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Edited Transcript of ATUS.N earnings conference call or presentation 5-Nov-19 9:15pm GMT

Q3 2019 Altice USA Inc Earnings Call

BETHPAGE Nov 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Altice USA Inc earnings conference call or presentation Tuesday, November 5, 2019 at 9:15:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dexter G. Goei

Altice USA, Inc. - CEO & Director

* Michael Grau

Altice USA, Inc. - CFO

* Nick Brown

Altice USA, Inc. - SVP of Treasury & IR

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Conference Call Participants

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* Benjamin Daniel Swinburne

Morgan Stanley, Research Division - MD

* Brett Joseph Feldman

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Bryan D. Kraft

Deutsche Bank AG, Research Division - Senior Analyst

* Craig Eder Moffett

MoffettNathanson LLC - Founding Partner

* Douglas David Mitchelson

Crédit Suisse AG, Research Division - MD

* James Maxwell Ratcliffe

Evercore ISI Institutional Equities, Research Division - MD & Senior Analyst

* John Christopher Hodulik

UBS Investment Bank, Research Division - MD, Sector Head of the United States Communications Group and Telco & Pay TV Analyst

* Jonathan Chaplin

New Street Research LLP - US Team Head of Communications Services

* Kannan Venkateshwar

Barclays Bank PLC, Research Division - Director & Senior Research Analyst

* Marci Lynn Walner Ryvicker

Wolfe Research, LLC - MD of Equity Research & Senior Equity Analyst

* Michael Rollins

Citigroup Inc, Research Division - MD and U.S. Telecoms Analyst

* Philip A. Cusick

JP Morgan Chase & Co, Research Division - MD and Senior Analyst

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to the Altice USA Q3 2019 Earnings Presentation. (Operator Instructions)

I'd now like to hand the conference over to your speaker today, Nick Brown, with Altice USA. Please go ahead.

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Nick Brown, Altice USA, Inc. - SVP of Treasury & IR [2]

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Hello, everyone, and thank you for joining. In a moment, I'll hand over to our Altice USA's CEO, Dexter Goei; and our new 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. The slides are available on the company's website, and we'll make a replay of the call available.

And now I'll hand over to Dexter.

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Dexter G. Goei, Altice USA, Inc. - CEO & Director [3]

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Thanks, Nick. Hello, everyone. Before I begin, I just want to take a moment to welcome Mike as our new Chief Financial Officer of Altice USA. He most recently led our financial planning control organization, and prior to that, held various leadership roles in finance at Cablevision for more than 15 years. So welcome, Mike.

I also want to take the opportunity to thank Charlie for his exemplary leadership at Altice USA, and I'm delighted for him as he takes on his new role at Sotheby's. I look forward to Charlie continuing as a member of our Board of Directors and to his ongoing valuable insights as adviser to me on strategic initiatives.

Starting with the summary on Slide 3. Revenue growth slowed to 0.9% in Q3 as we lapped the prior year rate event and had the absence of political advertising revenue as expected. Adjusted EBITDA was flat year-over-year, although grew 0.7% ex wireless losses, which stepped up a bit since we launched Altice Mobile in September. Based on the initial contribution we've seen from Altice Mobile, we now expect slightly lower growth for 2019, approximately 2.5%, primarily due to the slower ramp-up in sales of effectively 0-margin handset equipment, as we had previously anticipated making those sales available on our e-commerce online channel in Q3.

We expect to open this in other sales channels in the next few weeks to result in faster revenue growth in 2020, since it's mostly phasing for the ramp-up of Altice Mobile.

Note that our guidance for margins, free cash flow and leverage remain unchanged. Given our confidence in the anticipated acceleration of revenue and free cash flow in 2020, we were happy to take advantage of available liquidity and increases in our buyback in Q3 to reach a total of $1.7 billion for this year, ahead of our initial target.

Our core broadband and video business continues to perform very well driven by Altice One and our continuous network investments. This helped deliver the best ever third quarter underlying customer performance. This improved performance is one of the things that make us comfortable to pull the trigger on the unification of the Suddenlink and Optimum OSS and BSS platforms in September, which should bring numerous benefits to the company, which I will come back to shortly.

On top of the boost of growth we expect from Altice Mobile and Altice One continuing into 2020, we expect to start marketing Altice Fiber more heavily in the coming months and to benefit from all the additional new homes we've built. Additionally, we have combined our Altice News and Altice Advertising businesses under the leadership of Jon Steinberg. This should bring significant synergies, especially in expanding our share of the national advertising market, and is well-timed ahead of what we expect to be another big political year.

We also completed a further simplification of our debt capital structure and over $5 billion of refinancing activity in Q3, leaving our balance sheet in great shape.

On Slide 4, we show the breakdown of total revenue growth. Our Residential business grew 0.5%, and Business Services grew 3.9%, both slowing down from the first half as we previously flagged, since we lapped the later-than-normal rate event last year in June. We'll likely see similar levels of growth in Q4 before reaccelerating again in Q1 next year.

We benefit from better customer trends with unique Residential customer relationships growing 0.7% year-over-year as well as from a further increase in the take rate of higher data speeds and data consumption, which supported broadband revenue up 12%.

Our newly combined News and Advertising divisions declined 4.7% in Q3 as we saw a drop of about $20 million in political advertising revenue year-over-year. Excluding political, News and Advertising revenue grew 7.4% driven by the success of our advanced advertising platform, a4, and Cheddar.

On Slide 5, we illustrate the underlying customer performance, which was the best we've ever seen for a third quarter, and show net additions on both a reported basis and adjusted for onetime impacts of the migration of Suddenlink to Optimum's OSS/BSS platforms, which resulted in a temporary loss of gross additions during the period that both platforms were deactivated in the transition for about a week, as planned.

On the left-hand side, you can see the Residential. The unique Residential customers in Q3 were flat compared to the prior quarter on a reported basis. Adjusted for the OSS/BSS migration, Residential customer relationships net additions we estimate would have been 8,000.

In the middle of the slide, you can see that adjusting for the OSS/BSS migration, we estimate that video losses of 28,000 in Q3 2019 was in line with Q3 2018, continuing the resilient trends we've seen since we launched Altice One.

On the right-hand side for broadband, we saw net adds of 15,000 on a reported basis, which was better than the 14,000 reported in Q3 last year. Adjusting for the migration, we estimate broadband adds would have been 24,000, significantly ahead of the prior year. Although we have many levers to continue to improve churn and gross adds in 2020, we would caution about extrapolating this positive underlying trend into Q4, as we're seeing higher-than-normal promotional roll-offs from the last couple of years, which is up significantly year-over-year but should normalize next year, avoiding similar churn and related costs in the future. This will likely mean customer net losses in Q4.

Slide 6 highlights our -- again, our progress with the penetration of Altice One, where we now have over 500,000 customers, representing about 15% penetration of our video base, up from 7% in Q3 last year. Altice One is helping us reduce churn, increase gross additions and take market share.

On the video side, we recently announced we are adding Amazon Prime Video service to Altice One, joining Netflix, YouTube and other streaming services we have made available on the platform. We'll be able to aggregate more streaming services over time in a similar way as and when our content partners are ready to do this to help widen distribution.

On the broadband side, Altice One's built-in advanced WiFi router continues to support growing data usage on our network, underpinning broadband revenue growth.

Slide 7 shows how customers are consistently taking higher broadband speeds and using more and more data. On the left, you can see the average speed of our customers have increased about fourfold in the past 3 years to over 200 megabits per second, following all of our network upgrades and the launch of Altice One. In the coming months, we will be launching 1-gig services across Optimum's footprint following our DOCSIS 3.1 upgrade. With our parallel fiber network upgrade, we'll have multi-gig services increasingly available as well.

On the right, you can see household data usage continues to grow over 20% year-over-year to over 290 gigabits per month with an average of 12 in-home connected devices, a trend that shows no signs of slowing down.

Remember, we have found that data usage is correlated with speed. Our customers that take more than 200 meg speeds use 75% more data on average than customers that take less than 200 megs.

And most of this data usage is being driven by video streaming services. Given the proliferation of new streaming services, we feel very well positioned to benefit from continued growth in demand for our broadband services, which is at the heart of everything we do.

On Slide 8, we talk about Altice Mobile with an update since we launched in September with the most attractive unlimited offer in the U.S. market. We have just 1 simple plan with unlimited everything for $20 a month for existing Altice USA customers or $30 for noncustomers in and around our footprint.

At the end of Q3, we had 15,000 mobile lines and generated revenue of $3 million, which we think is a good start for us. Our initial focus has been on optimizing customer service and the on-boarding process, working through any initial teething issues, which is normal for any new product launch. We're currently training more sales and customer service agents so we can manage the higher volumes we're expecting once we open up all the sales channels.

We've had a bring-your-own-device option since launch, but so far, handset sales have been limited to just our retail stores, which is slightly different to our original plan and explains the modification of our revenue target for this year.

We are preparing the launch of online handset sales, which we see as a key to accelerating volume, as you've seen with many of our peers.

Slide 9 is an update on some of our key initiatives, including Altice Fiber, where we've now reached over 500,000 homes ready for service or around 10% of the Optimum footprint since we ramped up construction this year following the permits we've received. Remember, our existing plant and rights of way ideally position us to do a fiber build like this. We view fiber-to-the-home as an end state of the network, which is superior to other future cable DOCSIS network upgrades. This is especially the case as the fiber technology is already commercially available today, and we're leveraging expertise from our sister companies in how to deploy the fiber at a relatively low cost.

We believe future iterations of DOCSIS will end up with a fiber-deep Node+ 0 architecture anyway. But you will have seen that a DOCSIS plant, which is subject to all the same interference and maintenance issues, we're trying to eliminate with FTTH to save on costs and improve customer service and experience as soon as possible.

Separately, as I mentioned before, we completed the migration separately -- sorry, as I mentioned before, we completed the migration of the Suddenlink to the Optimum OSS/BSS platforms. This is a significant win for the company as we have radically simplified our tools. Remember, we're expecting about $50 million of initial annual cash flow savings, which will flow through next year, including about $30 million of OpEx savings.

This will give us more agility to launch new products and services with one unified platform, including integrated analytics and reporting so we can make better decisions. This will also allow us to simplify customer bills, which will help us reduce billing inquiries.

And now I'll hand this over to Mike, who will take us through some of the financials in more detail.

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Michael Grau, Altice USA, Inc. - CFO [4]

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Thank you, Dexter, and good afternoon, everyone. It's a pleasure to join these calls, and I look forward to meeting, hopefully, many of you in the coming weeks.

Resuming our presentation on Slide 10, we show how Altice USA's adjusted EBITDA margins have expanded over the past few years, reaching 44% in Q3 2019, which was flat year-over-year, excluding about $10 million in mobile losses. These mobile losses were slightly higher than the first half, reflecting some launch costs.

It's worth noting that excluding the impact of political advertising revenues from both periods, our ex mobile EBITDA margins would have grown about 40 basis points year-over-year. We will continue to look for ways to drive efficiencies in all facets of our business as a means to further enhance margins and cash flow. These higher margins, in turn, allow us to continue to be aggressive in investing in all of our growth initiatives that Dexter highlighted earlier.

Turning to Slide 11, we can see a breakdown of capital expenditures, which increased year-over-year as planned due primarily to our growth investments in fiber and new home builds.

Our total CapEx intensity was 15.4% in Q3. But without fiber and new home build investment, this would have been approximately 11%. And remember, following the fiber build, we will be able to reduce CapEx significantly, and we'll also have opportunity to take operating expenses out of the business.

The new FTTH network will enable us to reduce long-term costs to improve customer experience, including reduced customer interactions, lower technical service visit requirements and lower plant maintenance costs.

And finally, our mobile CapEx dropped as expected in Q3 since we've already completed the core network build and initial store upgrades, and we'll be very CapEx-light from here. We may roll out a few additional stores such as in Manhattan, where we intend to serve customers, but this should not be a big number.

On Slide 12 is a free cash flow waterfall chart for Q3. We generated $166 million of free cash flow in the quarter, which was down year-over-year mainly due to higher network CapEx, as we just discussed, as well as the temporary working capital outflow related to the OSS/BSS migration, which we expect to reverse in Q4.

In addition, it should be noted that we have higher cash interest payments in Q3 and Q1 due to the timing of coupons. So this will be a lower number in Q4.

Another point on cash interest payments. All of the refinancing activity we have done this year has created annualized savings of approximately $100 million going forward, and we expect to have many more opportunities for further savings of a similar magnitude with the incremental debt, which becomes callable in 2020.

Cash taxes remain close to 0 as we are utilizing our NOLs. And cash outflow in financing activities included $487 million for share repurchases in Q3 at an average price of $26.45 per share.

Turning to Slide 13. As Dexter noted, my predecessor, Charlie Stewart, was kind enough to leave me with the balance sheet in a very strong position, and we will continue to proactively manage it in the same way going forward. You can see on this slide our debt maturity profile at the end of Q3, pro forma for the recent issuance of an additional $1.25 billion of 2030 senior notes as well as the new Term Loan B5 maturing in 2027. The proceeds from this refinancing activity we used to repay the 2020 8% notes and the 2021 5 1/8% notes in full as well as amending and extending the Term Loans B2 and B4. This had the net impact of reducing our weighted average cost of debt to 6.0% and extending average maturity to almost 7 years.

We now have no bond maturities greater than $1.1 billion until 2025, with none at all in 2019 and 2020.

Our fixed rate debt as a percentage of the total is about 70%, and our liquidity is around $2.5 billion since we repaid our revolving credit facility in July.

Now turning to Slide 14, we show a summary of how we have significantly simplified the debt capital structure of Altice USA. You'll remember that around this time last year, we consolidated the Suddenlink, Cequel and Cablevision credit silos into one. And now with the debt pushdown transaction we just completed, we have further simplified our capital structure with the obligations of Cablevision assumed by CSC Holdings, as you can see on the right-hand side.

These transactions were leverage-neutral for Altice USA. And by further streamlining the company's debt capital structure, we expect to simplify Altice USA's financing strategy and financial reporting requirements going forward. The rating agencies have viewed all of these transactions as credit-enhancing due to the fact that all debt will exist at CSC only, which now has a larger scale and a more diversified credit profile.

Wrapping up on Slide 15 is an overview of our financial guidance for 2019, updating for revenue growth, which we now expect at approximately 2.5%, in line with the year-to-date performance. We are confident in the prospects of Altice Mobile and our News and Advertising division to help us break out of our recent revenue growth range in 2020.

We still expect EBITDA margin expansion, including -- excluding mobile costs, which is up 0.6 percentage points year-to-date. CapEx we still expect in the range of $1.3 billion to $1.4 billion, supporting all of our growth initiatives. And we still expect free cash flow growth in 2019, including any mobile-related costs.

Our target year-end leverage remains 4.5 to 5x, although we are likely to end up at the higher end of this range given that we have done more in share repurchases at $1.7 billion, executing at an average price of close to $23 and exceeding our prior buyback target of $1.5 billion.

As long as our stock remains on a significant relative discount to our peers, which is how we view it now, we're likely to remain towards the higher end of our leverage target and keep returning excess cash in the form of buybacks.

And with that, we'll now take any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

Your first question comes from John Hodulik with UBS.

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John Christopher Hodulik, UBS Investment Bank, Research Division - MD, Sector Head of the United States Communications Group and Telco & Pay TV Analyst [2]

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Great. Maybe for Dexter. Can you give us any more detail on the promotional roll-off you talked about in your prepared remarks? Maybe give us a sense for the size of that impact and whether it will affect both high-speed data and video?

And then in the quarter, the 24,000 high-speed data adds, sort of unadjusted for the -- or I guess, adjusted for the OSS issues, was stronger than what we've seen over the past few quarters. Could you talk about the underlying environment there? Or what drove that number above where it has been typically?

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Dexter G. Goei, Altice USA, Inc. - CEO & Director [3]

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Sure. Listen, on the promotional roll-offs, as you know, historically, depending on when we're going through promos, the shape and the size of the promo looks a little bit different. So you sometimes see a 1- or 2-year or an 18-month or a 3-year promo.

It just happens to be that we're hitting a vortex of a lot of the promos rolling off in the second half of this year. We saw some coming in Q3, but we're seeing an acceleration just in Q4. It's a significant percentage increase relative to last year. But going into 2020, we're going back to a normalized level that we saw in 2018. So this is really a onetime effect that we expect to see. I think, last year, in Q4, we were at like plus 7,000 unique customers. So we're not seeing a massive degradation expectation, but we do expect to see a net loss in Q4 relative to last year, which we were at plus 7. So it's a -- it's really just a one-off there.

In terms of broadband, listen, we continue to see very, very strong broadband demand. We continue to deliver the availability of higher 1-gig speeds in the Suddenlink footprint, and we continue to upgrade nicely on the Optimum footprint: One, for 1 gig on an interim basis, which we'll be able to make available very shortly; and then secondly, continue to drive the build-out of the fiber-to-the-home project. I think we're just seeing continued very, very strong demand in both Suddenlink and in Optimum for broadband and higher speeds. We're not seeing a significant slowdown in that even though we have very strong penetration levels in Optimum. But particularly, the Suddenlink footprint, the penetration levels continue to rise nicely, and we continue to creep and take some market share in the Optimum footprint. So nothing special there. We're not going very aggressive on pricing. There's not aggressive pricing mechanisms there in any shape or form. I think some of our peers are a little bit more aggressive on the promotional side. So I think we're outperforming here relative to expectations.

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Operator [4]

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Your next question comes from Philip Cusick with JPMorgan.

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Philip A. Cusick, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [5]

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Following up on mobile. We've seen that marketing has picked up. You said you haven't ramped up the online yet. What's the sort of timing on that? And did you see October adds running faster than September? And then how should we think about EBITDA next year? Is that -- could that be positive? Or you think it really depends on growth, could be probably still negative if you're growing quickly?

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Dexter G. Goei, Altice USA, Inc. - CEO & Director [6]

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Yes. So on mobile, first, week-over-week or almost day-over-day, we're seeing better trends. So that really is a function of 2 things. One is better performance of the online platform; and two, better training of our personnel. And so that will continue to drive, in our expectations, a continued increase of performance week-over-week going into year-end.

In terms of the launch of online sales of handsets and other distribution -- opening up other distribution platform, we're going to hopefully be ready in the next 2, 3 weeks on the handset sales side, which will start driving a lot more volume, in our estimation. We see a tremendous amount of traffic on our sites, but they literally stop ordering when they can't get any handsets. So we know that that's going to drive incremental volume.

And then secondly, we're in the process, and we have been already opening up some inbound calls -- seats, but we're going to open up a lot more inbound call seats in the near future and open up some of our other distribution channels as training increases. So we're really getting ready for a year-end push here for both on the marketing side and the volumes.

In terms of EBITDA next year, I think this is really going to be a function -- we're going to make these decisions on a quarter-by-quarter basis as to how much money we're going to pump into our distribution channels and our marketing based on performance.

If we think that we can go out there and get attractive volumes, even though we're going to lose money in the near term, then we'll go after that.

If we think that it's more important to get to an EBITDA breakeven as soon as possible, then we'll make that adjustment as well.

I think we've given guidance externally that we think that we're going to lose probably around $100 million of EBITDA in the first year after launch.

So we'll update you accordingly, if we think that's going to be better or worse, depending on how we're seeing the volume trends.

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Philip A. Cusick, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [7]

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Good. And good luck to Charlie.

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Dexter G. Goei, Altice USA, Inc. - CEO & Director [8]

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Why don't you call him up?

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Operator [9]

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Your next question comes from Craig Moffett with MoffettNathanson.

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Craig Eder Moffett, MoffettNathanson LLC - Founding Partner [10]

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Dexter, I wonder if you can just dig in a little more into the economics of wireless. You've said repeatedly that you can make money at the $20 price point, which I presume means gross margin positive and contribution to overall fixed costs at scale can be positive. Does -- how much of that is a function of you've got a very good contract and how much offload? Can you just give an estimate of how much traffic you think you can offload on to the strand-mounted small cells?

And then a related question is, as you think about the fiber build, can you just talk about the role of the -- I guess, what I'd call the freed-up coax? And is part of the magic of the fiber build actually to use the coax network precisely for that purpose, for strand-mounted small cells as a transmission medium because it's cost effective to put the radio equipment on?

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Dexter G. Goei, Altice USA, Inc. - CEO & Director [11]

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Sure. So on the economics of wireless, listen, I think you probably asked me the question, some of your peers many times. We've been relatively mute on giving more precision. But yes, clearly, we believe we've got a very attractive contract on a relative basis to our U.S. peers, in terms of being able to -- if you were to simplify it to a cost-per-gig type of a metric. And we think that we are gross margin positive on our unlimited packages, right?

So -- and the way we think about overall traffic is -- we obviously know what people's trend expectations are in terms of data usage on wireless. That goes between anywhere from 6 to 8 gigs. I think from our perspective, we're seeing numbers that are in line, if not better than that. So less usage than 6 to 8 gigs. And we're probably offloading onto our out-of-home WiFi network about 1 gig. So if you just do the math on that and you try and back-solve into what you think we're paying to our partners over at Sprint and AT&T, we feel that we are gross margin positive on every subscriber. And going forward, as you mentioned, on the volume side, at some point, we're going to contribute to the fixed costs related to OpEx here and be EBITDA positive as we get higher volumes.

On the fiber builds -- sorry, go ahead.

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Craig Eder Moffett, MoffettNathanson LLC - Founding Partner [12]

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No, I was just going to -- if I could just clarify, just to make sure I understand though, Dexter. You said that you're offloading about 1 gig onto your out-of-home WiFi network. But if I understand the contract correctly, what gets offloaded onto the strand-mounted small cells that Sprint put up also doesn't count against your usage levels. Is that right? So is that included in that 1 gig? Or is that...

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Dexter G. Goei, Altice USA, Inc. - CEO & Director [13]

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No, the 1 gig is our WiFi network, right? So it is the Optimum WiFi network that we are not sharing with anyone, and it's our economics that are being saved.

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Craig Eder Moffett, MoffettNathanson LLC - Founding Partner [14]

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But don't you save the economics when it goes over the small cells that were on your network?

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Dexter G. Goei, Altice USA, Inc. - CEO & Director [15]

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No, no. That's just a densification in the lighting up of the spectrum. It has nothing to do with the WiFi itself.

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Craig Eder Moffett, MoffettNathanson LLC - Founding Partner [16]

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Got it. Okay.

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Dexter G. Goei, Altice USA, Inc. - CEO & Director [17]

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So just to go to your second question. Yes, I mean, clearly, we have still a very attractive coax network that we've overbuilt and continue to overbuild. One of the usages would be to accelerate small cell mounted strands onto it. That's been a very successful experiment that -- experience that we've had with Sprint. I think we would be open to having that dialogue with third parties.

Going forward, there's a lot of things that we can do with that network as we free up capacity more and more.

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Operator [18]

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Next question comes from Brett Feldman with Goldman Sachs.

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Brett Joseph Feldman, Goldman Sachs Group Inc., Research Division - Equity Analyst [19]

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Yes. And I just want to clarify on the subs. When you were talking about a potential decline in the fourth quarter, I think you were talking to your total customer base, not necessarily the broadband base because it does sound like there's considerable momentum in there. So if you could just maybe help us get that right?

And then, typically, when you do see people come off promos, you get a little bit of an ARPU lift. So I was hoping maybe you could just let us know what the moving parts are in ARPU as you think about the product mix, exclusive of mobile?

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Dexter G. Goei, Altice USA, Inc. - CEO & Director [20]

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So on the subs, I mean, listen, we don't -- we still are 2 months away from quarter end. But we're just kind of using a basic rule of thumb as we look at the volume of roll-offs that we're facing, that we'd expect just based on experience, what the churn numbers could look like, right? So I don't think it's right for me at this point, Brett, to tell you what I think our RGU performance looks like. But I think it's fair to say that almost every single one of our unique customers takes broadband today. So it's almost a one-for-one correlation. So if we're losing unique customers, the anticipation, in my view, today would probably be that we will lose also some broadband RGUs on a year-over-year basis.

In terms of ARPU, listen, the mix continues to shift, right, in terms of the product mix. And so where we've seen maybe some pressure on ARPUs just driven by the video performance, whether it be cord shaving or people taking smaller packages, we continue to see good strength and resilience on the gross profit numbers because the mix is shifting more to broadband and people upselling on the broadband side. So I think Nick would be -- would love to spend a lot of time with you on your model going forward and giving you more granularity, but I think that's about as much I'll tell you on the phone call.

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Operator [21]

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Your next question comes from James Ratcliffe with Evercore ISI.

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James Maxwell Ratcliffe, Evercore ISI Institutional Equities, Research Division - MD & Senior Analyst [22]

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Two, if I could. First of all, can you talk about the status for the Lightpath process and where we are on that? And secondly, on Altice One, you highlighted that. Can you talk about relative churn you're seeing for Altice One versus customers who don't have the Altice One platform?

Just one housekeeping follow-up to the previous question. Just talking about losing broadband RGUs on a year-over-year basis or a sequential basis?

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Dexter G. Goei, Altice USA, Inc. - CEO & Director [23]

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So just sequential, just to take that last question off the ticker. But on the first question regarding Lightpath, listen, the update is very consistent with what we've said over the past several months, which is it is an ongoing process, which is we're getting quite a bit of inbound calls from third parties. There are several parties who've done a lot of work who are putting together interesting offers, let's call it, but we don't feel compelled necessarily until we see a really compelling offer, right?

So I think we're in the short strokes with a couple of people in terms of them presenting us proposals. And so we'll continue to have those discussions. But given that we've had a nice run-up of the stock, given that we don't need capital per se, and it's really about the quality of the partner and the value arbitrage that we could extract, I think we have to be just very, very thoughtful about how we proceed in this process and react accordingly, right? So there's nothing more to say. There's no update here other than to say that we continue to have dialogues with people. And we'll make a decision at some point in time, whether or not to pull the trigger.

On the Altice One relative churn, I don't think we've been public about talking about what we think the relative churn is between the legacy boxes and our existing boxes, but we can tell you that it's down. We could also tell you that the live TV viewership is higher on the Altice One box than it is on the older boxes. We could also tell you that the usage of the apps are -- about 40% of the Altice One customers use the apps. And similarly, the usage of the voice remote continues to increase very, very nicely. So all of the things that we would anticipate with the investment in Altice One are coming to fruition. I just -- we haven't been public about talking about relative churn numbers.

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Operator [24]

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Your next question comes from Michael Rollins with Citi.

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Michael Rollins, Citigroup Inc, Research Division - MD and U.S. Telecoms Analyst [25]

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Two questions, if I could. First, on the wireless side. Could you just expand in terms of what you're seeing on the mix of wireless -- interest in wireless activations between those that might be in the region where you have cable footprint versus those adjacency areas where you can serve the customers, but you don't actually have the cable footprint there?

And then secondly, if customers are coming off promotion and are leaving your service, where do you see them going the most?

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Dexter G. Goei, Altice USA, Inc. - CEO & Director [26]

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Well, listen, on the first question, listen, the mix is today, given the volume numbers are relatively small, is heavily weighted towards existing customers. Those are the ones that we can reach very easily, where the brand recognition is very easy as well. But as we ramp up advertising and all of our sales channels get opened up, and our e-commerce site is fully operational, we'll start targeting, let's call it, less dense residential areas such as, let's call it, Manhattan, right, as a place where we have Lightpath, but we don't have any residential customers. And so we already have billboards and digital ads and some broadcast ads in the Manhattan area. But we'll start accelerating a lot more of that advertising once we have all of our sales capabilities up and running.

In terms of the promotions where people are rolling off to, I think it really depends, obviously, in terms of what regions we're talking about.

But today, someone who is rolling off by nature in the Optimum footprint is tending towards going towards FiOS, if that's an option for them.

For those people who are in non-FiOS zones in the Optimum footprint, it is really a retention effort, a change of the way he is subscribing to his business and what package he's taking, right? So that's more of an economic discussion as opposed to a pure churn discussion.

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Operator [27]

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Your next question comes from Jonathan Chaplin with New Street.

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Jonathan Chaplin, New Street Research LLP - US Team Head of Communications Services [28]

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Dexter, I'm wondering -- I know it's early days on the wireless product and volume hasn't been huge so far. But I'm wondering if you could give us some feedback on what the broadband attach rate has been for people coming in through a wireless channel.

So for the guys that don't take broadband from you, what kind of pull-through are you seeing because of the opportunity for them to drop from $30 to $20 on broadband? And how do you think that will evolve when you push this more aggressively in -- across your entire footprint, through all of your channels?

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Dexter G. Goei, Altice USA, Inc. - CEO & Director [29]

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I think you're right, Jon. It's a little too early, given that we're just about 2 months into the launch. And we still haven't opened up all of our channels, and we still haven't really targeted noncustomers per se, right?

I think as we go broader, which is really, let's call it, Black Friday into Christmas season and going into the first quarter of next year, that's going to be something that I'm happy to share with -- I'm sure Nick will be able to give you some insights as to what we're seeing. But the anticipation is right, right? I think your question directionally is correct. We'd expect the attachment rate to broadband to be high. We expect churn rates to come down, whilst at the same time being profitable on a stand-alone basis in the wireless product.

I think what will be interesting to see is, as we think about maybe playing around with our price points, is to try and incentivize noncustomers to become customers. And do we become more aggressive or less aggressive in terms of the disparity between the price points? I think that's something that we'll consistently think about.

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Jonathan Chaplin, New Street Research LLP - US Team Head of Communications Services [30]

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Dexter, if you look longer term, how do you think this could change where terminal penetration for broadband in your footprint ends up? Do you think it could move where you would have sort of naturally stalled out in terms of broadband penetration materially?

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Dexter G. Goei, Altice USA, Inc. - CEO & Director [31]

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Well, assuming static competition, you'd expect us to take market share consistently, right? I mean the product performance has been very good. It continues to get better. There are some software-related issues that we're working through with some of our core network and other OEM providers, but they're minor. But the performance overall has been very, very strong. And so it's really going to be about price points and making -- getting mind share and brand awareness out there. But we're going to have -- just on the Optimum footprint, we'll have a fiber-to-the-home -- a true fiber-to-the-home network with the best performance possible, and probably one of the stronger networks in the Tri-state area, whether it's the Sprint one today or even better with the new T-Mo network going forward, if that deal goes through. So we'd expect us to be able to have very, very strong attachment rates between wireless and broadband going forward.

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Operator [32]

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Your next question comes from Marci Ryvicker with Wolfe Research.

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Marci Lynn Walner Ryvicker, Wolfe Research, LLC - MD of Equity Research & Senior Equity Analyst [33]

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Are there expenses that cross over from mobile into the core business, whether it's marketing or anything? Or are you able to segregate 100% of the wireless cost to wireless? And then secondly, as you're adding the streaming services like Amazon Prime and Netflix, what impact are you seeing on the video side of the business and on the broadband side of the business? Presumably, video maybe coming down and broadband going up. Just curious about that.

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Dexter G. Goei, Altice USA, Inc. - CEO & Director [34]

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On the first one, listen, there's clearly crossover expenses. I mean there is a dedicated mobile team. There is a dedicated residential fixed line team, but we do spend, let's call it, marketing dollars and branding dollars and Wifi CapEx dollars somewhat in unison. We know we need to continue to densify our WiFi network, and we do that. We were going to do that even if we didn't do mobile, but some of that CapEx gets allocated by definition over to our mobile business. I don't know if MyTime, per se, if some accountant is using MyTime allocated, but I'm assuming that there's going to be some type of head count allocation hours used amongst corporates that are associated with mobile and get just allocated there.

So as you know, Marci, we run a very tight ship with very few layers. So I think in many respects, the cost that we are spending on mobile per se probably are too much fully reflected, right? We would have been spending a lot of those costs in any case. And so we're just allocating some time from personnel and some CapEx, which we would have spent anyways on other endeavors. So it's probably to say that the loss numbers that are associated with it are probably higher than what they would be truly if you ran it on a stand-alone basis.

I think on the effect of some of the OTT players, what we are seeing is clearly that people are using the Altice One platform to access Netflix as opposed to changing the input button on their TV to access it either through their Apple TV or directly through their smart Samsung. That is allowing people to stay within our ecosystem much longer. That has really been also the benefit of the Netflix button. It's been so easy for people to shift to it. It's something that, I think, intellectually, we resisted because we thought that it would potentially promote a brand that's not ours and take away from what we were trying to achieve from a branding standpoint, but it's been a phenomenal success from a consumer standpoint. So people like it.

And so we think the usage of OTT platforms that are tethered to our Altice One platform has been higher than it has been if you got it in 2 separate platforms or you had to basically shift to another input button.

In terms of our broadband, you're right, right, which is that the basic statistic is if you are a cord shaver and a broadband-only, you're using about twice as much data download than if you were a bundled customer with a linear cable bundle, right? So people are using, obviously, broadband more and more for video. And all the incremental usage that you're seeing even from bundled customers, a lot of it is video related.

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Operator [35]

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Your next question comes from Doug Mitchelson with Crédit Suisse.

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Douglas David Mitchelson, Crédit Suisse AG, Research Division - MD [36]

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I wanted to ask you, Dexter, about the balance sheet strategy. But first, I guess, I'm feeling a little bit dense on the promotional roll-off. So the promotional sort of sub base that you have now different than a couple of years ago. I'm looking back through, I guess, broadband net adds, in particular, just sort of seasonally and over the last, like, 3 to 4 years. And I'm not really sure where I see the promotional benefit that you got.

So I'm trying to figure out when the promotional subs came in that are now going to have such a dramatic impact on the fourth quarter of '19. And then I'll ask you the balance sheet question.

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Dexter G. Goei, Altice USA, Inc. - CEO & Director [37]

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Yes, I think it's really -- the time frame is back-to-school, right? So -- and in the back-to-school periods, we're running various different promotions depending on the years.

I can't remember, and shame on me, just on terms of what the promo was exactly last year and the year before, but we are seeing an overlap, unfortunately, of the promos, and that's what's really driving this Q4 effect.

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Douglas David Mitchelson, Crédit Suisse AG, Research Division - MD [38]

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So it's kind of a combination of 1-year promos and 2-year promos rolling off at the same time?

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Dexter G. Goei, Altice USA, Inc. - CEO & Director [39]

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Exactly. We're at kind of the vortex of a bunch of promotional offers that happened in the back-to-school period and going into the Black Friday period and into Christmas, which changed in reaction to competition or just in terms of us coming up with a new product idea that was different from the year before. And so that is just -- we're at a onetime effect because as we fast forward to next year, and we look at what we think the volumes of promotional roll-offs are, they are perfectly normalized with numbers that we saw in 2018.

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Douglas David Mitchelson, Crédit Suisse AG, Research Division - MD [40]

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Got it. And then on the balance sheet, you've built a lot of flexibility in the next sort of 5, 6 years by pushing the stacks out. And I imagine there's a little bit of a cost to pushing the stacks out that far. And I guess, my question for you is, why are you building that much financial flexibility in your balance sheet?

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Dexter G. Goei, Altice USA, Inc. - CEO & Director [41]

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Well, I mean, listen, I think that cost of capital on the debt side continues to be very cheap.

And the availability of long-term capital, effectively almost permanent capital, is attractive at very cheap rates. I don't think we are building, let's call it, capacity for anything per se than -- other than optimizing our cost of capital and trying to maximize return for our shareholders.

There is, obviously, a desire by a subset of our shareholders and maybe the credit agencies for us to delever. But in this type of interest rate environment and where we think our stock continues to be undervalued, we do like the fact that we're going out there and borrowing very cheap debt to go out and retire expensive equity.

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Douglas David Mitchelson, Crédit Suisse AG, Research Division - MD [42]

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Yes, that was my back door way of trying to ask if there was other Suddenlink opportunities out there or whether our focus should be on buybacks, but...

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Dexter G. Goei, Altice USA, Inc. - CEO & Director [43]

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Well, listen, I think there is -- I've been open, which is -- the best use of our capital continues to be M&A, but there needs to be a seller for us to be able to buy something. And so we'll look at stuff. There are small systems we're looking at. We'll hopefully be announcing stuff at some point on small systems. But when something larger comes out, I'm sure you're going to know it at the same time we're going to know it. And you'll call us and ask us whether we're interested. And by definition, we are interested in most systems out there.

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Operator [44]

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Your next question is from Bryan Kraft with Deutsche Bank.

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Bryan D. Kraft, Deutsche Bank AG, Research Division - Senior Analyst [45]

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I wanted to ask you 2 questions. One, can you talk about the economics of the $70 for life, double-play offer that you've had in the market, I think, since September? Specifically, just how do you manage the profitability of a permanent promotional price point that's that low, given the annual inflation in programming costs?

And then secondly, I just wanted to ask a couple of numbers questions. Can you tell us what the right interest expense run rate is going forward? And also, any update on when you expect to become a full cash taxpayer or a material cash taxpayer?

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Dexter G. Goei, Altice USA, Inc. - CEO & Director [46]

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So I'll take the first one, and I'll hand it over to Nick and Mike on the second. Listen, on the double-play offer, it obviously excludes price adjustments relating to equipment and sports rights and broadcast fees. So those are excluded. So as we look at -- to your point exactly, on the programming adjustments that we see an inflation, we're going to continue to be able to pass those through to them. What we won't do is change the makeup or the price points related to the packages itself.

So if you have 200 megs, you're not going to be charged more for your 200 megs ever for the rest of the fact that you stay in that exact bundle. Same thing with your package. Your package itself will not change.

Now the logic behind it is pretty simple, which is, one, this promotional roll-off situation is somewhat unsustainable, where you're attracting customers for 1 to 2 years at attractive promotions and then jacking up prices by $15 to $20 after the roll-off. And not only does that lead to a retention effort where you're probably spending quite a bit of money in retention, but the customer satisfaction or dissatisfaction and the amount of phone calls that you get into your call center really drives a lot of customer contact, which is negative and, in many respects, unproductive. And so we're more of the thought process on that particular promotion, which is at some point in time, this customer is going to want to change the package, whether that be on broadband speeds, whether that be on picking up other channels or reducing the amount of channels. At that point in time, it resets obviously the package. And that's really the anticipation. That's the experience we've had with these types of promos is they are attractive. They give people peace of mind. There's a subset of customers who'll keep this offer forever and be very, very happy with it, and they'll never call us, which is fantastic. So NPS scores go up and customer contact numbers go down, which helps our OpEx and our EBITDA and our cash flow.

And then there are those that are sitting there with very good peace of mind, but at some point, they're going to say, listen, I'm not at 12 connected devices anymore, I'm at 24, and I'm not downloading 280 gigs anymore, I'm downloading 500 gigs, so I want to change. And at that point in time, we switch them into some type of other type of product. So that's really the genesis behind it.

I don't know whether we'll keep it for long periods of time. But the reception has been very good from consumers, which is why we're -- we feel good about our gross add numbers. It's really about disconnects in Q3 and Q4.

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Michael Grau, Altice USA, Inc. - CFO [47]

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As far as your second question goes, Bryan, I think you were asking kind of an annual interest expense run rate going forward. We talked about having a weighted average cost of debt right now of 6.0%, and that's on about $22 billion in debt. So I think if you do the math from there, you'll be in the right place.

On taxes, we have NOLs right now that will take us through the end of 2020. Somewhere in 2021 at the current time is when we would expect to become a full cash taxpayer.

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Operator [48]

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Your next question comes from Ben Swinburne with Morgan Stanley.

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Benjamin Daniel Swinburne, Morgan Stanley, Research Division - MD [49]

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Dexter, just a couple. First on the OSS migration. Do you have -- I think you've talked about sort of singles and doubles from here, but are there other kind of chunky synergy opportunities beyond this one that you look out over the next couple of years? Or is it more incremental?

And the way I understood it -- obviously, I might be wrong. I thought you lost sort of a week of customer adds because you had systems shut down. I'm sure that's wildly oversimplifying the situation. But I guess I would have thought those would have just slipped into the fourth quarter, which doesn't seem to be the case. So I was just wondering if maybe you could help explain a little bit the adjustment that you guys are making, so we can understand.

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Dexter G. Goei, Altice USA, Inc. - CEO & Director [50]

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No, listen, I think you're spot on, Ben. So just to answer your second question first, which is, there was a full week of installs that were not able to be made. And yes, that shifts into -- a percentage of that shifts, so you do lose customers on a time delay factor, right? So...

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Benjamin Daniel Swinburne, Morgan Stanley, Research Division - MD [51]

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Right. Don't want to wait, yes.

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Dexter G. Goei, Altice USA, Inc. - CEO & Director [52]

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Yes, they don't want to wait, right? So they'll go somewhere else, and they won't want to wait. But what we're talking about in Q4 has nothing to do with gross adds, it has all to do with disconnect volumes, right? So we are seeing the gross adds as expected in Q4. It's just that we anticipate, based on the first month and the expectation as we've seen historically on volumes of promotional roll-offs, to see a much higher churn rate related to promotional roll-offs in Q4.

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Benjamin Daniel Swinburne, Morgan Stanley, Research Division - MD [53]

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Anything about your synergies?

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Dexter G. Goei, Altice USA, Inc. - CEO & Director [54]

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Yes. Listen, I mean, we keep on getting asked that question because you want to know how to run your margins. I think there's 2 things you need to really focus on. Obviously, the mix is changing on products. And so let's call it, there's some fake margin improvements, which has nothing to do with OpEx related. It's just about customer mix. And then secondly, on the OpEx side, we are continuously looking to optimize and allocate more efficiently our capital, right? So you can imagine we're in the middle of budget period right now, and that is a discussion as to how do we continue to allocate capital primarily to ways to run our businesses better, which could help us disintermediate costs. And so there will be a program in place, for sure, for 2020.

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Benjamin Daniel Swinburne, Morgan Stanley, Research Division - MD [55]

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And then I just want to ask on the third quarter results, for you or for Mike or for either of you. ARPU -- residential ARPU, I think, was down about $1.30 or so Q-on-Q. I know you comped last year's price increase, but it wasn't obviously why it would have been down sequentially. I don't know if there's anything to call out there, pay-per-view or something else weird. And then I didn't know ...

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Dexter G. Goei, Altice USA, Inc. - CEO & Director [56]

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So there is some pay-per-view and there is -- and then there is -- I think there was a fight comp in Q3 last year that was not here this year. I also do think, just by definition, you're not seeing it in our gross profit numbers, but you do see a little bit on the revenue numbers as -- even though our subscriber numbers on video RGUs look better, you do continue to see a deterioration of the video product in general, which is a disproportionate amount of your revenue and your ARPU. And so when you're onboarding people at $110 to $120, but you see people cord shave $70, $80 on video, it's just a mathematical equation that the whole sector effectively is going through.

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Benjamin Daniel Swinburne, Morgan Stanley, Research Division - MD [57]

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Yes. I just didn't -- this is kind of housekeeping. I don't know if you guys knew how much acquired revenue you had in the third quarter. I think Cheddar -- you had a full quarter of Cheddar this quarter, and if you knew how much that contributed?

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Dexter G. Goei, Altice USA, Inc. - CEO & Director [58]

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Probably around 8% to 10% -- 7% to 8%, somewhere in there. We also had an outage if -- I don't know if you knew this, Ben, and I know you -- because, right -- I think it was a Friday of the U.S. Open, we had a massive outage here, which led to quite a bit of credits that we gave back to customers. So that's also -- that hit ARPU numbers in Q3.

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Operator [59]

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And the last question that we have time for today comes from Kannan Venkateshwar with Barclays.

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Kannan Venkateshwar, Barclays Bank PLC, Research Division - Director & Senior Research Analyst [60]

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So I have a couple. First, on the promotional side, Dexter, if you could just help us understand, what is so different about the promotions that you ran over the last couple of years, which gives you confidence that as you go into next year, the promotions that roll-off from this year don't really have the same impact in 2020 and beyond?

And secondly, when we think about your broadband revenue growth, you guys have been growing faster than both Comcast and Charter, and price has been a big part of it. But I think some of it is basically just speed upgrades. If you could just help us understand the different levers to keep this revenue growth going at this pace. And how much of your price -- or the ARPU growth in broadband is due to promo roll-offs versus upgrades? That would be very helpful.

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Dexter G. Goei, Altice USA, Inc. - CEO & Director [61]

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Sure. Listen, on the promotional side, roll-offs, we know in our database, in our CRM, every single package and when a customer comes off a promotional roll-off, right? So it just happens to be, again, that historically, in 2017, 2018, we may have had an excessive amount of 2-year promos, and last year, we may have had a lot of 1-year promos.

And so the culmination of not staying consistent on a time period on promos leads to some overlap of promotional roll-offs that are coming at the same time. So it's just purely mathematical in many respects that we can see the volumes of when people roll off.

And as we fast forward to next year, because we know we've been pretty consistent with how long our promos have been going on in terms of the period of time before we did price for life, so before the summer, and so we can already see that we don't have that type of overlap situation in 2020 and 2021. So it's really just for whatever reason, during the back-to-school and going into Black Friday and Christmas over the last 2 years, we happen to have shortened or lengthened promos that are leading to an overlap of those roll-offs.

And then in terms of your broadband revenue growth question, it is almost uniquely driven by price, and not price push, but price pull. So it's really about customers upgrading consistently here. And as people go for less bundled products, obviously, the stand-alone data product is a higher ARPU than the bundled data product. And so we are consistently going to see, and we've seen this quarter over quarter over quarter, double-digit growth in broadband revenue, which is really driven by some volume, but a high, high percentage of -- super majority percentage of it is driven by price, which are people continuing to drive up the product road map.

And so given that we are opening up 1 gig in the Optimum footprint, and we're averaging about 200 megs in the Optimum footprint, we continue to have a long runway there. But more importantly, we're opening up a 10-gig capacity on our fiber-to-the-home already next year, which will allow us, obviously, to have even a longer product road map going forward on broadband revenue growth.

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Kannan Venkateshwar, Barclays Bank PLC, Research Division - Director & Senior Research Analyst [62]

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Can I ask a follow-up question on that? I mean your speeds are at 200 megs right now. But from an application perspective, there aren't really applications outside of gaming which really need that kind of speed in theory. But as you roll out 1-gig and 10-gig capacities, how are you thinking about the pace of these upgrades? More recently, as you have moved more towards 200, has the pace of upgrades slowed? Or does it remain consistent with what you guys saw maybe a couple of years ago when you guys were at 50 megs?

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Dexter G. Goei, Altice USA, Inc. - CEO & Director [63]

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Yes, I think you can look at the chart, I don't know what page it's on, but it's a pretty straight 45-degree line that consistently sees the same revenue growth trends, both on data usage and on broadband speeds. I understand what you're saying relative to the usage necessities of broadband speeds relative to the applications available.

But frankly speaking, that was the same argument we heard 4 years ago when we were at 50 megs on average, which is why do you need more? Our friends over at Netflix say all you need is 2 megs or 5 megs in order to download. But the -- there's 2 things that are happening. Obviously, device -- connected devices continue to increase exponentially. Two, everyone is wireless at home pretty much and watching video on a regular basis at home. And thirdly, applications continue to drive larger and larger usage. So you're talking about certain applications like gaming, but actually, security cameras, as an example.

When you tether your security cameras to your broadband, it takes an inordinate amount of capacity -- of your broadband capacity. So there are going to continue to be more and more applications, and we're seeing that, where consumers either feel the necessity to upgrade because they want better speeds, right? Why do people buy Ferrari as opposed to Toyota? Because they want to go faster, not because it's a better car necessarily. But I think people have that perception that there is going to be a better performance if it's more expensive and they have more broadband speeds.

And secondly, really, it is -- the reality of it is that there are more and more applications that are driving the need for more broadband speeds.

And so I think as more and more products are available at more attractive prices -- because 1 gig, when it got launched, was probably in the multi-hundred dollars per month. Now you're seeing promotions on 1 gig at the $70 level, let's call it. That is very achievable, particularly when people cord shave from $150 down to $70 or $80 by getting rid of video. They're upgrading their broadband speeds pretty rapidly from there on. And we're not seeing that abate or slow down in any shape or form.

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Nick Brown, Altice USA, Inc. - SVP of Treasury & IR [64]

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I think that's it. Thank you, everyone, for joining and let us know if you got any follow-up questions. We'll catch up with you in the next few weeks.

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Dexter G. Goei, Altice USA, Inc. - CEO & Director [65]

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Thank you very much.

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Nick Brown, Altice USA, Inc. - SVP of Treasury & IR [66]

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Thank you.

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Operator [67]

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This concludes today's conference call. You may now disconnect.