Altice USA Inc (ATUS) 2018 Q3 法說會逐字稿

Good afternoon.

My name is Kim, and I will be your conference operator today.

At this time I would like to welcome everyone to the Altice USA Q3 2018 Earnings Conference Call.

(Operator Instructions)

Nick Brown, Head of Investor Relations, you may begin your conference.

Hello, everyone.

Thank you for joining, and welcome to Altice USA's Q3 earnings call.

In a moment, I'll hand over to Dexter and Charlie, who will take you through the presentation, and then we'll take questions.

As today's presentation may contain forward-looking statements, please read the disclaimer on Page 2. The slides are available on the company's website, and a replay of this call will be available for the next month.

And with that, it's my pleasure to hand over to Altice USA's CEO, Dexter Goei.

Thanks, Nick.

Hello, everyone.

We're very pleased to go through this deck.

So let's go straight to Slide 3. Today presents Altice USA's best financial performance yet, including improved subscriber trends, accelerated revenue growth, highest-ever margin and significant growth in equity free cash flow.

So starting with the summary on Slide 3, in the third quarter revenue growth accelerated to 4.1%, supported by improvements in all business segments, putting us well on track to achieve our revenue guidance for the full year of 2.5% to 3%, which we have reiterated.

This acceleration in growth was helped by a recent rate event and improved Residential customer trends year-over-year.

This demonstrates the value of the investments we've made to enhance the customer experience as we continue to see increased demand for faster broadband speeds, better quality WiFi and enhanced video services.

Broadband, in particular, is an increasingly important service for our customers, and we remain committed to being the best broadband provider across our footprint.

EBITDA growth was 5.8% on a reported basis, achieving our highest-ever margin, at 44.3%.

Adjusting for $10 million of losses from the consolidation of i24 which we acquired last quarter, EBITDA growth would have been even higher, at 6.8%, with a margin of 44.7%.

And we had a very strong growth again in equity free cash flow, up 28%; and year-to-date, it's up 66%.

We are delivering on our differentiated investment thesis, having just completed the initial launch of our Altice One entertainment platform, soft launching fiber-to-the-home broadband services and progressively very quickly with preparations for the launch of our Altice Mobile in 2019.

Separately, the entrepreneurial spirit of our management team has allowed us to build a differentiated advanced advertising platform in under 2 years, competing on a national basis in both linear and digital advertising and developing a new core competency.

As we continue to execute well against our plans and see this kind of growth coming through, it gives us high confidence in our future growth in free cash flow generation.

This is demonstrated by us initiating a share buyback, with $241 million of purchases in Q3 and a target of up to $500 million by the end of this year.

Including the $1.5 billion special cash dividend paid with the spinoff of the company in June, that would equate to $2 billion of total shareholder return in 2018, whilst keeping leverage flat from the beginning of the year, at 5x.

And we are planning for further healthy shareholder returns in 2019.

Finally, last week we successfully completed market transactions to consolidate our debt silos, which will strengthen our credit profile as well as further simplifying our capital structure.

Turning to Slide 4, we show a breakdown of the components of total revenue growth.

Our Residential business grew 2.4% year-over-year in Q3, which is an acceleration from the first half with the delayed timing of the price increase fully effective from the end of June, partly offset by the loss of pay-per-view revenue from the Mayweather-McGregor fight in Q3 2017.

Adjusting for this fight, Altice USA's total revenue growth would have actually been 4.6% in the quarter, and Residential revenue growth would have been 3%.

Business Services revenue growth accelerated to 6%, with both the enterprise and SMB segments continuing to trend well.

Lastly, the growth of our Advertising business increased significantly, to 37.8%, which I'll come back to in a moment.

Slide 5 on the left-hand side shows Altice USA Residential ARPU growth of 2.3%, to $143, with a stable Residential customer base year-over-year in Q3 contributing to the overall Residential revenue of 2.4%.

The total number of unique Residential customer relationships reduced by 5,000 this quarter, reflecting normal seasonality at Optimum, although this was an improvement compared to the 8,000 net losses in Q3 2017, which we think is a very solid performance given the timing of the rate event this year.

On the top-right, you can see that Altice USA's overall video trends were better in Q3 than last year, which is the third consecutive quarter of year-over-year improvements in a row, contrary to the industry trend, with 28,000 pay-TV net losses in Q3, again driven by Suddenlink improvements.

We saw slightly more disruption to customer trends from the rate event at Optimum, but this has normalized by September, with trends now back in line again with prior year.

We had 14,000 broadband net additions in Q3 2018, in line with the 16,000 net additions in Q3 2017; again with Suddenlink better and Optimum slightly worse.

On Slide 6, the chart shows we have been able to consistently provide higher and higher broadband speeds for customers following our network and CPE upgrades, as well as satisfying rapidly increasing data usage demands.

These trends have supported double-digit broadband revenue growth every quarter since the formation of Altice USA.

Over the last 2 years, the percentage of customers taking over 100 megabits of speed has risen to about 80% of our total customer base.

Recently, we have shifted focus to growing the penetration of 200-megabit services, with about 80% of gross additions now taking this speed tier or higher, reaching about half of our total customer base at the end of Q3, from less than 5% 2 years ago.

Over the same period, the average speed taken has increased from 56 megabits to 172 megabits, and this continues to grow every quarter.

Average data usage is now over 240 gigabytes per month per customer, and this continues to grow over 20% per year.

Slide 7, we outline some of the further network and CPE upgrades we are investing in to accommodate a continuation of the kind of usage trends I just showed you.

We believe this to be a differentiator to the rest of the industry, as no one else is doing a scaled FTTH deployment, and we have our own proprietary advanced CPE to complement it.

On the network side, the first objective is to have 1-gig broadband services available virtually everywhere.

For our legacy coax network in the Optimum footprint, we just need to do a digital switch video upgrade now to move us to DOCSIS 3.1 and 1-gig speeds, which we can complete over the next few quarters.

For the Suddenlink footprint, we already offer up to 1-gig services, but we will add further 1-gig capacity through some node splitting and CMTS upgrades.

We are also doing a QAM to IP migration on cable plant to deliver future IP services.

And with the move to DOCSIS 3.1, customers will have a uniform SSID across all of their devices, for an improved seamless WiFi experience.

We just soft-launched our fiber network in select areas of Long Island, and it's performing just as we expected so far, delivering a great 1-gig symmetrical single-play data service with a new advanced wireless gateway.

The smart-meshed WiFi we've introduced is also doing extremely well.

Our new FTTH plant gives us a path to more than 10-gig speeds, as well as enhanced WiFi, improved reliability and better customer experience.

Separately, the initial launch of Altice One is now complete, following expansion across Suddenlink, with availability now to over 80% of Altice USA's footprint.

We have reached over 200,000 Altice One unique customers, with a current run rate of about 100,000 Altice One customer additions per quarter.

In addition, we just launched a further update to the Altice One operating system with lots of new features like out-of-home DVR, and customers should see these benefits from this in the next few weeks.

Moving on to our Mobile strategy, on Slide 8. We are still on track for commercial launch in the first half of 2019 and wanted to highlight some of the key differences between our full infrastructure-based MVNO approach, compared to the other light MVNOs you may have seen in the market.

First, we will be operating our own core network with its own HLR, which is the brain of the mobile network.

This means we'll manage our own customer base and mobile services as well as providing our own SIM cards so we can negotiate costs with our SIM supplier directly and manage the configuration where we have scale and benefit from a lot of legacy experience in countries outside of the U.S.

We basically own and control everything apart from spectrum and base stations.

Although we are testing currently CBR spectrum and we'll see if any spectrum locally becomes available, we have a path to a spectrum strategy with this approach, whereas light MVNOs would have to completely switch strategies and build their own mobile infrastructure if they wanted to do this.

Second, we can optimize data offloading while preserving the customer experience with seamless hand-off so we can make sure we offload onto our own network wherever possible, which helps to reduce costs, especially given our existing very dense WiFi coverage.

We will have better hand-off between networks, better customer experience and maximized data offload.

Third, a light MVNO restricts the services you can offer and how you can market to customers.

So for example, you might have to sell in bundles and might not be able to sell a standalone product; for example, roaming data packages, offers for national and international roaming, video calling and HD voice.

Or constraints due to selling certain types of data packets.

We have maximum flexibility to do all of that.

Lastly, we are partnering with Sprint to densify their network to enhance coverage and capacity in our footprint significantly.

So we'll have a significantly lower wholesale price than light MVNOs, which means we'll have more control over our profitability.

The densification will also benefit the quality of experience for our future mobile customers, and initial results we are seeing are amazing, with third-party consultants noting that we have been 135% increases in average download speeds in Long Island in the last year.

In other words, we are getting ready to operate almost like an MNO and will provide a great value proposition to our customers and the market.

Next, turning to Slide 9, I want to outline in more detail our differentiated multi-screen advertising solutions which are driving growth beyond linear TV broadcasting advertising.

Our total Advertising revenue growth was 37.8% in Q3.

About half of this was from political, broadly in line with the rest of the industry, also benefiting from the enlarged structure of the New York Interconnect business we set up.

But the other half was organic from a4, our cross-screen addressable advertising company.

a4 also just launched Athena, which is a great example of the kind of capabilities we now have put together.

This is an audience-based, multi-screen advertising marketplace with household targeting for campaigns across TV, digital, OTT and social media.

It is a self-serve application for end-to-end campaign management, offering both local and national advertising solutions for both agencies or advertisers directly.

Athena also provides in-depth reporting, measurement and analytics, making it a one-stop shop for advertisers.

The other major announcement we made recently was a partnership with AT&T's advertising business, xandr, which will now have exclusivity to sell our addressable TV inventory at the national level.

As well as part of the deal, a4 will benefit from access to video subscriber data from AT&T subscribers that will help inform our national addressable digital campaigns and multi-screen campaigns at the regional and local levels.

Over all, this is our fastest growing business, and the numbers are really starting to make a difference to Altice USA's total revenue growth.

With that, I'll hand this to Charlie to walk you through the financials and the debt silo combination in more detail.

Thanks, Dexter, and hello, everyone.

On the next slide we summarize Altice USA's margins, where you can see that we were at 44.3% adjusted EBITDA margin in the quarter.

That's our highest-ever level, as Dexter noted.

With the operating free cash flow margin, or EBITDA less CapEx, at 30.4% on a reported basis.

And these figures extend our lead over our largest peers.

Those numbers include the impact of consolidating $10 million of i24 losses following the acquisition, which we completed in the second quarter.

Excluding i24, our EBITDA would have grown 6.8% year-over-year in the quarter, which would have represented an EBITDA margin of 44.7% and an operating free cash flow margin of 30.9%.

And just to focus on Optimum for a moment, remember, 3 years ago at Cablevision before Altice took over, it was declining in revenue, with an EBITDA margin of less than 26% in the third quarter of 2015.

And since then we've shown consistently accelerated revenue, resilient subscriber trends, and the EBITDA margin is now almost 20 percentage points higher.

Strong free cash flow growth is also supporting all the investments we're making in fiber, mobile and advertising to drive future revenue and cash flow growth.

We've now achieved all the efficiency targets that we've set out to achieve, way beyond anyone's expectations and at a higher level of revenue growth than even we had anticipated would be possible.

At the same time, we're not done yet, and we do see further optimization and growth potential from the business, not least from the new Mobile business, as Dexter described.

On the cost side, our total programming expenses grew 3.9% year-over-year, which equates to 7.3% per video customer, and our guidance, as we've said in the past, is to expect high single-digit increases per customer here, going forward.

And that guidance is unchanged with the recent Fox renewal.

We've now renewed over 90% of our programming contracts in the last couple of years.

So that gives us very good visibility in that category.

Slide 12 (sic) [Slide 11] shows us our usual view of free cash flow generation.

On the left you can see that we generated $276 million of equity free cash flow in the third quarter, which is after $28 million of cash restructuring costs, and that figure is up 28% year-over-year.

On the right-hand side you can see that year-to-date we've generated a total of $937 million of free cash flow, up 66% year-over-year.

And bear in mind that our interest costs are higher in the third quarter and first quarter with the timing of our coupon payments.

So you should expect free cash flow to be higher again in the fourth quarter sequentially, which will give you some indication of the total we expect for the year.

We've updated our cash CapEx guidance for 2018, as we now expect to spend less than $1.3 billion for the full year, which mostly just reflects the phasing of our fiber and Altice One rollouts.

Cash taxes were just $3 million in the quarter, and we still don't expect to be a significant cash taxpayer until 2020.

Financing activities and the change in cash does include the share repurchases that Dexter referenced during the quarter.

On Slide 12 you can see that our leverage has come down rapidly, to 5.2x on a reported last-2 quarters annualized basis at the end of the third quarter, from a starting point of 6.7x when we closed the Optimum acquisition in the second quarter of 2016.

Our target leverage remains 4.5x to 5x net debt to EBITDA, and we're on track to be there by the end of this year, even with the $1.5 billion special cash dividend and up to $500 million of share repurchases that we're targeting in the second half of this year.

Slide 13 is a summary of our debt maturity profile.

Our weighted average life of debt is 6.1 years, with a weighted average cost of 6.4%.

We have no major maturities at Suddenlink until 2021, and near-term maturities at Optimum are fully covered by a $2.3 billion revolving credit facility as well as our free cash flow generation.

Our total available liquidity was around $2.4 billion at the end of the quarter, and about 70% of our debt is fixed-rate.

If you look to the yield to maturity on our debt, we should have opportunities in the near term to reduce our overall cost of debt significantly, even in a rising rate environment, which we think is counter to what a number of people in the equity market perhaps believe today.

You should continue to see us be proactive and opportunistic in this regard, amending and extending our debt whenever we feel that the broader market is supportive.

Now turning to Slide 14 we show the pro forma corporate structure of Altice USA assuming the completion of our debt silo combination transaction.

Following the IPO of Altice USA and subsequent separation from Altice Europe, we were seeking to further simplify the capital structure and operations by combining Suddenlink, that is Cequel, and Optimum, i.e., Cablevision, businesses under a single credit silo, as we show here.

We just received regulatory approval from the FCC, and we expect to complete this internal reorganization very soon.

The combination is being effected through exchange transactions summarized in the appendix of this presentation.

But in short, we're exchanging legacy Cequel senior secured notes for new Cablevision guaranteed notes at the CSC Holdings OpCo level.

We're exchanging legacy Cequel unsecured notes for new Cablevision unsecured notes at the CSC Holdings level.

And lastly, refinancing the legacy Cequel term loan for a new Cablevision term loan B-3, as well as upsizing the Cablevision revolver.

These transactions in aggregate are leverage-neutral for Altice USA, and we've had overwhelming support from investors, with acceptance of 99.64%, or $5.5 billion, of original notes at the Suddenlink silo tendered for this exchange.

Finally, on Slide 15, we've summarized the key transaction highlights from the debt silo consolidation.

On a combined basis, the transaction certainly gives debt investors a more diversified cash flow profile.

We also believe there's value to managing Altice USA as a unified company with a common strategy, and aligning the debt capital structure is a continuation of that.

A larger capital structure also creates a more liquid trading complex.

And as I described earlier, the market benefits from a well-distributed maturity curve of benchmark securities.

The transaction will also lead to a simplification of our financing strategy and financial reporting, which will allow the management team to spend more time and be more efficient about driving growth and value for the benefit of all stakeholders.

And to that end, this quarter will likely be the last time that we'll have separate Cequel and Cablevision financial statements.

So we'll show 1 consolidated Altice USA P&L and cash flow statement, going forward.

And we should note that all of the agencies have put the credit ratings of our debt on review for upgrades pending completion of the internal reorganization.

And we've certainly seen a positive debt market reaction, outperforming the wider high-yield index recently.

And all of this sets us up very well for future refinancing.

And with that, that concludes our formal remarks, and we'll now take any questions.

(Operator Instructions) Your first question comes from Jason Bazinet, from Citi.

I just had a question regarding how you guys are thinking about that 4.5 to 5 turns in terms of your target leverage.

And the reason I ask is my model is pretty consistent with what you said, in that you're going to hit the high end of that range as you exit this year.

And when I look at my model, I've got something like $2 of fully tax-free cash flow per share next year.

And so do you think you'll sort of --- I guess if you could just provide a little bit of color about how you're thinking about that range of 4.5 to 5 turns.

Could you keep it towards the high end and sort of keep your leverage sort of constant from the 4Q18 level to do more buybacks?

Or do you think you're going to lean towards drifting towards the low end and using your cash flow to continue to delever?

Jason, listen, I think we are not in a position yet to guide you as to where we're going to do in terms of shareholder returns for next year.

I think, clearly, we've mentioned that this year we're going to do $500 million.

That kind of settles in us at about $2 billion for the entire year of shareholder returns.

I think it's fair to say that we'd expect financial results and cash flow to rise going into 2019.

And so it will allow us to have flexibility to do more than that, overall, and stay within our 4.5 to 5x.

But I think really it's all going to be about decisions around capital allocation based on the attractiveness of our stock, or not, in many respects.

We continuously believe that our stock remains very attractive at these levels.

So we'll continue to drive stock repurchases and be opportunistic when there needs for us to be.

But outside of that, I think we're going to drive you to be a little bit more patient here, and we'll give you more guidance as we go into year-end earnings.

Your next question comes from Brett Feldman, from Goldman Sachs.

Thanks for the optimism around the outlook for cash flow.

I think there are some investors who are unsure how to think about that, and not because they're concerned about your top line, but because you're going to be launching that MVNO next year.

And we appreciate the color you offered earlier in the presentation, but we have seen other operators put pressure on their EBITDA and on their cash flow through third-party device financing as they build up those businesses.

So I'm curious, how much of that infrastructure supporting the MVNO have you already paid for?

Is there going to be something incremental we need to model next year?

And then what are your thoughts about mitigating the working capital drag on your cash flow as your customers start to purchase financed devices through you?

Well I think on the first part, the bigger part of the CapEx related to the core network on the MVNO has been paid for already.

So we don't expect a meaningful or even a significant number related to CapEx on the MVNO for 2019.

That will all be --- have been spent already this year.

In terms of, let's call it, cash flow in general for next year, we have not finalized the business model.

Looking at what the market offers today if we were going to do something similar than our peers in the MVNO market, we believe we will not lose any money on an EBITDA perspective.

But again, we have not finalized our launch, on marketing materials and how we're thinking about the business model.

And so we'll give better guidance going into next year as to where we think Mobile will end up from a cash flow perspective.

On handset financing, again unclear as to which model we're going to adopt there, whether or not we're going to provide handset financing or if we expect people just to buy directly their handsets.

But again, we'll give you a lot more guidance there.

I think it's fair to say that we do not expect to see a meaningful deterioration in our cash flows in 2019 driven by Mobile in any shape or form.

Your next question comes from Craig Moffett, from Moffett Nathanson.

Dexter, in one of the investor conferences about a month and a half ago, or so, you talked about the payback on fiber-to-the-home.

I wonder if you could put some meat on the bones for us and put some numbers around that in terms of what your cost per drop is and what kind of cost savings you're getting in terms of recovery.

I think they were sort of eye-popping payback periods of just a couple of years on the cost of a fiber drop.

I basically would punt that question, Craig.

I don't think this is the right forum for the answer.

I don't think we've been very transparent on this.

But be happy to take this offline with you at some point and talk you through kind of how we think about it.

It's clear that from a homes passed perspective we've always told the market that we're seeing some of our European peers spending about EUR 500 per homes passed for fiber-to-the-home, and we think we could do better than that.

I'm specifically speaking about certain markets where we are in our sister company in Europe.

And so you can kind of re-engineer that number to get to our payback numbers that I was mentioning.

Well is it fair to say that the payback is primarily coming from reduced repair and maintenance?

And if so, is that sort of -- should we think about that as potentially taking your margins even higher as you get -- as those flow through the system?

It's a little bit of everything, but specifically maintenance CapEx or maintenance OpEx, even, relating to the network comes down.

And secondly, incidence rates relating to the network which relate to service calls and then truck rolls we expect to come down meaningfully.

Just as an example, in our French business over at Altice Europe today, we have a fiber-to-the-building cable plant as well as a fiber-to-the-home plant, as well, which we're doing in new areas over there.

And you are seeing more than 40% drop in incidence rates, or reduction in incidence rates that we're seeing on the fiber-to-the-home plant versus the cable plant.

So there's no reason to expect something dramatically different from those types of experiences, particularly as the architecture and technology continues to get better and better and better.

So you're going to see -- you should see a drop over time of the OpEx related to servicing clients, specifically around incidence rates and downtime [really] on the network.

And secondly, obviously, the maintenance CapEx and OpEx related to the network are going to come down, as well.

Your next question comes from Jonathan Chaplin, from New Street Research.

Just a follow-up on Craig's question, quickly.

Given that you're upgrading to DOCSIS 3.1 and that's giving you 1-gigabit-per-second speeds in your Optimum footprint without even going to fiber and I'm assuming you're also incurring costs for VIP transition, I'm just wondering what the benefits to the investment on the operating side of the business are.

So you sort of contextualized it initially as benefits in terms of where penetration of the products would go, on churn and then the cost pieces that you've just articulated.

But if you're doing DOCSIS 3.1, 1 gigabit per second, are you capturing those initial benefits already?

Well no, because ultimately our fiber-to-the-home rollout is driven, and I think we've mentioned this regularly, that we believe it's a very attractive NPV trade just on costs.

So future CapEx costs and future OpEx costs we expect to meaningfully come down, which will provide a good payback for that investment.

So we are not factoring in our analysis any churn benefits or any revenue enhancement that we may see from our Residential broadband -- our Residential or business customers.

The reason why we're doing 1-gig DOCSIS 3.1 is really to plug the hole in our product road map for the next couple of years as we roll out fiber-to-the-home across the entire footprint on Optimum.

So we don't want to be in a situation where we're not being able to provide 1-gig as the speeds requirements from our customers continue to grow quarter-over-quarter, as we showed in the graph in the presentation, where today 80% of our gross adds are taking 200 megs.

And I suspect 12 months from now 80% of our gross adds will be taking a higher speed tier than 200 megs.

So that 1 gig investment on DOCSIS 3.1 is not costing us a lot of money.

We're making that investment really to be able to provide the highest speeds on DOCSIS 3.1 that we can to date, but really driving the fiber-to-the-home investment for the future of our network, number one, to be able to provide higher and higher speeds.

We're already testing 10 gigs currently in our footprint.

We are getting very close to that level in our initial tests.

So as we continue to roll out fiber-to-the-home, we really just need to upgrade our software in order for us to deliver 10-gig speeds, going forward.

So we're 10-gig ready, effectively, on our fiber-to-the-home network, and as we get more and more volume there it will drive the cost equation and the CapEx equation down over the next several years, and over the long term, significantly down.

So maybe that's a little bit of a mouthful for you, Jonathan, but hopefully that answers your question.

It's really a stop-gap investment that we're making in DOCSIS 3.1 for the next several years.

And then after that it's really all about fiber-to-the-home.

Your next question comes from James Ratcliffe, from Evercore.

2, if I could.

First of all, on the price increase, any color on how much of that you see as sticking versus in prior efforts?

And secondly, on the lower CapEx guide, is that an element of greater efficiency?

You're doing the same things for less money?

Or is there a timing element there, as well?

Listen, on the price increase I think I mentioned on the last call that the expectations were us to have stickiness of about 50% of that.

We've done better than that.

And now that we are over 2 months past the price increase, we clearly have seen those benefits stick nicely.

So we've outperformed our expectations on the stickiness of the price increase.

On the lower CapEx guide, it's a little bit of both.

Some of it is timing related to a delay on the Altice One rollout and some of the fiber-to-the-home rollout this year.

But secondly, it's also about continuously being able to get better price points on our CapEx spend.

Your next question comes from Philip Cusick, from J.P. Morgan.

This is [Sebastiano] on for Philip.

Just quickly, administratively on the fiber-to-the-home, with the delay do you still expect to hit your initial timeline to cover the Optimum footprint?

I think 4 years from when you (inaudible).

Is that still (inaudible) you can hit?

It was 5 years, and we're still on track to driving for that.

I think we're going to see a significant acceleration going into 2019 of the rollout.

I think we are probably at the far end of that range.

Maybe it takes us an extra year, or so, to complete the last 10%, 20% of the footprint because of really the permitting process associated with the local communities.

But the by and large bulk of it we're definitely going to hit in the 5 years.

And did you guys, I didn't see it in the press release, did you provide a wired versus currently marketed number in terms of your fiber (inaudible)?

We do not.

And I think we'll be a lot more transparent on that next year as we do a hard launch on the fiber-to-the-home.

Great.

And then just thinking about with the -- currently you're ongoing the billing system upgrade and migration at this point.

But you had the rate increase in December (inaudible) 2018 the second quarter for video.

Just how are you thinking about future rate increases in 2019 and beyond, whether it be on the B2B or B2C side, just timing-wise?

Listen, I think it's -- again I think this is something that we'll give guidance on, on our year-end earnings in terms of the guidance for a rate event in 2019.

There is a part of the organization that suggests we should go back onto the normality of a first quarter kind of price increase or stick to what we did this year, which is a mid-year one.

So we clearly do not want to do it right in the middle of the OSS/BSS transition.

Just to give you a quick update there, our B2B business will get transferred onto the Netcracker platform sometime in November, in about 2 weeks I believe is the date.

And that is going extremely well.

It's tested well.

We don't expect to see any significant difficulties in that transition.

That's about 400,000 SMB clients.

And then we had expected to do a test launch on the Residential side in North Carolina.

Again to be very clear, it's just the Suddenlink platform going onto the Optimum BSS/OSS.

And so it will all be about the Suddenlink platforms.

And we are doing a North Carolina migration in the fourth quarter.

So we're on track for that.

We definitely ran into preparation issues because of Hurricane Florence, but we're through that and we should be ready by the end of this quarter to make that transition, and then the rest of Suddenlink in the first quarter of next year.

Your next question comes from Kannan Venkateshwar, from Barclays.

So just 1 from me.

When you think about the Advertising business, obviously there is a lot of strength there.

And when you think about the margin profile, the contribution margin profile, of these new revenue streams that are coming in, ex-political, how should we think about that?

Is it comparable to television, the legacy television business?

Or are these targeted ads from a contribution margin perspective better?

Well the whole issue about the Advertising business and margins sits within the gross margin contribution.

And so when you own inventory, which we do on the linear side because that's the, let's call it, the 2 minutes per hour of ad inventory that we own, that is very, very high gross margin.

When you are acquiring inventory outside of your footprint, so when we're delivering a national campaign, whether it be linear or digital, we're competing for inventory with third parties outside of our footprint.

That is significantly lower gross margins.

Just to give you a kind of sizing, when you own your own inventory, that's kind of an 85%, 90%-plus gross margin business.

When you don't own your inventory, it's a 30% to 50% gross margin business.

So it really depends on where the growth is coming from, whether it's coming from our out-of-market business or our in-market business, which is going to drive the margin contribution profile.

Okay.

And another question, on the balance sheet.

If you think about the macro environment and expectations around that appear to be shifting, does that in any way inform what end of your leverage guidance you want to be, within the 4.5x to 5x?

How should we think about the macro trends shaping that perspective?

Kannan, it's Charlie.

On that, of course we watch the dynamics very closely.

We've got flexibility to some extent to manage within that range, given the different levers we can pull.

I would point out that given that the majority of our debt is fixed-rate, on the one hand, and secondly, given the very limited maturity profiles, there's not a lot of rate or refinancing risk in the near-term horizon for us.

So we feel pretty comfortable with where we are.

Again, between the growth in EBITDA and cash flow, we've got sort of multiple paths to deleveraging that we think we can balance it.

And of course we also look at, as Dexter mentioned earlier, the capital return to shareholders, which at the moment is very compelling.

Your next question comes from Doug Mitchelson, from Credit Suisse.

There's been a lot of focus on the growth initiatives, and I'm curious some of the go-to-market strategy thoughts when you think about fiber-to-the-home, you think about the launch of Mobile next year.

Is this something where we should think about a jump up in marketing spend to start to sort of rebrand the company or drive those products?

Or is this something that happens more organically over time?

And just also curious about the competitive environment.

When you think about repositioning with mobile and fiber to take customers back from Fios, for example, or go after the 2 satellite companies that seem to be sort of on their back foots, in terms of marketing focuses is there an opportunity there to use these launches to go after those?

Or is that something that really these have to scale first and it's going to be a couple of years before we expect that kind of activity?

Good question.

On the go-to-market side, we clearly are transitioning to an Altice brand with the Altice One launch, with Altice Mobile launch and with Altice fiber-to-the-home launch and what we're doing on the a4 side, as well.

I think the timing and the sizing of any marketing spend is really more of a gradual approach, as opposed to 1 big bang transition.

We really want to get through the product launches more importantly than the branding launches.

And I think the way we all think about our marketing campaigns is it will be slightly incremental on the Mobile launch side but not anything of meaningful spend, because we'll be able to cross-fertilize the branding and the marketing dollars that way.

In terms of the opportunities out there, there clearly are opportunities for us to grow our subscriber base, to reduce churn and to get incremental subscribers from both Altice West and Altice East.

We will look at providing discounts for existing customers, which we think will be a very attractive proposition for our existing customers and which should have the intended effect of reducing churn as well as growing revenues and profitability.

But I think we also believe we have a standalone product portfolio that, in itself, is attractive to attract new customers on a standalone basis relative to what the competition can offer, both on a quality of service, customer experience and price points.

And the discounts you said, that was discounts related to the fiber-to-the-home, or related to the Mobile?

Related to the Mobile, specifically.

It is easier for us to target our existing customer base with Mobile with an attractive offer than it is with a standalone offer.

And want to give us any hint of what the pricing might look like?

If I knew, I would tell you, of course, but I don't know.

Your next question comes from Rich Greenfield, from BTIG.

Wondering as you think about the set-top box world, you're obviously still pretty early in your rollout of Altice One, while you've made it available.

Wondering how you're thinking about alternative set-top boxes?

Charter is probably getting closer to launching an initiative with Apple to roll out Apple TV as their set-top boxes.

And wondering just as you think about driving up the connectivity side of your business, how important is the Altice One box versus an array of boxes by third parties as you think about the future of Altice?

And what are the trade-offs to those different strategies?

Well listen, we've obviously seen what our friends over at Charter have done with the impending launch of the Apple box.

We as well continue to evaluate all the opportunities that are available to us.

What really drives who we may partner up with if we do partner up with someone is what is the quality of the experience that they can get on a, let's call it, an Altice USA video offer and making sure that that does not cannibalize our existing product through the Altice One platform.

And so finding that partner who delivers a great experience but also is flexible in what we are offering and when, relative to our existing platform, is also just as important.

So that's how we are going to think about our planning and our choice of potential partners, as a broadband-only plus a third party set-top box model could be attractive.

Your next question comes from Bryan Kraft, from Deutsche Bank.

I wanted to ask you 2 things.

One, I wanted to see if you could talk about some of the areas where you still think you have room to target cost efficiencies in 2019 and beyond, whether that's real estate, corporate functions, the BSS/OSS conversion, et cetera.

And then the other thing I wanted to ask you about is you've laid out the advantages of your full MVNO pretty clearly.

But one of the questions I think people always have with the MVNO strategy is how you're able to manage the impact of higher costs, higher variable costs, from perpetually growing average usage.

So I was wondering if you could comment on your ability to manage that headwind, that impact from growing usage.

Sure.

Listen on the first one, I think we've been pretty consistent over the last couple of quarters that we see the opportunities for singles and doubles out there.

We've taken out over $1 billion of costs over the last couple of years, and there are not meaningful movements.

I think you've listed a couple of things where we see opportunities for those singles and doubles: real estate, the BSS to OSS, other investments that we're doing on the technology side that are going to help us reduce OpEx costs, some potential outsourcing of functionalities that we think we can also arbitrage and get good service while reducing costs.

So I think that's kind of going to continue to be the theme, that we don't see any significant drivers of cost reductions in kind of the triple-digit numbers on a single situation in any near-term basis.

On the full MVNO, completely agree with you.

We've always said that we're big believers in fixed-wireless consolidation in many respects.

In the absence of fixed-wireless consolidation, particularly given our relatively restricted geography, we have been testing CBRS spectrum.

We also know that there are people out there, third parties who have spectrum in our region which is not being utilized today.

So we are looking at all alternatives.

To the extent that we get to the volume numbers that we would hope to get to, we clearly will look at building some infrastructure in, particularly, the Optimum footprint to drive a better cost dynamic.

Your next question comes from Ben Swinburne, from Morgan Stanley.

Dexter, there's been a lot of conversation this quarter, not just this quarter, but particularly this quarter, on sort of programming costs and the relationship with programmers.

I know you guys reiterated your programming cost guidance tonight.

But just as you step back and think about the next couple of years, do you see sort of a meaningful transition in your video business to allow you to maybe get some relief on programming costs and, particularly, when you leverage Altice One to bring in third-party services?

I'm just curious how you're thinking about that opportunity for the company in terms of driving maybe some margin relief or margin upside over time.

Well listen, I think we are, as Charlie mentioned, we've basically renewed 90% of our portfolio.

So assuming that on average that's a 3- to 5-year renewal cycle, there's no real near-term drivers there, other than customers not taking as much video product as before.

And so the unit costs may be coming down, depending on what types of programming people take.

But we're pretty locked in, in terms of our programming costs for the medium term here.

Clearly, the Altice One platform is setting ourselves up and is providing our customers with abilities to choose a lot more.

And so where the maybe unit cost per video subscriber itself may not be able to move and we have a lot of flexibility on, we do see that the customers will have a lot more choice.

In 2019, we will drive to onboarding several more of the larger, more prominent, either a vMVPD or OTT providers out there that could be attractive.

And I think our mix will change, and it will help us kind of be a lot more balanced in terms of what our customers want.

And as we continue to drive our investment in infrastructure to be able to provide more and more speeds and capacity for data download, we expect that customers will maybe pivot away from a falling-margin business that we have on the video business and take up more of the OTT platform stuff that we have on the Altice One box, which we should be able to monetize in several different ways.

I think that's really the strategy, is to be able to pivot in a seamless way as the market transitions to people wanting more choice and as vMVPDs become more attractive, because today I think they've hit the volume numbers of many subscribers that are initial early adopters.

I think we are seeing that slowing in our footprint currently today, given that there is still a big difference between the cable bundle and the vMVPD channel lineup.

But we are definitely have our eyes on trying to shift our customers away over time should they want to choose to do that, onto our Altice One platform and just OTT providers and being a good healthy broker in that business.

That's really interesting.

So it sounds like you would consider bringing a vMVPD onto that platform?

Yes.

At the end of the day you can't put the toothpaste back in the tube, even though everyone keeps on trying to do that.

But we're big believers in having our eyes wide open.

People are going to have ability to access anything they want to over our network.

So at the end of the day you either decide you're going to provide that in the most user friendly, best customer experience way, or you try and be obstructionist.

And ultimately, that's a failing strategy, in our view.

Yes, that's a good point.

And maybe if I could just ask 1 follow-up, back on Advertising, which is obviously growing like a weed for you.

You've built some products that at least seem to be particularly relevant nationally, but you obviously have a relatively modest regional footprint.

Are there big opportunities from a revenue perspective to sort of take what you've built and maybe license it out across the country in a way that would drive pretty high-margin revenue?

I know you talked about sort of either a rep business or buying inventory, and that's a little bit lower margin.

But I would think on the licensing side if you could license out this IP you could drive some nice EBITDA.

You raise a very good point.

I think today we basically took a blank piece of paper, realized we had a small regional local sales ad inventory linear business and turned it into a national linear and digital business today, where we can do both addressable national campaigns as well as IP targeting over the digital side.

Now, the reason why we did that is we kind of looked around and said we have some great assets here in the New York DMA, which is the #1 DMA in the country, and we should be able to parlay that into an opportunity with just a little bit of smarts and hard work into something that could be attractive for the long term.

There's a $140 billion advertising market here in the U.S., of which we generate today about $450 million in.

And so that was really the thesis.

Now, the execution of it has been very good, and we think we've got the opportunity to continue to grow that and maybe add on some other capabilities through discrete acquisitions if we find something interesting to buy.

Licensing it out is a little tough given the agreements that we have.

But can we partner up with, let's call it, other MVPDs to help develop their capabilities there and help them drive better advertising models for them so that they don't have to recreate the wheel like we did?

Absolutely.

And so we worked already with other MVPDs out there to help them in their advertising strategies.

Can we turn this into a rep for them, in many respects?

And I use that in a very broad context.

Yes, possibly, absolutely, particularly if we continue to work very well in improving the local ad sales business.

Your next question comes from Mike McCormack, from Guggenheim Partners.

Dexter, maybe just a quick comment on competition from the over-the-top providers.

Some of your peers are saying they expect maybe a little less headwind in 2019 as all the introductions during 2018 drew a lot of customers away initially but might be slowing down a bit.

So any thoughts around that.

And then also on the wireless side.

From a network perspective, how do those assets stack up as far as what kind of spectrum would be best for you guys to deploy?

Well on the first one, this is the third quarter in a row we've seen sequentially better video RGU performance relative to last year.

So maybe we're a leading indicator relative to whatever our friends say at Comcast and Charter for 2019.

I think it's too early to tell for us to say with all certainty that we expect to continue to see improvements in the video trends, but we've seen 3 quarters sequentially of improvements.

We're launching the Altice One now in more volume.

And so that should have a positive impact on the trends.

And I do think there is some reality to the fact that the offers that the vMVPDs offer today in terms of the channel lineup is a little bit sub-scale relative to, particularly here, what we have in the Optimum footprint.

Just an example, just the diversity of the cultural mix that we have in terms of the population, as well as the 3 RSNs that are in this market, with the 9 professional sports teams.

That really kind of provides a marked difference relative to what a vMVPD can do.

And we've seen that in our take-ups of the video product in the Optimum footprint, which continued to be in that 60% of gross adds continue to be taking a video product, which is much, much higher than you see in other DMAs in the country.

So we kind of are crossing our fingers and continue to expect and hope for better performance going into 2019, but today all we can talk about is that we've continued to see good performance over the last 3 quarters.

In terms of the wireless side of the equation, sorry, could you just repeat exactly what you were asking?

Just wondering how the network lines up as far as what kind of spectrum (inaudible).

We're testing right now 3.5-gigahertz of CBRS spectrum, which is a very cost effective spectrum out there, to say the least.

Obviously, it is not sufficient enough to have a good mobile experience.

We're going to need to have in order -- if we want to build our own infrastructure in, let's call it, the Optimum footprint, we're going to need lower spectrum there in order for it to work well.

And so I mentioned in I think answering another of your colleague's questions that there are people out there with lower spectrum that is unused in our region, and we'd love to work, if we can, if we thought it made sense to build a network, we'd love to work with those guys and potentially license some of that spectrum off of them.

Your next question comes from Emmanuel Carlier, from Kempen.

2 questions.

One, on the CapEx, the CapEx guidance has been lowered a bit.

Would you guide us a little bit how you look at your CapEx guidance for the coming years?

Because on the fiber side you need to ramp that.

So should we see a big increase?

And then secondly, on the Mobile MVNO business, if I just look at what Telenet has done in Belgium, for example, they have succeeded in generating 20% EBITDA margins and cross-selling their mobile products to 10% of the fixed customer base in just 1 year.

I just would like to check if you believe that something similar could get achieved in U.S.?

And if not, why?

So on the CapEx, listen, our CapEx guidance is unchanged.

So the fact that we have a lower guidance going into the end of this year, I think I answered the question, which a little bit has timing to do, a little bit has to do with price points that are better than expected.

But our CapEx guidance, going forward, that $1.3 billion to $1.4 billion level for the next kind of 4 to 5 years, is unchanged, and we believe we can deliver on our fiber-to-the-home build-out with that.

On the Mobile MVNO, I am familiar with, let's call it, the King and Kong or the Kong and King over at Telenet.

I think we have been pretty open that we believe this is a profitable business for us.

We think that we can offer a very attractive product and a very good user experience to our customers, particularly in the Optimum footprint, given what we've done with our friends over at Sprint in terms of densifying the network, in terms of the performance, which has been tested by independent third parties in Long Island where we've put a lot of small cells up already and we're seeing 135% increases in download speeds.

And so your margin equation is really a question as to what price points we want to play with, which we still haven't determined and we'll only determine closer to the launch.

But we would not be launching this if we didn't think we could have a very profitable business and we can get very good penetration.

So, yes, we believe we could do what Telenet does, and hopefully better.

I now turn the call back over to Nick Brown.

Thank you, everyone, for joining.

Do let us know if you have any follow-up questions.

And we look forward to catching up with you in the next few weeks.

Thank you.

Thank you.

This concludes today's conference call.

You may now disconnect.