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

Okay. We can get started with our next session. I'm John Hodulik, telecom and media analyst here at UBS. I'm very pleased to introduce our next speaker, Dennis Mathew, the Chairman and CEO of Optimum Communications. I'm just still getting used to the new name.

Awesome. Yes, me, too. I like it, though. It has a ring to it.

Yes. I like it, too. It simplifies everything. So again, Dennis, thanks for being here. What we always do at the conference at the end of the year is just start by giving us a little outlook about the priorities for the company as you look out to 2026.

Yes, happy to. And I think to talk about the '26 priorities, it's good to understand the context of where we've been and where we're headed. I joined the company a little over 3 years ago, and it was a massive transformation initiative that we took on, transforming the culture so that we're really working as one Optimum, bringing on over 200-plus leaders and working to implement operational discipline, financial discipline and ultimately, on a journey to restore trust with our customers. And to do that, we really had to focus on quality and value. And we've made progress, but there's more work to do. And the reality is from the time I started the journey to where we are today, the competitive landscape has intensified significantly. And so as we go into 2026, our first priority, of course, is to stabilize broadband. And there's 2 key components to that. One is we're really leaning into base management and evolving our strategies there. To date, it's been very manual, very painful. And as we've gotten past the point of just stabilizing the company, we're now investing, and we'll talk more about AI and automation, so that we can really communicate effectively with our customers and ensure that we're delivering great quality, great value and making them aware of the great products that we have like mobile and Total Care and our new video products. And at the same time, we need to elevate our go-to-market strategies. There's fewer jump balls than ever. And so we have to leverage, again, AI and our new Martech stack as we invest in that in 2026 so that we can compete effectively for every jump ball. And so stabilizing broadband, huge initiative and huge area of focus. And then as I mentioned, we're going to continue to elevate our customer experience and continue to drive operational efficiency leveraging AI. And we've made some nice progress over the last 12 months, but there's more work to do. We're excited about the investments that we've made with Google, CES and a number of other partners so that we can really ensure that our teammates have the absolute best tools to serve our customers so that we can proactively identify when there's an issue in the network so that we can ensure that we're resolving that and forcing customers to have to call us and really ensuring that we're driving efficiency throughout the operation. And then number three, we're going to continue to invest in the network. Over this past year, we've started investing in mid-splits. We've launched our first market with 2 gig speeds in the HFC footprint. And so we're going to continue to invest, continue to expand. We're going to continue to grow our passings, and we're going to continue to invest from a Lightpath perspective in our hyperscaler footprint. And then finally, of course, a major priority is to really continue to work on our capital structure so that we have the right capital structure to ensure that we can deliver long-term sustainable growth for the company.

Got it. Why don't we start -- and I'm going to hit all of these issues, especially the competition and your efforts on the broadband market.

Sure.

But maybe we'll start with the balance sheet. Can you provide us an update on sort of your capital structure? I think there was a recent lawsuit filed against some of your creditors. Just sort of give us the details.

Yes. So we recently announced a couple of weeks ago that we received some financing from JPMorgan, which was really helpful in terms of providing us financial flexibility as well as ultimately, it was leverage neutral and gives us some additional duration. On the lawsuit itself, we believe the facts speak for themselves. And for anyone that wants to read up on it, it's available, but we have nothing more to say on the litigation itself.

Okay. Got it. Anything you can tell us about how you plan to address the upcoming maturities in early '27?

Yes. We're making really strong progress in our business transformation. That being said, we need -- that being said, meaningful debt reduction and a reset of the balance sheet are essential to helping us continue to drive our transformation, to continue to compete effectively, to continue to invest effectively so that we can maximize long-term value for all of our stakeholders. And so we're continuing to evaluate all options, and we're continuing to be proactive to take steps so that we can get to a capital structure that supports our long-term objectives.

Got it. Is there an opportunity to use ABS for your...?

Yes, we're looking at all options, and we'll continue to share as there's news to share.

Got it. Okay. Maybe switching to broadband. You said things have gotten more competitive since you joined the company. Can you tell us about sort of maybe what you're seeing in the fourth quarter from a competitive standpoint, both on the fiber side and on the fixed wireless side?

Yes. The competitive environment is the most intense I've seen it in a long time, and it's weighing on our Q4 results even relative to Q3. As we entered into Black Friday and the holiday season, we saw some even heightened offers in the marketplace. We're seeing gig for less than $40. We're seeing really rich gift cards to the tune of several hundreds of dollars. Free seems to be everywhere, free months of service, free TVs and free speakers, like free, free, free. And so it's up to us to really find the right balance. We want to be laser-focused on driving profitability and driving the right balance between rate and volume. We've been competing, as I've mentioned in the past, more effectively in certain markets with fiber overbuilders. And we're testing and trialing new pricing, new packaging, some price locks, some value adds so that over the next few quarters, we can really find a path to stabilizing broadband and our performance for the long term. And I believe that we have the right tools, the right team, the right portfolio of services, and that's the journey that we're on.

Well, you're not the first to mention that because Comcast was here and they said that they saw some higher -- they saw more -- we're seeing more competition in the fourth quarter on the fiber side because of these promotions. And then we ran that by AT&T and they said, yes, that makes a lot of sense given what we're doing on the fixed wireless side. So I think it all sort of fits together. Before we talk a little bit about fixed wireless and fiber, you started with your -- some of your comments that there's fewer jump balls in the market.

Yes.

Is that a result -- and maybe you could sort of give us some more color on it. Is that a result of just sort of what we're seeing in the housing environment, plus the fact that there's just less DSL subs, legacy DSL subs sort of coming off of these legacy telco networks? Or what do you think is...?

Yes. I really do think the macroeconomic environment is impacting people from a move perspective. Folks are locked into really attractive interest rates that make it hard to then pick up and decide, hey, I'm going to go from 2% to 3% to 6% to 7-plus percent. New housing starts, also some headwinds there. And then I do know that as we looked at DSL switchers, which was an opportunity for the industry, we're finding that folks are leaning towards fixed wireless in many cases, moving from DSL to fixed wireless. And so we, as a company and as an industry, need to do a better job of telling our story so that we can compete most effectively in terms of our product superiority, the reliability that we bring to the table and the value proposition that we have.

Yes. And I would imagine that sort of converting those DSL subs to fixed wireless would have to be a big strategy of AT&T. They have a lot of those legacy U-verse subs still, and they now have a fixed wireless product that they really weren't pushing a year ago, right? It's like a new thing. Are you seeing either -- in really either territory, the Suddenlink territory or the Optimum territory? I guess they're all Optimum territories now.

East or West.

Yes, East or West. Now -- or even in the consumer business market, the sort of the impact of AT&T's entry into the fixed wireless side?

I mean we're seeing fixed wireless competition intensity increase across the board. And I mentioned that in Q3 that we saw an uptick in the East, in particular, where we're seeing folks like T-Mobile. And then in the West, we're seeing that with AT&T, Verizon. So it's really across the board, across the footprint. And it's really up to us to make sure that we're talking about our value proposition and our product superiority to be able to compete.

Right. Maybe we'll talk about fiber deployment from Optimum.

Yes.

How is that progressing? And how should we think of incremental passings over the next year?

Yes. Fiber, as we think about fiber deployment and incremental passings, if we take a step back, when I started on this journey, I'm just really proud of the discipline that our teammates have put in place from a financial perspective. When I joined, OpEx was at all-time highs, ARPU erosion was at an all-time high. And now we're seeing really moderation in OpEx. We're seeing gross margin at all-time highs. Obviously, CapEx intensity has moderated. But that being said, I don't want to provide any guidance for '26, but the reality is that our balance sheet makes it a challenge in terms of we're capital constrained. And so we do need -- we do want to continue to drive fiber passings and drive fiber growth. But as I mentioned before, we are looking for, as we think about the best approach, meaningful debt reduction, meaningful reset in the balance sheet is going to be helpful to ensure that we can maximize long-term value, that we can compete most effectively, that we can invest to drive growth in our passings and ensure that we provide maximum benefit to all our stakeholders.

So the focus or the priority for '26 is the balance sheet more so than the fiber and...

We're going to continue to focus at the levels that we can. As I mentioned, when I joined, we were at all-time highs in terms of CapEx intensity.

Right.

And so we've moderated that to be financially disciplined. And so we're going to find the right balance.

Right. Makes sense. So in areas where you do have fiber, how are the fundamentals? Where are you winning in the marketplace with that infrastructure? And where do you think the share is coming from?

Yes. So we're really excited about fiber because we see the improved NPS. We see the improved churn benefit. And so we have 3 million passings, the majority of which are in the Northeast and they overlap our HFC network. And so we're driving fiber acquisition. We're selling fiber anywhere we have fiber, and we're driving that and we're seeing really great results. And then we're being really disciplined about migrations. And we now have 700,000 customers on our fiber plans. And our base management strategies will help us really ensure that we're driving migrations where we need to drive migrations and that we're competing most effectively from an acquisition perspective where we have fiber as well.

Great. So obviously, the 700,000 customers, 3 million passings. In your most mature areas where you've had the product there the most and where you've sort of executed the best, where -- if you can sort of look at it sort of on a cohort-by-cohort basis, where do you think the -- sort of we should be thinking of sort of like a good steady-state sort of penetration number of those passings journey, what's a good number from a customer standpoint?

Yes. So today, without giving specific numbers, and everybody has seen kind of how we've performed over the last few quarters, we're going to continue to drive from an acquisition perspective across the Northeast, where we have fiber. Our new passings are fiber-rich, and we're leading with fiber. And as we think about migrations, we're going to continue to be balanced there. And so that's part of our strategy as we enter into 2026. We want to be aggressive just generally in terms of driving broadband stability and fiber is a key product in our portfolio to help us do that.

Great. Previously, you mentioned that you would implement price locks in certain areas if needed. How should we think about your pricing strategy in 2026?

Yes. The good news is that we have a tremendous opportunity from a revenue and top line perspective by driving products like mobile, like our value-added services. We're really just in the early innings. As we've talked about for mobile, we're at 7% penetration now. We have a long runway there. We're really in the early innings of driving some of these new products. Over the last 3 years, we've been really focused on bringing new products like our video packages, like Whole Home WiFi, like Total Care to market so that we can continue to drive our top line. And at the same time, given the competitive landscape, we need to be disciplined about our broadband pricing. And the reality is that price locks are part of the offering, part of the expectation. And so we need to be able to pulse that in, in the right way so that we can make sure that we're winning our fair share, and we have to do that with the entire portfolio.

Right. That makes sense. And there's been a -- that has been a topic of conversation. Comcast is obviously not raising price in the first half of the year. And I think Charter sort of suggested something similar. What does that do to the economic? If you do institute some price locks, does that change what we should expect from an ARPU standpoint or does it change what we're assuming...?

Well, I think it's really up to us to really drive the base management strategy so that as we implement some of these things around broadband and we test and trial, we are a little bit unique in that we're really in the early innings of these new products. And so we have to be talking to our customers about the entire portfolio and driving top line by selling in more products.

Right.

And we're finding that customers want to have that conversation. When we reach out to customers and we share with them the broader portfolio of mobile, of Whole Home WiFi, of Total Care, these are customers that are more loyal, that want to stay with us longer term because we're bringing more value to the table. Whereas historically, we didn't have these products to talk about.

Right. So you mentioned mobile in the 7%, mobile penetration. I'd say within that base, is it helping the overall sort of customer lifetime value of those customers? Is it doing what you would expect it, obviously a relatively small base? And how far -- how -- as that product matures and you're able to distribute more, what's the -- is there a target, level of penetration you could -- we should think of?

Yes. So there's no -- we're on a path, I think, to be performing in line with our industry peers. And we relaunched mobile now 2 years ago. And the first step was to scale it across our channels. And so really just training our teammates. It's a very different product than broadband and selling it in our sales channels, selling products for the first time in channels like care and retention. And we've made incredible progress there and our teammates are really enjoying being able to have that conversation. There's a lot of work that we had to do in terms of pricing and packaging and really making sure we made it easy for our customers to buy not just one but multiple lines. And so we've been evolving our credit policies, making it easier to finance devices. And so I really do think that we're in the early innings of mobile as well. We've -- in Q3, over 500,000 lines, and we shared late last year that we're on a path to over 1 million, and we remain focused on that. Over the last several quarters, I've talked about the fact that we're laser-focused on the quality of mobile and making sure that we're not in some spin cycle, but we're selling in a way that really drives quality. And so we're seeing an increase in the number of -- when somebody is coming on, they're porting their phone number, and that makes that customer stickier. They're buying a new device that makes that customer stickier. And so we think this is all great hygiene for us to ultimately really start to hit the accelerator in 2026.

In the mobile side?

On the mobile side, yes.

And can you -- anything -- any comments you could make on the sort of profitability of that business? I don't know if you guys have said it, it's breakeven or -- yes.

Yes, we've talked about the fact that it's gross margin positive, and we're really happy with the economics. We're really happy with the partnership that we have with T-Mobile, and we have the opportunity to bring to bear 2 incredible networks, our mobile product, powered by the T-Mobile network and then our fixed product powered by our fiber and HFC networks. And when you bring those products together and those networks together, you have the absolute best connectivity in home and outside the home.

And is there any opportunity in the business market for the mobile product? I mean I would imagine you're selling it mostly in the consumer market, but I mean, does it help make that stickier?

Yes. We're in the early innings of that. There's more work that we need to do from a back-office perspective to really unlock scale. And so we launched in a small way, somewhat of a pilot earlier this year, and we're looking at the back -- the work that we need to do on the back end to scale that potentially in '26.

Got it. Maybe switch to video. How has the progress been with the new video packages? I think the take rate was 13% last quarter. I think you said what's that doing for your overall business? And how -- where can that go?

Yes. It's -- we shared in Q3 that we've achieved 13% penetration of our video subscriber base is now on these new video packages. And we're really excited about them because customers value choice and flexibility. And so as you look at these packages, it delivers the type of content that they're looking for. It gives flexibility. For those that are looking for just entertainment type of offerings, you can subscribe to our entertainment package for as low as $35. If you're looking for entertainment and broadcast, you can step up to the next tier. And contrary to popular belief, not everybody is interested in sports. But if you're interested in sports, you can get the everything tier. And so this has allowed us to have a different conversation with -- on the acquisition side, on the base management side. And as we enter into '26, we're laser-focused on continuing to negotiate and advocate for our customers. The cost of video, as we've seen over the last several years has increased significantly. And so as we enter into every negotiation with our programming partners, we're advocating for our customers. We're putting the customers at the center, and we're advocating for flexibility and choice so that our customers can choose what content they want and don't want. And additionally, over the last few months, we've been excited to announce some new partnerships with folks like Netflix and Disney and Hulu. And so we can now bring together both the traditional video packages combined with streaming, and that's really starting to resonate with our customers.

So as we think about the broadband market for -- or over the next year or 2, you'll be pushing more mobile into the base.

Yes.

Hopefully, the video product will be resonating -- is already resonating, but hopefully -- do you think the 2 of these can be helpful in sort of stabilizing the base? Or what are the other sort of major -- you started off by saying that's the main focus. But what are the other sort of drivers of that efforts to stabilize the base aside from these other products?

Yes. It's really laser-focused on quality and value, quality and value. That's what we talk about every day. Let's put the customer at the center, quality network, quality product, quality service and how do we -- and ultimately, we have to become the simplest company to do business with by driving digital, driving automation, driving AI. We have to make it easy to do business. If you have a question on your bill, you shouldn't have to call someone. If you have a problem with your service. And so you shouldn't have to -- we should be able to reach out proactively. And so stabilizing the base and continuing to compete at the highest level is, one, making sure you have great value through this product portfolio, but then also delivering the highest level of quality and being easy to do business with when there is a need and being able to do that digitally and leveraging AI so that we can solve those problems as fast as possible.

Good. Maybe shifting to Lightpath. Can you frame the size of the Lightpath opportunity?

Yes. Exiting '24, we announced that over $100 million in sales that we're really excited about over the past year that the Lightpath team has done a great job continuing to win new work and continuing to fill the funnel. In Q4 of this year, we're going to see some of that hyperscaler revenue come to bear, and there's more opportunity. The team is doing a great job of really being disciplined in terms of continuing to build out the infrastructure, operating with discipline, filling the sales funnel and driving that funnel so that we can ultimately monetize these investments.

I mean how should we look at that as sort of the overall -- I don't know if there's a way to put sort of a TAM around it. But obviously, we had a data center panel. We have a couple of other data center companies, it's a -- there's massive demand for AI compute. I mean how big of an opportunity is it for Lightpath over the next couple of years? And are you guys willing to build to data centers outside the current Optimum footprint or how's it?

Yes, we haven't spoken to that specifically, but the good news is that we're already outside the footprint. We recently announced deals in places like Columbus, Ohio, Miami, Phoenix as well as within our footprint, New York, New Jersey, Connecticut. And so we've got the whole country where the team is looking at where it makes sense. And so it's an exciting opportunity. And the team is continuing to be aggressive in that space, continuing to fill the funnel, continuing to land deals. And it's just a testament to their ability to execute.

Great. And how should we think of the sort of economics of that business? Or how do you sort of gauge the profitability of that business?

Well, we're really excited about the potential for the business overall. We've seen that the team has done a great job in terms of driving profitability, in Q3. EBITDA grew by 11%. And so we're expecting continued growth, and we're excited about the margins and the profitability of this hyperscaler opportunity.

Okay. Great. Maybe with a few minutes we have left, we could touch on a couple of things. First of all, if we could address some of the -- your guidance for the year. Your $3.4 billion EBITDA guide implies a big step-up in 4Q despite the tougher advertising comps. Are the cost savings on track to drive the year-over-year growth?

Well, I'm excited to share that we expect Q4 to be the first quarter in 16 quarters where we're going to see year-over-year EBITDA growth.

Fantastic.

I mean first quarter in 16 quarters. And that's a lot of hard work on the top line and from an efficiency perspective. I did mention that the competitive landscape has been intense, and so that's been weighing a bit on our top line results. And so we expect our adjusted EBITDA, our reported adjusted EBITDA to be between $3.3 billion and $3.4 billion. But you may recall, we're laser-focused on operating and the core of our business. And so earlier this year, we did announce that we are disposing of the i24 business. And so that's going to be completed. We expect that to be completed in Q4. And so when you exclude the losses from i24, we will be delivering approximately $3.4 billion of adjusted EBITDA. And we remain on track from a revenue perspective. We're going to see some benefits, as I mentioned from Lightpath and the hyperscaler business from advertising revenue, some very competitive races in New York and New Jersey, as many of you know, some benefit from some rate events that we took in the second half of the year. And then on the OpEx side of the house, we announced earlier this year a 5% reduction in our workforce, all tied to efficiency. We didn't have to touch any of our front line because we are laser-focused on delivering great quality, but we have been able to drive efficiency. We see reduction in call volume. We see reduction in dispatch rate, over 20% reduction in service visits. And so this is all helping us with this quarter-over-quarter step up and ultimately delivering for the first time in 16 quarters, year-over-year EBITDA growth.

Got it. That's a great achievement given where you've come from. Look out to '26, can EBITDA grow -- continue to grow in '26?

Yes. So we're not providing guidance for '26, but we are laser-focused on continuing to drive our transformation. And there's more work to do as we test and trial prices -- pricing and packaging to help us lean into stabilizing broadband. There's more opportunity from an OpEx efficiency perspective.

Which is more cost...

There's just more -- as we -- the good news is as we leverage AI and automation, we do 2 things. We elevate customer experience. We make it easier for customers to do business with us, and it further drives efficiency. And so we'll continue to lean into that.

Great. Last question. How do you view Optimum's positioning against potential industry consolidation? Obviously, we're seeing a pretty big deal right now with between Charter and Cox. There's been a lot of speculation that there would be more cable -- consolidation in the cable industry. How do you view that in relation to Optimum?

Yes, nothing to announce today. We're laser-focused on continuing to transform the business, always open to value-accretive transactions. But my focus day in and day out is driving the performance and transformation of the business.

Okay. That's a great way to leave it. Dennis, thanks for being here.

All right. Thanks so much. Appreciate it.

Appreciate it.