a year-on-year basis. How are you thinking about the path to sustained growth in the broadband subscriber base? Where do you need to be with your turnaround initiatives to be able to say, I think we're at a point where that is the appropriate expectation?

There's macroeconomic factors, and then there's things that we can control. And bringing on a brand new sales leadership team, have a new Head of Consumer Sales, new Head of Retail, new Head of Contact Center, new Head of Digital, new Head of door-to-door, new Head of B2B sales, these folks have come in on fire, ready to hit the ground running, and we're already seeing the improvements there. We're seeing improved yields in our contact center. We're seeing improved productivity from our door-to-door teams, and we're excited about the path forward. And so I do think that, that is our goal, and we're on that trajectory. We're going to continue to stem the losses and our goal is to get to broadband growth again. And I believe that every day these teams are together, it's going to allow us to run the business more effectively as we move forward.

Subscribers is only one component of what drives your revenue. Obviously, ARPU is the other key input. For a number of years, ARPU had been the primary driver of broadband revenue growth at Altice. So there had been some sub growth, but they have been pretty extraordinary ARPU growth. That has moderated considerably and we tried to make sure your price point wasn't a deterrent from getting your customer base to stabilize around the trends you're looking for. How are you thinking about the right pricing strategy for your broadband product based on the market and also based on the improvements you're making in the network?

Right. Well, there are a whole host of ways to drive top line revenue growth. So we should talk about that. In the broadband ARPU perspective, my mission, one, was to just stabilize ARPU erosion. And as I looked at what we were doing front book, back book, we were just giving away too much value. And so from a gross add and go-to-market perspective, we've gotten much more disciplined to make sure that we've got the right offers, we've got the right discipline around gift with purchase and gift cards so that we can drive gross add activity but do it in a way that provides the proper return. And then from a back-book perspective and a base-management perspective, we really just didn't have a base management strategy. We just haven't -- other than providing a price increase once a year. I'm used to a world where we're constantly having a conversation with our customers, talking about value, talking about products, talking about services, helping them understand the opportunities to upgrade into faster speeds into mobile. And so we've done simple things that others have done. We've built the customer lifetime value model. We're implementing that in Q4, and that's going to allow us to talk to the base in a much more surgical fashion and not have a one-size-fits-all conversation. Today, one of the challenges is if anybody in the base calls us and calls into retention, we just have one offer. That's it. And so that doesn't make sense. We need to have offers that really, based on the profitability of the customer, are customized such that we can maximize ARPU while retaining -- while driving retention rates. And so I do believe that we're going to be able to get to a point where we can stabilize further the erosion and then get back to a place of growth.

Well, speaking about how you're going to market, we have seen cable companies, in general, evolve their go-to-market strategy really over the last year plus with an increasing focus on converged service bundles, and that would include your own Optimum Complete bundle. Why has the focus shifted to bundles? And in what ways do you see Optimum Complete has given the company a go-to-market edge versus your telco competitors?

I've got to tell you, we did the consumer research, and it was incredible feedback. Over 25% of consumers said that they are looking for one provider to provide their in-home and out-of-home connectivity, broadband and mobile. I mean just a few years ago that notion didn't even exist. And so consumers were clear, they said they want three things: They want simplicity, they want value, and they want quality. And so we're able to do that with Optimum Complete, where we're able to provide them simplicity in terms of the offer and the step-ups and the pricing. We're able to provide them a great value when you bring broadband and mobile together, especially as you look at the savings versus a Verizon or a fixed wireless solution. We're saving them hundreds of dollars. And then we're on that journey to provide the right quality; quality products, quality network, quality service. We're already seeing that in terms of improved TNPS, less contact rate, less service visits. But folks are looking for providers to bring those solutions together, and that's exactly what we've done.

To what extent do you see convergence as a product strategy versus a network strategy? And it's really a way of asking at some point do you think you're going to need to invest in more mobile infrastructure.

We're really happy with the MVNO that we have with T-Mobile and they have the largest 5G network. And so we think we have within the portfolio via that relationship, a great network. We also have a great broadband network where we have fiber and 3.1. And so we view it as both, the product and network strategy that we're able to bring to bear and then we're able to pass on incredible value to our customers.

You started offering a free line promotion last year. I think you said so far you've been able to convert about 60% of those promotional customers into paying subs. What's been your strategy for converting those customers? And how do you kind of fine-tune that approach as you've learned through the process?

Yes. Honestly, this was our first tiptoe into active base management. We said, hey, who are these customers that are about to roll off? And maybe we should start to communicate with them. Maybe we should start to have conversations and send e-mails and text messages and really just start to make sure they were aware of the roll off and then have an active conversation on getting them packaged and rebundled and get them into Optimum Complete. And the great thing is, 60% of the customers said, yes, we like that. We like this conversation -- we like the fact that you are talking to us. And we like the words that are coming out of your mouth, and so we would like to continue on, and we were able to get them into the right package. And so that -- the number of those customers will tail off in this quarter. And going forward, we're going to be more disciplined about pricing and packaging for mobile customers.

And the 40% you didn't roll the pay, what were the primary reasons why it didn't happen?

Folks had lots of different reasons in terms of some honestly had not used the service. Some folks had just decided that they were going to go with a different provider. But ultimately they downgraded mobile but continued to maintain their broadband relationship. And we're continuing to dig into that and learn and help us inform our go-to-market in the future.

And how are you assessing whether the wireless initiatives at the business are having the desired impact? Are you mostly looking at the success of the wireless product by itself and its ability to become a meaningful EBITDA contributor? Or is it really about improving the overall lifetime value of the customer relationship, which is built around broadband?

I think there's an opportunity for both, Brett. From a gross margin perspective, we already have mobile providing profitability, but there's more opportunity in terms of -- we're literally on the 1 yard line of selling accessories, selling insurance, really selling more lines. We're at 1.2 lines today. We can drive that 2-plus lines. And so we think it can help us from an overall household ARPU perspective, from an EBITDA contribution perspective. We also have opportunity to really leverage our infrastructure to drive more mobile offload in terms of -- particularly when you look at the East and the density, there are areas, in particular, like Brooklyn and others where we can leverage our access points to drive mobile offering. That's a bit of a longer-term strategy, but we think it can contribute from both ends. And from a stickiness perspective, historically, from where I -- from my previous company, we know that it provided churn benefit, and so we're analyzing that as well.

Okay. I'd like to hear you weigh in a bit on some recent headlines from last week. So we have this programming dispute between Charter and Disney. During its presentation to analysts and investors, Charter expressed its view that the video ecosystem is broken and that the model that has proposed to Disney is a model that it will pursue with all programmers going forward. How do you see the relationship between cable companies, particularly yourself and programmers evolving? And what do you think is going to be the win-win model as cord-cutting accelerates and more viewers pivot to streaming platforms?

Brett, this is so odd. Nobody has asked me this...

Good. I'm glad...

No. I mean this has been evolving for 10-plus years, right? We've seen linear video subscribers declining, we've seen the emergence of the streaming products and direct-to-consumer products. And it's just this really odd dynamic where demand is decreasing and price is increasing. And we have these conversations with programmers and we have these contractual obligations to put in front of consumers packages that are not in the best interest of consumers. They want certain content, and we then have to bundle in other content that they have no interest in. And so I really do think that as we think about the future, we need to figure out how to put the consumer at the center. And the reality is that consumer viewing habits have evolved. And some are looking for linear, some are looking for direct-to-consumer. And so we want to be able to offer that to our consumers. The reality is that video is the #1 application on our network. And people have said they want simplicity. And so we would love the opportunity to be able to offer both linear and direct-to-consumer solutions in packages and have those packages better reflect the content that consumers want to consume. And so I don't think there needs to be kind of a win-lose situation here. I think this is a unique opportunity for us as distributors and programmers to work together, put the consumer in the middle and really figure out what's a win-win that -- and a business model that is long-term sustainable for all parties.

I mean, Charter has said they're reaching a point of economic indifference, essentially saying if we're not able to shift the economics of this relationship, we're going to be -- we're already indifferent as to whether we actually offer this product. Presumably, as a bigger distributor, they get better rate than you do. Is it fair to say that you're at a similar point where if you can't find a better relationship with programmers, it might be quite rational to start backing away from offering that product?

In January, when I came in front of my team, I said we have a very clear mission: We are going to be the connectivity provider of choice in every community that we serve, connectivity in the home with broadband and connectivity out of the home with mobile. Something is missing in that equation. I said people were asking, hey, what about video? Hey, video is in the portfolio. People want to consume video. We want to have video in the portfolio so that we can provide a whole portfolio of solutions to consumers. So -- but something does need to change so that we can offer it in a way that is beneficial and drives value to the consumer.

Okay. Let's talk about your connectivity businesses a little bit more. Particularly, your Business Services segment, it's about 15% of your total revenue. Not surprisingly, we've seen some deceleration recently, just the macro backdrop is obviously going to influence that. Can you give us a latest update on the trends you're seeing in that business? And maybe bigger picture, how do you think about the growth opportunity for Altice in the business segment?

I'm very excited about B2B. I mean there's a lot of work that we were doing on the B2C side of the house. And now we are driving focus. We brought in a brand-new leadership team, new Head of Sales. We've hired a new Head of Product joining in the next couple of weeks. There's tremendous opportunity in terms of operational execution. So we're starting there in terms of making sure we've got the right sales quotas, making sure we've got the right sale to install rates. But then there's also opportunity to build out the product portfolio. And right now we're really just offering connectivity. We need to evolve that to offer solutions like LTE backup, managed WiFi, cybersecurity, SD-WAN. We need to offer voice across the entire footprint. Let's start with that. And so we've got these types of initiatives prioritized that will allow us to really start to drive meaningful growth in the business as we move forward.

And where does Lightpath fit into the portfolio? Is this a core asset? Or is this something you consider selling if you were to offer the right value for it?

We've got a great partnership with Morgan Stanley Infrastructure Partners, and we're really excited about the business and the opportunities for growth. We've seen network expansion in Boston, Miami, and so that's what we're focused on, is continuing to drive the operation, continue to drive growth. And so we're not actively looking for a transaction right now.

Okay. Let's talk about the P&L a little bit. So you've made some significant OpEx investments this year, including for distribution, rebranding, customer service. And obviously that has put some pressure on EBITDA, which was down about 10% through the first half of the year. What do you see as the key swing factors that can drive Altice back to EBITDA growth? And is 2024 the right timeframe for thinking about that inflection point?

Yes. The good thing is we've been able to stabilize OpEx over the last 2 quarters, and that's really all about continuing to improve the customer experience while removing noise and transactions from the system. We prioritize things like digital and self-install and really making sure that we've got first time right, where we're solving the issue the first time. And so we do think that there's opportunities to continue to stabilize OpEx while continuing to drive a better customer experience. And then from a revenue perspective, we've started to stabilize ARPU erosion, and we do think that there's opportunity to continue to drive top line growth as we drive mobile, as we drive B2B. And so we feel very good about getting back to a place of revenue, subscriber and EBITDA growth as we move forward.

So really executing against the business plan, if you do the execution, the way the team should be able to, that should get you there. You don't think it would be...

Absolutely. Yes. We've been able to take almost 1 million less calls year-to-date. We've been able to perform a few hundred thousand less service visits. That's all going to the bottom line.

So I talk a little bit about the balance sheet and cash flow. Leverage right now is in the high 6s. That's obviously well above your target range of 4.5x to 5x. You're in an investment phase. You haven't seen EBITDA turn yet. So obviously, leverage is going to remain elevated for at least a little while. What gives you confidence that you are going to be back on a sustained pace of delevering? And then how are you thinking about the evolution of your capital allocation priorities? What could cause you to delay CapEx or accelerate CapEx or change something else to make sure that you're hitting those delevering targets?

Yes, the team has done a great job of pushing out these near-term maturities and allowing us to continue to invest in the business. We want to invest in long-term growth. At the same time, we want to be disciplined. And you've seen us moderate CapEx meaningfully as we went from '22 to '23. And so we'll continue to look at it every year and make sure that the CapEx intensity is in line with the overall business performance. And so that's something that we're actively looking at right now as we build the budget for '24 and as we look at our long-range plan. And we'll continue to invest as it allows as we are able to. And we'll -- and that's the discipline that we're going to -- that's the discipline that we're going to execute with. We want to continue to drive new build. We want to continue to drive the fiber strategy. That being said, we're going to take a disciplined approach.

All right, Dennis, it's been a great conversation. Thanks so much for being here.

Yes. Thanks so much. I appreciate it. Thank you.