Altice USA, Inc. (NYSE:ATUS) Q4 2023 Earnings Call Transcript
Altice USA, Inc. (NYSE:ATUS) Q4 2023 Earnings Call Transcript February 14, 2024
Altice USA, Inc. misses on earnings expectations. Reported EPS is $-0.26 EPS, expectations were $0.07. Altice USA, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Hello, and welcome to the Altice USA Q4 and Full Year 2023 Earnings Results Conference Call and Webcast. [Operator Instructions] A questions-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Sarah Freedman, Investor Relations. Please go ahead, Sarah.
Sarah Freedman: Hello, and welcome to the Altice USA Q4 and Full Year 2023 Earnings Call. We are joined today by Altice USA's Chairman and CEO, Dennis Mathew; and CFO, Marc Sirota, who together will take you through the presentation and then be available for questions. As today's presentation may contain forward-looking statements, please carefully review the section titled Forward-Looking Statements on Slide 2. Dennis, please go ahead.
Dennis Mathew: Thank you, Sarah. I'm pleased to be here with all of you to review our Q4 and full year performance. Before we start, I want to express my gratitude to our dedicated teams and their families. In 2023, Optimum began a transformative journey marked by the introduction of a new mission and strategic priorities to deliver improved customer and employee experiences. It's only because of their dedication and support that we were able to deliver on the commitments we set forth. We did what we said we were going to do and it took everyone to do it. I remind you that in the beginning of the year, we established our new Optimum mission to be the connectivity provider of choice in every community that we serve. And we introduced the four strategic priorities that would position us to return to sustainable customer, revenue and cash flow growth.
They are to delight with the best customer experience, grow with the best customer relationships, connect with the best networks and inspire with the best people. Throughout this year, we took steps to lay the foundation against these pillars. And while we are in the very early innings of our turnaround, I'm incredibly proud that we achieved our full-year objectives and began transforming every area of the business which has set the stage for 2024. Let's review some of the achievements beginning on Slide 3. Priority number one was to transform the culture and we did just that. We brought in amazing talent to complement our teams and to lead through operational, financial and cultural transformation. The successful integration of a new CFO and a new telecoms executive leadership team, including more than 100 new leaders across our organization, has equipped Optimum with a best-in-class team with decades of global and U.S. broadband, mobile and video experience.
We introduced a regional operating and leadership model with a localized go-to-market approach paving the way for a hyper local presence in the communities we serve. And we drove employee engagement by listening and acting, so all of our employees are empowered to represent Optimum at its best. Second, we acted with financial discipline. We changed how our finance organization works with our operational teams, embedding a culture to help drive the business and make smarter decisions. And as a result, we have seen stabilization in our adjusted EBITDA margins with full-year 2023 EBITDA margin of 39.1%. We drove capital intensity down throughout the year from the recent peak in Q1 of over 25% down to under 13% in Q4 of 2023. We committed to being positive free cash flow in the full-year and delivered $122 million of free cash flow through improved topline, EBITDA and CapEx trends in the back half of this year.
We were proactive in our debt maturity management, clearing out the 2024, 2025 and 2026 maturities giving us one way to focus on operating the business with no maturities until 2027. And we managed our operations and financial profile with a focus on our core growth businesses. As evidenced by the recent sale of Cheddar News, we will continue to strategically evaluate our operations to maximize our focus on the core business, positioning ourselves for sustained growth and success. Next, we introduced an improved base management strategy that will enable us to profitably evolve the price value equation for our base. Specifically, you saw a few weeks ago, we announced changes to our fiber and HFC rack rates for everyday pricing and began rightsizing speeds for customers as part of our efforts to simplify and normalized pricing and packaging.
We also introduced artificial intelligence and machine learning capabilities, leveraging customer lifetime value models to advance our frontline's ability to more effectively manage our base. Looking ahead, we will continue to take a disciplined approach to profitability while ensuring we offer the best value for each customer so we can reduce churn and grow ARPU over the long-term. On the customer front, I'm pleased that we meaningfully accelerated mobile and fiber growth. We set a new mobile strategy this year that enabled mobile line net additions of 34,000 lines in the fourth quarter, an acceleration of more than eight times in our pace of mobile growth compared to Q4 of the prior year. We also sustained improvements in fiber penetration now reaching over 12% at the end of 2023.
The growth in both mobile and fiber are supported by our sales optimization efforts, driven by a new winning sales culture, stronger channel performance, a clear retail strategy, improved compensation models, disciplined performance management and attractive clear offers like Optimum Complete. And finally, we made significant improvements in the customer experience, advancing CX as our best product at Optimum. We prioritize delivering top tier network quality and providing exceptional experiences for our customers, precisely when they depend on us the most, be it for school, work, healthcare or family moments. This year, we also launched 8-gig symmetrical speeds on our fiber network to more than 2.7 million customers, making us the nation's largest 8-gig provider.
This continues to be a strong competitive advantage everywhere we overlap with a fiber competitor in the Northeast. We successfully implemented new self-service tools such as the My Optimum app and we advanced other self-service options like chat and a more customer friendly portal. We also placed greater emphasis on self-installed and we've seen the number of self-installations nearly double in the full-year 2023 compared to the prior year. Everything we have improved in terms of quality products, quality network, quality service and quality team is translating into better NPS. Furthermore, it's resulting in significantly fewer service calls and truck rolls, which are leading indicators of improved performance, giving us confidence that our strategy is working and we will return to broadband customer growth over time.
In summary, 2023 was about people, strategy and process. I'm pleased that we have vastly more capabilities, more operational rigor, more tools and more execution discipline to be able to drive a more effective go-to-market strategy, deliver high quality experiences, enhance our base management and stabilize our business. With all of this in place, we have strong levers to pull in 2024 as we pave the way to return to long-term sustainable growth. Let's turn to Slide 4 to review them. First, we will continue to evolve our connectivity portfolio and value proposition to meet changing customer demands, while driving improved ARPU trends across our residential and business division. Broadband and mobile remain our anchor products supported by an attractive bundle offer with Optimum Complete.
As we move through 2024, we will better leverage assets like fiber as we sell in gig and multi-gig speeds combined with mobile to give customers the best connectivity experience for the best value. On the video side, in 2023, we launched Optimum Stream as our main video product, which blends a streaming experience with a linear video viewing experience through the Optimum TV app. We will continue to carefully evaluate how we go to market with our video product to maximize both customer experience and profitability and have plans to launch new video package options later this year giving our customers greater flexibility and choice. With respect to our business services segment, I previously mentioned that we have significant potential on the horizon.
In Q4, we saw B2B revenue grow 1% year-over-year. We launched Optimum Mobile for SMB last month and we will continue to expand the B2B portfolio over the year, which will give us additional runway to support ARPU expansion in our B2B segment. We are confident we will continue to see improvement with additional products and a new dedicated team led by our President of Business Services, Mike Parker, who joined the organization in December. As we continue to evolve our operational approach, we are working in parallel to infuse innovation across the business. For example, we're exploring a host of digital engagement and generative AI tools to better engage and interact with our customers. Our aim is to emerge as industry leaders dedicated to seamlessly embedding innovation into every aspect of our business.
This commitment extends across customer experience, product development, operations and beyond. Next, as I shared earlier, in 2023, we took initial steps to introduce a more thoughtful approach to pricing and packaging. In 2024, we will drive this new strategy even further with a base management program focused on retaining profitable customers, improving ARPU trends, strengthening our competitive position and reducing churn. Marc, will review this in more detail shortly. Third, we are focused on fiber penetration growth and strategic network expansion in 2024. We continue to see positive trends in churn reduction, ARPU and increased satisfaction scores amongst our fiber customers. Given the trends and performance, we will continue to increase penetration of our fiber network and strengthen the experience of fiber migrations for our customers.
Our current footprint today covers some of the fastest growing cities in the country. That combined with our more proactive approach and how we go to market in new communities sets us up well to drive growth by expanding our footprint through new build and edge out. This brings us to our fourth lever, which is our segmented hyper local go-to-market approach and a new brand strategy. In support of these plans, in Q4, we hired an experienced Chief Marketing Officer to elevate our go-to-market and brand strategy. We also brought on a new leading advertising agency of record and plan to reintroduce our brand and a new platform, new values and evolved creative positioning to enhance our brand image in the market. This new Optimum brand and marketing approach combined with our newly formed regional Optimum market structure will ensure that we are resonating with customers and that we are competing for every jump ball to drive growth.
Next, we will continue to simplify customer interactions and experiences. We made great progress in 2023 on this front and continue to upgrade tools, processes and technology to simplify how our customers interact with us and how we communicate with them. We remain focused on enhancing our reputation as a company that's easy to do business with and one that will solve issues right the first time every time. And this customer centric approach will contribute to us structurally reducing operating expenses. CX remains foundational to all the work we do across the company and is embedded in our company culture. And last, as we continue to focus on fiber upgrades, DOCSIS upgrades and total passings expansion, we are committed to doing so with financial discipline, aiming to keep capital intensity stable year-over-year in-line with 2023 levels.
Now before I hand it over to Marc, I want to reiterate that the strategy we put in place one year ago is already driving operational improvements and positioning us for growth. We will continue to operate with financial discipline, with deliberate capital allocation and balance sheet management. We are focused on execution and efficiency as we continue to take the actions necessary to improve our performance and strengthen the business. This includes a heightened focus on our core operations and a strategic effort to maximize our total asset portfolio. I am extremely proud of the goals we accomplished in 2023. And building off this foundation, I am fully confident that we are on the right path to return to sustainable long-term customer, revenue and EBITDA growth over time.
And in 2024, we will take another step in the right direction. With that, I'll turn it over to Marc to review our Q4 and full-year performance in detail.
Marc Sirota: Thank you, Dennis. Turning to Slide 6, I'd like to begin with a review of our financial performance. In Q4 2023, we reported total revenue down 2.9% or down 2%, excluding the News and Advertising segment. This was driven by a 2.8% year-over-year decline in our residential business, a 1% growth in our Business Services segment and a 15.7% decline in our News and Advertising segment. It's worth noting, however, that excluding political ad revenue, News and Advertising revenue grew 8.9% in the fourth quarter. Total revenue trends were mainly driven by decreases in our residential subscriber base over the last 12 months. But notably, in the second half of 2023, we showed significant improvement in the rate of revenue decline across segments.
This was driven by successfully implementing a disciplined approach to rate and volume, preserving more ARPU as well as tactfully employing AI tools, better base management strategies and maximizing profitability in our retention centers. We also saw significant improvement in our year-over-year declines in EBITDA with Q4 ‘23 adjusted EBITDA just down over 1% in the fourth quarter. In comparison, we reported an adjusted EBITDA decline of 15.7% in Q4 of 2022 versus 2021, demonstrating a significant moderation and the rate of year-over-year adjusted EBITDA decline. In 2023, we stabilized our operating expenses compared to the prior year, which peaked in Q4 of 2022 at $680 million excluding share-based compensation. In comparison, our operating expenses for Q4 of 2023 were $653 million a 4% decline in OpEx year-over-year.
Improved adjusted EBITDA trends yielded better free cash flow trends in the back half of 2023. In the full-year, we generated $122 million of free cash flow and $322 million in the second half of the year, offsetting the losses from the first half. In addition to improved adjusted EBITDA trends, free cash flow is supported by a step down in cash CapEx. In the fourth quarter cash CapEx declined to $295 million marking a consistent quarterly decline in our capital spend throughout the year. Turning to Slide 7, we saw stable adjusted EBITDA margins, a step down in capital intensity and a corresponding step up in our operating free cash flow margins. Adjusted EBITDA margins in Q4 2023 were 39.2% and 39.1% for the full year. Our goal in 2024 is to keep margins relatively stable compared to 2023.
Turning to capital intensity, you can see that it peaked this year in Q1 at over 25%, and I'm pleased to report that we nearly halved this to 12.8% in the fourth quarter. This is a result of fewer fiber passings constructed and a more disciplined approach to capital spending due to the thoughtful governance practices around capital project prioritization. Full-year capital intensity was 18.5%, which we believe is the right level to efficiently run the business today while also continuing to invest and upgrading the network to support future growth. Our outlook for the full-year 2024 capital is to moderate versus 2023 in the range of $1.6 billion to $1.7 billion. We are strategically investing capital in the best growth areas for the business drive both near-term improvements and long-term sustainable growth.
We are taking a more disciplined approach to our fiber construction by targeting markets that yield the best ROIs recognizing we have a low move environment which limits how quickly we can grow on this front. To that end, we will expand fiber passings to about 3 million homes by year-end and focus more on driving migrations of customers to this incredible network. Additionally, we will add a total of 175,000 new passings compared to 165 new passings in 2023. And we will continue to invest in network quality improvements and best-in-class product developments across the business within our CapEx envelope. Last, on our operating free cash flow margins or EBITDA less CapEx margins, Q4 ‘23 margins were 26.4% or 20.6% within the full year. Again, we saw significant step up over the course of ‘23 driven by stable adjusted EBITDA margins and a notable step down in CapEx. Turning to Slide 8, I'd like to review our recent ARPU trends and base management strategy that Dennis previewed.
Q4 2023 ARPU grew 0.1% year-over-year or $0.15 higher than Q4 ARPU of the prior year. Even with the headwinds of continued losses of video subscribers, we've been able to offset ARPU declines by driving mobile penetration, reducing churn and implementing AI into our care and retention centers to maximize profitability with advanced customer lifetime model. Accordingly, as we mentioned during the last earnings call, we have been evolving how we price and package services as well as how we strengthen our customer relationships by providing the best in price in value packages. Our overall growth is to provide clear transparent pricing will driving meaningful increases in profitable customer relationships. A few weeks ago, we introduced new rational everyday pricing as our new rack rates, resulting in offer and build transparency.
For broadband services, new everyday prices will be lower than prior rack rates across most speed tiers. It's worth pointing out that historically less than 10% of our customers were paying full rack rates and specifically on broadband, less than 5% were paying full rack rates. We also began speed rightsizing to provide more value to our customers, specifically in Q4 we reached more than 100,000 subscribers in the Northeast with this approach. Overall the [speed] (ph) has received well by customers with very few requesting downgrade. Additionally, we saw both churn reductions and lower contact rates in customers who were upgraded compared to a measure control group. These results underscore that moving customers to higher speed tiers strengthens the price value equation, leading to lower churn and improved customer satisfaction, which will ultimately translate to stronger customer lifetime value for the business.
At the core of our current and future base management strategy is the integration of artificial intelligence and machine learning capabilities to create sophisticated models and customer programs. This will allow us to make smarter, customized, data driven decisions and how we interact with our customers. We have been testing the deployment of AI capabilities in some of our retention centers using data to predict churn propensity based on specific retention offers. As a result, we have seen an increase in the profitability of customers who engage within our retention centers. This work will continue and will expand across the care centers and other areas of the business. At last, we will continue to drive sell in and connectivity products with broadband and mobile at the forefront.
With 7% mobile penetration of our broadband base, we have significant opportunity to drive additional mobile take rate within our existing customer base and sell into new customers. Overall, this transformation of our base management strategy will lead to long-term benefits to churn, customer satisfaction and customer lifetime value and will have a de minimis impact on our near-term revenue and residential ARPU trajectory. With a more disciplined and thoughtful approach to how we implement these changes, we are better positioned to improve ARPU trends over time. Turning to Slide 9, I'd like to review our balance sheet position in recent proactive management. In January of this year, we issued $2 billion of senior guaranteed notes due January of 2029 at a rate of 11.75% to pay down the outstanding term B loan and the incremental term loan B-3, which were due in 2025 and 2026.
In conjunction with this transaction, we announced that we would pay down the $750 million senior note due in June of 2024 with a draw from our revolving credit facility for which we had previously earmarked capacity. These two proactive refinancing activities have successfully cleared out all near-term maturities until 2027 giving us the runway to continue to operate and drive the business toward growth. Our weighted average cost of debt pro forma for these transactions is 6.5% and our weighted average maturity is 5.1 years. Our fixed rate to total debt is 86% inclusive of floating to fixed interest rate swaps and pro forma at the end of 2023, we have $1.2 billion of liquidity, providing us the flexibility in daily operations. We will continue to be proactive in managing our debt maturities and evaluate how our capital structure best supports our operating goals.
Next on Slide 10, I'd like to review our subscriber trends, highlighting by the acceleration of our fiber and mobile growth. In Q4 2023, we added 46,000 fiber customers through both new net additions and migrations of existing customers. We previously said we would put more focus on migrations and by doing that we achieved penetrations of over 12%, which is an increase of almost five percentage points from the end of the prior year. Plus with a more disciplined focus on growing our fiber penetration, we've identified opportunities to improve processes and systems related to fiber migrations, which we believe will allow us to accelerate our rate of penetration even further in the coming months. Regarding mobile, we continue to accelerate the pace of net adds each quarter adding 34,000 lines in the fourth quarter.
This growth is over eight times better than Q4 of 2022 when we added just 4,000 lines. We are pleased with the trends we are seeing in mobile. For example, when customers take mobile in addition to our broadband product, we see a 20% annualized churn reduction compared to the fixed only customer base. This presents a significant opportunity to further reduce churn as we expand mobile penetration in our customer base and drive higher take rates. Next, on our total broadband subscriber trends, as we mentioned last quarter, similar to our peers, we saw heightened competition around the holiday season in Q4. That, in addition to continued challenging macroeconomic environment and a low move activity, impacted our broadband performance as reported a loss of 27,000 total broadband subscribers.
Although we saw some incremental headwinds in Q4, which may carry over into the beginning of 2024, we are confident that we have the right strategy in place. With broadband and mobile combined with enhanced base management programs, the strategic regional and hyper local go-to-market approach, network upgrades, dedicated customer care focus and financial discipline, we are well-positioned to return to positive broadband subscriber trends over time. Before we turn to the next slide, I would like to touch on our participation in the Federal Affordable Connectivity Program. We remain committed to bridging the digital divide by providing affordable and accessible internet and mobile services to our customers, and we are fully supportive of continued funding for the program.
At the end of Q4, we had 125,000 customers receiving a subsidy on their broadband or mobile services through ACP. Given our limited exposure, we do not foresee a significant impact if the federal funding concludes. Additionally, we will be proactive in our efforts to engaging with these customers and providing compelling retention offers. We also see this as potential tailwind and an opportunity to attract new customers with plans in place to go after every jump ball. Turning to Slide 11, I'd like to wrap up with some of the key performance drivers that give us confidence that we can have the right long-term plan and that underscores our commitment to delivering the best network experiences and services to our customers. NPS scores across our base continuing to improve with tNPS growing 21 points in Q4 2023 year-over-year.
We also continue to drive increased usage of self-service tools across technical support, customer care and onboarding. In fact, self-installation has grown 68% year-over-year in Q4. Furthermore, self-service tools, improved customer communications and enhanced network quality experiences led to 1.7 million fewer inbound calls and 300,000 fewer truck rolls in full year 2023 compared to the prior year. While a portion of these improvements are driven by fewer customers in our base, more notably the rates per customers continue to improve. On our network achievements, we launched 8-gig symmetrical speeds in 100% of our East Fiber footprint in the early part of 2023 and now customers can take speeds of 1-gig or higher in 96% of our total footprint.
Additionally, as of Q4, we had upgraded 93% of the West to DOCSIS 3.1 with plans to reach nearly 100% by the end of 2024. In summary, we are pleased with our achievements in 2023 and our capital investments plans for 2024 are strategically designed for both near-term and long-term returns for the business, ensuring we sustain excellence in our network, customer experience and business growth. With that, we will now take questions.
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