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

All right. Good morning, everybody. I'm Ben Swinburne, Morgan Stanley's Media and Cable analyst. Please note that important disclosures, including my personal holdings disclosures and Morgan Stanley disclosures all appear as a handout available in registration area and on the Morgan Stanley public website. And we're really excited to welcome back to the conference, after a 1-year hiatus, Altice USA, and welcome for the first time Chairman and CEO, Dennis Mathew. Dennis, thanks for coming.

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

Good. All right. So you have been CEO and Chairman of Altice for about 18 months, which is a relatively brief period of time. Maybe you could talk about what you've been focused on with the teams since you arrived from Comcast and what you're sort of -- how you're spending your time.

Yes, absolutely, 18 months, my goodness. Feels like a minute and it feels like 10 years. It's -- I tell everybody it's 90% exciting and exhilarating and a little bit exhausting at times, but the mission keeps me motivated. Now our #1 focus is to drive maximum positive impact for our teammates, our customers, our communities that we serve, and the shareholders by accelerating our transformation. And there's a few tenets to that. First and foremost, we want to drive our culture and transform the culture, and that is critical to us driving the transformation. We need to operate with a level of discipline, financial discipline, operational discipline and rigor. We need to put the customer at the center of everything that we do. And in '23, as I shared on the earnings call, I'm happy to share that we are starting to deliver. We set some goals and objectives and we accomplished those. When you think about the cultural transformation, you may ask, well, how do you bring that to life? What does that even mean? And the leadership team is pivotal to driving a culture of winning, driving a culture of discipline and execution. And so current teammates have taken on new and expanded roles. And then we brought on over 100 new VPs and above. Sales, marketing, product, finance, procurement, supply chain. No small task to identify, vet, onboard these folks, and that journey continues, but we're probably 80%, 90% of the way through. We said we were going to put the customer at the center of everything we do, and we'll talk more about this, but quality, quality products, quality network, quality service. Okay, those are great words but there's a whole host of actions tied to delivering. The good news is that we've had 20-plus point improvement in NPS, and so the strategy is coming to life. And then we said discipline, financial discipline. We're going to stabilize OpEx. We're going to stabilize our CapEx intensity. We're going to moderate ARPU erosion, and we're going to deliver free cash. And so we did it in '23, but what it took to win in '23 is not -- it has to continue to grow and evolve in '24, and that's the journey we're on.

That's a great overview. When I talk to investors about Altice, the #1 question is getting back to growth in the business. So you just listed a whole bunch of things you and the team are doing internally. How would you sort of summarize what you think needs to happen, either internally, externally or both for the business to start to grow again?

Yes. We got to get back to the basics. People want quality and value, quality and value. The competition is more fierce than ever and so we have to be firing on all cylinders across those 2 dimensions. And so on the quality side, we've stood up a whole host of programs to ensure that we are delivering on first time right. The problem -- there shouldn't be a problem. But right now, we have a problem. And so when there is a problem, we need to solve it the first time. And we need to have accountability. We need to drive performance. We need to provide the right tools, the right training. And we're starting to see that come to life as we look at contact rates coming down, as we look at truck roll rates coming down, as we look at the ticket, escalation tickets coming down. We're not where we need to be by any means. But those are key indicators for me as I think about, are we headed in the right direction? We can't solve everything overnight. There's no silver bullet. People say, Dennis, just, blah, do this There's no silver bullet. There's 10,000 small things that we must do and we will do them. We will maniacally prioritize and then we will execute. And so there's a whole host of quality initiatives and metrics that we're focused on. And then there's the value. Well, we just unfortunately did not have a base management strategy of any sort. And so we've started to bring that to life. And so that includes, and I know we'll talk more about this a bit, the pricing. That includes the product portfolio. That includes speed. And ultimately, that translates also into less noise in the system. As I look at less calls into our retention queues, as I look at stabilizing churn, these are all leading indicators for us that we are moving the business in the right direction.

Yes. And we've seen that as the results improve certainly through '23. You have been in the cable business for a long time and we've talked a lot about competition. It could be as competitive as it's been certainly in a long time. I'm wondering, do you think the level of competition prevents you from getting the business back to growth? Or is it really all more or less in your and the team's control?

It is. I mean, let's be clear, it's the most competitive that I've seen in my time. But I think we have the tools to win. First and foremost, we should compete. Now when I came, there wasn't a proactive competitive strategy. And we have to compete in line with the local competition. And so when you look at the East, we've got 70% overbuilt with Verizon, a very mature fiber overbuilder. And then when you look at the West, you've got small fiber overbuilders. You've got AT&T and a bit of a pocket. And then kind of over all of that, you've got fixed wireless now kind of popping up, and when they have capacity on their network, they get a bit more aggressive and then when they don't, you hear less from them. And so that's happening and kind of pulsing throughout the entire space. And so this is why it's so important for us to have feet on the street, our leadership teams, our Optimum market structure that we've put in place to help us ensure that we're giving them the right tools. They know the competitive landscape. They know who is building or not building or paused building. They know what marketing is happening in the local towns that they're competing in. They know what offers are there. And we need to build playbooks that will allow them to compete most effectively. And so I believe that we have an incredible network. We have an incredible product portfolio. We have all the tools necessary to compete against the spectrum of competition, but we need to be much more disciplined. We need to be much more present. We need to be driving proactive competitive tactics versus when I showed up, we were unfortunately constantly on our back heel and constantly reacting. And now we need to take the driver's -- the steering wheel and start to drive forward.

Got it. I want to ask about your network in a second, but before we do, so as we focus on '24, what would you tell the investment community to be focused on and tracking your progress and kind of how you would define success this year?

Yes. We're going to do more. More in terms of customer experience and quality and delivering and improving our service so that we continue to drive out calls. We continue to drive down truck rolls. We continue to stabilize our base. We're going to continue with our financial discipline and deliver free cash at the end of this year by moderating our CapEx, by being disciplined around OpEx. We're going to continue to see improved residential ARPU trends. We saw that year-over-year from Q4 to Q4 '22 to '23. And we're going to continue to be disciplined in terms of our go-to-market offers, in terms of our pricing and packaging, and making sure that we have that discipline in every channel, sales channels, retention channels, care channels. We're introducing tools to enable our teammates to be able to do that more effectively. We're going to continue to drive mobile. We're really excited about mobile and the impact it's having on the business. A 20% churn benefit, for one, which is exciting. People are looking for one provider to provide in-home and out-of-home connectivity. But we're also excited about the value it provides to the business. Gross margin positive and we're just getting started. There's more growth. And then fiber. We are -- and we'll talk more about that, but we have an amazing fiber network, 2.7 million homes growing to 3 million. And so in '24, we're going to be laser focused on initially fixing some of the operational issues tied to migrations so that we can really hit the accelerator in the back half of the year.

Okay, that's a good segue into and -- thank you. So this was a question that your predecessors would get all the time, which is why does it make sense for Altice, especially given the known balance sheet focus and free cash flow to build a fiber network, to go fiber-to-the-home when the rest of the major cable operators in the U.S. are generally leveraging DOCSIS and other sort of, maybe we'll call them evolutionary technology? So then you came from Comcast. You know it's not a religion for you, so you've decided to embrace the fiber build. Why does it make sense for Altice?

Yes, the strategy is evolving. When I joined, it was -- one, I was excited about fiber because I was competing heavily against Verizon in my old footprint. And when you're competing against a mature fiber provider like Verizon, I do find that it's helpful to have the best product, when you're competing and you're delivering on all cylinders, on quality and value and all -- when you're firing on all cylinders, then you've got the product piece, and it matters a lot. And there is a much more proliferation of understanding symmetrical speeds and multi-gig speeds. And so it was exciting to me to hear that investment that was being made here in the Northeast as we are 70% overbuilt by Verizon who has fiber. We have much better fiber with our XGS-PON and able to deliver 8-gig symmetrical speeds. So we have modern technology fiber. But as I looked at the West, it was clear to me that there were many other tools in our toolkit that we were not using. And so everything from mobile to being able to provide solutions to delivering better quality, to being able to provide the right level of service. And so we decided to pause that strategy to overbuild the West and focus on continuing to deliver the East. And there's a great return. When you look at the customers on fiber, it's undeniable, the satisfaction, the churn benefit, the incremental ARPU. And so this is the year to monetize that investment. This is the year to really start to drive customers on to fiber in the East and then use fiber strategically in the footprint. But to your point, when I looked at being from cable and DOCSIS, I said, hey, we need to invest in DOCSIS, too. And so we invested and upgraded 300,000 homes in the West to 3.1, and we're going to keep going. We'll do another 200,000. And so it really does have to be a balance because it's not one size fits all. We need to have the right products, the right service, the right go-to-market strategy based on the competitive landscape.

Is it sort of too early at this point beyond '24 to think about how much more fiber you build versus leveraging 3.1 or mid splits or any other technology?

We're looking at it every day. When I look at the East, I still see a path to continuing to build fiber, continuing to drive more customers on to fiber. When I look at new build, whether it's in the East or in the West, where there's opportunity to drive fiber where it makes economic sense and the right return on investment. And so we're going to take a balanced approach. We're meeting literally every month, looking at what are the opportunities ahead of us. And we've got great problems to solve. We're in 4 of the 16 fastest-growing cities in the country. That's amazing. And that's outside of the amazing footprint we have in the East. And so it's, okay, where are we going to get the best return? Where do we want to deploy capital and ensure we drive this transformation at the right pace?

You did report fiber net adds accelerate -- that accelerated in the fourth quarter, you were doing earlier in the year. Can that trend continue as you guys focus on migrations here in '24?

Absolutely, absolutely. I think as I mentioned on the earnings call, as we really started to roll up our sleeves, we did identify some operational and technical challenges that need to be solved. And so that's a big focus for us in Q1 and Q2. So we're -- we haven't stopped. We're continuing to drive migrations as well as gross adds on to the fiber network. But the second half of the year, we're going to really hit the accelerator. We had the fortunate opportunity to bring on Luciano Ramos, our new CTIO, as well as Nate Edwards, our new EVP of Field, partnered with our Head of Consumer Sales, Morgan Collins. And they put together a SWOT team to really help us accelerate because we had some challenges. And so we're going to work on solving those issues. And then I'm confident we're going to be able to hit the accelerator in the second half of the year.

Great. So I'd say after the fiber build, the other big topic that has been discussed at Altice over the years with your predecessors as well has been pricing and packaging. And I know you mentioned base management earlier. I was interested to hear you on the call say only 5% of your broadband customers are actually on your broadband rack rate price, which feels like a very low number. I've never run a cable system, but 5% seems like a low number. So can you talk about how much of a headwind pricing packaging back book, front book has been to the business in the past? And you mentioned the ARPU trends are improving. How hard is it to fix this?

Yes. Really, the headwind is the lack of a base management strategy, which includes pricing. It includes rightsizing folks with speed. It includes getting people into the right products. The big headwind on pricing, quite frankly, as we did the research, talked to our customers, listen to calls is that we had a lack of transparency, a lack of predictability. And we needed to solve that. People wanted transparency, simplicity, and predictability. So these are all the things I want in a product. And so the new pricing structure allows us to deliver on that so that folks understand what's my price now? What will it be in 12 months, 24 months? And shrink the gap between the front book and back book so that it just makes it a much more predictable experience for our customers. This was a major pain point, headwind that we are in the process of solving. Part of that also included the price value equation, where I'm used to a world where as we're upgrading the plans and upgrading the network, we're able to provide some of those benefits to existing customers. And that discipline and that strategy didn't exist. And so in the last few months, we've upgraded over 100,000 customers to faster speeds, and that journey will continue. And we've gotten great feedback from customers in terms of, hey, thank you so much. We -- just something that was pleasant surprise, and that just builds long-term customer loyalty. And then having an active dialogue with our customers about our broader product portfolio, particularly mobile and Optimum Complete. And so that's been a great conversation to have. And so the big headwind that we've had to work to resolve has been this kind of absence of a relationship with our customers. And so now we are on the offensive to tell our story, have a relationship and make sure that they feel like they have the right level of quality and the right value, whether that's broadband, whether that's mobile, whether that's video, and our new stream product, these are all great conversations that we can have and customers want to have.

If you're successful, and I know it takes time, are you able to, you think, drive broadband ARPU growth in the business because that would obviously be quite helpful to the business.

Yes. And we're laser-focused on residential ARPU because now we have these packages and we have internal allocation, which we don't need to get into here, but I am very confident that we will grow. We are establishing a strategy that will allow us to grow residential ARPU. It will allow us to drive more mobile. It will allow us to drive gig and multi-gig speeds, which we're now doing in a way that we haven't done in the past. It will allow us to have a conversation about video and just really grow residential ARPU in the long term through these strengthened relationships.

Yes. Again, sticking with the theme of sort of self-help. Self-installs were up, I think, 70%, you said, in the fourth quarter. Has this been something that's weighed on the business in the past, not having a robust self-install option for consumers? And are you sort of there now in terms of giving them what they want?

It's just like a win-win all around. We have better onboarding NPS. It's no surprise. Not everybody wants a stranger in their house to install products. Some are very comfortable receiving a box now that we get boxes every day from Amazon. You get a box, you open it up. There's some instructions. There's some -- and so many folks are very happy to just be up and running. So we have to make it easy. We have to be there for them if they have an issue, and there's still opportunity. We've been able to meaningfully change the trajectory of self-install this past year. There's still more eligibility opportunities as we look at different use cases and make it more available to our customers. And we're going to expand self-install to more products like video. Now that we have our new Optimum Stream product that will allow us to make it -- make self-install available to them as well. And so this is better customer experience, lower cost, win-win all around, and we're excited about continuing to expand it in '24.

Maybe last kind of operational question. So customer service, something you're very focused on. You mentioned NPS scores. You have to do all this with a relatively locked OpEx space. You mentioned stabilizing OpEx. So the question is, can you continue to improve customer service trends without having to put a lot more money into your call centers, either in-sourced or outsourced?

People ask me, basically, do you have what you need to be able to deliver on this business? And the answer is this has nothing to do with investing more. This has everything to do with operational discipline, driving execution. We need better training. We need better tools. We need better performance management, all of which we just need to, now with our new leadership team, elevate the technical acumen, the operational acumen. We have a whole host of business partners. They need to be held to the same level of quality and standard that we would hold ourselves to. And so having a governance process, having the ability to hold people accountable, performance management. And so there's still opportunity to continue to improve customer experience through the blocking and tackling of everyday operation.

All right. Let's talk about competition. You already sort of buried the lead here by saying it was the most competitive you've ever seen, so that kind of sets the stage in terms of how competitive it is. Maybe spend a couple of minutes talking about how you plan to compete and win back customers. And I'm guessing the answer varies whether we're talking about sort of the East or the West in your footprint.

Yes, there's some foundational things that we needed to put in place. As you mentioned, I've been in the industry 17-plus years before I showed up here. And it's very clear to me that you need to have a level of local, regional leadership because the footprints are very different. Historically, when I came, it was one size fits all. And that's just not the case. I've been traveling around the country. And the reality is that College Station is very different than Brooklyn, which is very different than Flagstaff, which is very different than Charleston, West Virginia. It's no surprise. And so it can't be one size fits all. And so we've hired up some small, lean, mean teams, Optimum market structure to just drive different result, whether that's local retail strategies, local go-to-market strategies, the ability to execute with more precision, having the right offers in place. All of this matters even more because there's less jump balls. There's less moves than we've ever seen, right? Interest rates are high. There's some macroeconomic challenges that we have no control. Okay, so then we have to control what we can control. And that is our ability to execute at the highest level for every jump ball. And that is the team, and that is the system and processes and playbooks that we're putting in place. And so it does look a little different when you're talking about a mature fiber provider like Verizon because they've got the full portfolio of products. And so now Optimum Complete is that much more important because when you take our broadband and 2 mobile lines, you can save $1,000 versus a like-for-like solution in a Verizon territory. But we can look a little bit differently in an area where there's a fiber overbuilder, and we shouldn't have the same exact price and the same exact product portfolio because there's no mobile there. They have no video there. And so now we can monetize and compete much more -- much differently and more effectively depending on the cost competitive landscape. And then you've got fixed wireless that sits across both. And there, we have to have -- equip our teammates to tell our story because a fixed solution, in my mind, is -- not in my mind, reality, from a technical perspective, is superior to a fixed wireless solution. But we have to be able to tell that story of what and why and how we can deliver great product and great value at the same time.

And on to the mobile front, you've had some good numbers there as well. Is that a business you expect to accelerate in net adds as you look out into '24 as well?

I'm really excited about mobile. When I first joined, I saw this kind of as a tool sitting dormant in our toolkit. And we decided to elevate it. We made clear our mission is to be the connectivity provider of choice in every community we serve. And so that's connectivity in the home and outside the home, and so that includes mobile. We have -- we're very happy with our MVNO relationship with T-Mobile. We have access to the largest 5G network in the country. And so we built Optimum Complete as a package, which delivered on this promise of simplicity, predictability, transparency. You knew what the price was, you knew what the step-ups were over time. And now we're seeing a meaningful acceleration in mobile, in all of our channels. We elevated retail to become a sales destination of choice for mobile. And so we put up a good result in '23, but the goal is to continue to build on that. I do believe that we can get to the, once you normalize for size, similar run rates to what our peers are doing. There's no reason why we should not be able to get to similar run rates in terms of sales and overall penetration.

Got it. That makes sense. Okay, so we talked about broadband and wireless. I do want to spend just a couple of minutes on video. I know it's a smaller piece of the business...

Simple topic.

Might be the most complex one. But you still generate roughly 10%, 15% of gross profit dollars from the video business. That business is being disrupted, as everyone knows. I'm sure it will be a big theme this week at the conference. How are you managing the video business at Optimum? And are you thinking about more kind of dramatic business model pivots, the likes of which we've seen from maybe a Cable One or what Charter is trying to do with their programming deals?

Yes, there's a whole host of objectives here. One is from a short-term perspective, we just need to rightsize the business. And we need to be much more disciplined in terms of pricing and packaging and, similar to our peers, passing through cost inflation and being much more disciplined there. And so that journey has already begun. You saw us start to make some of those changes in '23 as you looked at video margin, and we're going to continue on that journey, to just be more disciplined about video and how we price and package it. That being said, there's a whole host of medium- to long-term solutions that we're looking at. We do know that video is the #1 product consumed on broadband. People are consuming more video than ever. But they're consuming it in all different ways. They're consuming linear video, they're consuming streaming video. Of course, linear video viewership is declining rapidly. And so we need to have the right solutions to allow folks to consume however they want. And so you saw us take a step in that direction with our new Optimum video stream product. It allows -- it's built on the Android platform, and it allows you to consume linear video through an app, and it allows you to watch whatever other streaming service you like. And so our consumers are telling us, though, that they would like us to make it easier, to make it simpler, to allow them to consume more video. Everybody has got -- the consumption appetite is insatiable. And so we're here to help them solve that. And so we're looking at all different solutions. There's opportunities for us to continue to evolve the current solution that we have, and we're rolling out stream in the near term. We've rolled it out across the East. Our goal is to roll it out across the West in its entirety this year. I mean, that's pivotal to make it available to all of our customers. We want to make it simpler for customers to be able to manage all their subscriptions and all their billing. Well, there's lots of different partners that we are -- we could partner with. And so we're looking at those solutions and figuring out what makes sense for us long term. But in the short term, we are having conversations with our programming partners to put the customer back at the center and really fighting for our customers when we look at rate, when we look at these inflexible packages that have viewing content that people don't want with content that they do want and how do we make them more flexible and then ultimately ensuring that they have access to direct-to-consumer solutions in the near term. And so these are all conversations that are happening. We will be launching some new packages later this year that provides a bit more packaging flexibility, content flexibility.

Skinny bundles, that sort of thing?

Yes, some bundles that are informed through consumer research so more to come on that in the second half. But this is all part of the journey that we're on.

Everyone has a strong view on the sports streaming JV that you may have heard about, while you've been doing your day job. There's been a lot of news on that front. I'm just curious, I'm not going to ask you to opine on sort of how successful it would be, but would you like to offer your customers a package like that? I think it's 14 channels, a lot of the sports people like. You think that's something that flexibility would be interesting for Altice and interesting to consumers?

Yes. This is exactly the conversation. One, I think we've got to wait and see where kind of the dust settles. I know things are still forming, but we want our linear customers to have access to these types of solutions. And so how do we do that in a way that's a win-win, win for the customer, win for the programmers and win for us. And I don't think we're there yet. Those conversations are not happening at the right level. And so those are some of the discussions we're pushing to have in the near term.

One quick one on Business Services or Commercial, your Lightpath business. Are there opportunities to accelerate that business as well?

I'm really excited about our B2B business, which includes Lightpath and the new partnership we have with that team. And we just hired Michael Parker as the new President of our B2B division. And I think we're in the early innings. We're in the early innings. If we're in the third inning of consumer, we're like in the first inning of B2B. We have an opportunity to drive just a much higher level of operational execution, driving sales productivity, driving completion rates, driving quality and customer experience. We have an opportunity to build out a much more robust product portfolio. Today, quite frankly, all we do is provide connectivity, and that's not acceptable. If you look at our peers, they have rich product portfolios, which include cybersecurity, LTE backup, WiFi solutions, managed solutions. And so that's the journey we're on. Mike has hit the ground running with his team. He's building up his new team, and I'm confident that we have a path to drive growth through B2B.

Got it, okay. Well, in the time we have left, I want to touch on your balance sheet and kind of capital structure. When you took this job, obviously, eyes wide open on sort of level of leverage. I guess the first question is how much does the debt level and leverage level impact your ability and execute on all the things we've been talking about for the last 35 minutes?

One, I'm just really appreciative of Marc, our CFO, and the entire team. They've been doing just incredible work on our capital structure, and this recent refinancing has helped us clear the runway to really just allow the business to operate. We've got 3 years now where we can just be heads down, focused on driving the business and driving this transformation. And so we're going to be -- we are committed, Marc and I, hand in hand, to be fiscally disciplined. We're going to be looking at the investments that we make, where we're making them, why we're making them, what's the return, what's the return horizon. We need to have the right balance so that we can meet all of our commitments. And so we've got the room to operate now, and we've got the focus on driving the business.

Over the years, Altice has, at least according to the press, entertained asset sales -- actually, not just according to the press, you sold your Cheddar business recently. Suddenlink was, I think, in a process many years ago. Are asset sales, I mean, you guys are considering as you think about trying to delever more quickly than you could naturally?

Yes. I'm a big fan of cheese, but we did sell Cheddar recently. And -- but I really like the businesses and our portfolio and our geography, and so we're heads down focused on driving the business. Opportunistically, we'll look at transactions opportunistically. And -- but we really want to focus on growing the core and not be distracted right now.

Well, I have to ask you, at least give you the opportunity to comment. There was a Bloomberg story a week or so ago that Charter was considering a bid for Altice U.S. Is there anything you would like to -- I don't know if you heard about that. Check your email.

Well, 3 things. I want to say 3 things about that. One is we're a controlled company. Two is, I don't speculate on what other companies may or may not be doing. And three is that my #1 focus is to drive maximum positive impact for our teammates, our customers, communities that we serve, and our shareholders by accelerating this transformation.

Great. Well, we're basically out of time. Anything you want to wrap up with before we sign off?

Really appreciate this opportunity to continue to tell our story. Thank you.

Thank you for being here. Thanks, everybody.