Earnings Labs

Optimum Communications, Inc. (OPTU)

Q1 2019 Earnings Call· Thu, May 2, 2019

$1.52

-4.38%

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Transcript

Operator

Operator

Good afternoon. My name is Emily and I will be your conference operator today. At this time, I would like to welcome everyone to the Altice USA First Quarter 2019 Earnings Conference Call. [Operator Instructions] Thank you. Nick Brown, you may begin your conference.

Nick Brown

Analyst

Hello, everyone, and thank you for joining. In a moment, I'll hand you over to Dexter and Charlie, who will take you through the presentation, and then we'll take questions. As today's presentation may contain forward-looking statements, please read the disclaimer on page 2. The slides are available on the company's website and a replay of this call will be available through the next month. And with that, I'll hand over to Altice USA's CEO, Dexter Goei.

Dexter Goei

Analyst

Thanks, Nick and hello, everyone. Altice USA has made a great start to 2019 as we continue to realize the benefits of our ongoing investments to improve the customer experience and deliver state-of-the-art connectivity services, advanced business solutions and high-quality content. Summarizing on Slide 3, in the first quarter, revenue growth was 2.9%, supported again by growth in all business segments. EBITDA growth was 5.3% on a reported basis, achieving our highest ever Q1 margin at 43.1%. Adjusting for $10 million of losses from the consolidation of i24 and minor mobile losses ahead of our launch, EBITDA growth would have been even higher at 6.7% with a margin of 43.7%. Operationally, 1 key highlight is that Altice One is now the best ever video customer performance for Altice USA. This makes us very pleased we decide to invest in our own proprietary video set-top box and broadband router, including the integration of linear and non-linear programming, vastly improved user interface and new features such as voice control. We continue to see increased customer demand for higher broadband speeds and significantly growing data usage. And Altice One has also contributed to a big enhancement in Wi-Fi performance. And we are facilitating this data usage growth with our continuous network upgrades, underpinning our broadband customer revenue and cash flow growth. We remain laser-focused on our new growth initiatives to diversify our revenues and maximize the potential of our core network assets and installed base of broadband and video customers. First mobile, where we're on track for a launch of some -- of services this summer; second, the acceleration of fiber-to-the-home and new-build activity; third, our differentiated advanced advertising business where we continue to deliver strong growth; and last, our latest initiative is our news business where we just this week announced the…

Charles Stewart

Analyst

Thanks. Dexter and hello, everyone. On Slide 10, we summarize Altice USA's continued margin progression where you can see on the right-hand side that we were at 43.1% adjusted EBITDA margin in the first quarter on a reported basis. Just want to note that, that included the impact of consolidating $10 million of i24 losses, following the acquisition in April of 2018. Excluding i24 as well as just $3 million of mobile costs, neither of which were in last year's first quarter numbers, our EBITDA margin would have been 43.7% which is over a 1,000 basis points higher than 3 years ago on a pro forma basis. This substantial margin improvement is really helping support higher investments for growth and all the initiatives that Dexter just described and we're certainly not done yet. Every quarter, we are demonstrating that we can sustain a high level of operating efficiency with improved subscriber trends and sustainable growth in revenue, which is dropping through to free cash flow and which supports our tax-advantaged levered equity returns. Turning to Slide 11, we show a breakdown of our CapEx, which increased year-over-year due to our growth in -- growth investments in fiber, our new home build, our DOCSIS 3.1 and mobile spending. Our total CapEx intensity was 14.2% of revenues in the first quarter of 2019, but it's worth noting that if you strip out mobile, fiber and new home build investment , it would have been just 10% or even somewhat less which is where we see our long-term recurring CapEx level. In particular, in addition to driving additional medium-term operating efficiencies, our fiber network will help us reduce longer-term CapEx. The fiber network is completely passive and so it will be more resilient with significantly less service outages and incidents. This will drive…

Operator

Operator

[Operator Instructions] Philip Cusick, JPMorgan.

Philip Cusick

Analyst

Let's talk about the mobile launch. I appreciate telling us it's going to come in the summer of '19. Any updated views on how you're thinking about that roll-out in terms of relative price to the market and willingness to subsidize or finance devices? Are you ready with BYOD and should we expect wireless CapEx to be similar in 2Q as you get ready for the launch? Thank you.

Dexter Goei

Analyst

Just on the mobile launch, we are completely focused on our launch product and our marketing plans. We have our price points, we know how we are going to distribute the product, we're just not going to disclose that until we get closer to actual launch. In terms of the CapEx, no, we don't expect to have the CapEx in Q2 similar to Q1. That really was a roll-off from accrued CapEx in Q4 of last year, where payments came in from a cash CapEx standpoint to Q1 this year.

Operator

Operator

Brett Frank, Goldman Sachs.

Brett Feldman

Analyst

Brett Feldman with Goldman Sachs. But thanks for taking the question. Two, if we could get an update on your strategic review of Lightpath, that would be helpful, especially if there's anything you might say about how you would apply proceeds if you could do something. And then just following up on Phil's question about mobility, your peers in cable are still in sort of net loss positions in many cases, a year-and-a-half. And having launched these products, I know you're not giving specific guidance around this, but just some way we could think about the framework for what it takes to get to the point where this would be a good accretive product to you, that would be really helpful as we think about modeling it out. Thank you.

Dexter Goei

Analyst

Sure. I'd love to help you with your model, Brett. On the strategic review on Lightpath, we've been very open that this is something that we wanted to review closely. There have been multiple news reports that this process has been launched, so I can confirm that. And I think we're not close to having results there, but as you know these M&A processes do take some time, so I suspect that sometime towards maybe the end of the second quarter or maybe the beginning of the third quarter, we'll have something more to say about that. I think in terms of use of proceeds to the extent that we do sell or find some liquidity, whether it's partial or full, our first instinct is to probably buy back more shares. But clearly, depending on the size of the proceeds, some may be used to deleverage the balance sheet as well. In terms of your mobile question, we've been also pretty upfront that we think that the infrastructure-based MVNO allows us to have better control of the economics, not only in terms of our price points with our agreement with Sprint, but also in terms of the managing of the traffic. I said the last time that if we were doing a similar MVNO price point to other MVNOs out there, that would be profitable right out of the box. I think the question here is, if we are more aggressive, what could be the cash flow utilized to do that. We said that it would be a marginal impact in the first 12 months if we were to be a lot more aggressive on price points.

Operator

Operator

Craig Moffett, MoffettNathanson.

Craig Moffett

Analyst

I'm going to ask the obligatory video question. You talked about some of the investments you've made in video. Can you just talk about the role that you think video plays and there's a lot of talk obviously from different operators about how important video is or isn't in reducing broadband churn and in overall economics. I wonder if you could just talk about your own views for video in the bundle.

Dexter Goei

Analyst

Sure. I mean, I think we've been asked this question pretty regularly, Craig. So we continue to believe that video is a core product. We will continue to offer it in multiple sizes and shapes to our customers. It has a lot of benefits to our customer base in terms of retention and churn, but it continues to be a profitable business for us. We are and we've highlighted a little bit of a differentiated video market. One, we have a very high penetration of video pay TV subscribers in the Optimum footprint. We continue to see very, very high selling rates on our video product, and we're under-penetrated in the historically Suddenlink footprint, so that becomes an opportunity for us to grow our video subscribers if anything stemmed the losses that we have seen historically. And so, we have seen that specifically on Suddenlink. I think this is the sixth quarter in a row we've outpaced our year-over-year numbers. In the last 2 quarters, we have seen positive net video RGU. So with a better content and we've highlighted that the adding of Viacom, we think that was a positive impact to our subscriber base. The unification of our marketing products and on top of that the launch of the Altice One platform as of September of last year, has really had a positive impact as that area of the US has seen quite a lot of losses in the satellite pay TV space, and as well as no longer seeing as aggressive of vMVPD penetration there. So that's a net positive for us on video. That may be different than other operators out there, but we're seeing a tremendous amount of opportunity in the Suddenlink footprint on video. And on the Optimum side, we continue to see very strong performance of the video product and that really helped our advertising platform as well. That's a big plus in terms of what we've done from a data analytics standpoint to a very targeted, addressable linear and digital advertising product that we've excelled out from the local and regional standpoint, and now are looking to do more national, particularly with the Cheddar product out there as well.

Operator

Operator

John Hodulik, UBS.

Dexter Goei

Analyst

John?

Operator

Operator

John if your line is on mute, please unmute.

Dexter Goei

Analyst

Operator, maybe we can come back to John and we can get to the next question please.

Operator

Operator

Jason Bazinet, Citi.

Jason Bazinet

Analyst

I just had a quick question. Maybe 2 years ago, during your IPO, the idea to sort of consolidating cable was a big part of the narrative and all of that has sort of faded to the background. And without talking about names, could you just qualitatively sort of describe what you see the supply of cable assets are looking like, if any? Could this -- in other words, could this re-emerge as a narrative for your stock going forward? Thanks.

Dexter Goei

Analyst

Yes, I mean, Jason, you know that if there is interesting, I'm ready to do. We will be the first people to raise our hands and look at it. We think that we do a very good job of buying companies and integrating them within Altice USA. So it's not for lack of appetite today. But today, we've been focused so much on the organic platform that we have. We have so many great initiatives for organic growth today. That's going to continue to drive great free cash flow growth, great top-line growth and really great experiences for our customers. So I think on a standalone basis, we feel great about our future for the next -- a very long time out there as we continue to roll out new products, I think in terms of the supply, that's no hidden secret. Everyone knows the other assets that are out there, the different shareholders that control and the management team, and I think you have to take your view as to there if there is an appetite for consolidation. This is a sector and we've said it repeatedly that we will consolidate and that will potentially include other infrastructure-based telecoms companies. I think we are all awaiting for our merger decision to occur in the next couple of months and that may change or dampen expectations. But I think that is something that everyone is waiting for before anyone decides to do or think about more consolidation in the sector.

Operator

Operator

John Hodulik, UBS.

John Hodulik

Analyst

I guess, following up on the Cheddar deal, anything can you guys tell us on the sort of return characteristics of that $200 million investment that maybe sort of compared to another $200 million in share repurchases. I mean how should we think of sort of the growth rate of the advertising business and maybe any synergies you get from putting together with your existing news businesses? And then at last -- and as I said lastly, is this sort of a one-off deal or should we think that you guys are sort of in the market for, sort of other media or content assets? Thanks.

Dexter Goei

Analyst

Let's start with the second one first. This is a one-off. We're not interested in acquiring more media assets. This is a very targeted acquisition to help underscore the asset value and drive more value in the news and advertising divisions of our business. I think on Cheddar itself, I mean all M&A that we do, we always find it more accretive than doing anything else. This one's got a little bit of a longer tail in terms of financial performance because the underlying financial statistics are not similar to, let's call it, other cable businesses, where you've got an immediate cash flow potential return. But we think that this is going to be a significantly accretive acquisition for us as it's going to drive, I mean, the business itself. Cheddar is what's called a break-even business this year going into hopefully significant cash flow growth next year with significant top-line growth. But just as importantly, other than the standalone Cheddar business, there's a tremendous amount of operational synergies on the top line and some on the cost side for the integration of Altice news with Cheddar. So this is really a win-win acquisition for us not only strategically in terms of complementarity of skill sets, in terms of the content that we're going to create. We've got a full suite of news content, hyper local, national business and international, linear and digital, but on top of that, what Jon Steinberg and his team brings to the table is a tremendous amount of experience and success in the national advertising market, which is something -- which is just nascent over at a4 here at Altice USA. So it ticks all the boxes in terms of shareholder returns and far outpaces what we think we could have done just in terms of buybacks.

Operator

Operator

James Ratcliffe, Evercore.

James Ratcliffe

Analyst

Two, if I could. First of all, any further refinancing opportunities you see beyond what you had done in 1Q? And secondly, within the competitive environment and particularly the strength at Suddenlink on video, how much of that do you attribute to any strategy changes by DIRECTV in particular? Thanks.

Charles Stewart

Analyst

Hey. It's Charlie. To obviously answer the first one, in terms of re-fi opportunities, over time we think we can continue to bring our average financing cost down. There are some higher cost bonds out there, but nothing that's necessarily immediately actionable that meets our sort of return criterias for doing so. And as I said, we really have no actual maturities of any materiality. I think it's just a little over $500 million next April. That's all we've got in the next couple of years. So we look at it closely. When opportunities present themselves, we pull the trigger. And -- but nothing that's necessarily imminent currently. On the Suddenlink video performance, I think there is obviously a positive impact from the performance of other pay TV operators in the sector. But I do think that it's -- we consistently have been repeating the same thing, which is, we have now a full suite of content, we're attractively priced and we have, what we believe, is the best customer experience through the Altice One platform available. So the combination of those 3 things, plus the fact that we have quite low penetration of video subscribers in the Suddenlink footprint, makes it a real opportunity for us to grow that platform hopefully going forward, if anything stem the losses or slow down the losses that we've seen historically.

Operator

Operator

Marci Ryvicker, Wolfe Research.

Stephan Bisson

Analyst

It's Stephan on for Marci. So you guys came in at top end of the revenue growth guide in Q1 and will seemingly have accelerating growth from the price increase at the end of Q1. Is there reason why you are going to exceed it presumably, just the headwind from advertising or is there something else?

Dexter Goei

Analyst

Well, listen, I think we felt good about the guidance that we've given today. We, obviously -- there are going to be things in the second half this year, which we won't see relative to the second half of 2018 such as political advertising, but we continue to feel very, very good about our guidance. We're at the high end of the guidance right now and we're going to now focus on launching mobile, closing the Cheddar acquisition to the extent we have additional commentary, I think you're going have to wait 3 months, until we give additional commentary.

Operator

Operator

Jonathan Chaplin, New Street Research.

Jonathan Chaplin

Analyst

So I'd love to just delve into the Cheddar acquisition a little bit more. Is there a little bit of skepticism out there just given how poorly all the digital content investments and acquisitions that the cable companies and telcos have made over the course of the last couple of years have turned out? And so you've touched on a little bit Dexter, but I still would love a better understanding of what's unique about Cheddar? What is it exactly that you're buying, is it the 40 million households that they tapping into today, is it a unique content creating capability that you couldn't replicate yourselves, is this another play on tapping into millennials that seem hard to get that, what's the -- what's the unique asset here? And then from a synergy perspective, I hear you say that the revenue and cost synergies are putting it together with your news business. If you could go into that in a little bit more detail, that would be great. And I'm assuming there aren't a whole lot of synergies between this asset and the cable business but -- yeah, that would be my other question.

Dexter Goei

Analyst

It's a lot of questions. Just on that, Jonathan, let's focus on what Cheddar is today, right. Cheddar's founding management team has identified a mousetrap, which is business news for millennial. And if you look at where businesses from a video standpoint as to assume today, it primarily is on CNBC and Bloomberg TV. Those demographics are much older demographics, I believe the statistic on CNBC is over 60 years old in terms of the average viewership. And the actual number of households that watch it is very small. However, it punches way above its weight and power ratings in terms of the revenues and cash flow it generates, because all the premium Fortune 500 CMOs advertise on CNBC going up that very lucrative demographic. What Cheddar has been able to do in the last 2.5 years is recreate a more user-friendly, let's call it, business news platform for millennials and that's first on the digital-first basis, particularly with the success on Facebook and Twitter and Snap, and provide business news for people that are also growing their wealth assets at a very fast pace, but don't have the traditional attention span and brand loyalty to a CNBC. And so with that he has been able to drive those same national advertisers to drive revenue sponsorship and advertising revenue across Cheddar. And so, not only are we happy to be getting the 400 million video views we get every month, but on top of that, he realized if he was going to be even more successful, you need to pivot it back into the new world and drive a linear viewership to drive incremental advertising. So on top of that now, there's 40 million households that he reaches. He has all of the major MVPDs and vMVPDs out there buying…

Jonathan Chaplin

Analyst

Yeah. No, that was really helpful.

Operator

Operator

Mike McCormack, Guggenheim Partners.

Michael McCormack

Analyst

Dexter, really just to elaborate on your comments regarding the vMVPD competitive landscape, I know you can frame that in your comments regarding the price points. We wrote recently about the price uptick there making that synthetic broadband standalone plus a vMVPD product much more expensive than your promotional double play pricing. So maybe what you think about that on a going forward basis? And then secondly, just on the fiber-to-the-home build, what dictates the pacing of that? Thanks.

Dexter Goei

Analyst

So on the first question, listen, we're like you guys, which is we're watching the statistics that are being published by our peers in the vMVPD world. And so that slowed down and some even losses by certain vMDPDs subscribers, but we are seeing the fruits of that. I can't tell you that 1 subscriber who is going to go to vMVPD land is now staying with us. But it's clear that the addition of what we're seeing statistically as a slowdown in vMVPD penetration and a reduction in the subscribers subscribing to satellite TV, is helping MVPDs like ourselves. But to get to your point on the synthetic bundle, today we have a double play offering of Internet and video at $64.99 to $69.99, right? With taxes and set-top boxes, we're onboarding people in the $100 to $110 range for that product. And if you look at the -- if we look at the vMVPDs today, which let's call it, YouTube TV $50 to $55, DIRECTV now anywhere from $50 to a lot higher than that. The average single play ARPU is $55 to $65. So you add that to the vMVPD, you are in that $110 to $125 range depending on what you are having for less content and what we believe to be a less, not as good as a user experience and the Altice One user experience today. So that is -- the reality of it is, it makes very little sense for many people to go on to a vMVPD plus a single data product relative to the cable bundle.

Michael McCormack

Analyst

Okay and just on the pace in the fiber-to-the-home, Dexter?

Dexter Goei

Analyst

Yes, listen, we think that all of the fiber build-out and the new homes build that we're driving to is very accretive from an MVPD standpoint perspective. So what's really driving the pace is authorizations and opportunities. Authorizations on the fiber-to-the-home side and opportunities on the new homes build side. We think that things that are contiguous of the new homes built side to our existing platforms and footprints are -- is a very accretive investment. And as we've spoken about on fiber-to-the-home, we think that the OpEx and CapEx savings mid-to-longer term are significantly accretive before we even talk about potential churn reduction or revenue opportunities we have on fiber itself.

Operator

Operator

Greg Williams, Cowen & Company.

Gregory Williams

Analyst

I just had 2. One question was on fixed wireless. I know you mentioned you are rather dismissive of the technologies, but I think that's alluding to the millimeter wave small cell type. I want to touch on the T-Mobile solution specifically, their traditional macro towers using the sub-6 gigahertz fixed wireless. On their call, I think they said they could reach 66 million pops. It seems like it could have a niche rural suburban fringe play, because here your thoughts pertains to the Suddenlink territory. Second question, just changing gears back in the Lightpath process, you mentioned it could take a while, late Q2 early 3Q. I'm wondering the complexity behind that? More specifically, the difficulty of unwinding Lightpath and I'm not even going to talk about the IR used to connect your cable Islands, but who owns what? The Cabinet supports the equipment. Is this work already done or is this part of the hurdle to process and why it might take so long? Thanks.

Dexter Goei

Analyst

On the fixed wireless service side, listen we're not dismissive of the potential challenge, challengers out there. I think what's clear is, we think it's a more of a niche product relative to the initial anticipation that it could be a much more broader, deeper product across a larger footprint in the US. So to your point, we actually do think that there are quite attractive potential applications of 5G whether with T-Mobile or someone else from a rural standpoint out there that could potentially impact some of our footprint over time. We are just saying today that the way we think about the world and we think about capital allocation, we just don't think that we are at the center of the attention from 5G. We don't expect that for us to be the center of attention for quite some time, given our footprint, one of the overbuild side on Optimum, but secondly, how dispersed we are in the Suddenlink side today. On the Lightpath side, listen, it is a separate business. It's got its separate employees. It's got its identifiable, very clear financial and assets, and so the question really is, it's not the complexity of separating it, because the complexity of separating it is not so complex. Where there's a will, there's a way. I think it really is a question of who the buyer is, whether a buyer would like to acquire 100% or like to partner up with us. And then the question really is, is do we provide a very deep SLA or not. And that is probably the -- complexity is the wrong word, but probably the issue at hand...

Charles Stewart

Analyst

Variables.

Dexter Goei

Analyst

That we're going to have to do in terms of the variables on the transaction.

Operator

Operator

Andrew Beale, Arete Research.

Andrew Beale

Analyst

I'm just wondering if you can help us with the profile of taking i24 to profit? You've obviously got carriage on major MVPDs, but the losses haven't quite -- haven't come down quite yet. What is the timeline to scale the advertising revenues on top of carriage and get it to break even? And then what is the acceleration you might get from Cheddar? That's the first one. And then, second question, I mean, Charter spoke on their call testing a dual SIM approach while they combine the Verizon MVNO and traditional MVNO with CBRS at the SIM level. Could you just compare and contrast your full MVNO and what will in future, become a hybrid network approach with that alternative way of doing things? Thanks.

Charles Stewart

Analyst

It's Charlie. I'll start on the i24 question which is, we acquired it a little less than a year ago, and I will say over that time, we've been very pleased with the direction of growth, both in terms of distribution audience as well as revenue. So we're certainly headed in the right direction. We added some big distribution partners just in the last quarter and that started to come online. So we expect the trends to continue, and obviously, we are very -- we recognize it's a start-up. You have to have a high-quality product, which we believe we do. And so we're going to keep driving into that in that direction and we'll keep you apprised as we go. Certainly, everything Dexter elaborated on in Cheddar I think is absolutely just as true as with regard to i24 as it is with News 12 or Cheddar itself. We're going to be very focused on exploring those opportunities to enhance it and we'll also update you once we get the acquisition closed and kind of have those plans developed and moving forward. But I think certainly the Cheddar acquisition will only accelerate the opportunity we have at i24. I think on your comments regarding to dual SIM, I mean listen, first point -- first things first, we think the innovations is good -- good for everyone. I think the key comments that we have on dual SIM today relating to the difference between light MVNOs and infrastructure-based MVNOs, is we don't think that the dual SIM approach works for light MVNO today, one in terms of the authorization, with the existing partners that they have. But secondly, in terms of just the pure technology as we understand it today. But if it does work, fantastic right. We're all for it going forward, but today, it seems like, as we understand dual SIM, that does not help a light MVNO execute better today.

Operator

Operator

We have no further questions at this time, I will now turn our call back over to the presenters for their closing remarks.

Nick Brown

Analyst

Thank you everyone for joining and do let us know if you have any follow-up questions. We look forward to catching up with you in the next few weeks. Thank you.

Dexter Goei

Analyst

Thank you.

Operator

Operator

This concludes today's conference. You may now disconnect. Have a great day.