Altice USA, Inc.

Hello, everyone. It's Nick Brown here from Altice USA. Thank you for joining, and apologies for the slight delay. We had a technical difficulty of our operator. In a moment, I'll hand you over to Altice USA's CEO, Dexter Goey, and our CFO, Mike Graw, who will take you through the presentation, and then we'll have time at the end for Q&A. As today's presentation may contain forward-looking statements, please read the disclaimer on page two.

Dexter, over to you. Hello, everyone. I'm going to start today by summarizing the Q3 results and then provide an update on our strategy and accelerated investment plan. Starting on slide three, revenue growth in the third quarter was 5.8% year-over-year, with continued strong recovery in news and advertising and business services. Adjusting for anticipated regional sports network credits, which impacted revenue last year, revenue growth was 2.3% this quarter. Further adjusting for an incremental $69 million of air strain revenue, which was recognized in Q3 for early termination of a backhaul contract, revenue growth would have been closer to flat for the quarter. Broadband customer net losses were $13,000 in Q3, which is a bit better than I previewed in September, as we finished the quarter better than expected and puts us approximately flat for the year. As I will go deeper on our plans to return to growth later in this presentation, I do want to reiterate here what we believe is just a temporary customer loss driven by a couple of reasons. First, we're still operating in an unusual environment where the effects of the pandemic have not yet fully normalized, particularly in our unique optimum footprint surrounding NYC. Going forward, we'll see some more benefit from our accelerated pace of footprint expansion, optimum fiber upgrades, and additional Sunlink network upgrades. Back to the numbers, adjusted EBITDA grew 3.4% year-over-year with a margin of 45.2%. We delivered another strong quarter of free cash flow at $389 million and just over $1.3 billion year-to-date. And as I previously flagged, we reduced the pace of share purchases in Q3 to $79 million as we are shifting to invest more aggressively for growth, now targeting up to $1 billion of share purchases for the year. We have also updated our financial outlook for 2021. We still expect to grow revenue and EVDA. For CapEx, we now expect to be at the low end of our prior guidance range at $1.3 billion, which is consistent with the free cash flow for the year of approximately $1.6 billion and net leverage of $5.4 billion. Looking at our Q3 revenue growth in more detail on slide four, you can see the adjustments I mentioned for the quarter and year-to-date more clearly. Recall last year we booked RSN revenue credits of $79 million in Q3 and a further $19 million in Q4. relating to rebates from the RSNs primarily due to a shortened baseball season during the pandemic. Residential revenue grew 2.2% in Q3, but declined 1.9%, adjusting for RSN credits. Business services grew 21.7% in Q3 on a reported basis. However, excluding the RSN credits and $69 million of air strand revenue I mentioned, business services was up 2%. Note we expect to record approximately $30 million of additional Airstrand revenue in the fourth quarter related to the same contract. Finally, news and advertising grew strongly again, up 15.7% in Q3, supported by strong recovery across local, regional, and national advertising. On slide five now, focused on our residential business. We reported a net loss of 25,000 residential customer relationships in Q3 and a broadband net loss of 13,000. As I flagged in September, we saw fewer gross additions than usual in the back-to-school period, and move-turn remained elevated in our footprint during the quarter. If the level of gross additions and move-turn was more in line with the third quarter of 2019, we estimate we have shown positive broadband additions much closer to 2018 and 2019 levels. Additionally, in the quarter, we disconnected about 3,000 customers that were previously affected by the prior hurricanes in the Gulf Coast, as some customers here have never returned. I want to highlight that we've seen growth year-to-date at optimum in non-FIOS areas and across Suddenlink, which has been consistent with 2018 and 2019 levels. Where we're seeing losses is only in optimum areas where we overlap with FIOS, so we're focused on addressing this isolated issue. As things stand, we still expect to return to broadband customer growth in Q4 and therefore grow slightly for the full year. Turning to slide six on business services, revenue trends continue to recover as SMB customer growth has been stronger this year, reporting at plus 2.6% growth in Q3, excluding Airstream revenue. So you can see we're building back up to pre-pandemic levels of growth. Business reopening activity has been accelerating as vaccination rates increase and community restrictions continue to relax. We are also seeing retail and commercial office-based vacancy rates continue to improve, as well as schools reopening. With respect to LightPath, we saw a slight decline in the quarter of less than 1% as the company saw some one-time legacy contract renewal impacts. But as we've announced LightPath's entry into several new markets recently, we expect the newly expanded sales team to deliver an acceleration of growth here in the coming quarters. On our news and advertising business on slide seven, we saw strong growth again this quarter, up 16% or almost 22% ex-political revenue, as we continue to analyze the negative impact from the pandemic last year. Local, regional, and national advertising markets all continue to recover, which we expect to continue. One notable exception is the auto segment, where there is some market pressure. Ex-autos, our news and advertising revenue, was up 37% versus Q3 2019 levels. While we continue to expect advertising revenue to decline in Q4, given the tougher political comparison, we now expect revenue for the full year will be slightly up on a year-over-year basis, given our performance to date has been ahead of our initial expectations. On slide eight is an overview of strategic measures we are announcing today to enhance the company's network product portfolios and customer experience on an accelerated basis. First, we are significantly accelerating our fiber network rollout. With a more differentiated broadband service, we expect to drive higher gross additions and help reduce churn given the reliability of the fiber network service. So our long-term network maintenance and technical service costs should also fall. We are further accelerating our new build activity, edging out the Sunlink footprint to drive customer growth. In the near term, to support the return to broadband customer growth ahead of getting the full benefit of our accelerated network benefits, we have rolled out new, more competitive offers recently where we're starting to see traction. We are accelerating investments in mobile and converged offerings, which will be available from early next year and will help improve broadband customer return as well. On the customer experience side, we're looking to expand sales and distribution channels to pre-pandemic levels to support additional customer growth. And more generally, we're making investments to improve the customer experience, including reorganizing our call center setup. Lastly, as we start seeing more material improvements in our operational performance based on the above initiatives, we will pull the trigger on rebranding Sunlink to Optimum to drive a consistent marketing message and customer experience across the country. Before digging into some of these strategic initiatives in more detail, I want to give an updated snapshot of our footprint on slide nine. We have a total of 9.2 million passings across 21 states with optimum legacy cable vision businesses in the New York tri-state area, representing about two-thirds of our total footprint. We compete with FIOS across the majority of our optimum footprints. This is where our FTTH rollout has been focused so far, and you can see from the zoomed-in lens, we've covered about 25% of the optimum footprint with fiber now. We have upgraded the rest of optimum to DOCSIS 3.1 hybrid fiber coax that offers up to 1 gig speed, and the plan is to expand the FTTH rollout to many of these areas as well. Furthermore, within this footprint in New York and New Jersey, which are our largest states from a customer perspective, Remember, we were disproportionately impacted in the last year by the respective executive orders, which were pandemic-related regulatory programs, restricting us from normal disconnect policies. But we're back to business as usual here now. Texas is our third largest state and also represents the majority of Sunlink business. Here we have been focused on new build activity, including expanding into three of our top five fastest-growing communities in the country. Household broadband penetration across the Sunlink states is also below the national average at about 80% versus just over 90% in the New York tri-state area. So this is our biggest growth opportunity today. Finally, it's worth knowing that North Carolina is now our sixth-largest state following the Morris broadband acquisition, which is making way for much more new home-build opportunities as well. Turning to slide 10, I first want to summarize how our prior network upgrades, since we've owned the Optimum Sunlink businesses over the last five to six years, has significantly widened the availability of higher broadband speeds. When we started, very few customers had access to speeds greater than 100 megabits per second, but as of today, 1 gigabit speeds are available to 92% of our footprint. This has helped drive an increase of more than sevenfold in the average broadband speed taken by our customers, from less than 50 megabits per second at the end of 2015 to just under 350 megabits per second today. Our one gig penetration has now reached 13%, but given that our one gig sell-in to new customers, where it is available, is almost 50% right now, this represents a significant growth area for us. About half of our customer base still only takes speeds of 200 megabits per second or lower, so we have a lot of runway here, too. And clearly, as our FTTH coverage expands on an accelerated basis, and we make multi-gig services available, we expect the average speed taken by customers to continue to step up materially beyond what our competition can offer today. On the left of the slide, you can see we are on track to reach 1.5 million FTTH passings by the end of this year, which is an increase of over 500,000 year-over-year, with customer fiber penetration right now at about 5%. Remember, we saw a slowdown in our FTTH rollout last year due to pandemic-related restrictions, but we're looking to significantly catch up next year with a target for an additional 1 million new fiber passings to reach 2.5 million fiber passings by the end of 2022. This includes continuing to upgrade areas where we overlap with Fios, as well as completing the vast majority of Connecticut by the end of next year. additionally we're planning to expand our fiber investments into areas of sunlink with approximately 100 000 homes targeted for fiber upgrades next year on the right you can see we're on track for at least 150 000 new homes built this year mostly edging out around sunlink footprint with morris broadband inorganically adding another 90 000 passings we are still achieving above 40 penetration after the first year of expanding our network into new areas so it makes sense to push harder here in adjacent areas. That's a great driver of our new customer growth. Right now, we're targeting an additional 175,000-plus passings in 2022. Separately, we are continuing to upgrade existing HST homes in the Sunlink footprint in areas where customers previously only received a maximum of 160 megabits per second, taking this up to either 400 megabits or 1 gig. We're on track to deliver over 300,000 upgrade homes here by the end of the year, at the higher end of which we were targeting, and we've already commenced additional upgrades, which we will complete next year. Moving to slide 11, last month we announced a new sales approach with our optimum flexibility offers. New and existing optimum and sunling customers now have the freedom to pick and choose the internet speed, TV package, or mobile data plan they want. Whether selecting a single service or adding together multiple services, customers can change their services at any time, whether they need to adjust their internet speed, TV lineup, or mobile data plan. We've also simplified the pricing and bill with no extra fees and no annual contracts. And most recently, we've been bundling free streaming services such as HBO Max with our Optimum Stream product and offering more generous gift cards on promotions to be more competitive. While these new offers may weigh on our crew growth near term, we believe this will improve our product positioning, value proposition, and customer growth. Optum Mobile has approximately 181,000 mobile lines as of the end of September, reaching 3.9% penetration of LPC USA's residential customer base, with revenue in Q2 of 3.9% year-over-year. We expect to re-accelerate growth here more materially from the beginning of next year as we launch more integrated conversion offers and deploy more marketing dollars. Slide 12 illustrates clearly how we pulled back on sales distribution channels during the pandemic, necessitated by stay-at-home orders and social distancing protocols, but in retrospect, we've been too slow in getting back to pre-pandemic levels here. We estimate this has cost us about $60,000 in gross additions this year when compared to what these channels delivered for us in 2019, which likely means we could have seen growth in customers instead of losses this quarter and mitigate the various headwinds we've seen. On the left, you can see we're targeting approximately the double number of door-to-door sales representatives we have in 2022, up to 400 to 500. And on the right, you can see we're looking to add approximately 50 to 75 new retail stores in 2022, which is also a key driver of mobile sales in the U.S. Speaking more broadly about customer experience improvements, we're making additional investments into our call centers and field services to reduce friction points in customer interaction. Once we are happy and seeing significant improvements in our operational performance and customer experience, we will move ahead with the rebranding of Sunlink to Optimum. All of these strategic initiatives are areas that I and the telecoms leadership team have been spending a significant amount of time on reviewing, and I'm very optimistic about our ability to execute against these targets. And with that, I'll now hand this over to Mike to go over financials and outlook in more detail.

Thank you, Dexter, and good afternoon, everyone. Thanks very much for joining us today. Turning to slide 13, you can see our adjusted EBITDA margin was 44.2% year to date, or 45% ex-mobile, which is slightly ahead of 2019 levels. Remember, we did have some temporary savings last year, so 2019 is a better comparison. Ariba Dial S CapEx, or operating free cash flow margin, of 33% unit date was also ahead of 2019 levels, although slightly below last year, driven by increased network investments. I should highlight that some of the areas Dexter mentioned where we are increasing investment will include higher operating costs as well as higher CapEx, which will likely negatively impact margins in 2022 to drive better customer growth and higher medium to long-term revenue and cash flow growth. We expect to give more granularity here with our full year results as we are just finalizing our budget right now. But we are taking measures to mitigate the impact on 2022 EBITDA and leverage to support this higher investment, as we believe it's the right thing to do for the business. On slide 14, you can see our capital intensity was 12% this quarter and 11.2% year-to-date. Without fiber and new home-built growth investment, this would have been closer to 7% in Q3. Dexter outlined the main components of our increased CapEx target in 2022, which totals between $1.7 billion and $1.8 billion on a cash basis, including $300 million of additional FTTH CapEx and $150 million of additional new-build CapEx. For 50 to 75 new retail stores, this will cost approximately $50 million of additional CapEx next year. We still see the same opportunity to reduce CapEx longer term once our FIBA build is complete. We're just trying to get there quicker now. Slide 15 highlights the annual free cash flow trend. We had another strong quarter of free cash flow generation in Q3 at $389 million, reaching over $1.3 billion year-to-date, and we've given a new free cash flow target of $1.6 billion for this year. Remember, we have exhausted our tax NOLs, so cash taxes have been higher this year, and our CapEx increased year-over-year given the restrictions we had in 2020. Looking forward, it is likely free cash flow will be lower again in 2022 with the accelerated investments that we're planning to drive growth. But thereafter, we remain confident in our ability to grow free cash flow again through EBITDA growth, reduce capex, and lower interest costs. Slide 16 shows our CSC holdings leverage trend since the acquisition of Cablevision, completed in mid-2016, when net debt to EBITDA was closer to seven times. You can see we've been trending to our 4.5 to 5 times leverage target in the last few years, with a couple of exceptions, being the $1.5 billion dividend we paid in mid-2018 in conjunction with the spinoff of Altice USA and the $2.3 billion tender offer at the end of last year following the LightPath minority stake sale. We remain committed to reduce leverage to this target range, even as we are accelerating investments to support all of our key strategic initiatives. This will include reducing the pace of share repurchases and paying down debt in the next year, as we showed in Q3. That said, it is worth noting that our balance sheet right now is in really good shape. As of today, our $2.5 billion revolving credit facility is completely undrawn, so we have a huge amount of liquidity on top of our very healthy level of free cash flow generation. The weighted average of our debt is currently 6.4 years, and our weighted average cost of debt remains at 4.7%. We have no annual bond maturities greater than $1 billion before 2025, all of which could be covered by either free cash flow generation or capacity from our revolver. We will continue to proactively and opportunistically manage our liabilities in the same way as we've done in the past and still see plenty of additional refinancing opportunities. Lastly, on slide 17, we summarize our updated financial outlook. We still expect to grow both revenue and adjusted EBITDA for the full year. Our medium-term leverage target, as I was just highlighting, remains unchanged at between 4.5 and 5 times. However, in light of our slower than expected customer growth, we are now likely to land at 5.4 times at the end of this year, in line with the current level. We expect cash capex for 2021 to come in at the lower end of our prior guidance range at $1.3 billion before increasing to between $1.7 and $1.8 billion in 2022 to support our accelerated investments. Our free cash flow target for 2021 is $1.6 billion. And we've reduced our share repurchase target to less than $1 billion in 2021, having acquired just over an $800 million unit date. to accommodate higher near-term investments in the business. As Dexter has commented previously, we will look to be opportunistic as it relates to use of excess pre-cash flow, including in the way we evaluate any potential additional share repurchases. And with that, we will now take any questions.