Altice USA Inc (ATUS) 2020 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Altice USA Q3 2020 Results Presentation. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker, Mr. Nick Brown. Thank you. Please go ahead, sir.

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

Thanks, Nick, and hello, everyone. Before we begin, I once again want to thank -- to take the opportunity to thank the Altice USA team. I'm very proud of the ongoing commitment displayed by our employees in navigating this uniquely difficult time, and we delivered another great quarter together.

Starting with a summary on Slide 3. Total revenue was flat year-over-year due to the adjustments for anticipated 9 months of regional sports network credits. If not for this revenue adjustment, we would have grown 3% in Q3. I'll come back to this in a moment.

Separately, this quarter, our business was impacted by Hurricane Isaias in the New York Tristate area and Hurricane Laura, which mostly hit Louisiana and the Gulf Coast. We mainly saw disruptions from down power lines and damaged cable strands interrupting service for some of our customers for which we have issued customer credits. Further adjusting revenue for these storm credits, underlying revenue growth would have been a strong 3.7% in the third quarter, a significant acceleration from growth in the first half of the year.

Our revenue outperformance was driven by broadband revenue growth of 15.6% year-over-year. We saw strong demand for our broadband services with net additions of 26,000, even with the storm disruptions or 32,000 adjusted for storms. Our acquisition of Service Electric, which closed in July, contributed in another 30,000 additional customers in the quarter.

Contributing to this growth was our successful completion of the 1-gig rollout of Optimum, making 1 gig service available across the entire New York Tristate area. In Business Services, we continue to see resilience amongst both our SMB and Lightpath enterprise customers. In news and advertising, we had a strong recovery, helped by political revenue and improved local advertising. Our strong performance led to an acceleration in adjusted EBITDA growth to 5.5% year-over-year or 6.3% year-over-year, ex-mobile, and up to 7.7% further adjusting for the storm's impact. Our free cash flow of $458 million was up 176% year-over-year, helping us deliver $1.46 billion in free cash flow year-to-date, which is already well ahead of the $1.2 billion generated for the full year 2019.

We continue to take advantage of the attractive valuation in our share price, completing approximately $450 million in share repurchases in Q3, totaling just over $1.8 billion year-to-date through the third quarter. We have raised our target guidance to $2 billion or higher share repurchase for the full year from $1.7 billion previously. On the outlook, more broadly, we continue to expect revenue and adjusted EBITDA growth this year. We maintain our CapEx guide of less than $1.3 billion and target year-end net leverage of 4.5 to 5x.

To wrap up the summary, I want to say we remain incredibly optimistic about the strength of our core business, and we continue to focus on opportunities to drive value for shareholders.

Turning to Slide 4, you could see our underlying revenue growth remains strong in this environment, demonstrating the defensiveness of our business. Total revenue was flat at minus 0.2% year-over-year. The RSN revenue credits of $79 million booked this quarter represents an estimate of what we expect to refund to customers when we realize rebates from the RSNs due to fewer games being delivered year-to-date because of Major League Baseball decision to shorten the season. These RSN credits did not impact reported EBITDA nor cash flow since we will have a corresponding reduction in programming costs.

In Q4, we anticipate further RSN credits to reflect the corresponding impact on the last 3 months of the year, which we expect to be approximately 1/3 of the amount we recorded in Q3. And the Q3 number, again, was a year-to-date number for the entire year.

Excluding these RSN credits, we achieved 3% total revenue growth in the third quarter. Further excluding the impact of storm credits, which totaled about $16 million this quarter, total revenue growth would have been 3.7%. Residential revenue declined 1.6% year-over-year, including the RSN credits, but would have grown 2.3% adjusted for that or 3% further adjusted for the storm credit. Business services grew at 1.3% year-over-year, but would have grown 1.8% adjusting for the RSN credits and 2.4% further adjusted for the storm credits.

We are also extremely pleased with the recovery in News and Advertising, where revenue grew 5.2% year-over-year. All in all, we are very pleased with the results, and we continue to believe that our businesses are well positioned in this environment.

Turning to Slide 5. We once again delivered strong subscriber results. Altice USA added 8,000 unique residential customers in the quarter, including 26,000 residential broadband customers compared to a year ago when we reported flat unique customers and 15,000 residential broadband additions. The storms had a negative impact of about 6,000 subscribers. So in the absence of these storms, we would have grown customer relationships by 14,000, with over 32,000 broadband net adds.

The impact of Hurricane Delta, in October, which hit Louisiana area right after Hurricane Laura, is likely to have similar customer impact in Q4, given the severity of the damage in the region of Delta compounding on Laura. Note that these figures exclude Service Electric, which added another 34,000 customers to our base, including 30,000 broadband customers in the quarter.

The adjusted subscriber results shown here exclude customers who would have otherwise been disconnected in adherence with our normal disconnect policy of greater than 90 days in the absence of the FCC Pledge and New Jersey Executive Order. Making these adjustments, we still would have reported 5,000 customer relationship net adds and 23,000 broadband net adds. We continue to benefit from increased market share gains, including from DSL and mobile-only households. In summary, we feel extremely good about the underlying momentum in our customer growth metrics.

Slide 6 provides a more detailed breakdown of the bridge between our reported and adjusted customer metrics. We have been really pleased with our progress in retaining Pledge customers. And as of the end of Q3, we only had a small number of customers remaining on the Pledge. Recall that last quarter, we had about 10,000 customers on the Pledge who are past due on their payment by greater than 90 days. We are now below 3,000 as we had success in various retention initiatives implemented to retain the customers and begin receiving payments again.

On video, we saw an accelerated pace of disconnect compared to the prior year. This was mostly due to lower gross add video attachments as well as disconnecting the video products for some of our customers associated with the Pledge and the New Jersey Executive Order as we work through our various retention programs.

Turning to Slide 7. We continue to see our network performing very well, even with heavier usage during the pandemic. Our broadband speed upgrades remain elevated, up 45% year-over-year. Average monthly data usage per customer was up 44% year-over-year, averaging approximately 420 gigabytes per customer per month in Q3. And our broadband-only customers use nearly 530 gigabytes of data per month.

29% of our gross additions took 1 gigabit broadband speeds in areas where it was available, up from 24% in the second quarter, and we remain very optimistic about the 1-gig opportunity. And following the commercial launch of our fiber double and triple offering, I'm pleased to say our fiber sell-in rates, a portion of gross additions taking fiber-to-the-home in areas where it's available, is already at 44%, up from 28% in Q2 2020, ending the quarter with just over 16,000 customers and representing an enormous growth and cost-saving opportunity.

Additionally, 60% of our fiber gross adds are taking the 1-gig product, which is the higher proportion of customers taking the 1 gig on our HFC plan, representing a great monetization opportunity. To summarize, we're very pleased with our network performance, and we remain focused on continuously monitoring and upgrading our network to support demand.

Turning to Slide 8. We are pleased to announce that we completed our 1 gig rollout this quarter with 1 gig services now available across 100% of the Optimum footprint. We more than doubled 1 gig availability year-over-year to 92% of our consolidated Altice USA footprint, up from 76% at the end of the second quarter. Our 1-gig customer penetration increased to 5.7% in Q3, up from 3.7% in Q2, and we continue to see a lot of room to drive penetration, upselling customers to higher speed tiers.

Increasing 1 gig availability across the rest of Optimum's footprint through the rest of 2020 increases our broadband opportunity to continue to upsell to higher speeds. Our average download speeds continued to increase to 262 megabits. But about 60% of our base today still only have internet speeds of 200 megabits or lower, representing a meaningful opportunity for us to continue to deliver faster speeds to customers.

Turning to Slide 9. We wanted to remind you once more of our long-term network strategy. We are focused on upgrading our existing networks, new build edge-outs and pursuing additional footprint expansion opportunities. In addition to completing our 1-gig DOCSIS 3.1 upgraded cost for Optimum footprint, we have now passed over 900,000 home staff today ready for service for FTTH. And we're targeting upgrading the entire Optimum footprint, which totals about 5 million homes passed, to further improve the customer experience, significantly reduce costs longer term and drive revenue growth as we upsell.

In Suddenlink, about 80% of our homes are 1-gig enabled over HFC, but that means we have a sizable upgrade opportunity remaining with approximately 400,000 homes, which can be upgraded for 1 gig capacity, cost effectively and further increase our penetration from approximately 30% today on those 400,000 homes. Our network edge-out strategy is focused primarily in our Suddenlink footprint, where we have seen extremely strong traction in capturing market share as soon as we roll out new-build. On average, we reached about 40% penetration within 12 months of a new-build, a remarkable result that gives us a lot of optimism and comfort in our strategy.

We are currently adding 150,000-plus homes passed annually and are focused on increasing the level of new-build activity going forward, which will help drive future customer and revenue growth. Finally, an additional footprint expansion opportunities beyond Edge-Outs, we complete our purchase of Service Electric, which added another 70,000 homes passed to our footprint.

As I've shared before, we continue to look for other cable M&A opportunities to expand. We have also filed for the upcoming FCC RDOF auction, which starts this week, where we look for opportunities to invest in network builds in rural areas with partial subsidy by government, should the return on investment be attractive.

Turning to our mobile business on Slide 10. We launched flexible data plans this quarter, offering our consumers the flexibility to choose any of our 3 very affordable tiered data plans at 1 gig for $12; 3 gigs for $20; or unlimited at $40 per month. Our mix and match capability will accommodate customers and families with all types of data usage needs.

We added 18,000 mobile net additions for the third quarter, ending the quarter with 162,000 lines. Our momentum remains slowed by retail store closures due to the pandemic, with nearly half of our stores still closed, but we have managed to reach 3.5% penetration as a percentage of our total unique residential customer base.

We remain focused on improving customer experience and broadening our product offerings, with the continued expansion of our handset lineup and launching our 5G service. We continue to see an early indication of churn reduction in mobile during stay-at-home and remain excited about the opportunity for further churn reduction from bundling with our cable offering.

On Slide 11, turning to Business Services, we saw resilience in recovery in both our SMB and Lightpath businesses. Total Business Services revenue grew 1.3% or 1.8% adjusted for $2 million in RSN credits and 2.4% if we further adjust for the storm credits. Lightpath grew 2.6% and SMB and other grew 0.8% year-over-year.

At Lightpath, we continue to see increased sales and customer engagement to the education, health care and government verticals and a benefit from shorter sales cycles during the work-from-home. We also launched our SD-WAN products suite, which helped contribute nearly 49% revenue growth in our managed services offerings year-over-year.

In our SMB business, Q3 represented the first quarter this year that we saw positive net additions in the SMB space. Our e-commerce sales activities have increased, which lowers our cost of customer acquisition. Obviously, there is still uncertainty from a potential second wave of shutdowns in our markets. However, we remain very pleased with this business services performance and recovery throughout this challenging year, performing better than we expected. We continue to expect a close to our Lightpath transaction in the fourth quarter following regulatory approval.

Turning to our News and Advertising business on Slide 12. We're extremely pleased to report revenue growth of 5.2% year-over-year in Q3. Even without the incremental contribution from political ad sales this quarter on a year-over-year basis, the trajectory of recovery in our news and advertising business has improved. Advertising revenue, ex political, declined only 6.6% year-over-year in Q3 compared to a decline of 15.6% in Q2.

In addition to the boost from political, we saw a recovery in local advertising from its trough in April. October, I've seen a further increase in advertising revenue to the highest monthly level year-to-date. We continue to benefit from positive viewership trends with 42% increase in Cheddar website traffic since pre-pandemic, an increase in users of 64% and a 35% increase in News12 TV viewership on a year-over-year basis. Sports are starting to come back as well, which is a positive for advertising spend. However, we still anticipate pressure on the national branded segment of our business and continue to assess market conditions.

Year-to-date, our News and Advertising business is now flat, and we are cautiously optimistic that we can achieve flat revenue for the full year but this continues to depend a lot on many factors, including whether we can see a full comeback of sports for the remainder of this year and avoid further protracted lockdowns.

And with that, I'll turn this over to Mike to discuss the financials in more detail.

Thank you, Dexter. Good afternoon, everybody. Thanks for joining us. We certainly hope everyone is doing well. I want to spend a minute highlighting our EBITDA growth trajectory on Slide 13, for starters.

In Q3, we grew adjusted EBITDA 5.5% year-over-year or 6.3% year-over-year excluding mobile. In the quarter, we had an additional impact of approximately $16 million to adjusted EBITDA through the Hurricanes Isaias and Laura. Excluding mobile and excluding storms, we grew EBITDA 7.7% year-over-year. And you can see that our rate of growth has accelerated each quarter this year.

We continue to benefit from a combination of strong customer growth and deliberate cost actions and remain very confident in our ability to grow EBITDA this year and deleverage. We also feel very good about our opportunity to continue to drive margin expansion in our business, which I'll turn to you now on Slide 14.

On Slide 14, you can see that we posted an adjusted EBITDA margin of 46.3%, up 200 basis points year-over-year. Some of the margin improvement in this quarter is driven by the adjustment to decreased revenue and programming costs for regional sports network credits due to expected rebates from sports programmers. Excluding these RSN credits, adjusted EBITDA margin would have been 44.8%, still up 100 basis points year-over-year.

Excluding mobile EBITDA losses, our 3Q EBITDA margin was 47.5% or 46.3% further adjusted for both RSN credits and storms, which is the best-ever margin result ever achieved by our cable business and compares to 44.3% a year ago or a 200 basis point improvement year-over-year. In Q3, our EBITDA less CapEx, operating free cash flow margin of 38% was up nearly 1,000 basis points year-over-year due to a combination of EBITDA margin growth and lighter CapEx due to some delays in fiber permits. Adjusted for RSN credits, we would still have seen an increase of 840 basis points year-over-year.

Turning now to Slide 15. We continue to underspend on CapEx this year relative to prior periods. Our total capital intensity for the quarter was 8.3% in Q3. But without fiber and new home build growth investments, this would have been 6.5%. This quarter, we did complete our 1-gig rollout in Optimum.

As I noted earlier, we remain impacted by permitting delays due to the pandemic, but are focused on reaccelerating all of our network initiatives and continue to invest in our network, anticipating that we will see permanent changes in consumption behaviors across much of our customer base. Furthermore, the combination of Hurricanes Isaias, Laura and Delta has led to some onetime capital outlays in the third and fourth quarter to repair storm-related damage, including replacing a fiber ring in Louisiana. However, we continue to expect cash CapEx for the full year to come in below $1.3 billion.

For the next few years, as we build out fiber and Optimum, we continue to think that we can comfortably operate in the $1.3 billion to $1.4 billion CapEx envelope and complete our various network upgrade and edge-out initiatives. Longer term, we think there remains significant opportunity for a reduction in capital spending to below $1 billion annually, particularly once we have completed with our fiber upgrade in the Optimum footprint. In summary, we continue to feel very good about the long-term potential of our network to deliver superior connectivity solutions to our customers at a reasonable cost.

Turning to Slide 16. I'm very pleased to report another very strong quarter of free cash flow performance. With our results in the first 3 quarters, we have already delivered more free cash flow year-to-date 2020 than any prior full year. We generated $458 million in free cash flow in the third quarter, up 176% year-over-year and generated $1.46 billion in free cash flow year-to-date. Our free cash flow per share year-over-year on the last 12-month basis has increased 72% to $3.06, representing a significant yield relative to our current share price.

In the quarter, our cash flows from investing activities included $150 million outlay for the acquisition of Service Electric. Our cash flows from financing activities reflect the number of transactions in the third quarter. We saw a cash outlay of $433 million in Q3 for share repurchases. In July, we redeemed a sum total of $1.7 billion, about 5 3/8% guaranteed notes due 2023 and 7 3/4% senior notes due 2025 that we refinanced in June, which we discussed in our Q2 call. And in September, we received proceeds of $865 million from bond issuances from our Lightpath financing, which is being held in escrow until the transaction completes, and which appears as restricted cash on our balance sheet this quarter.

Slide 17 presents an overview of our pro forma capital structure, inclusive of the new Lightpath debt silo. Pro forma for the Lightpath transaction, the consolidated Altice USA net leverage on the last 2 quarters annualized EBITDA basis is 4.9x. Cablevision Lightpath LLC is now an unrestricted subsidiary of CSC Holdings LLC.

In September, Lightpath raised new debt of $1.465 billion, which is held within a separate debt silo and is nonrecourse to CSC Holdings LLC. This includes $600 million in a term loan facility priced at LIBOR plus 325 basis points, which has not yet been funded; $450 million in the new 7-year senior secured notes, priced at 3 7/8%; and $415 million of new 8-year unsecured notes priced at 5 5/8%. This represents a blended average cost of debt of 4.3% at the Lightpath level and proceeds from the notes of $865 million are reflected as restricted cash on our balance sheet this quarter.

Cablevision Lightpath pro forma net leverage is approximately 6.9x on the last 2 quarters annualized basis. Lastly, CSC Holdings LLC is reporting net leverage pro forma for debt and equity proceeds from the Lightpath transaction of 4.8x net debt-to-EBITDA on an L2QA basis.

On Slide 18, we provide an update on our interest savings initiatives. 2020 will be similar in cash interest expense to 2019 due to the timing of our recent refinancing activity. However, our current run rate implies that we expect to realize over $200 million in cash interest savings relative to 2019 cash interest expense on a run rate basis going forward. And zooming out, we are very happy to illustrate that since 2017, we have taken out approximately $600 million in cumulative annual interest savings.

In Q3, we refinanced our $1.7 billion of 10 7/8% notes via an add-on offering to our 4 5/8% unsecured note we had priced in June for an effective yield of 4.16%. We also refinanced $1 billion of 6 5/8% senior guaranteed notes into a new 10.5-year note and achieved a record low coupon of 3 3/8%. This further lowered our cost of borrowing to 4.9% in Q3 from 5.4% last quarter for CSC Holdings LLC.

If we were to refinance our entire CSC Holdings LLC debt stack at similar levels, leaving the Lightpath entity unchanged, our annual interest expense would come in less than $900 million. Additionally, through the refinancings, we extended our weighted average life of debt to 6.9 years this quarter at the CSC Holdings debt silo. We have no annual bond maturities greater than $1 billion before 2025, all of which could be covered by either free cash flow generation or our undrawn revolver.

We will continue to proactively manage our balance sheet in the same way going forward, and remain very proud of the progress we have made and comfortable with the strength and resilience of our balance sheet.

Finally, on Slide 19, we provide our updated outlook for 2020. We are maintaining guidance for revenue ex-mobile and adjusted EBITDA growth this year. We delivered 0.2% revenue growth, ex-mobile, year-to-date on an as-reported basis, but this growth would be 1.3%, excluding the RSN credits. Total adjusted EBITDA growth year-to-date is 2.6%, and we still expect faster growth in Q4 compared to the first half of the year.

We continue to guide to cash CapEx of less than $1.3 billion, including some temporarily elevated CapEx to address storm damage. Our leverage target remains 4.5 to 5x on a last 2 quarters annualized basis at CSC Holdings LLC, which is a level at which we are very comfortable. Given the favorable financing environment, we are likely to remain towards the higher end of this range in the short term.

We have raised our share buyback target to reflect the fact that we have already completed $1.8 billion in share repurchases as of the end of Q3, and now target at least $2 billion this year, up from $1.7 billion previously. This level of share buybacks is consistent with our leverage guidance of around 5x.

And to conclude, I just want to echo Dexter's remarks, and that we remain incredibly proud of the Altice team for their dedication and resilience during this time, which has once again resulted in a very strong quarter.

And with that, we will now take any questions.

(Operator Instructions) And your first question is from Phil Cusick of JPMorgan.

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

And then second, can you dig into how we should think about taxes in 2021? Have you run through your NOLs with the Lightpath sale?

So on the guidance, you're right, we are a little open-ended, and that we're guiding towards growth. And I think we mentioned that we do continue to anticipate accelerated growth in the fourth quarter, at least in terms of adjusted EBITDA relative to the first half of the year. So I don't think we're going to get any more specific than that, Phil, but that's kind of where we are.

On revenue growth, we will have some headwind in the fourth quarter. I think we alluded to the fact that the RSN credit adjustment we made in -- as of 9/30, will have an additional element in the fourth quarter. But as -- even given the RSN credits in 3Q and anticipated in 4Q, we're still guiding towards revenue growth for the year. On taxes, we entered 2020 saying that we would be a full federal cash taxpayer in the beginning of 2021. We did get a lot of benefit from the CARES Act in terms of enhanced deductibility of some of our interest expense, and we pushed that out to the beginning of 2022. Now with the Lightpath transaction, we're back where we were when we started the year, saying that we anticipate being a full federal cash tax payer in the beginning of a very early in 2021. The actual tax burden in that year we...

Michael?

Yes.

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

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

Your next question is from Craig Moffett of MoffetNathanson.

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

Yes, Craig. Just on the broadband ARPU, we're -- so broadband ARPU grew by about 11.2%. And I think broadband revenue was 15%, 15.5%. So the 11.2% breakdown, very much like in our previous quarters when we called this out, about 1/3 of it is accounting; 1/3 of it is growth; and 1/3 of it is upsell, right? So that's pretty much what we're seeing consistently here quarter-over-quarter. So if you exclude the accounting allocation, you're looking at kind of a 8%-ish type cash-on-cash growth in broadband ARPU.

In terms of how we're thinking about margins, I mean, as you know, we're running probably in certain parts of our businesses north of 50% today. Clearly, the shift here away from video and more focus on broadband, broadband upselling and higher broadband ARPU is going to help accelerate that margin growth, and what we continue to do, obviously, in terms of our capital expenditures and infrastructure, which we think are going to help us drive lower customer interactions, and also continue to drive higher gross margin products.

Yes, I mean, let's first get to 50%, and then ask me the question when we get there, and I'll hopefully give you some more guidance going forward.

Your next question is from Brett Feldman of Goldman Sachs.

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

Yes. Brett, I think, listen, we've had, through all disclosable metrics, just outstanding growth KPIs across the board, from customer acquisitions, to broadband growth. The numbers, as I saw also on FiOS and AT&T, were good, very strong numbers in Q3. And we haven't seen anything particular from either of them in terms of overaggressiveness on the marketing side. But it's -- I think there's business back to usual. We saw FiOS be less present in Q2, given some of their labor issues in terms of installations. And so I think they're catching up a little bit there, but we're still, to date, 80,000, about 125% higher than we were last year, year-to-date, in terms of broadband substance.

So we're very focused on continuing to grow our customer counts and our broadband RGUs. And so we've been able to nicely defend all the gains that we got in -- at the end of Q1 and the balance of Q2 that we're not seeing anything outrageously different from competition out there, despite the fact that they've got strong results.

Your next question is from Doug Mitchelson from Crédit Suisse.

Dexter, I was just hoping you could remind us of some of the facts around fiber because the 44% sell-in in the market of footprint, for gross adds, is pretty interesting. Now you're scaling gross adds, is the cost to connect fiber as you expected? And can you remind us what the timing is for when OpEx savings from the fiber network happens? Does it happen when you connect to customers? Does it happen when you connect to lots of customers or when you roll them all over to fiber and turn off the coax network? And are you starting to see fiber build and fiber connect costs and customer reactions successful enough to the point that you think parts of Suddenlink makes sense for fiber?

And then for Mike, I just want to make sure I heard it right. You said $400 million to $450 million was a reasonable placeholder for cash taxes in '21, because that would be, I think, something like a 33% tax rate. I just want to make sure I heard you right.

So why don't I hit the fiber question first. We're still in the early days on the rollout. What's obviously very nice to see is how the selling rate has picked up very rapidly quarter-over-quarter. I think we're still in what I would see in terms of efficiencies on connections and installations, not anywhere near where we want to be in terms of the time it takes and the cost it takes to connect our fiber subscribers, which is absolutely normal, which is as expected in terms of training our field techs as well as just getting customers very comfortable with the newer technology.

So this is going to be -- we're going to continue to monitor this very closely, put a lot of resources on the training side to improve on the efficiencies of the connections. But we see just a very, very huge runway ahead of us in terms of the pent-up demand for this product, particularly as people work from home, upload speeds become more and more relevant here. And so I think this is more of a story that I think we'd like to continue to have some interaction with you guys on from quarter-to-quarter as we grow the base and start having some data points that we can share. I think it's still too early today.

And to your point about cost-effectiveness, I don't think we're there yet in any shape or form as to where we want to be. I think in terms of what we want to do on the Suddenlink footprint, we are laying fiber very, very deep into our new-builds there, which effectively allow us to adapt to a fiber-to-the-home technology should we want to do that last drop or in-house wiring in terms of fiber.

But today, I think we are going to continue to focus on the HFC plant, by and large, on Suddenlink, but we will look at pockets where I'm certain that we're going to upgrade to full fiber-to-the-home, given what we're doing in terms of edge-outs and how we're positioning that.

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

Your next question is from Ben Swinburne from Morgan Stanley.

Maybe Dexter for you, 2 different topics. One, you mentioned the video sell-in rate has continued to trend down. I'm just wondering if you could remind us of roughly where that sits. And maybe that's a good way for us to think about where penetration settles in longer term.

And then on the edge-outs, 150,000 homes a year gives you guys a nice kick or 2 sub growth. I'm wondering if you think there are opportunities to go bigger than that. I know you're focusing on Suddenlink, but -- and maybe there aren't opportunities in Optimum, which is obviously a pretty well built-out area. But I'm just curious if there's potential to sort of maybe take that number even higher based on the economics and the returns you're seeing around broadband builds.

Yes. I mean listen, Ben, just answering your first question first. On the video selling rates, we're in the mid- to high 30s now. At the kind of the best-in-class when we were very, very high on selling rates, we were in the low 60s. We were really seeing numbers in the mid- to high 40s as late as the second quarter of this year, and that's fallen off to the mid-30s to high 30s.

And some of it is pandemic-related as we look at some of the things that we're doing in terms of promos and roll-offs, and forgiveness of debt when it comes to New Jersey Executive Order or Pledge people. So there's some -- there's a big mumble jumble of stuff where we've disconnected people and reconnected people. So the numbers aren't super clean in the Q3 as they would be historically. But I think that 40% number is probably kind of a safe number, and it goes from there, right? So we'll see quarter-over-quarter where we're going from there as we get back to a more normal marketing period. But that's -- but we fall in, obviously, significantly from where it used to be kind of in that mid- to high 50s and even touching the 60 number.

In terms of edge-outs, the biggest challenge we have is just getting the machine up and running all over again, given a lot of the work has been stopped during the pandemic. So we're extremely focused on lining up our crews towards the end of this year, getting ready for the New Year and delivering 150,000 plus.

Do we think there are more to do? Yes. Can we do them with a lot of confidence next year? Probably not. But we're looking really in a 3-year trajectory. If we're going to average 150,000 a year, 450 for the next 3 years, can we do more? Yes, we're definitely going to try and push for more.

We are going to see some opportunities from RDOF. I can't tell you exactly how big that will be or how small that will be. We're going to be very thoughtful on obviously the return economics here, but there is going to be some opportunity here, particularly for some areas that were just super-contiguous to what we're doing already from a build-out standpoint. Even on the cost per home may be expensive, post subsidies, it makes a ton of sense for us to do that. So that will be a number, I think, we will be more open about once we know kind of what the results are and what the opportunity is ultimately going to be.

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

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

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

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

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

Yes, it's really difficult, Ben, to lose any sleep over this and to think -- to overthink it because you can take a snippet of rhetoric from some debate 6 months ago and go crazy about it. You could just basically understand that the process of anything to do with something that could be overregulation relative to our sector is going to take a very, very long time to enact as we saw last time. And whether or not any type of FCC administration is going to want to act on it is something else altogether, right?

So this is a dialogue that's not even reached our screens yet as a sector, even with obviously the focus on potentially many regulatory elements that may come into a new administration. But I think this is a wait-and-see. We'll be reactive, and we're obviously proactive in many respects on certain things. But I think the country is extremely focused on great broadband and continued improvement and enlargement of access. And so continuing to incentivize people to do that, I think, is going to be the underlying criteria. After that, can we do things for different subsets of demographics? I'm sure there will be things that come up. But again, there's nothing that we see that's imminently on the horizon that we need to be worried about.

Your next question is from John Hodulik from UBS.

Two quick ones, I think. First, any updated thoughts on the use of proceeds from the Lightpath transaction, just given the better-than-expected EBITDA growth you've seen in the second half here? And then, Dexter, you talked about M&A among smaller cable companies. Can you give us a sense of what the landscape looks like?

Obviously, there's a lot of small cable companies out there, sort of is it a target-rich environment where you guys got a lot queued up? Or any sort of insight into sort of what you look for? And obviously, we know about the Atlantic Broadband situation, but are you looking for contiguous regions or underpenetrated assets or lower margins? Or any hints as to how you guys sort of look at the landscape would be great.

Sure. Listen, I think on the use of proceeds of Lightpath, and you guys are probably doing your back of the envelope math, our $2 billion-plus re-guidance is a guidance based on non-Lightpath proceeds, right? So given the EBITDA growth we saw on Q3 and some expectations that we see for Q4, we'll be able to do $2 billion or more of buybacks just on the non-Lightpath proceeds. The $1.1 billion of net proceeds we're going to get, to the extent we don't see any attractive M&A opportunities to deploy that, I think it's fair to say that we'll probably use some or all of it to buy back shares.

On the M&A side, I like all of your criteria: contiguous, underpenetrated cable, all that stuff sounds great. We are out there looking at a handful of things. The smaller operators, like Service Electric, there are those types of guys, a little bit all over the place. And given that we're in 21 different states, 18 through Suddenlink, there's a lot of contiguous smaller assets out there. It's not necessarily that easy to unlock all this stuff. But I do think, given the environment, given the interest rate environment, given that size does really matter here in terms of getting operational synergies and investing heavily in technology and customer service, it is starting to percolate that some of the smaller operators, some of the mom-and-pop guys are looking to deal here.

And I think it's very obvious to us when we picked up Service Electric, even though it's very small in scale, that's been a network that has not been invested in a lot. There has not been any consistent marketing for the residential and especially not in the SMB side of the business. And we're seeing a lot of low-hanging fruit just by adding 2 or 3 additional salespeople, both on the SMB side and on the B2C side. That's been very lucrative of us just increasing penetration out there, bringing new products, and we're upgrading, obviously, the network as quickly as we can.

So everything that we are able to get our hands on, in terms of M&A opportunities, will be the best use of our capital in terms of return standpoint. But absent that, I think we like buying 12%, 13% free cash flow yield equity when we're financing at 4%, 4.5%, right? So that will continue to be the best use of our capital, in the meantime outside of M&A.

Your next question is from Peter Supino from Bernstein.

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

Peter, we don't break out the Suddenlink numbers, but it's been clear that a disproportionate chunk of our volume growth is coming from Suddenlink, which is very similar to some of our other public peers out there in terms of the demographics. So the subgrowth has been good. We benefit from a better programming cost lineup as our sensors are not as prominent in the Suddenlink footprint as it is in the New York Tristate area. And you throw on a lot of diversity channels as well. And the gross margin on video are worse in the Optimum footprint than in Suddenlink.

Funnily enough, and it makes a lot of sense, from a ARPU -- broadband ARPU, we consistently see broadband ARPU on the Suddenlink side be, let's call it, 5% to 10% higher than our average broadband ARPUs on the Optimum side. And that's really driven by the intensity of competition that historically, has been in the FiOS zones versus the Suddenlink zones, which is less penetrated by competitors there. So the growth has been superior from a broadband net add standpoint, but also ARPU numbers have been higher. And also, historically, we've been upgraded to 1 gig a lot earlier on the Suddenlink side than we have on the Optimum side, which we just finished.

So maybe that gives you some insights into it. One of the things that you don't see when you try and break out the 2 businesses is also the SMB side of the business is a much stronger growing business on Suddenlink than it is on the Optimum side, given the penetration of Optimum. However, the flip side is most of the advertising dollars and profitability and growth comes from the Optimum side than it does from the Suddenlink side. So that is a little bit of an equalizer in certain respects, in terms of the overall consolidated numbers for each property, one versus the other.

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

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

I think on the -- just to answer on Atlantic Broadband, our latest offer had an expiration date going to November 18. So other than reiterating that, I don't think there's anything more for me to say there.

In terms of the $1.1 billion, obviously, there's a lot of ways we could deploy that, whether it is an accelerated share repurchase or just trying to be aggressive in open market repurchases or doing some other type of structured offering. But I do think that, given where the price levels are today, we'll continue to try and be opportunistic in the today as opposed to trying to spread it over the next 12 months.

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

Yes. Listen, I think we're very cognizant that the controlling shareholder needs the acquiesce to engage at a minimum, let alone look to do a strategic transaction with 2 other strategics.

So based on his rhetoric and his statements today, I think it's fair to say that there's a low chance of us being able to collectively -- us and Rogers, being able to move forward on this project. But I guess, formally, we've got until November 18 to see if there's anything that shakes loose.

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

Your next question is from Bentley Cross from TD Securities.

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

Yes. I mean I think a lot of it has to do with our fiber-to-the-home rollout. We obviously are not on budget for this year, given the permitting and construction restrictions that we've run into. Same thing on edge outs, we're definitely not going to hit the numbers that we budgeted this year. So we are in the process of -- given what we see today, in terms of the availability of resources and the ability for us to go out and do stuff as aggressively and quickly as we can in the first half of next year, we're probably going to do 500,000-plus more fiber-to-the-home next year.

And to the extent that we reach that milestone because the machine has gone up and running, we've got the permitting process moving at a quick pace, we'll probably be doing 1 million-plus per year thereafter.

So we're looking -- if you just do the math, you're probably looking at 3.5 to 4 years before we complete the entire Optimum footprint on FTTH.

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

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

So just to take your second question first, yes, as we are rolling out fiber across the Optimum footprint, we're putting very high strand count into that fiber so that we could multipurpose it going forward, not knowing necessarily exactly what could happen. But that is clearly in our planning.

In terms of the mobile strategy, we are with good dialogue with T-Mobile. We are roaming on them right now. We are discussing a very near-term timetable in terms of re-homing ourselves off the Sprint network and onto the T-Mobile network. And that really is a function of their preparedness, some to do with OSS BSS, some other technical factors, but that is a very near-term thing that we expect to happen. And we're going to continue to look to develop additional products and services with our partners at T-Mo and look at other opportunities to grow the business.

I think in terms of, let's call it, sizable capital allocations relating to building infrastructure, that's probably not something that we are going to do a lot of. I think we like the model more of looking to partner with people who may have some infrastructure or help people build out their infrastructure in exchange for capacity and those types of deals as opposed to focusing on a subset of a region where we could potentially buy spectrum or build out an infrastructure. I think that is probably less economical given the fact that a lot of our subscribers are moving around, and that probably doesn't drive the economics that attractively.

Thank you very much, everyone. It sounds like that's the last question. I appreciate your time. And obviously, Nick, Cathy, myself and Mike are available for follow-on questions whenever.

Thank you.

Thank you.

Thank you, everybody.

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