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

Okay, everyone, thanks for joining us this afternoon. Again, I'm John Hodulik from the media, telecom and infrastructure team here at UBS. And this afternoon, we are joined today by Altice's Chairman and CEO, Dennis Mathew. Dennis, thanks for being here.

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

So Dennis, you made a fair amount of progress in turning around the fundamentals in your short time at the company, which is 14 months. I mean that the time went fast. What inning of that turnaround would you say we're in right now? And as we sit here, sort of end of '23 looking into next year, what are your main priorities for '24?

John, we're in the early innings of this turnaround. When I joined the company, we've made it very clear that we were going to be the connectivity provider of choice in every community that we serve, but those can't be just words. Those have to be actions. And so we're laying the foundation of best-in-class employee engagement, best-in-class customer experience, and that's what's going to translate into growth. We said early on and often that there were a few things that we wanted to accomplish. We wanted to improve our customer experience, and we've seen tremendous growth quarter-over-quarter, delivering improved tNPS. We said that we were going to focus on mobile. And we're seeing mobile acceleration every quarter, and Q3 was 5x of the previous Q3. We said we were going to deliver on fiber penetration. And we've seen a record high in fiber net adds past quarter, and we're continuing on that trajectory. And then there's a whole host of other things, stabilizing OpEx, stabilizing ARPU erosion, all of these things we said we would do, and we're doing. But the #1 thing was transforming the culture. And that's I'm happy to say that we are making meaningful progress. We've brought on 60-plus new VPs and above, sales leaders, ops leaders, finance leaders. Almost as important as anything, we've put in some new leadership at the area level to have a more hyper-local presence as we go forward. And so as we look at '24, we're going to do more, more mobile, more fiber, continue to drive customer experience, continue to improve the quality of our products and our network and our services. I'm excited about B2B. As I talk about bringing on the right people, we just hired Michael Parker as the new President of our B2B business because I think there's lots of opportunity there in terms of building out the portfolio, adding a whole another level of rigor in terms of sales and execution and really driving that business as we go forward. And so we're excited about 2024.

And you talk a lot about sort of employees and getting the right people in the right place. How far through that process are you? What did you say, 60 VPs and above that you've hired? I mean a lot of -- that's a lot of people.

It is a lot of folks. We've got folks -- Michael just joined today. So we've got folks that are days in, weeks in, months in. I think we're -- it's more art than science. But let's say, we're 70%, 75% of the way through in terms of bringing on the right people and getting people into the right seats. It's been a bit of that as well. We've had great people on the team as well that we needed to put in positions to succeed. But I'm very excited that everyone is coming in knowing what great looks like, and that's the key. Being able to come in and work as a team, and there's no silver bullet, John. There's probably 10,000 small actions that need to happen. And we are working together as a team to maniacally prioritize and drive disciplined execution. So we can't boil the ocean, but we know what we need to accomplish today and tomorrow. And every Monday needs to be better than last Monday. Every week needs to be better than last week, and we measure that. We literally report on that. We measure that, and we continue to push ourselves. And so we're continuing to finalize the team, but we feel good entering into '24 that we've got a meaningful portion of that done.

Great. Let's focus on broadband. In your short stay at Altice, you've been able to cut broadband subscriber losses pretty meaningfully, but you're still seeing declines. What's the pathway from here to subscriber growth?

Being in the industry for a long time, it's clear to me that people want 2 things. They want quality and they want value. And there's been a lot of work that we've done on both of these areas. There's more work to do. As I mentioned before, quality, in terms of quality products, quality network, quality service. That's translating into better NPS. That's translating into 1 million less phone calls. That's translating into 300,000 less truck rolls. These are all kind of leading indicators to the fact that we're seeing improvements, translating into improvements in churn and helping us just go to market more effectively. The value piece is -- one element of that is mobile. And having that in the portfolio, going to market with Optimum Complete, being able to bring broadband and mobile together as an offering to customers. When we did the consumer research as we prepared to offer and go to market with Optimum Complete, over 25% of consumers said they wanted a bundle with broadband and mobile. You could say, well, where is the rest of the 75%, but the reality is 5 years ago, that number was probably single digits. And so it gives us tremendous value, especially as we compete against fixed wireless. We're able to provide $300-plus value with Optimum Complete and even some of the more mature providers like Verizon, $500-plus value annualized. And so I think it's a combination of continuing to deliver great service, continuing to deliver great value. And then there's some work that we need to do to compete at a more hyper-local level that our new regional leadership teams will allow us to do. The reality is that historically, we've not done a good job. When a fiber overbuilder showed up in our footprint or a competitor, we were always kind of on our back heels in a defensive posture reacting. We're going to go on the offensive and tell our story and make sure that we have the right offers and the right go-to-market strategy to compete most effectively in these areas.

You mentioned fixed wireless. Maybe you could just talk about how the -- in the 14 months that you've been here or what you've seen in the last year or 2 from a competitive standpoint? And then any comment on what you're seeing in terms of fourth quarter trends?

Yes. So fixed wireless remains a competitor across the footprint. Their availability is really tied to the capacity they have on the network. But they market broadly, and then they have to adjust based on where the sales are happening. We're seeing T-Mo. We're seeing Verizon, particularly in the B2B space. We're seeing AT&T pop up a little bit. I think they're in their early innings in places like Texas and North and West Virginia. But we feel like we have a really great set of tools to compete. And we're seeing that as we make progress in our win share, a 4-point improvement in win share in the third quarter. And I think that's due to 2 things. One is just stronger sales channel performance. As I mentioned, we brought in new sales channel leaders, new leader of retail, new leader of inbound sales, new leader of direct sales, new leader of digital, new leader of B2B across the board. We're seeing better performance management. We're seeing a stronger sales culture, which is yielding to better yield, better conversion, better productivity. And then we're going on the offensive a bit in our marketing as well and just telling our story. We have a story to tell on our fixed solutions versus fixed wireless and that we have a great product and a great value, and that's helping us make progress. And then in terms of Q4, as I mentioned at the beginning of Q3, we are seeing heightened competition. And similar to our peers, it's going to be -- we're seeing that competition play out. And so we're going to continue to battle to drive Q4, but it's been increased level of competition.

Got it. Got it. Okay. And then can we talk a little bit about sort of the trends you're seeing in the fiber areas versus the nonfiber areas? I mean are you positioned in -- are the underlying subscriber trends better in the areas where you have fiber?

I mean the fiber areas, when we look at the metrics no matter how we look at it, we look at NPS, double-digit benefit on NPS. We're seeing 10-point benefit on churn survivability in the first year. We're seeing 20% benefit on ARPU from a gross add perspective. And so we're really bullish on what fiber is able to deliver in the footprint. We have 2.7 million homes. And so we are laser-focused on continuing to drive adoption and fiber penetration. That being said, as we look across the footprint, we're very bullish about our HFC networks as well. We're investing in DOCSIS 3.1. And as I mentioned at the start of the year, we had 0.5 million homes that didn't have 3.1. And so we've upgraded 200,000-plus homes to 3.1, and we're going to continue to drive that next year. And we're using the full portfolio of solutions that we have to drive our go-to-market in the areas where we have fiber and where we don't have fiber.

And with the 3.1 upgrades, does that -- how quickly do you see trends improve there? And does it help you out both in terms of sort of gross add and churn?

It's really all about stabilization. It really allows us to deliver a better experience, really allows us to deliver the right quality of network. We offer gig speeds in 95% of our footprint. We want to get to 100% in 2024. And so it's a combination -- when I mentioned before, on how do we really stem churn or make sure that we're delivering on our promise of quality, it's quality product, quality service and quality network. And the 3.1 upgrade is an element of that promise to delivering the highest level of quality.

And then what about ARPU because you said that it's all about value. So speeds versus the price that you guys can come in. How do you see that trending over time? And are you providing enough value to customers to sort of bring them on and sort of bend the curve in terms of subscribers?

Yes, the ARPU story is very clear. We're going to use a lot more science and less art. When I joined, the ARPU erosion was really at an all-time high. And it was -- we were bleeding ARPU in our care channels, in our retention channels. And we, unfortunately, did not provide our teammates with the right tools to be able to have those conversations in a surgical, strategic fashion. You've seen us really moderate that ARPU erosion over the past few quarters, and we're going to continue to make improvements as we go into 2024. We're launching new tools and new capabilities that will really allow our teammates to be able to have the right conversation with every one of our customers. So if they're calling us in care, they're calling us in retention, we're able to have a robust conversation that's tied to price, that's tied to speed, that's tied to value and rightsize them from a packaging perspective. The other element is that we're seeing incredible ARPU benefit on fiber, and so we need to continue to lean in to driving our fiber strategy. And when I walked in the door, we really didn't have a clear retail strategy. Now our retail strategy is all about selling and sales. And in our footprint, we have 90%-plus folks that walk in the door are existing customers. So it gives us an opportunity to talk about mobile, talk about speed upgrades and talk about fiber. And that is already starting to pay dividends as we see an increased level of performance in our retail channels. And then the other element of ARPU is base management. And unfortunately, quite frankly, when I joined, there really wasn't a base management strategy in place. There was kind of promo role and rate event. And so we are implementing a much more robust strategy that includes speed upgrades. It includes providing predictability and transparency on price, so that people know what's happening and when it's happening. And then having a conversation about mobile, so that we can deliver the value that customers are looking for.

It seems like the more topics we talk about, the more it sounds like when you got to Altice, it was -- was there less infrastructure, sort of less sort of analysis and rigor? And I mean especially from what I know of where you -- Comcast, where you came, a different animal altogether in terms of how the business was run. And would you say that you're getting to the point where you're comfortable with the infrastructure that you've put in place so that you can sort of effectively manage these assets? Because it really doesn't seem like as we go through sales or customer care or churn management, all those kind of things that -- none of that infrastructure was in place.

Well, one, I'll just tell you, maybe I need a cocktail for this. I'm never comfortable. I live in a constant state of paranoia, and so that's how I live. And the reality is there's more work to do. Do we have the infrastructure in place? We are in the early innings, but we have vastly more tools 14 months later. We have vastly more capabilities to be able to drive a more effective go-to-market, to be able to deliver higher quality, to be able to manage our base more effectively, and yet there is more to do, more work to do. And so Marc and I and many of the leaders that have joined come from a level of operational rigor that it's a daily grind every day, every day, maybe every minute of the day. I've visited some of my teams in areas, and they're talking to me about, hey, 7:30, we're talking about the installs that are coming up. And 8:15, we're talking about the customers that are having challenges. And 9:00, we're talking about the new build activity. And so that's the level of rigor that we're putting in place that just didn't exist prior.

Got it. Makes sense. Lastly getting back to ARPU, as you guys roll out more fiber and upgrade the coax, the sort of Optimum West, is there room for you to sort of grow ARPU from here, do you think, as you look out over the next year or 2?

Yes, I believe that we've been able to get to a point of stabilization. And then as we leverage assets like fiber, as we sell in gig and multi-gig, as we bundle in mobile, I do think that there's an opportunity to stabilize and then find opportunities for growth.

You mentioned a new hire running the business segment. You talked about that as an opportunity, maybe talk about where -- how you see your sort of penetration of the business market now and where you can take that to.

Yes. I think the reality is that our -- we're very focused on connectivity. And I come from a world where there's much more focus on solution selling. And we have an opportunity to really build out the portfolio, to grow ARPU and to grow the business. And so there's exciting opportunities when you think about solutions like cyber, cybersecurity, LTE backup, managed WiFi, SD-WAN. It's just the tip of the iceberg. Mobile, we didn't even get into mobile yet. And so connectivity is great, but we don't -- we want to be more than just connectivity. And we want to be operating at all levels, SMB, mid-market, maybe one day enterprise. And we're excited about bringing on someone with the level of industry experience like Michael that can help us build out the portfolio, build out the operational discipline and help us start to grow that business. And you saw a little bit of that growth in Q3, just through some rigor in terms of driving sale to completion rate and making sure that every day, we're waking up and we're looking at the installs, and we're making sure that they're getting done. And if they're not getting done and they're falling off the rails, we're putting them back on the rails, even simple things about like putting in the right quota and putting in the right sales compensation. And so these operational items will help us really put us back on a path to growth for B2B.

Are you seeing any pressure in the B2B segment on -- from fixed wireless? Mike Cavanaugh was here earlier today. He kind of mentioned that, that was one area where fixed wireless was starting to make some inroads.

Yes, we are. I mean I think Verizon, in particular, we've seen really good focus there. We just need to -- we have the right tools. We have the right portfolio. We just have to get on the offensive. We haven't done a great job of telling our story. We're starting to do that. We were a bit gun-shy in the past of even having any marketing that told our story versus fixed wireless, and now we're starting to do that. We think we have a great product. We think we have a great value proposition. We're excited to bring mobile into the B2B portfolio. We think we'll have that done in the first half of 2024, and that will give us Optimum Complete for business solution that will allow us to compete even more effectively with solutions like fixed wireless. But that being said, we also have a path and a trajectory to deliver a broader portfolio and then even shoring up the portfolio. There's elements of the portfolio where we don't have a full solution set of video and voice. And so we're shoring that up as well.

So yes, let's turn to wireless. So I think you said that you've seen a year-over-year, and I'd have to look the numbers up, sort of 5x increase in the net adds on a year-over-year basis. So what's driving that? Can you just talk about where you are in the wireless strategy? I guess it's a small base but growing, where those subs are coming from and what channels are -- that they're using.

Yes, we're really excited about mobile. It's one that we have -- I have a lot of familiar with from my previous life. It took us some time to get our legs under us, but we did it, and I know we can do it here as well. And you're starting to see that. I think first and foremost, we needed to build it into the packaging. It was kind of sitting on the outside when I showed up, and it was -- there wasn't a real go-to-market strategy. I think you know last year, we had kind of this free offering for a period of time, but that wasn't long-term sustainable. The good news is that we were able to convert 60% of those free customers into paying customers. But some of the structural things that we did, first and foremost, we've invested in retail, and we made it really clear that retail is to sell. That is the purpose of retail. And we're converting the culture and converting the leadership and really the focus to selling mobile first and foremost. And we're seeing incredible performance by our teammates. We've adjusted the compensation. We've adjusted our incentives. We're just doing basic things like performance management. And combining that with Optimum Complete, we're able to tell that story much more effectively. And so we're seeing great performance in retail. We're also -- which is more of a base management-type strategy, but we're also seeing great performance in our inbound channels, which are primarily driving our growth adds. We've seen -- we've been able to double the attach of mobile since we launched Optimum Complete. And it's just a matter of putting in that rigor and discipline to communicating the value of mobile and the benefits that it delivers. We've also opened up new channels. Retention, care. Historically, these are channels that I'm used to also participating in selling solutions and making customers aware of the value and the products that we have available to them, and now we're doing that. And we're seeing great performance across retention and care as well.

Is that -- can that be like a lead offer, right, a bundled broadband and wireless? I mean is that -- I mean I can't think of it right now. But I mean do you guys go to market with advertisers and say, hey, save X amount on your bill over the course of the year with these together? I mean is that...

No, that's right.

Aside from just sort of penetrating the existing base but sort of growing both broadband and wireless?

Yes, that's right. We offer $300 annual savings when you stack up Optimum Complete against fixed wireless solution like T-Mo's. We offer $500-plus annual savings. And so we need to continue to raise awareness, nonsub awareness, our customer awareness that we have mobile. And so that's been a huge focus of ours, integrating it into our marketing and making sure that we're talking about it at the right level so that people are aware that we have this solution in our portfolio. But we do think it's a great conversation, both in terms of acquisition and in terms of base. When customers are calling us in retention, they're really looking for solutions to save sometimes on their monthly bill. And this is a great conversation for us to have. And we're finding that it's absolutely resonating with our existing base, but it's also resonating from a go-to-market perspective. There's more work to do. It's also very helpful when you think about some of our West markets and we're competing against these fiber overbuilders, who don't have solutions like mobile and video in their portfolio. It allows us to offer a much broader portfolio of products that our consumers are looking for.

How should we think of trends in video? I mean, obviously, you guys, like the rest of the industry, are seeing video losses. But I remember Jim Dolan complaining about profitability in video 20 years ago. So I can't imagine that's a huge sort of profit pool for you at this point. But how do you look at that product sort of over time? I mean I could imagine sort of continued losses, but talk about trends in that business.

Yes, 50% of our customers take video. So it's a very important product. And the near-term objectives, there are 3 is to: one, rightsize our pricing, packaging, tier mix. Our video margins, as you saw in Q3, have expanded a bit, and so we're on that journey. We need to rightsize video within our existing portfolio. And part of that rightsizing also includes fixing some of the structural costs related to supporting video like self-installed. So where I come from, historically, we had very robust self-install options for video, which we don't have today. And so we just launched a stream video product that is one, an amazing viewing experience, but also allows customers to install the solution themselves. And so we're going to be launching that capability in '24 so that customers can -- and again, that's going to be tens of thousands of truck rolls that we can pull out of the system and deliver a better customer experience. We're seeing that on broadband, where we've doubled our usage of self-install on broadband. And we have higher onboarding NPS, and we have lower cost because we're pulling out truck rolls. And then third is there does need to be a different conversation with our programmers, partners. They are our partners, and so we need to work together. We need to put the customer at the center. Today, I have to tell you, traditional video defies the laws of basic economics. Demand is at an all-time low and price and cost of content is at an all-time high. And so we didn't get here overnight, it's taken decades. I know how we got here, but we need to figure out the path forward. And so those are the conversations that we're having. And customers want direct-to-consumer offerings like streaming. They want -- they don't want content that they don't watch. They don't want to have to pay for that. And so as I think about video going forward, first and foremost, we're a connectivity company. We're leading with broadband. We're leading with mobile, but our customers are consuming video. That's the #1 thing they consume, and we want to be able to provide them traditional video solutions, direct-to-consumer solutions. We want to have a platform that allows them to consume that video, how they want it, where they want it. Customers are telling us every day, I've got too many log-ins. I've got too many billing relationships. I'm confused. Please help. And so that's our objective is to find a path to help with platforms and partners that will come alongside to put the customer at the center.

You just launched this -- you're launching the streaming service in '24. I mean, over time, do you see that becoming the sort of core video service or sort of moving away from the sort of traditional set-top box and going to sort of adoption of a more streaming focus? And within that, what's the possibility of sort of basically getting out of the video business altogether and just sort of like reselling like a YouTube TV or Hulu with Live as your main linear strategy?

Yes. I mean I think in the near term, there's a couple of things. The stream service is actually a stream box that we've launched. It's an Android-based box that is self-installable. We'll be offering it in our retail centers, we'll make it available. There are absolutely folks that want kind of a traditional video experience, and we want to make that available. That being said, it runs as an app on that Android box, which you can now download on Apple TV or any other OTT streaming box. And so okay, you want a traditional box from us. We have it. You want an app, you don't want our box. You have an Apple TV box. We want to be able to allow you to watch our video service through that. But then, yes, in the future, there may be a whole host of solutions that we can bring to market. But we are, again, in the early innings of looking at those types of solutions.

Turning to margins. We've seen some real margin degradation, a lot of it ARPU-driven, new cost-driven, but we've got some sort of highest margins in the wireless space to the lowest, which makes sense given your scale. I mean how soon -- obviously, this is sort of crystal ball forward-looking, but when can we start to think about margins bottoming here and starting to move back in?

Yes. I'm excited that over the last few quarters, we've stabilized our OpEx. We've stabilized our margins. We think that there's continued opportunity to remove noise. We're really in the early innings of this digital transformation. This is a conversation that we're having internally for every element of our business. We need to remove phone calls and just make it simple for our customers to use a mobile app, to self-serve, to chat, to use our IVR to get text messages and just self-serve and remove some of that noise, which will improve the customer experience and remove operating expense that's just weighing down the operation and then removing truck rolls. We've removed 300,000 truck rolls in the past year. With our focus on first-time right, quality products, quality networks, driving self-install, we think that there's more opportunity there. That, in combination with stabilizing our ARPU erosion, stabilizing our subscriber performance, we -- I'm confident that we can get back to a path of growth.

And then lastly on the financials, just CapEx, obviously, slowed a bit with -- looking at your procurement. How should we think of your sort of fiber build plans going forward?

Yes. We came into the year at about 25% CapEx intensity and came in hot. The weather was good. We built like crazy. We got a lot of that work done early in the year. We had some things that happened during the course of the year. But when I started at the company, I made it clear that we were shifting our fiber strategy. First was in the West where we said we're not going to fiberize the entire network. We're going to be disciplined. We're going to be surgical in how we deploy fiber in the West, and we're going to really focus on deploying fiber in our new build footprint. And in the East, we're also going to be very disciplined. We've now brought that 25% CapEx intensity to 15%. We think going into next year, we'll be a bit north of that 15% but we want to -- we still are bullish on fiber, but we're going to do that in a much more moderated pace. I'm very bullish on our new build strategy. We've delivered 2% growth over the last couple of years. And we're very focused on doing that in an effective and efficient way going forward. And then we have 2.7 million fiber homes, and we need to drive more customers to that fiber network.

Got you. And the remaining time, I want to turn to the balance sheet. Obviously, a lot of worry about the '24 and '25 maturities in that sort of higher-for-longer world. How do you think of these maturities and the risk they pose to equity holders?

Yes. We -- the good news is that we've been able to raise that $1 billion guaranteed note in April. We completed the amend and extend at the end of '22 that pushed out some of the maturities out of '25. And so we feel really good that we have the runway we need to rightsize the business, really get into the proper operating rhythm. That being said, we're very focused on continuing to drive down and look at all the right options. And so we're looking at those options and talking through options every day. And we'll be ready to move forward in the first half of next year.

First half of next year. And is ABS similar to what Frontier did? Is that a potential option for the company?

Yes. We're in the early innings of those conversations. That is an option. We're looking at all options, but that's one that we're in the early innings of exploring. And we'll continue to pursue that as we move forward as well as just making sure we have a holistic view of all options.

Great. Well, Dennis, thanks for joining us today.

Yes, thanks so much. Great to speak to you.