Ladies and gentlemen, thank you for standing by, and welcome to the Altice USA Q3 2020 Results Presentation. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker, Mr. Nick Brown. Thank you. Please go ahead, sir.

Hello, everyone, and thank you for joining. In a moment, I'll hand you over to Altice USA's CEO, Dexter Goei; and CFO, Mike Grau, who will take you through the presentation, and then we'll move to Q&A. As today's presentation may contain forward-looking statements, please read the disclaimer on Page 2. Dexter, please go ahead.

Thanks, Nick, and hello, everyone. Before we begin, I once again want to thank -- to take the opportunity to thank the Altice USA team. I'm very proud of the ongoing commitment displayed by our employees in navigating this uniquely difficult time, and we delivered another great quarter together. Starting with a summary on Slide 3. Total revenue was flat year-over-year due to the adjustments for anticipated 9 months of regional sports network credits. If not for this revenue adjustment, we would have grown 3% in Q3. I'll come back to this in a moment. Separately, this quarter, our business was impacted by Hurricane Isaias in the New York Tristate area and Hurricane Laura, which mostly hit Louisiana and the Gulf Coast. We mainly saw disruptions from down power lines and damaged cable strands interrupting service for some of our customers for which we have issued customer credits. Further adjusting revenue for these storm credits, underlying revenue growth would have been a strong 3.7% in the third quarter, a significant acceleration from growth in the first half of the year. Our revenue outperformance was driven by broadband revenue growth of 15.6% year-over-year. We saw strong demand for our broadband services with net additions of 26,000, even with the storm disruptions or 32,000 adjusted for storms. Our acquisition of Service Electric, which closed in July, contributed in another 30,000 additional customers in the quarter. Contributing to this growth was our successful completion of the 1-gig rollout of Optimum, making 1 gig service available across the entire New York Tristate area. In Business Services, we continue to see resilience amongst both our SMB and Lightpath enterprise customers. In news and advertising, we had a strong recovery, helped by political revenue and improved local advertising. Our strong performance led to an acceleration in…

Thank you, Dexter. Good afternoon, everybody. Thanks for joining us. We certainly hope everyone is doing well. I want to spend a minute highlighting our EBITDA growth trajectory on Slide 13, for starters. In Q3, we grew adjusted EBITDA 5.5% year-over-year or 6.3% year-over-year excluding mobile. In the quarter, we had an additional impact of approximately $16 million to adjusted EBITDA through the Hurricanes Isaias and Laura. Excluding mobile and excluding storms, we grew EBITDA 7.7% year-over-year. And you can see that our rate of growth has accelerated each quarter this year. We continue to benefit from a combination of strong customer growth and deliberate cost actions and remain very confident in our ability to grow EBITDA this year and deleverage. We also feel very good about our opportunity to continue to drive margin expansion in our business, which I'll turn to you now on Slide 14. On Slide 14, you can see that we posted an adjusted EBITDA margin of 46.3%, up 200 basis points year-over-year. Some of the margin improvement in this quarter is driven by the adjustment to decreased revenue and programming costs for regional sports network credits due to expected rebates from sports programmers. Excluding these RSN credits, adjusted EBITDA margin would have been 44.8%, still up 100 basis points year-over-year. Excluding mobile EBITDA losses, our 3Q EBITDA margin was 47.5% or 46.3% further adjusted for both RSN credits and storms, which is the best-ever margin result ever achieved by our cable business and compares to 44.3% a year ago or a 200 basis point improvement year-over-year. In Q3, our EBITDA less CapEx, operating free cash flow margin of 38% was up nearly 1,000 basis points year-over-year due to a combination of EBITDA margin growth and lighter CapEx due to some delays in fiber permits. Adjusted…

[Operator Instructions] And your first question is from Phil Cusick of JPMorgan.

So a couple of things, if I can. First, Mike, you just talked about guidance for a second. Let's go back to that. At this point, your guidance for growth in revenue and EBITDA this year leaves a lot of room. Can you say again how you think about sustainability of growth on both of those in the fourth quarter, and anything you can give us for 2021 at this point? And then second, can you dig into how we should think about taxes in 2021? Have you run through your NOLs with the Lightpath sale?

So on the guidance, you're right, we are a little open-ended, and that we're guiding towards growth. And I think we mentioned that we do continue to anticipate accelerated growth in the fourth quarter, at least in terms of adjusted EBITDA relative to the first half of the year. So I don't think we're going to get any more specific than that, Phil, but that's kind of where we are. On revenue growth, we will have some headwind in the fourth quarter. I think we alluded to the fact that the RSN credit adjustment we made in -- as of 9/30, will have an additional element in the fourth quarter. But as -- even given the RSN credits in 3Q and anticipated in 4Q, we're still guiding towards revenue growth for the year. On taxes, we entered 2020 saying that we would be a full federal cash taxpayer in the beginning of 2021. We did get a lot of benefit from the CARES Act in terms of enhanced deductibility of some of our interest expense, and we pushed that out to the beginning of 2022. Now with the Lightpath transaction, we're back where we were when we started the year, saying that we anticipate being a full federal cash tax payer in the beginning of a very early in 2021. The actual tax burden in that year we...

Michael?

Yes.

I was just getting dropped. Continue please, the actual tax burden in that year?

Yes, it's somewhere in the neighborhood of $400 million to $450 million, I think, is a reasonable placeholder number. We continue to -- there's always room for strategy and some efficiencies in that area. We're certainly pursuing a number of channels in that regard.

Your next question is from Craig Moffett of MoffetNathanson.

A couple of questions. First, on broadband ARPU, just given how complicated the allocations within the bundle get and with the RSN discounts and that sort of thing, can you break down how we should think about broadband ARPU growth now and going forward in its components of upgrades and then unbundling the bundled discounts and that sort of thing? And then just a broader question, if I look out further, given how high margins have gotten, I think you once said you didn't think 50% margin, Dexter, were out of the question for this business. I wonder if you'd sort of revisit that, and what do you think the ceiling on margins might be as you look out now that you're actually getting reasonably close to 50% margins.

Yes, Craig. Just on the broadband ARPU, we're -- so broadband ARPU grew by about 11.2%. And I think broadband revenue was 15%, 15.5%. So the 11.2% breakdown, very much like in our previous quarters when we called this out, about 1/3 of it is accounting; 1/3 of it is growth; and 1/3 of it is upsell, right? So that's pretty much what we're seeing consistently here quarter-over-quarter. So if you exclude the accounting allocation, you're looking at kind of a 8%-ish type cash-on-cash growth in broadband ARPU. In terms of how we're thinking about margins, I mean, as you know, we're running probably in certain parts of our businesses north of 50% today. Clearly, the shift here away from video and more focus on broadband, broadband upselling and higher broadband ARPU is going to help accelerate that margin growth, and what we continue to do, obviously, in terms of our capital expenditures and infrastructure, which we think are going to help us drive lower customer interactions, and also continue to drive higher gross margin products. Yes, I mean, let's first get to 50%, and then ask me the question when we get there, and I'll hopefully give you some more guidance going forward.

Your next question is from Brett Feldman of Goldman Sachs.

At this point, we've seen that some of your chief competitors, FiOS and AT&T's fiber business, obviously, had very good quarters. And clearly, that did not impact your ability to put together a solid quarter as well. So we know that. The question we keep getting is what is the competitive dynamic like in your markets between you and your fiber competitors? And are you seeing them in some way step up their efforts, and have you had to make any adjustments? And I think we're really trying to understand what's the run rate been like as we move past the third quarter and look into this quarter and into 2021.

Yes. Brett, I think, listen, we've had, through all disclosable metrics, just outstanding growth KPIs across the board, from customer acquisitions, to broadband growth. The numbers, as I saw also on FiOS and AT&T, were good, very strong numbers in Q3. And we haven't seen anything particular from either of them in terms of overaggressiveness on the marketing side. But it's -- I think there's business back to usual. We saw FiOS be less present in Q2, given some of their labor issues in terms of installations. And so I think they're catching up a little bit there, but we're still, to date, 80,000, about 125% higher than we were last year, year-to-date, in terms of broadband substance. So we're very focused on continuing to grow our customer counts and our broadband RGUs. And so we've been able to nicely defend all the gains that we got in -- at the end of Q1 and the balance of Q2 that we're not seeing anything outrageously different from competition out there, despite the fact that they've got strong results.

Your next question is from Doug Mitchelson from Crédit Suisse.

Dexter, I was just hoping you could remind us of some of the facts around fiber because the 44% sell-in in the market of footprint, for gross adds, is pretty interesting. Now you're scaling gross adds, is the cost to connect fiber as you expected? And can you remind us what the timing is for when OpEx savings from the fiber network happens? Does it happen when you connect to customers? Does it happen when you connect to lots of customers or when you roll them all over to fiber and turn off the coax network? And are you starting to see fiber build and fiber connect costs and customer reactions successful enough to the point that you think parts of Suddenlink makes sense for fiber? And then for Mike, I just want to make sure I heard it right. You said $400 million to $450 million was a reasonable placeholder for cash taxes in '21, because that would be, I think, something like a 33% tax rate. I just want to make sure I heard you right.

So why don't I hit the fiber question first. We're still in the early days on the rollout. What's obviously very nice to see is how the selling rate has picked up very rapidly quarter-over-quarter. I think we're still in what I would see in terms of efficiencies on connections and installations, not anywhere near where we want to be in terms of the time it takes and the cost it takes to connect our fiber subscribers, which is absolutely normal, which is as expected in terms of training our field techs as well as just getting customers very comfortable with the newer technology. So this is going to be -- we're going to continue to monitor this very closely, put a lot of resources on the training side to improve on the efficiencies of the connections. But we see just a very, very huge runway ahead of us in terms of the pent-up demand for this product, particularly as people work from home, upload speeds become more and more relevant here. And so I think this is more of a story that I think we'd like to continue to have some interaction with you guys on from quarter-to-quarter as we grow the base and start having some data points that we can share. I think it's still too early today. And to your point about cost-effectiveness, I don't think we're there yet in any shape or form as to where we want to be. I think in terms of what we want to do on the Suddenlink footprint, we are laying fiber very, very deep into our new-builds there, which effectively allow us to adapt to a fiber-to-the-home technology should we want to do that last drop or in-house wiring in terms of fiber. But today, I think we are going to continue to focus on the HFC plant, by and large, on Suddenlink, but we will look at pockets where I'm certain that we're going to upgrade to full fiber-to-the-home, given what we're doing in terms of edge-outs and how we're positioning that.

And then, Doug, in response to your question on taxes, I mean I was giving you a rough estimate. I may have erred a little on the high side. But certainly not -- we're not using a 33% rate. We continue to use a 27% effective rate inclusive of states. And I did mention we certainly have opportunities available to us to kind of manage that number down a little bit.

Your next question is from Ben Swinburne from Morgan Stanley.

Maybe Dexter for you, 2 different topics. One, you mentioned the video sell-in rate has continued to trend down. I'm just wondering if you could remind us of roughly where that sits. And maybe that's a good way for us to think about where penetration settles in longer term. And then on the edge-outs, 150,000 homes a year gives you guys a nice kick or 2 sub growth. I'm wondering if you think there are opportunities to go bigger than that. I know you're focusing on Suddenlink, but -- and maybe there aren't opportunities in Optimum, which is obviously a pretty well built-out area. But I'm just curious if there's potential to sort of maybe take that number even higher based on the economics and the returns you're seeing around broadband builds.

Yes. I mean listen, Ben, just answering your first question first. On the video selling rates, we're in the mid- to high 30s now. At the kind of the best-in-class when we were very, very high on selling rates, we were in the low 60s. We were really seeing numbers in the mid- to high 40s as late as the second quarter of this year, and that's fallen off to the mid-30s to high 30s. And some of it is pandemic-related as we look at some of the things that we're doing in terms of promos and roll-offs, and forgiveness of debt when it comes to New Jersey Executive Order or Pledge people. So there's some -- there's a big mumble jumble of stuff where we've disconnected people and reconnected people. So the numbers aren't super clean in the Q3 as they would be historically. But I think that 40% number is probably kind of a safe number, and it goes from there, right? So we'll see quarter-over-quarter where we're going from there as we get back to a more normal marketing period. But that's -- but we fall in, obviously, significantly from where it used to be kind of in that mid- to high 50s and even touching the 60 number. In terms of edge-outs, the biggest challenge we have is just getting the machine up and running all over again, given a lot of the work has been stopped during the pandemic. So we're extremely focused on lining up our crews towards the end of this year, getting ready for the New Year and delivering 150,000 plus. Do we think there are more to do? Yes. Can we do them with a lot of confidence next year? Probably not. But we're looking really in a 3-year trajectory. If we're going to average 150,000 a year, 450 for the next 3 years, can we do more? Yes, we're definitely going to try and push for more. We are going to see some opportunities from RDOF. I can't tell you exactly how big that will be or how small that will be. We're going to be very thoughtful on obviously the return economics here, but there is going to be some opportunity here, particularly for some areas that were just super-contiguous to what we're doing already from a build-out standpoint. Even on the cost per home may be expensive, post subsidies, it makes a ton of sense for us to do that. So that will be a number, I think, we will be more open about once we know kind of what the results are and what the opportunity is ultimately going to be.

Got it. And those RDOF opportunities I imagine are completely unserved, right? So it's sort of your market to go after, if you get it.

That's exactly right. So we expect to get some subsets, which are just us, the contiguous data we want to build out or not. And we want to build out. It's a basic answer. Even for small communities, we'll continue to push that, particularly, for very contiguous properties.

Yes. And maybe just wrapping that up into one last question then. Dexter, obviously, election next week, in case you weren't aware. There's a lot of focus...

I did already today but I didn't want to wait in the rain for 3 hours.

Yes, 12 hours, right. A lot of focus on the implications for cable, and you guys fortunately aren't going to be the targets in Washington, at least among the cable industry. But it could affect you. I'm just wondering how you think about the implications, if any, of things like Title II, maybe a greater political focus on affordability and access. I mean to me, the RDOF stuff seems like it works financially and politically, not to sound too cynical, but just wondering how you're thinking about all this stuff as you look out to a potential Democratic FCC.

Yes, it's really difficult, Ben, to lose any sleep over this and to think -- to overthink it because you can take a snippet of rhetoric from some debate 6 months ago and go crazy about it. You could just basically understand that the process of anything to do with something that could be overregulation relative to our sector is going to take a very, very long time to enact as we saw last time. And whether or not any type of FCC administration is going to want to act on it is something else altogether, right? So this is a dialogue that's not even reached our screens yet as a sector, even with obviously the focus on potentially many regulatory elements that may come into a new administration. But I think this is a wait-and-see. We'll be reactive, and we're obviously proactive in many respects on certain things. But I think the country is extremely focused on great broadband and continued improvement and enlargement of access. And so continuing to incentivize people to do that, I think, is going to be the underlying criteria. After that, can we do things for different subsets of demographics? I'm sure there will be things that come up. But again, there's nothing that we see that's imminently on the horizon that we need to be worried about.

Your next question is from John Hodulik from UBS.

Two quick ones, I think. First, any updated thoughts on the use of proceeds from the Lightpath transaction, just given the better-than-expected EBITDA growth you've seen in the second half here? And then, Dexter, you talked about M&A among smaller cable companies. Can you give us a sense of what the landscape looks like? Obviously, there's a lot of small cable companies out there, sort of is it a target-rich environment where you guys got a lot queued up? Or any sort of insight into sort of what you look for? And obviously, we know about the Atlantic Broadband situation, but are you looking for contiguous regions or underpenetrated assets or lower margins? Or any hints as to how you guys sort of look at the landscape would be great.

Sure. Listen, I think on the use of proceeds of Lightpath, and you guys are probably doing your back of the envelope math, our $2 billion-plus re-guidance is a guidance based on non-Lightpath proceeds, right? So given the EBITDA growth we saw on Q3 and some expectations that we see for Q4, we'll be able to do $2 billion or more of buybacks just on the non-Lightpath proceeds. The $1.1 billion of net proceeds we're going to get, to the extent we don't see any attractive M&A opportunities to deploy that, I think it's fair to say that we'll probably use some or all of it to buy back shares. On the M&A side, I like all of your criteria: contiguous, underpenetrated cable, all that stuff sounds great. We are out there looking at a handful of things. The smaller operators, like Service Electric, there are those types of guys, a little bit all over the place. And given that we're in 21 different states, 18 through Suddenlink, there's a lot of contiguous smaller assets out there. It's not necessarily that easy to unlock all this stuff. But I do think, given the environment, given the interest rate environment, given that size does really matter here in terms of getting operational synergies and investing heavily in technology and customer service, it is starting to percolate that some of the smaller operators, some of the mom-and-pop guys are looking to deal here. And I think it's very obvious to us when we picked up Service Electric, even though it's very small in scale, that's been a network that has not been invested in a lot. There has not been any consistent marketing for the residential and especially not in the SMB side of the business. And we're seeing a lot of low-hanging fruit just by adding 2 or 3 additional salespeople, both on the SMB side and on the B2C side. That's been very lucrative of us just increasing penetration out there, bringing new products, and we're upgrading, obviously, the network as quickly as we can. So everything that we are able to get our hands on, in terms of M&A opportunities, will be the best use of our capital in terms of return standpoint. But absent that, I think we like buying 12%, 13% free cash flow yield equity when we're financing at 4%, 4.5%, right? So that will continue to be the best use of our capital, in the meantime outside of M&A.

Your next question is from Peter Supino from Bernstein.

I was curious to ask about Suddenlink and in particular, whether -- in September, you provided some really helpful color on the profitability of Suddenlink. And I would love to know more about subscriber growth and/or ARPU levels and trends in the Suddenlink territories given the different customer demographics there.

Peter, we don't break out the Suddenlink numbers, but it's been clear that a disproportionate chunk of our volume growth is coming from Suddenlink, which is very similar to some of our other public peers out there in terms of the demographics. So the subgrowth has been good. We benefit from a better programming cost lineup as our sensors are not as prominent in the Suddenlink footprint as it is in the New York Tristate area. And you throw on a lot of diversity channels as well. And the gross margin on video are worse in the Optimum footprint than in Suddenlink. Funnily enough, and it makes a lot of sense, from a ARPU -- broadband ARPU, we consistently see broadband ARPU on the Suddenlink side be, let's call it, 5% to 10% higher than our average broadband ARPUs on the Optimum side. And that's really driven by the intensity of competition that historically, has been in the FiOS zones versus the Suddenlink zones, which is less penetrated by competitors there. So the growth has been superior from a broadband net add standpoint, but also ARPU numbers have been higher. And also, historically, we've been upgraded to 1 gig a lot earlier on the Suddenlink side than we have on the Optimum side, which we just finished. So maybe that gives you some insights into it. One of the things that you don't see when you try and break out the 2 businesses is also the SMB side of the business is a much stronger growing business on Suddenlink than it is on the Optimum side, given the penetration of Optimum. However, the flip side is most of the advertising dollars and profitability and growth comes from the Optimum side than it does from the Suddenlink side. So that is a little bit of an equalizer in certain respects, in terms of the overall consolidated numbers for each property, one versus the other.

Your next question is from Jonathan Chaplin of New Street Research.

Just a follow up on Hodulik's questions. With the Atlantic Broadband process extra, is that over at this point? And if not, is there sort of a date at which point it will be over? And when we think about the use of proceeds from Lightpath, is -- if there isn't another deal like Atlantic Broadband to do, would you do an accelerated share repurchase program in the fourth quarter that would consume that? Or would the $1.1 billion be sort of spread out over time in terms of share repurchases?

I think on the -- just to answer on Atlantic Broadband, our latest offer had an expiration date going to November 18. So other than reiterating that, I don't think there's anything more for me to say there. In terms of the $1.1 billion, obviously, there's a lot of ways we could deploy that, whether it is an accelerated share repurchase or just trying to be aggressive in open market repurchases or doing some other type of structured offering. But I do think that, given where the price levels are today, we'll continue to try and be opportunistic in the today as opposed to trying to spread it over the next 12 months.

Got it. And just going back to the Atlantic Broadband process, Dexter, the letter from Louis Audet seems fairly definitive. Do you regard that as definitive? Or is there still an opportunity for you there?

Yes. Listen, I think we're very cognizant that the controlling shareholder needs the acquiesce to engage at a minimum, let alone look to do a strategic transaction with 2 other strategics. So based on his rhetoric and his statements today, I think it's fair to say that there's a low chance of us being able to collectively -- us and Rogers, being able to move forward on this project. But I guess, formally, we've got until November 18 to see if there's anything that shakes loose.

It seems like investors win either way. We had to get Atlantic Broadband or $1.1 billion of share repurchases, so I think that's awesome.

Your next question is from Bentley Cross from TD Securities.

A quick question on capital intensity. I mean 8.3% in the quarter and lower than that ex newbuild. You guys communicated that's going to be in the same range, 1.3 to 1.4 going forward. Just wondering when we get down to that dream scenario of sub-1 billion and if you can put a time frame on that.

Yes. I mean I think a lot of it has to do with our fiber-to-the-home rollout. We obviously are not on budget for this year, given the permitting and construction restrictions that we've run into. Same thing on edge outs, we're definitely not going to hit the numbers that we budgeted this year. So we are in the process of -- given what we see today, in terms of the availability of resources and the ability for us to go out and do stuff as aggressively and quickly as we can in the first half of next year, we're probably going to do 500,000-plus more fiber-to-the-home next year. And to the extent that we reach that milestone because the machine has gone up and running, we've got the permitting process moving at a quick pace, we'll probably be doing 1 million-plus per year thereafter. So we're looking -- if you just do the math, you're probably looking at 3.5 to 4 years before we complete the entire Optimum footprint on FTTH.

We have time for one last question. And your final question is from Michael Rollins of Citi.

Curious if you could talk a bit more about the mobile strategy in terms of how you're looking at rolling into the T-Mobile network and if you're looking at building some infrastructure in your markets. And related to that, when you're building fiber-to-the-home, are you layering in a lot more strands or capability where you might be able to leverage your own fiber over time to either build or partner and offer a solution to another provider?

So just to take your second question first, yes, as we are rolling out fiber across the Optimum footprint, we're putting very high strand count into that fiber so that we could multipurpose it going forward, not knowing necessarily exactly what could happen. But that is clearly in our planning. In terms of the mobile strategy, we are with good dialogue with T-Mobile. We are roaming on them right now. We are discussing a very near-term timetable in terms of re-homing ourselves off the Sprint network and onto the T-Mobile network. And that really is a function of their preparedness, some to do with OSS BSS, some other technical factors, but that is a very near-term thing that we expect to happen. And we're going to continue to look to develop additional products and services with our partners at T-Mo and look at other opportunities to grow the business. I think in terms of, let's call it, sizable capital allocations relating to building infrastructure, that's probably not something that we are going to do a lot of. I think we like the model more of looking to partner with people who may have some infrastructure or help people build out their infrastructure in exchange for capacity and those types of deals as opposed to focusing on a subset of a region where we could potentially buy spectrum or build out an infrastructure. I think that is probably less economical given the fact that a lot of our subscribers are moving around, and that probably doesn't drive the economics that attractively. Thank you very much, everyone. It sounds like that's the last question. I appreciate your time. And obviously, Nick, Cathy, myself and Mike are available for follow-on questions whenever.

Thank you.

Thank you.

Thank you, everybody.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.