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

Okay. Good afternoon. For important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales rep. Excited to welcome back to the conference, second year in a row. Good to have you back, Dennis Mathew from Altice USA, Chairman and CEO. Dennis, good to see you again.

Yes. Great to be here. Great to see you as well.

Thanks for coming back to Chile, San Francisco.

Yes. Happy to.

So I think it's been about, what, 2.5 years for you as a CEO of the company. So from your perspective, when you look out over the next 2 to 5 years, what are the places that you and the management team are most focused on and you think can drive the most value for shareholders?

Yes, we're excited about this journey that we've been on. On the previous call, I mentioned that we've completed Phase 1, which has allowed us to really stabilize the business, transform the culture, build an incredible leadership team and stabilize our network and the products that we have and deliver the level of quality that our customers' demand and rebuild the trust with our teammates. And this is all foundational to helping us drive this transformation. As I look out across the next 2 years, we have tremendous opportunity to continue to drive our go-to-market strategy to continue to drive how we compete. And so, we put some mile markers out there. We want to grow mobile to over 1 million customers. We want to grow fiber to 1 million customers. We want to launch new products and services and really drive adoption and monetization of those products and services. We want to continue to elevate our quality and so that we can compete at the highest levels. We announced in the last call that we now have a multiyear network strategy that will really help us compete at the highest levels. And so I'm excited for where we've been, but now it's time to hit the accelerator and really drive growth, really stabilize broadband and ultimately drive EBITDA and cash flow growth, and we have a whole set of strategies to help us get there.

So you mentioned some of the targets you guys have laid out for us. Mobile lines, you mentioned fiber subscribers, but you also have some margin expectations, including 40% EBITDA. So how do you grow? You just said it's time to grow, trying to go on offense and also, at the same time, generate consistent free cash flow year after year and get your operating margins up.

Yes. So the last 2 years have really been about getting the right people on the bus, getting them in the right seats and just rolling up our sleeves and stabilizing the organization through just share will and hard work and resiliency and the team has done an incredible job. And now we have an opportunity to really establish sustainable systems and processes and lean into digital and automation and AI, and we could spend so much time here because this is not just words. These are actions and plans that are coming together. We laid out a target and a goal of continuing to drive OpEx efficiency of 4% to 6% by the end of '26. And we are laying out a plan that will really get us there as we continue to drive efficiency in truck rolls and call volumes and really make it simpler for our teammates and for our customers to engage with us. So this is a huge opportunity for us in terms of driving efficiency while raising and elevating employee experience and customer experience. And then at the same time, we do have the headwinds of video business continuing to see cord cutting, but we're launching new products. We're driving mobile. We're driving fiber, we're driving value-added services like total care, and we're launching whole home WiFi, we've launched connection back up. So these new products will help us drive the top line while we drive efficiency into the business through digital and automation and AI.

So these are -- most of these sort of '26, '27 targets. If we focus on '25, what are the things that we and the investment community should be looking at to sort of assess how well you're doing on your way to these longer-term goals?

Yes. The good news is we're not waiting until '26 and '27. Over the next couple of quarters, we'll be laying out a very clear strategy on how we deliver on these goals and objectives. We invested in some global benchmarking in Q4 to help us understand where are the gaps, where are the opportunities? How do we really ensure that we have a clear line of sight to delivering on these goals and objectives and make sure that we have the proper prioritization of programs and projects to execute against? And so you'll see quarter-by-quarter are we continuing to drive and accelerate mobile? Are we continuing to drive and accelerate these value-added services that we keep talking about, which are really in the single digits in terms of penetration, and we'll start to deliver that in a much more meaningful way. You'll continue to hear about how we're driving connection backup and other products and services on the B2B side and how we're driving growth there. Historically, we've really just been a connectivity business on the B2B side, and now we're building out a whole portfolio of products that will allow us to drive ARPU and growth. And so we'll provide regular updates on how we're leveraging these new products to drive the top line as well as driving these initiatives to drive efficiency into business.

Could we expect to see residential revenue, the pace of residential revenue decline that we've seen over the last year or so, improve as we move through '25? Is there no visibility at this point?

That's right. I mean, if we go back to EBITDA, in particular, when I joined nearly a 13% decline. And then we've been able to moderate that in '23 to less than 7%. And this past year, under 6%, closer to 4.4% and that's been through financial discipline that's been through putting the right governance in place, but also launching new capabilities around pricing and packaging and really making sure that we can execute on promo roles and rate increases and really have a higher level of discipline in terms of acquisition pricing and managing the base to help us further stabilize revenue while at the same time, driving adoption of these new products. And really, this is something that we just didn't have the muscle historically in terms of base management. And historically, our base management was providing a rate increase. And now we have the ability to have robust conversations about new products, new services, new packages that will help us further stabilize ARPU and revenue in '25 and into '26.

We've had a number of conversations with competitors and cable peers of yours over the last couple of days. And one topic, of course, is AI and how that's being leveraged in the operations of the business. Are you doing that at Altice? And where is that having the biggest impact, if you are from an operating point of view?

Yes, we're really excited about how we can leverage AI to elevate the employee and customer experience. we started in our call centers. We started in retention and care. It was really challenging for our frontline teammates when a customer would call. We had very basic tools, literally a spreadsheet where they would have to go through thousands of lines to figure out what offers to provide customers. And we were -- now we have a tool called AVA that allows us -- allows the frontline teammate to really have a much more structured conversation. And we're doing that by leveraging customer lifetime value, understanding the competitive landscape, understanding the products and services and teeing up for that teammate, 1 or 3 or 5 offers that can maximize CLV while delivering a great offer for the customer. And so we're scaling that into care. We're starting to scale that into sales and really help us ensure that our teammates have the absolute most productive, constructive conversation. We're also running pilots with our field technicians so that ultimately, we can elevate the capability of those tools and really ensure that we can drive resolution much faster. And ultimately, we want to become proactive versus reactive, so that we can see on the network where there are issues and challenges. The other big opportunity via generative AI is to really consolidate these knowledge bases and make it much simpler for our frontline teammates and our teammates in general to find the information they need, whether that's employee information around benefits and/or information that they need to help solve customer issues. Today, they have to go into 5 different tools and it takes time to really figure out how to solve and troubleshoot. This year, we will leverage AI to make that significantly simpler.

Got it. Thank you for that update. On -- I want to move on to sort of your fiber and DOCSIS strategies because that's been evolving since you've been the CEO. And as you know, Altice -- the prior team was fiber-to-the-home was really the strategy. It feels like you guys have come to a sort of a fork in the road and moves a little bit more in the DOCSIS direction, that's fair. But I would love to hear from you what -- why you think kind of pulling back on the fiber expansion plans that were there from the prior team and kind of reinvesting back into HFC and DOCSIS makes sense today.

I'm really excited about DOCSIS and the power of the HFC network. I feel like over the last few years, it's really not been well understood the power of this network. And so when I joined, there's a lot of questions, hey, we're going to fiberize the whole country, what's the plan, that's capital intensive. I knew that I was very excited about the plan for the East because obviously, we are competing against a very mature fiber provider there. And I've competed in that space in the past and having a best-in-class next-generation network that delivers 8 gig symmetrical, made a lot of sense. But then we had to do a bit of an inventory of what do we have in the West. And what we found is that we have an incredible network. And we're able to upgrade that network and deliver gig and multi-gig speeds in a very cost-efficient manner. And the return on investment, just the math, it makes a lot of sense. We're able to do this for hundreds of dollars versus thousands or tens of thousands of dollars. And so it took us some time. We had, again, a brand-new team that did an inventory helped us really build that strategy. And we're excited to lean into our incredible DOCSIS network. And we've invested tremendously in getting us to a gig, and we have a path to getting to 65% multi-gig over the next few years. And at the same time, we're unique. We have experience in fiber. And so as we look at new build and new passings, we're going to lean into fiber. And we can do that in a cost-effective manner. And we can do that in a way that really maximizes that capability. And so we have now 70,000 passings in the West. And as we continue to look at opportunities to build new passings we're going to lean into fiber where it makes sense. And so we're very excited about this strategy that really maximizes our return on investment.

So competitively, Dennis, in the East, are you now fiberized sort of wherever you compete with Fios or is there still some more gap there?

We have 3 million passing. So that's a pretty significant substantial overlap. And so we feel like we have what we need to compete, especially as we've now launched mobile across the footprint. We now have these incredible video packages, and we've really evolved our go-to-market strategy. As I've mentioned in the past, we've established local leadership teams that are close to the customer and close to the competition. And we are seeing a real -- some real momentum as we've exited '24 jumping into '25 with our ability to compete in the East, leveraging fiber, leveraging this incredible product portfolio. The reality is we've had to spend some time rebuilding trust with the customer. We've had to really rebuild that trust, rebuild that brand. And now we're winning awards from Ookla and others for having the best fiber network. And so we're going to hit the accelerator now. And we're driving quarterly historic highs in terms of fiber migrations and we're going to continue to drive in the East, and we're very excited for our ability to compete in the West. The West, we continue to see headwinds with fiber overbuilders and fixed wireless, but we now have the right network and right product portfolio to compete.

So what is hitting the accelerator mean from a go-to-market perspective in the East versus the West? Are you using different strategies depending on who the competitor is? Can you talk a little bit about that?

Well, it's -- so I mentioned on the last call, we were doing a 4-market test where we can now look at how we need to evolve our pricing and packaging to match the competitive intensity. When I joined, it was literally one size fits all across the entire country, and that doesn't make sense, and it's very inefficient. And so we now have won the strategy and to the infrastructure to be able to compete more effectively, whether it's having the right retention offers, having more aggressive acquisition offers based on the level of competitive intensity. And that looks a little bit different, whether it's a fiber over builder versus mature fiber provider that has a broader portfolio of products. And so yes, we are evolving. We're not going to have 1,000 playbooks, but we'll have a few playbooks that match the competitive intensity and ultimately allow us to maximize rate while driving volume.

Where are you seeing fiber competition ramp? And what's your sense of where we are in sort of the competition with fixed wireless in the Altice...

Yes. On the fiber side, the East is about 70% overbuilt with fiber, and that's been steady.

Essentially Verizon.

Essentially Verizon, and that's been very steady. In the West, it has been steadily increasing, and it's now at 45% and people always ask me, Hey, how is the pace? Is it speeding up? Is it slowing down? It has been steady. And so I think it will continue to be steady until I see something different. And so we are evolving our playbooks and strategies and planning accordingly. And fixed wireless has come in across the footprint. And they have particularly been targeting the income-constrained demographic. And really, these are challenging macroeconomic times. There was an article in the Wall Street Journal a few weeks ago that literally said that 50% of spending comes from 10% of the population I mean it's like the numbers I've never seen before. We did the research as we are building out this income-constrained strategy and found that 75% of the population has some level of budget strength that they're trying to manage for. And so folks are in a position where they're looking for value and consistency and transparency in the pricing and quite frankly, good enough product in this season, while they're managing through that. And so we are launching some pilots in Q2 and really looking forward to scaling that strategy in the second half of the year. But we're seeing the pace of fiber continue in the West, and we see fixed wireless, I think, continuing to be competitive across the footprint.

I know you guys are working on some new price tiers, particularly for that part of the marketplace. I think you've also lapped a lot of the fiber kind of rack rate adjustment. There's been a lot going on in ARPU, and there's obviously a huge focus. Certainly, if you could get ARPU growing again, it would mean a lot to the broader P&L and cash flow position. Can you talk about your expectations of sort of getting back to broadband and residential ARPU growth and some of the things you're doing on the pricing side to make that happen?

Yes, Our focus is customer ARPU and driving customer ARPU being a lot more disciplined on the gross add side of the house, while driving a disciplined approach on the base. And we have just a lot more tools in our toolkit. We just have more products, more services. When I joined quite frankly, it was a little bit of much more art than science in terms of how we executed, which ended up driving more churn than we would have liked. And now coming into this year, as I mentioned on the last call, our goal is to deliver an incremental $100 million of value through our pricing strategy. And that's going to be a combination of driving rate in a disciplined fashion across the base. and also in our acquisition strategies. And we're starting to see that come to life, and we have a whole host of new products and services like mobile and others to be able to help us drive and continue to stabilize ARPU -- customer ARPU and ultimately get back to customer ARPU growth.

We've been talking a lot about broadband, but I want to make sure we talk about wireless. You guys have obviously laid out some targets there. Convergence has been a big topic today with all the telecom and cable CEOs at the conference. What's your perspective on the role of mobile and wireless for Altice over the long term?

Yes. We're excited about mobile and the value that it delivers to the business. I think from a churn perspective, we're seeing tremendous benefit for our customers, and then it is helping us provide tremendous value. When you bring broadband and mobile together, we're able to save customers hundreds if not thousands of dollars literally. And it's our job now to tell that story. When we -- when I joined, it was really just not sitting on the shelf. We didn't have offer. We didn't have it built into our go-to-market strategy. We didn't have the right level of compensation and incentives. We were building out retail, and we weren't showcasing mobile. And so now you walk into retail, you see mobile, you'll be able to have a robust conversation. We weren't selling it in our care channels, retention channels, and we've started to ramp those channels because it's a great opportunity for us to have a robust conversation with our customers about incremental value that we can provide, particularly in these challenging times. As we prepare to relaunch Mobile when I joined, we did the customer research, and over 25% of customers were looking for their provider to provide both an in-home and out-of-home connectivity solution. And that was almost 2 years ago and the expectation only continues to increase. And it's not just, hey, just have 2 products from one provider. They want real value. and they want the simplicity of having that from one provider, and we're delivering that, and we're continuing to invest in our channels to drive growth there.

Wireless certainly can be a marketing-intensive retail-intensive business, how do you differentiate the Optimum, particularly on the East or across your footprint, your wireless business from the competition? And can you do all that and grow the business with, again, sustaining free cash flow generation?

Yes. The good news is that we have opportunities to just drive awareness, drive consideration through the millions of interactions that we have every day, whether it's in our channels, whether it's in retail, and it's been a steady journey of really driving into our base, the products that we have. We have an incredible partnership with T-Mobile and the MVNO relationship we have. And we've been continuing to unlock new products, new services. And now it's all about continuing to tell that story in the existing conversations that we're having. And that in and of itself is allowing us to drive this growth and fuel this growth. And so, we're very excited about continuing to tell that story across the existing channels, across our existing marketing assets and making customers aware that we have now the ability to give them tremendous value by bringing their broadband and their mobile services together.

Got it. The other thing that I would note, was interesting in your investor deck was a video slide showing the attach rate actually going up. I don't think I've seen one of those in a long time. You guys have been working hard at kind of reinventing your video packaging, you seem excited about it. What have you guys been able to do? And is this something you think customers value still and want from Altice?

Yes, I'm very excited about putting the customer at the center of everything that we do and taking a stand for our customers and not forcing individuals to pay for content that they don't watch. And that is the conversation that we are having with our programming partners. And it's not easy. It's not easy. There's decades of brokenness that needs to be fixed. And we've had conversations and folks have said, Dennis, we've been doing this, this way since 2004. And I said, Well, that's the problem it's not 2004, it's 2025. Tech companies, the largest in the world have entered this space. There's more streaming available than ever. And so you can look up online I give a whole conversation about how broken this is. Could you imagine walking into a grocery store wanting to buy diet coke and then being required to buy hot tamales.

I cannot imagine that.

Yes, like hey, I'm trying to buy Diet Coke. Great. For the privilege of buying Diet Coke, you have to buy hot tamales. And that's literally the state of the business. And so the good news is that we're excited to work with our programming partners to be able to offer this level of flexibility and provide value because this is particularly challenging times for our customers. And so, we've been able to reach deals that allow us to do that, and now we're seeing an uptake in video. And look, one quarter doesn't make a trend. We have a lot more work to do. but folks are excited about our entertainment package for folks that are not interested in broadcast and regional sports or sports. They just want to watch HGTV and the Food Network. And there's -- that's what they're interested in. And for those that are interested in these other more expensive types of content, we can give them those products as well. And ultimately, we're excited later this year, we'll be able to seamlessly bundle in and package in streaming services as well.

Got it. Okay. That's helpful. I'm going to remember the hot tamales analogy. I liked that one.

I like hot tamales, by the way. I don't like Diet Coke. I'm not a big Diet Coke guy. I like coffee, black coffee.

I'm with you. All right. So let's talk about the P&L a little bit more. So you guys have laid out some margin targets. We talked about the 40% adjusted EBITDA. There's also 70% gross margin target that we've talked about. How do you get there? And then this 4% to 6% reduction in OpEx especially coming off a quarter where OpEx was a bit elevated, I think, versus expectations. Kind of can you bridge us from where we are in Q4 to where we're going?

Yes. The good news is when I joined, you had OpEx going up into the right, and it was a bit challenging there. We had to put the right controls in place as I think about Phase 2, it's all about driving digital, driving automation, really taking even more noise out of the system. And that 4% to 6% is one that I'm confident in. Over the next couple of quarters, we'll lay out kind of what's happening and when it's happening and how we're going to deliver on that. And it's going to be continuing to put systems and processes in place that help elevate the customer experience while driving meaningful efficiency on the direct margins, I'm confident as we continue to stay disciplined in these discussions. We continue to elevate there last quarter at over 67%, and we'll continue to drive there. And so it's going to be a combination of driving transformation, driving growth of these new products, these new services being disciplined. We've shown that we can drive into the base these new products. We said we were going to launch mobile and drive growth of mobile. We are. We said we were going to drive fiber and deliver that in an accelerated pace. We're doing that. And now as we launch these new products and services, I'm confident that we'll be able to integrate them into the channels so that whether it's at the point of sale or in one of our care or retention or retail channels, we'll be able to drive adoption of these products so that we can ultimately drive EBITDA growth.

Is some of the gross margin opportunity on the video side and sort of getting programming costs more aligned with the reality of the business?

That's right. It's going to be a combination. We're excited for where we are on the gross -- in terms of gross margin positive on mobile. We'll continue to drive on video, and we'll just continue to be disciplined in the way we drive the business as we move forward.

Got it. And on the OpEx efficiency, I know we'll hear more from you, but a lot of that around taking kind of transactions out of the business in terms of truck rolls and call center stuff and all that kind of...

That's right. We want to be the simplest providers to work with. And we're not there. And we know that customers are looking for tools and want to be -- they don't necessarily wake up saying, man, I want to call my cable provider. We're probably the last people we want to call. And they may have a quick question. And so we've launched an app. We're going to be investing in delivering more and more capabilities, whether that's self-service or chat and really making it easier half our calls are confusion around billing. And so we're putting -- making investments there to make it once, just simpler to understand the bill and what's happening and why it's happening, but then also just quickly get that answer, whether it's in the IVR or in the app, make sure people understand what's happening and why it's happening, I mean this isn't sexy stuff. This is kind of like Dennis is like mom and apple pie, but this is sexy stuff for us. I'm excited about it because I see the noise in the system and the frustration that it causes for our teammates and for our customers and resolving that frustration is going to be incredible for the business, but it's also going to drive loyalty and drive really further trust in the relationships with our teammates and our customers.

Let me ask you another question, then we'll see if there's anything from the audience as we wind down here. So we talked a bit about the pivot from fiber kind of back to HFC. Is -- from a CapEx point of view, Dennis, is '25 kind of a high watermark for CapEx at Altice, at least as we think about the next several years as you kind of scale back to a DOCSIS upgrade versus a fiber expansion? Any way you can help but think of capital intensity?

Yes. I can't be more proud of the team. we are continuing to deliver on all of our business objectives while bringing down CapEx. And it's all about driving efficiency. We were able to leverage technologies like OFDM and OFDMA to continue to elevate the performance of HFC, our HFC network for hundreds of dollars versus node splits that were costing tens of thousands of dollars. And so we're continuing to find efficiency is my point. And so, there's still more work to do, and I'm confident that we have the CapEx envelope that we need to continue to drive the business in terms of investing in growing our footprint, investing in growing multi-gig, investing in new products while continuing to find efficiencies this year and as we move forward.

Got it. Any questions from anybody? Yes, David, go ahead. There's a the mic coming just so they can hear you on the webcast.

Can you talk a little bit about the balance sheet liability management. You have a couple of years to think about your next debt maturity, but you do have elevated financial leverage. And just kind of philosophically, how do you think about managing that and as the leverage continues to be quite elevated?

Yes, nothing to announce today. I've been really proud of the team in terms of giving us the runway to operate the business. First and foremost, as I stepped into this role, that was very important to me to have runway to really make the changes we needed to make. The transformational changes around the operation and our ability to drive our go-to-market strategy and deliver the level of quality expected. And now we're evaluating all options. And the environment continues to evolve. And when we're ready to provide more details, we will. But we're looking at all options so that we can manage that appropriately. Yes.

And I know you guys have guided to free cash flow growth in '25 and '24. Is that still the expectation?

Correct. Correct. We're going to continue to be disciplined, continue to execute our strategies, which will help us to continue to deliver.

Got it. Okay. Good. All right. Anything you want to wrap up with us before we run out of time from the audience?

Well, I'm excited about the momentum. As you can tell, as we exit '24 and enter '25, I'm excited. We have tremendous growth opportunity on Mobile, on fiber, on the new value-added services that we're launching. I'm really excited about the results of these 4 market tests that we've delivered. And so we're going to continue to hit the accelerator as we drive transformation throughout the enterprise.

All right. Thank you, everybody. Thanks, Dennis.

Awesome. Thanks so much.