Q3 2019 Earnings Call
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The conference over to your Speaker today, Nick Brown adults you will see please go ahead.
Hello, everyone and thank you for joining in a moment, Oh, hi, David outpaced U.S. tasty I like the gate and on you see if I might grow it would take you through the presentation and then we'll move to Q and <unk>.
Today's presentation may contain forward looking statements. Please read the disclaimer on page two slides are available in the company's website and will make a replay of the code available and now how nervous.
Thanks, Nick Hello, everyone before I begin just want to take a moment to welcome Mike as our new Chief Financial Officer about piece USA.
He most recently letter financial planning control organization and part of that held various leadership roles and finance.
Cablevision for more than 15 years. So welcome Mike I also want to take the opportunity to think Charlie towards exemplary leadership that LTC USA and I'm delighted for him as he takes on his new role at Sotheby's I look forward to Charlie continuing as a member of our board of directors into an ongoing valuable insights an advisor to me on strategic initiatives.
And with the summary on slide three revenue growth slowed to 0.9% in Q3 as we lap the prior year rate event and how the absence of political advertising revenue as expected.
Adjusted EBITDA was flat year over year, although grew 0.7% X wireless losses, which stepped up a bit since we launched L. T mobile in September .
Based on initial contribution with seasonality snowball, we now expect slightly lower growth for 2019, approximately 200% primarily due to slower ramp up in sales effectively zero margin heads up equipment.
We had previously anticipated, making no sales available on our ecommerce online channel in Q3.
We expect to open this and other sales channels in the next few weeks to result in faster revenue growth in 2020, since it's mostly mostly phasing for the ramp up Nobel Peace mobile.
Note that our guidance for margins free cash flow unleveraged remain unchanged.
Given our confidence they anticipate acceleration or revenue in free cash flow in 2020.
Happy to take advantage of available liquidity and increases our buyback in Q3 to reach a total of 1.7 billion for this year ahead of our initial target.
Our core broadband and video business continues to perform very well driven by Eltis one in our continuous network investment.
This helped delivered the best ever third quarter underlying customer performance.
It's improved performance is one of things that make us comfortable to pull the trigger on the unification of the suddenlink and up to almost nothing to be assessed platforms in September which should bring numerous benefits the company, which I will come back to shortly.
On top of the boost of growth, we expect milk is Nobel and now piece one continuing into 2020, we expect to start marketing ltcs fiber more heavily in the coming month end to benefit from all the additional new homes with built in.
Additionally, we have combined are out these news in L. PC advertising businesses under leadership of John Steinberg, They should bring significant synergies, especially in expanding our share of the national advertising market and as well timed ahead of what we expect to be another big political year.
We also completed a further simplification of our debt capital structure and over 5 billion of refinancing activity in Q3, leaving our balance sheet in great shape.
On slide four we showed a breakdown of total revenue growth our residential business grew 0.5% and business services grew 3.9% both slowing down from the first half as we previously flagged since we lapped the later than normal rate event last year in June .
We'll likely see similar levels of growth in Q4 before Reaccelerating again in Q1 next year.
We benefited from better customer trends with unique residential customer relationships going 0.7% year over year.
As well from a further increase the take rate of higher data speed and data consumption, which supported broadband revenue up 12%.
Our newly combined news an advertisement divisions declined 4.7% in Q3 as we saw a drop of about 20 million political advertising revenue year over year, excluding political news in advertising revenue grew 7.77, 0.4% driven by the success of our advanced advertising platform, a four and shutter.
On slide five we illustrate the underlying customer performance, which was the best we've ever seen for third quarter and show net additions on both the reported basis and an adjusted for onetime impact of integration of Suddenlink to optimize what's spss platforms.
Which resulted in a temporary loss of gross additions during the period that both platforms with de activated in the transition for about a week as planned.
On the left hand side, you can see the residential to unique residential customers in Q3 were flat compared to the prior quarter on a reported basis.
Adjusted for the oldest spss migration residential customer relationships that additions, we estimate would have been 8000.
In the middle to slide you can see that adjusting for the oldest spss migration. We estimate the video losses of 28000 in Q3 2019 was inline with Q3 2018, continuing to resilient trends we've seen since we launched LG is one.
On the right hand side for broadband we saw net adds of 15000 on a reported basis, which was better than the 14000 reported in Q3 last year adjusting for the migration, we estimate broadband adds would've been 24000 significantly ahead of the prior year.
Although we have many levers to continue to improve churn and gross adds in 2020, you would caution about extrapolate this positive underlying trend into Q4, as we're seeing higher than more normal promotional roll off from last couple of years, which is up significantly year over year, but should normalize next year aborting similar churn and related costs in the future.
This will likely means we're not losses in Q4.
Slide six highlights sorry, again, our progress with the penetration developed it's one where we now have over 500000 customers representing about 15% penetration of our video base up from 7% in Q3 last year.
This one is helping us reduce churn increased gross additions and take market share.
The video side, we recently announced we are adding Amazon Prime video service to Al just one joining Netflix you tube and other streaming services, we have made available on the platform.
We'll be able to aggregate more streaming services overtime in a similar way.
As and when our content partners are ready to do this to help widen distribution.
On the broadband side LTX ones built in advanced Wi Fi router continues to support growing data usage on our network underpinning broadband revenue growth.
Slide seven shows our customers are consistently taking higher broadband speeds and using more and more data unless you can see the average speed of our customers has increased about four fold in the past three years to over 200 Megabits per second following all of our network upgrades and the launch about piece one.
In the coming months, we'll be launching one gig services across often footprint. Following our docsisthree 0.1 upgrade with our parallel fiber network upgrade will have multi gig services increasingly available as well.
On the right you can see household data usage continues to grow over 20% year over year to over 290 Gigabits per month with an average of 12 in home connected devices, a trend that shows no sound signs of slowing down.
Remember we have found that data usage is correlated with speed or customers that take more than 200 make speeds you, 75% more data on average and customers that take less than 200, thanks and most of this data usage is being driven by video streaming services given the proliferation of new streaming services, we feel very well positioned to benefit from continued.
Growth in demand for broadband services, which is at the heart of everything we do.
On slide eight.
We talk about multi ltcs mobile with an update since we launched in September with the most attractive unlimited offer in the U.S. market.
We have just one simple plan with unlimited everything for $20 a month for existing LTC, USA customers or $30 for non customers in around our footprint.
At the end of Q3, we had 50000 mobile lines and generated revenue of $3 million, which we think is a good start for us.
Our initial focus has been on optimizing customer service and the Onboarding process working through any initial teething issues, which is normal for any new product launch. We're currently trending more sales and customer service agents. So we can manage the higher volumes were expecting once we open up all the sales channels.
We've had to bring your own device options since launch, but so far handset sales have been limited to just our retail stores, which is slightly different to our original plan and explains the modification of our revenue target for this year.
We are preparing to launch of online handset sales, which we see as a key to accelerate and volume as you've seen as many of our peers.
Slide nine is an update on some of our key initiatives, including LTC fiber, where we've now reached over 500000 homes ready for service or around 10% of the often footprint since we ramped up construction. This year following the permits we've received.
Remember, our existing plant and rights of way ideally positioned us to do a fiber build like this.
We view fiber to the home as an end state of the network, which is superior to other future cable DOCSIS network upgrades.
This is especially the case as the fiber technology is already commercially available today, and we're leveraging expertise from our sister companies and how to deploy the fiber at a relatively low cost.
We believe future iteration of DOCSIS will end up with a fiber deep node plus zero architecture anyway, but you have seen that adults. This plant, which is subject to all the same interference and maintenance issues, we're trying to eliminate with ft th to save on costs and improve customer service and experience as soon as Paul said.
Separately as I mentioned before we completed the migration separately, sorry, as I could as I mentioned before we complete the migration the sudden linked to the optimum office spss platforms.
This is a significant win for the company as we have radically simplified our tools remember, we're expecting about a $50 million of initial annual cash flow savings, which will flow through next year, including about 30 million of Opex savings. This will give us more agility to launch new products and services with one unified platform, including integrated analytics.
And reporting so we can make better decisions. This will also allow us to simplify customer bills, which will help us reduce billing inquiries.
And now ill hand, this over to Mike who will take us through some of the financials in more detail.
Thank you Dexter and good afternoon, everyone. It's a pleasure to joining these calls and I look forward to me the hopefully many many of you in the coming weeks.
Resuming our presentation on slide 10, we show how LTC USA is adjusted EBITDA margins have expanded over the past few years, reaching 44% in Q3, 2019, which was flat year over year, excluding about 10 million in mobile losses.
Mobile losses were slightly higher than the first half, reflecting some launch costs.
It's worth noting that excluding the impact of political advertising revenues from both periods. Our ex mobile EBITDA margins would have grown about 40 basis points year over year.
We will continue to look for ways to drive efficiencies in all facets of our business as a means to further enhance margins and cash flow.
Hi margins in turn allow us to continue to be aggressive in investing in all of our growth initiatives. The Dexter highlighted earlier.
Turning to slide 11, we can see a breakdown of capital expenditures, which increased year over year as planned due primarily to our growth investments in fiber a new on builds.
Our total Capex intensity was 15.4% in Q3.
But without fiber and a new home build investment this would've been approximately 11%.
And remember following the fiber builds we will be able to reduce capex significantly and we'll also have opportunity to take operating expenses out of the business.
The new FCC age network will enable us to reduce long term cost through improved customer experience, including reduced customer interactions lower technical services, it requirements and lower plant maintenance costs.
And finally, our mobile Capex dropped as expected in Q3 as we've already completed the core network build an initial store upgrades and we'll be very capex light from here.
We may roll out a few additional stores such as in Manhattan, where we intend to serve customers, but there should not be a big number.
On slide 12, as a free cash flow waterfall chart for Q3.
We generated 166 million of free cash flow in the quarter, which was down year over year, mainly due to higher network Capex as we just discussed as well as a temporary working capital outflow related to the iOS Spss migration, which we expect to reverse in Q4.
In addition, it should be noted that we have higher cash interest payments in Q3 in Q1 due to the timing of coupons. So this will be a lower number in Q4.
Another point on cash interest payments all of the refinancing activity. We've done this year has created annualized savings of approximately 100 million going forward.
We expect to have many more opportunities for further savings of a similar magnitude with the incremental debt, which becomes callable in 2020.
Cash taxes remain close to zero as we're utilizing our Nols.
And cash outflow in financing activities included 487 million for share repurchases in Q3 at an average price of $26.45 per share.
Turning to slide 13.
As Dexter noted my predecessor trolleys through it was kind enough to leave me with the balance sheet in a very strong position.
We will continue to proactively manage it in the same way going forward.
You can see on this slide debt maturity profile at the end of Q3.
Pro forma for the recent issuance of an additional 1.25 billion of 2030 senior notes as well as the to the new term loan B five maturing in 2027.
The proceeds from this refinancing activity, we used to repay the 2028% notes and the 2021, five and one 8% notes in full as well as amending and extending the term loan b two and before.
This had the net impact of reducing our weighted average cost of debt to 6.0% and extending average maturity to almost seven years.
We now have no bond maturities greater than $1.1 billion until you sit until 2025 with none at all in 2019 in 2020.
A fixed rate debt debt as a percentage of the total is about 70% and our liquidity is around 2.5 billion since we repaid our revolving credit facility in July .
Now turning to slide 14, we show a summary of how we have significantly simplify the debt capital structure for LTC USA.
You'll remember that around this time last year, we consolidated the suddenly sequel, and Cablevision credit silos into one.
And now with the debt pushed down transaction. We just completed we have further simplified our capital structure with the obligations of cablevision's assumed by CSC Holdings as you can see on the right hand side.
These transactions will leverage neutral for LTC USA and by further streamlining the company's debt capital structure. We expect we expect to simplify LTC USA is financing strategy and financial reporting requirements going forward.
The rating agencies have viewed all of these transactions as credit enhancing due to the fact that all debt will exist as CSC, only which now has a larger scale and a more diversified credit profile.
Wrapping up on slide 15 is an overview of our financial guidance for 2019.
Updating for revenue growth, which we now expect at approximately 2.5% inline with the year to date forms.
We are confident in the prospects of Ltds mobile and our news and advertising Division Tubeless break out of our recent revenue growth range in 2020.
We still expect EBITDA margin expansion, including or excluding mobile cost, which is up 0.6 percentage points year to date.
Capex, we still expect in the range of 1.3 to 1.4 billion supporting all of our growth initiatives.
And we still expect free cash flow growth in 2019, including any mobile related costs.
Talk at year end leverage remains 4.5 to five to five times, although we are likely to end up at the higher end of this range given that we have done more on share repurchases at 1.7 billion executing at an average price of close to $23.
And exceeding our prior buyback target of 1.5 billion.
As long as our stock remains on the significant relative relative discount to appears which is how we view. It now we're likely to remain towards the higher end about leverage target and keep returning excess cash in the form of buybacks.
And with that we'll now take any questions.
At this time I would like to remind everyone in order to ask a question. Please press star one on your telephone keypad, we'll pause for just a moment to compile the acuity roster.
Your first question goes from John Hodulik with UBS. Your line is open.
Great.
Hey for Dexter can you give us any more detail into the the promotional roll off you talked about your prepared remarks, maybe give us a sense for.
The size of that impact and whether it will affect both high speed data and.
And video and then in the quarter the 24000.
Speed data ads sort of on an unadjusted for the or I guess adjusted for the though access issues was stronger than what we've seen over the past few quarters can you talk about the underlying environment, there or what drove that number above where it where it where it has been typically thanks.
Sure listen on the promotional roll off so as you know.
Historically, depending on when we're going through promos.
The the.
The shape and size of promo looks little bit different. So you, sometimes see a one or two year or an 18 month or three year promo. It just happens to be that we're hitting a vortex.
Of.
A lot of the promos rolling off in the second half of this year, we saw some coming in Q3, but we're seeing acceleration just in Q4.
It's a significant percentage increase relative to last year.
But going into 2020, we're going back to a normalized level.
That we saw in 2018. So this is really a onetime effect that we expect to see I think last year in Q4, we were like plus 7000 unique customers.
So we're not seeing a massive degradation expectation, but we do expect to see a net loss in Q4.
Relative to last year, which we were plus seven.
So it's really just a one off there in terms of broadband.
We continue to see very very strong broadband demand.
We continue to deliver.
The availability of of higher one gig speeds in the Suddenlink footprint.
We continue to upgrade nicely.
On the optimum footprint one for one gig in interim basis, which will be able to make available very shortly and then secondly continued to drive.
The the build out of the fiber to home project.
I think we're just seeing continued very very strong demand in both.
Suddenlink and in.
In optimum for for broadband and higher speeds.
We're not seeing significant slowdown in that even though we have very strong penetration levels.
In in optimum.
But particularly the suddenly footprint the penetration levels continued to rise nicely and we continue to creep and take some market share.
In the Optum footprint, so nothing special there, we're not going very aggressive on pricing is not aggressive pricing mechanisms. There nation perform I think some of our peers are little bit more aggressive on the promotional side.
So I think we're outperforming here relative to expectations.
Great. Thanks. Thanks.
Your next question comes from Philip Cusick with Jpmorgan. Your line is open.
Hey, guys. Thanks, following up on mobile.
We've seen that marketing picked up you said you haven't ramped up the.
The online yet whats the sort of timing on that and did you see October adds running faster than September .
And then how should we see that next year.
Is that could that be positive or you think it really depends on growth could be probably still negative growing quickly. Thanks.
Yes, so on mobile.
First week over week or almost they everyday we're seeing better trends.
So that really is a function of two things.
One is best to better performance of the online platform.
And to better training of our personnel.
And so that will continue to drive.
And our expectation.
Continued increase a performance week over week going into yearend.
In terms of the launch of online sales of handsets and other distribution opening up other distribution platform.
We're going to hopefully be ready in the next two three weeks on the handset sales side, which will start driving a lot more volume and are in our estimation, we see a tremendous amount of traffic on our sites, but they literally stop ordering when they can't.
Get any handsets. So we know that that's going to drive incremental volume.
And then secondly, we're in the process and we have been already opening up some inbound calls.
Seeds for an open up a lot more inbound call seeds.
In near future and open up some of our the distribution channels as training increases so we're really getting ready for year end push here.
For both on the marketing side and the volumes.
In terms of EBITDA next year I think this is really going to be a function.
We're going to make the decisions on a quarter by quarter basis as to how much money, we're going to pump into our distribution channels and our marketing.
Based on performance, if we think that we can go out there and get attractive volumes, even though we're going to lose money in the near term then we'll go after that if we think that it's more important to get to a EBITDA breakeven as soon as possible. Then we'll we'll make that adjustment as well I think we've given guidance.
Externally that we think that we're going to lose.
Probably around 100 million of EBITDA in the first year after launch.
So we will update you accordingly, we think thats can be better or worse, depending on how we're seeing volume trends.
Good thanks texture and good luck to Charlie.
[laughter] once you call them up.
Your next question comes from Craig Moffett with Moffett nascent Sir your line is open.
Hi, Dexter I Wonder if you just dig in a little more into the economics of wireless you've said repeatedly that you can make money at the that 20 dollar price point at which I presume means gross margin positives and contribution to overall fixed cost that at scale.
Can be positive does how much of that is a function of you've got a very good contract and how much offload can you just give an estimate of how much traffic. You think you can offload onto the the strand mounted small cells and then a related question is.
As you think about the fiber builds can you just talked about the role of the the I guess, what I'd call. The freed up co acts and is part of the magic of the fiber build actually to use the co acts network precisely for that purpose for strand mounted small cells as the transmission meet.
I am because it's so its cost effective today to put.
The radio equipment.
Sure so on the economics of wireless listed.
I think you'd probably asked me the question some of your peers many times.
We've been.
Relatively mute on giving more precision, but yes, clearly we believe we've got a very attractive contract on a relative basis.
To our us peers in terms of being able to if you were to simplify to a cost per gig type of a metric.
We think that we are gross margin positive.
On on our unlimited packages right, so and the way we think about overall traffic is we obviously know what the what people's trends expectations are in terms of data usage.
On wireless.
That goes between anywhere from six to eight gigs.
I think from our perspective, we're seeing a numbers that are in line, if not better than that so less usage than six to eight gigs.
And we're probably offloading onto our out of home Wi Fi network about one gig.
So if you just do the math.
On that and you try and back solve into what we what you think we're paying to our partners over at sprint.
And the TNT, we we feel that we are gross margin.
Positive on every subscriber and going forward as you mentioned on the volume side at some point, we're going to contribute to the fixed costs related to to Opex here and be EBITDA positive as we get higher volumes.
On the fiber build sorry go ahead.
I was just going to if I could just clarify just to make sure I understand though Dexter you said that your offloading about a gig onto your out of home Wi Fi network, but if I understand the contract correctly.
What gets off loaded onto the strand mounted small cells that that sprint put up also doesn't count against your.
Usage levels is that right. So is that included in that one gig or what's the one the one gig is our Wi Fi network right. So it is the optimum Wi Fi network that we are not.
Sharing with.
Anyone and it's our economics that are being saved.
But don't you save the economics when it goes over the small cells.
That's that's just say that's just the Densification and then lighting up of the of the spectrum. It has nothing to do with the Wi Fi itself.
Got it okay.
So just to go to your second question, Yes, I mean, clearly we have.
I still a very attractive collects network that weve overbuilt and continue to overbuilt one of the usages would be.
To accelerate small cell.
Mounted strands onto it.
Thats been a very successful experiments that we experienced that we've had with with sprint I think we would be open to having that dialogue with third parties.
Going forward as a lot of things that we can do with that network as we free up capacity more and more.
Great. Thank you.
Your next question comes from Brett Feldman with Goldman Sachs. Your line is open.
Yes, Thanks, and I, just want to clarify and the subs. When you were talking about a potential decline in the fourth quarter. I think you were talking to your total customer base not necessarily the broadband base because it does sound like there's there's considerable momentum in there. So if you could just maybe help us get that right and then typically when you do see people come off from as you get a little bit of an ARPU lift. So I was hoping maybe you could.
Just let us know what the moving parts are in ARPU as you think about that product mix exclusive of mobile. Thank you.
So on the subs I mean listen we don't we still are two months away from.
Quarter end.
But we're just kind of using a.
Basic rule of thumb as we look at the volume of roll offs that we're facing that we'd expect to just based on experience what the churn numbers could look like right. So.
I don't think it's right for me at this point breadth to tell you what I think our ARPU performance looks like.
But I think it's fair to say that almost every single one of our unique customers takes broadband.
Today, so it's almost a one for one correlation so if we're losing unique customers.
Anticipation in my view today would probably be that we will lose also some broadband our views on a year over year basis.
In terms of ARPU. This is the mix.
Continues to shift price in terms of.
The product mix and so where we've seen maybe some pressure on ARPU is just driven by the video.
Performance, whether it be cord shaving or people take the smaller packages.
We continue to see good strength and resilience on the gross profit numbers because the mix is shifting more to a broadband and people upselling on broadband side. So I think Nick would be would love to spend lot of long time with you in your model.
Going forward and give you more granularity, but I think thats by as much fell tell you on the phone call.
Great. Thank you for that.
Your next question comes from James Ratcliffe with Evercore ISI. Your line is open.
Hi, folks thanks to if I could first of all can you talk about the status felt lightpath process, where we are a map and secondly.
Okay. One you highlight that you're talking about relative churn you're seeing for all piece one versus the same customers who don't have the all piece one platform just one housekeeping follow ups to previous question.
Not losing broadband ARPU use on a year over year basis or sequential basis. Thanks.
So just sequential just to take that last question off of the.
The ticker.
But on the on the first question was then Lightpath listen the update was very consistent with what we've said over the past several months, which is it is an ongoing process, which is we're getting quite a bit of inbound calls.
From third parties.
There are several parties who've done a lot of work.
Who are putting together.
Interesting offers let's call it.
But we don't feel compelled.
Necessarily until we see.
I really compelling offer right so.
I think we're in the short strokes with a couple of people in terms of them then presenting us proposals and so we'll continue to have the discussions but given that we've had a nice run up of the stock.
Given that we don't need capital per se.
And it's really about the quality of the partner and the value arbitrage.
That we could extract.
We have to be just very very thoughtful about how we proceed.
In this process and and react accordingly, right. So.
There's nothing more to say, there's no update here other than to say that we concede we continue to have dialogues with people.
And and we'll make a decision at some point in time, whether or not to pull the trigger.
On the LTE, one relative churn I don't think we've been public about talking about what we think the relative churn is between the.
Legacy boxes, and our existing boxes, but we can tell you there to its down.
We could also tell you that live TV viewership is higher on the LTE is one box and is on the older boxes.
We could also tell you that the usage of the apps.
Our about 40% of the LTE is one customers use the app.
Similarly, the usage of the voice remote continues to increase.
Very very nicely. So all the things that we would anticipate with the investment in Lps, one are coming to fruition I, just we havent been public about talking about relative to our numbers.
Thank you.
Your next question comes from Michael Rollins with Citi. Your line is open.
Hi, Thanks, two questions if I could first on the wireless side.
Expand in terms of what you're seeing on the mix of wireless.
Interest in wireless activations between those that might be in the region, where you have cable footprint.
Those adjacent areas, where you can surf the customers, but you actually have the cable footprint. There and then secondly, if customers are coming off promotion and are leaving your service, where do you see them going the most thanks.
Well listen on the on the first.
Question listen the mix is today given the volume numbers are relatively small.
Is heavily weighted towards existing customers.
Those are the ones that we can reach very easily where the brand recognition.
It's very easy as well.
But as we ramp up advertising in all of our sales channels get opened up and our E. Commerce site is fully operational.
We will start targeting let's call it.
Less dense residential areas such as let's call it Manhattan right as a place where we have lightpath, but we don't have any residential customers.
And so we already have billboards and digital ads and some broadcast ads.
In the Manhattan area.
But we will start accelerating a lot more of that advertising once once we have all of our sales capabilities up and running.
In terms of the promotions, where people are rolling off too I think it really depends obviously in terms of what regions we're talking about.
But today someone who is rolling off.
By nature in the.
In the often footprint is tending towards going towards filing if thats if that's a.
That's a option for them for those people who are a non file zones in the optimum footprint.
He is really a retention effort a change of.
Of.
Of the way he is subscribing to his business and what the what packages taking right. So that's more of an economic discuss discussion as opposed to a pure churn discussion.
Thanks.
Your next question comes and Jonathan Chaplin with New Street. Your line is open.
Thanks, Doug I'm wondering I know, it's early days on wireless products.
So far but I'm wondering if you could give us some feedback on.
Well timed to attach rate and spin or people coming into a wireless travel to the guys that don't take pullback from you.
What kind of pulled through are you seeing because of the opportunity for them to tempting.
$80 to $20 on broadband how do you think that April .
On April .
When you push this more aggressively.
In across your entire footprint team one of your channels.
I think your rights on its a little too early given that.
We're just about two months into the launch and we still have an open up all all of our channels and we still havent.
Really targeted non customers per se right.
I think as we go.
Broader which is really let's call it.
Last Friday into Christmas season, and going into the first quarter of next year.
Yes, thats going to be something that im happy to share with Im sure Nick will be able to give you some insights as to what we're seeing but the anticipation is right right. I think your question Directionally is correct we'd expect.
The attachment rate the broadband to be high.
Expect churn rates to come down.
Well, some same time being profitable on a standalone basis in the wireless product.
I think what will be interesting to see.
It is.
As we think about maybe playing around with our price points is to try and incentivize noncustomers to become customers and you know.
Do we become more aggressive were less aggressive in terms of the disparity between the price points I.
I think thats something that will consistently think about.
Thanks for if you look.
Good how do you think this could change where terminal penetration to feel bad in your footprint.
And that speaking good.
Need where you would it sort of.
Bob Motz, when you sold out in terms of broadband penetration materially.
Yeah.
Well, assuming static competition.
You'd expect us to take market share.
Consistently right I mean, the product performance has been very good.
It continues to get better there some software related issues that we're working through.
With some of our core network.
And other OEM providers, but they're minor.
But the performance overall has been very very strong and so it's really going to be about price points, and making getting mindshare and brand awareness.
Out there, but we're going to have just Justin the ultimate footprint will have a fiber to the home.
A true fiber to the home network with the best performance possible.
And probably one of the stronger networks that tristate area, whether it's the sprint one today or even better with the new Timo.
Network going forward if that deal goes through so we'd expect us to be able to have very very strong attachment rates between wireless and broadband going forward.
Got it thanks.
Your next question comes from Marci Ryvicker with Wolfe Research Your line is open.
Thanks art their expenses that crossover from mobile into the core business, whether its marketing or or anything or are you able to segregate, 100% out of the wireless costs to wireless and then secondly, as you're adding the streaming services like Amazon Prime and Netflix what impact are you seeing.
On the inside the business and on the broadband side of the business, presumably video, maybe coming down and broadband going I'm just curious about that.
On the first one.
Listen.
There is clearly crossover expenses I mean, there is a dedicated mobile team there is a dedicated residential fixed line team.
But we do spend let's call it marketing dollars and branding dollars and Wi Fi Capex dollars somewhat in unison.
We know we need to continue to densify, our Wi Fi network and we do that we were going to do that even if we didn't do mobile but some of it some of that capex gets allocated by definition.
Over too.
Two or mobile business.
I don't know.
My time per Se is some accountant is using my time allocated but I'm, assuming that there's going to be some type of head count allocation hours use.
Lungs corporate.
That are associated with mobile and get just allocated there so.
As you know Marci, we want to a very tight ship.
With.
Very few layers.
So I think in many respects the cost that we are spending on mobile per se.
Probably are are far too much fully reflected right. We would have been spending a lot of those costs in any case and so we're just allocating some time from personnel.
And some capex, which we would have spent anyways.
On other endeavors, so it's probably to say that the though the loss numbers that are associated with it a probably.
Higher than what they would be truly if you ran it on on a standalone basis.
I think on the.
On the effect of somebody OTI T. players. What we are seeing is clearly that people are using the l. piece one platform to access Netflix.
As opposed to changing the input button on their TV to access it either through their Apple TV.
Or directly to their smart Samsung.
That is allowing people to stay within our ecosystem much longer.
That is really been also the benefit of the Netflix button, it's been so easy for people to shift to it.
It's something that I think intellectually resisted.
Because we thought that it would potentially promoted brand thats not ours and take away from what we were trying to retreat from a branding standpoint, but it's been a phenomenal success from consumer standpoint.
So people like it and so we think the usage.
Of OTI key platforms that are tethered to our LTL one platform has been higher.
Then then that it has been if you data in two separate platforms or where we had to basically ships to another input button.
In terms of our broadband you're right right, which is that the basic sophistic is if you are accord shave or in a broadband only do using about twice as much.
Hey to download than if you were a bundled customer with a linear cable bundle.
So people are using obviously broadband more and more for video and all the incremental usage that you're seeing ever for bundled customers a lot of it is video related.
Okay. Thank you.
Your next question goes from Doug Mitchelson with Credit Suisse. Your line is open.
Oh, thanks, so much I wanted to ask your Dexter about the balance sheet strategy, but first I guess I'm feeling a little bit dance on the promotional roll offs are the promotional sort of sub base that you have now different than a couple of years ago I am looking back through I guess broadband net adds some particular, just sort of seasonally and over the last like three to four years I'm not really sure where I see the promotional benefit that you.
Got so I'm trying to figure out where when the promotional subs came in that are now going to have such a dramatic impact on the on the fourth quarter of of 19, then I'll ask you the balance sheet question.
Yes, I think it's really you know the timeframe is back to school.
Right. So and then the back to school periods were running various different promotions depending on the years.
I can't remember and shame on me just on terms of what the promo was exactly last year in the year before.
But we are seeing overlap unfortunately of of the promos and that's what's really driving this Q4 effect.
So it's kind of a combination of one year promos on to your promos roll off at the same exactly where we're at kind of the vortex of a bunch of promotional offers that happened.
In the back to school period going into the Black Friday period into Christmas, which changed in reaction to competition or just in terms of us coming up with a new products idea and that was different from the year before and so that is just where we're at a onetime effects because as we fast forward to next year.
Here and we look at what we think the volumes of promotional roll ups are they are perfectly normalized with numbers that we saw in 2018.
Got it and then on the balance sheet built a lot of flexibility. The next sort of five six years I pushing the stack, so and I imagine, there's a little bit of a cost to pushing the stacks out that far I guess my question for you as well why are you building that much financial flexibility in your balance sheet.
Well I mean listen I think that cost of capital on the debt side continues to be very cheap.
And the availability of long term capital effectively almost permanent capital.
Is attractive at very cheap rates.
I don't think we are building, let's call it capacity for anything per se than other than optimizing our cost of capital and trying to maximize return for our shareholders.
There is obviously a desire by a subset of our shareholders and maybe the credit agencies for us to de lever.
But in this this type of interest rate environment, and where we think our stock continues to be undervalued.
We do like the fact that we're going out there and.
Borrowing very cheap debt to go out and retire expensive equity.
Yeah, I was my back to our way of trying to ask if there was other suddenlink opportunities out there or whether he knows our focus should be on buybacks, but.
Well listen I think I think there is one.
I had been open which is we do the best use of our capital continues to be M&A.
But there needs to be a seller.
For us to be able to buy something.
And so we'll look at stuff, they're small systems were looking at.
Will hopefully be announcing stuff at some point on small system.
But you know when something larger comes out I'm sure you're going to know that same time, we're going to know it.
And your Colisson assets with are interested and by definition, we are interested in most systems out there.
Got it thanks, so much.
Your next question comes from Bryan Kraft with Deutsche Bank. Your line is open.
Thanks, Good afternoon I wanted to ask is two questions. One can you talk about the economics of the $70 for life double play offer that you've had in the market I think since September .
Specifically, just how do you manage the profitability of a permanent promotional price point, that's that low given the annual inflation and programming costs.
And then secondly, just wanted to ask couple numbers questions can you tell us what the right interest expense run rate is going forward.
And also any update on when you expect to become a full cash taxpayer or material cash tax there. Thanks.
I'll take the first what I'll hand, it over to Nick and Mike in the second.
On the double play offer it to obviously excludes.
Price adjustments relating to equipment, and sports rights and and and broadcast fees.
So those those are excluded so as we look at to your point exactly on the programming adjustments that we see in inflation, we're going to continue to be able to pass those through to them. What we won't do change the makeup or the price points related to the packages itself. So if you up 200 megs.
You're not going to be charge more for your two in Jamaica ever.
For the rest of the fact that you stay in that in that exact.
A bundle same thing with your package you are package itself will not change.
Now the launch of behind it.
Is pretty simple which is one.
This promotional roll off situation is somewhat unsustainable, where you're attracting customers.
For one to two years at attractive promotion, and then jacking up prices by 15% $20.
After the roll off and not only does that lead to a retention effort, where you're probably spending quite a bit of money on retention, but the customer satisfaction or dissatisfaction and the amount of phone calls that you get into call center really drives a lot of customer contact which is negative and then your second unproductive and so.
We are more of the thought process on that particular promotion, which is.
At some point in time this customer is going to want to change the package whether that be on broadband speed, whether that be on picking up other channels or reducing the amount of channels.
At that point in time, it resets, obviously, the package and Thats really the anticipation that experience. We've had with these types of promos is they are attractive to give people peace of mind, there's a subset of customers will keep this offer forever.
And be very very happy with it and they'll never call us, which is fantastic. So NPS scores go up.
And the customer contact numbers going down.
Which helps our opex in our EBITDA on our cash flow and then there are those that are sitting there with very good peace of mind, but at some point, they're going to say listen I'm not a 12 connected devices anymore about 24, and im not downloading 280 gigs anymore I'm down lending 500 gig so I want to change and at that point in time, we switch them into.
Some type of other type of products, So thats really the genesis behind a behind it I don't know whether we'll keep it.
For long periods of times.
But the their reception has been very good.
From from consumers, which is why were we feel good about a gross adds numbers, it's really about disconnects.
In in Q3 in Q4.
As far as your second question, Brian I think you're asking.
Kind of an annual interest expense run rate going forward, we talked about having a weighted average cost of debt right now of 6.0% and Thats on about 22 billion in debt. So I think if you do the math from there you'll be in the right place.
On taxes, we have entered wells right now that will take us through the end of 2020 somewhere in 2021.
The current time as when we would expect to become a full full cash tax there.
Got it okay, great. Thank you.
Your next question comes from Ben Swinburne Byrd with Morgan Stanley . Your line is open.
Hey, good afternoon guys.
Dexter, it's just a couple first on the Lss migration.
Do you have I think you've talked about sort of singles and doubles from here or there other kind of chunky synergy opportunities beyond this one.
That you look out over the next couple of years or is it is it more incremental.
And.
The way I understood. It obviously might be wrong I thought you lost sort of a week of customer ads because you had system shut down I'm sure. That's wildly oversimplify the situation, but I guess I would've thought those would it just slipped in the fourth quarter, which doesn't seem to be the case I'm. Just wondering maybe you could help explain a little bit the adjustment that you guys, you're making so we can understand no listen.
I think you're spot on Ben so.
Just to answer your second question first.
Which is.
There was a full week of install that were not able to be made.
And yes that shift into a percentage of that shift so that you do lose.
Customers.
On the time delay factor right so going away.
Yes, I don't want to wait right. So they'll go somewhere else and they will want to wait.
But we're talking about in Q4 has nothing to do with gross adds it has all to do disconnect volumes.
All right so.
We are seeing the gross adds as expected in Q4, it's just that we anticipate based on the first.
And the expectation as we've seen historically on volumes of of promotion will love to see a much higher.
Churn rate related to promote roll off in Q4.
Hi.
Okay, and then turn it off.
Yeah listen I mean.
We keep on getting asked that question because you want to know how to how to how to run it hurt your margins I think there's two things you need to really focus on obviously the mix is changing.
On on products and so let's call. It theres some fake margin improvements, which has nothing to do with Opex related.
Just about customer mix and then secondly on the Opex side, we are continuously looking to optimize.
Unallocate more efficiently our capital right. So you can imagine we're in the middle of budget period, right now and that is a discussion as to how do we continue to allocate capital primarily to ways to run our business is better which could help us to disintermediate cost.
And so there was any there will be a program in place for sure for 2020.
And then just wanted to ask on the on the third quarter results for you or for microphones are either view.
ARPU residential ARPU I think was down about a buck 30, or so Q on Q.
I know you comps last year's price increase but it wasn't obviously why it would have been down sequentially I didn't know if anything to call out their pay per view or something else Weird and then I.
Hello.
So there is some pay per view.
And there is and then there is I think there was a fight comp in Q3 last year that that would not here this year.
I also do think just by definition.
You're not seeing it in our gross profit numbers, but you do see it little bit on the revenue numbers as even though our subscriber numbers on video RG look better.
You do continue to see a deterioration of the video product in general which is a disproportion on your revenue in your ARPU.
So when you are onboarding people at 110 to $120, but you see people cord shave.
70, $80 on video, it's just a mathematical equation that.
But the whole sector effectively is went through.
Yeah, I, just didnt kind of housekeeping you know if you guys knew how much acquired revenue you had in the third quarter I think shutter.
Full quarter of Cheddar this quarter and if you knew how how much that contributed.
Probably around eight to 10 sub seven seven to eight somewhere around there.
Also had an outage I don't know if you knew this spending and I know you because right right I think it was a Friday of the US open we had a massive outage here, which led to quite a bit of credits that we gave back to customers.
So that's also hit ARPU numbers in Q3.
Okay.
Okay. Thank you.
In the last question that we have time for today comes from came in fed Kishore with Barclays. Your line is open.
Thank you so I have a couple of first on the promotional side.
Victor if you could just.
Help us understand what is so different about the promotions that you ran over the last couple of years.
Which gives you confidence that as you go into next year.
Emotions that roll off from this you're going through you have the same impact.
In 2020 and beyond.
Secondly would be think about.
Your broadband revenue growth you guys have been growing faster than both Comcast and chatter.
And price has been a big part of it.
But I think some of it is basically just speed upgrades.
If you would just help us understand.
Different levers to keep this revenue growth going at this space.
And how much of your price it or the ARPU growth and broadband adds you to promote or loss was upgrades that would be helpful. Thanks.
Sure listen on the promotional signed roll off.
We know.
In our database and our CRM every single package and one that customer comes off a promotional roll off right. So it just happens to be again that historically in 2017 2018.
We may have had an excessive amount of two year promos and last year. We may have had a lot of one year promos.
And so the the combination of not staying consistent on a time period on promos leads to some overlap promotional roll offs are coming at the same time.
So it's just purely.
Mathematical in many respects that we can see the volumes of when people roll off and as we fast forward to next year, because we know we've been pretty consistent with how long are promos have been going on in terms. The period of time before we did price for life.
So before the summer.
And so we can already see that we don't have that type of overlap situation in 2020 in 2021.
So it's really just.
For whatever reason during the back to school and going into Black Friday and Christmas over the last two years, we happen to have shortened or lengthening promos that a leading to an overlap of those roll offs.
And then in terms of your broadband revenue growth question is almost uniquely driven by price.
And not price push but prize pool, so it's really about customers upgrading.
Consistently here.
And as people go for less bundled products, obviously, the standalone data product.
This is a higher ARPU than the bundled.
Data product and so we're consistently going to seen we've seen this quarter over quarter over quarter double digit growth in broadband revenue.
Which is really driven by some volume.
Hi high percentage of Super majority percentage of its driven by price, which people continue to drive up the product roadmap.
And so.
Given that we are opening up one gig in the Optune footprint.
And we're averaging about 200, megs and the optimum footprint, we continue to have a long runway there, but more importantly.
We're opening up 10 gig capacity on our fiber to the home.
Already next year, which will allow us obviously to have even a longer product roadmap going forward on broadband revenue growth.
Okay.
A follow up question on that I mean, you speeds. It at 200 makes right now, but from an application perspective, I'm truly applications outside of gaming, which really need that kind of speed.
In theory, but.
As you roll out one gig and 10 gig.
Capacities.
How are you thinking about the base of these upgrades. Most recently as you move more towards 200 has the base of upgrade explode.
All or does it remain consistent with what you guys saw maybe a couple of years ago anyways would exit fee mix.
Yes, I think you know you can look at the chart I don't know what pages on but it's a pretty straight 45, great degree line.
Consistently see sustained revenue growth trend both on data usage.
And on on broadband speeds.
I understand what you're saying.
Relative to the usage.
Necessities.
Broadband speeds relative to the applications available.
But frankly speaking that was the same parking we heard four years ago. When we were at 50 50 mix on average which is why do you need more you know our friends over a Netflix they all you need is.
To mix or five mix in order to download.
But the there's two things that are happening obviously device connected devices continue to increase.
Exponentially.
To everyone is wireless at home pretty much in watching video on a regular basis.
At home and thirdly applications continue to drive larger largest usage, so you're talking about certain applications like gaming.
But actually security cameras as an example.
When you tether your security cameras to your broadband that takes an inordinate amount of capacity.
Of your of your broadband capacity, so they're going to continue to be more and more applications and we're seeing that where consumers either field and necessity the upgrade because they want.
Better speeds rights you know why do people buy Ferrari is as opposed to until yoda, because we want to go faster not because it's a better corn at this early.
But I think people have that perception that there is going to be better performance, if it's more expensive and they have more.
More broadband speeds.
Secondly, really is the reality of it is that there are more and more applications that are driving the need for for broadband speeds and so I think as as more and more.
Products are available at more attractive prices because one gig when it got launch was probably in the multi hundred dollars per month now you're seeing promotions on one gig at the $70 level, let's call it.
That is very achievable, particularly when people cord shave from $150 down to 70 or $80.
By getting rid of video they're upgrading their broadband speeds.
I am pretty rapidly from there on.
Right, and we're not making that abate in it or slowdown in shape or form.
Sure.
Thank you.
Okay.
I think thats. It. Thank you everyone for joining him that it's maybe got any follow up questions will catch up with you. The next few weeks. Thank you very much. Thank you.
This concludes today's conference call you may now disconnect.