Nick Brown - Head, IR Dexter Goei - Chairman & CEO Charlie Stewart - Co-President & CFO.

Philip Cusick - JP Morgan Brett Feldman - Goldman Sachs Craig Moffett - MoffettNathanson Jason Bazinet - Citi James Ratcliffe - Evercore ISI Jonathan Chaplin - New Street Research Bryan Kraft - Deutsche Bank Amy Yong - Macquarie Kannan Venkateshwar - Barclays Ben Swinburne - Morgan Stanley Matthew Harrigan - Buckingham Research Brian Russo - Crédit Suisse Brandon Nispel - KeyBanc Capital Markets.

Good afternoon. My name is Chantal and I will be your conference operator today. At this time, I would like to welcome everyone to the Altice USA Q2 2018 Results Conference Call. [Operator Instructions]. Nick Brown, Head of Investor Relations, you may begin your conference..

Hello, everyone, and thank you for joining. In a moment, I'll hand over to Dexter and Charlie, who will take you through the presentation, and then we'll take questions. As today's presentation may contain forward-looking statements, please read the disclaimer on Page 2.

The slides are available in the company's website and a replay of the call will be available for the next month. And with that, it's my pleasure to hand over to Altice USA's CEO, Dexter Goei..

Thanks, Nick. Hello, everyone. Good [technical difficulty].

Why don't we jump straight into the presentation starting with summary on Slide 3? In Q2, revenue grew 1.8% with 1.5% growth in EBITDA on a reported basis although this included losses from the consolidation of i24, which we acquired in the quarter, larger than normal legal accruals primarily pertaining to pre our ownership activity and certain other costs such as management fees, which won't be incurred in future periods, which I'll let Charlie go through in more detail later.

Adjusting for these items, EBITDA grew 4.2%. We are very pleased to report improved residential subscriber trends as we continue to grow data units at a very good pace, and video units were better than expected at both Optimum and Suddenlink.

The mix shift we are seeing is favorable for our margins and we believe we are on the right investment and bundling strategy to continue to improve customer experience in and out of the home, reduce churn, grow revenue and increase free cash flow, which was up over 70% year-over-year in Q2.

As such, we are reiterating our 2.5% to 3% revenue growth guidance for 2018. We saw solid growth in business services revenue, up 4.2%, with both SMB and enterprise continuing to trend well. Advertising revenue is accelerating supported by our investment in our multi-screen targeted advertising business, a4, as well as positive trends at News 12.

We continue to invest in our new entertainment platform, Altice One, where we're currently expanding the rollout across the Suddenlink footprint as well as expanding our fiber network and preparing for our mobile launch next year. And lastly, we completed the spinoff of Altice USA in June as expected.

On Slide 4 we summarized the Altice USA shareholder structure following the spinoff, which shows a significant increase in the free float to about 44% from 10% previously. The sponsors retain about a 15% economic stake.

And the next concert, including the interest of Altice founder and Altice USA Chairman, Patrick Drahi has a 42% economic stake, but 80% of the voting shares. On Page 5 we show a breakdown of the components of total revenue growth.

Our residential business grew 1% year-over-year in Q2, which is an acceleration from Q1 since Optimum trends normalized following the Starz dispute and multiple storms we saw in the last quarter, on top of a sustained improved trend of Suddenlink, which grew 3% year-over-year.

We still expect this to accelerate further the second half of this year with the delayed timing of the price increase fully effective from the end of June. Broadband growth continues to underpin the residential revenue growth, up 11% year-over-year in Q2.

Business service is still growing mid-single digits with solid customer growth, and the same price increase will also benefit this segment in the second half. Lastly, the growth of our advertising business continues to accelerate with revenue up 12.7% in Q2.

We expect this will grow even faster in the second half as we have additional tailwind from political advertising, which was not a major factor in our Q2 results. Slide 6 shows our residential ARPU growth of 1% to $140 with a stable residential customer base year-over-year in Q2 contributing to the overall residential revenue growth of 1%.

In Q2, Altice USA saw total unique residential B2C customer relationships net losses of 4,000 versus minus 12,000 in Q2 '17 reflecting normal seasonality at Suddenlink although the performance here was better year-over-year.

And as I just mentioned, Optimum unique customer trends normalized in Q2 and were in line with the last year following the Starz and storms impacts seen in Q1. We will remain very focused on growing residential ARPU through higher broadband speed tiers and the Altice One experience. We also expect the rate event will help in the second half.

Slide 7, you can see Altice USA's overall video trends were better than last year for the second quarter running with 24,000 pay TV net losses in Q2 versus 37,000 last year. Again driven by Suddenlink improvements even though we haven't fully deployed Altice One here and with Optimum trends normalizing.

We had 10,000 broadband net additions in Q2 2018, above the 2Q 2,000 additions in 2Q, 2017 due to improved performance at Suddenlink. Recall Q2 is normally a seasonally weaker quarter for Suddenlink because of its exposure to university towns whereas Optimum is normally seasonally weaker in Q3. Let's move on to our growth initiatives on Slide 8.

Starting with Altice One, which has been available throughout the Optimum footprint since January 2018. We're now at a point in terms of performance and customer satisfaction where we will start promoting more aggressively and will start pushing the migration of existing customers during the second half of this year.

This will be supported by a further update of the Altice One operating system with lots of new features like out-of-home DVR. We are expanding the rollout across Suddenlink footprint during Q3, which should further support better trends in those markets.

On Altice mobile, we're on track to launch next year and will have 4G LTE and voice-over-LTE services available straight away. Recall we have a full infrastructure-based MVNO, which has attractive economics and flexibility features for us.

We have a dedicated and experienced mobile management team which will lead the development, launch and ongoing mobile strategy. In terms of network development the densification of Sprint's network, which we're helping with our AirStrand deployment is comfortably ahead of schedule as are the upgrades to and expansion of our WiFi network.

We are also testing CBRS spectrum with equipment in a 3.5 gigahertz band as this may be good complementary capacity for us. Let's move to Slide 9. Our various network upgrades are facilitating significant increases in broadband usage, which is driving the growth of our broadband customer base, revenue and cash flow.

First, following the digitization of our DOCSIS network, we are doing a QAM to IP migration upgrade as well as rolling out our new fiber FTTH network in parallel.

These new IP networks will allow us to extend the availability of 1 gigabit broadband services without penetration constraints as well as being optimal for multi-device services and costing us less money to run over time. With the fiber network, more than 10 gigabits of speed will be possible.

This truly differentiates us in the industry and puts us in a strong competitive position. We're also launching smart WiFi by the end of this year, which will enhance the quality of the WiFi service and boost coverage further.

Lastly, our new full MVNO is being constructed in a way to allow seamless converged fixed wireless services, which is really the future we see for all of our networks across every market. In terms of usage patterns, our customers are taking an average download speed of 162 megabits as of Q2, which is up 74% year-over-year.

Using over 220 gigs of data per month, which is up 20% year-over-year, with 10 in-home connected devices, on average. If you take the top 10% of our highest data consuming customers as a leading indicator, they are using, on average, almost 1 terabyte of data per month with 26 in-home connected devices.

To support these usage patterns, which are mainly driven by video streaming and the proliferation of new OTT services, it requires a high quality fixed network like ours. There is no substitute. For example, so called unlimited data plans from the US mobile operators start capping or significantly throttling customers at 20 gigs of usage per month.

Over 60% of our customers are now using over 100 gigs of data per month right now, which the mobile operators do not and will not have the capacity to match on a scaled basis unless they over build with a new dense fiber network.

And Altice One is the perfect platform for us to reaggregate OTT video services as well so we will expect to make positive margins and cash flow from our video business going forward, as we do today, through bundling in broadband-centric packages. And now I'll hand over to Charlie for the financial review..

Thanks, Dexter, and hello, everyone. On Slide 10 we summarize Altice USA's margins where you can see that we were at 42.5% adjusted EBITDA margin in the quarter with the operating free cash flow margin or EBITDA less CapEx, at 32.4% on a reported basis, which we believe is meaningfully ahead of our largest peers.

However, it's relevant to note that our EBITDA includes the impact of consolidating $11 million of i24 losses following the acquisition, which we completed in the second quarter, as well as larger than normal legal matter accruals, which we didn't have in the second quarter of 2017.

Those relates to settlements of lawsuits that are claims pre-dating our acquisition of Cablevision and Suddenlink. On i24, we just signed up another major MVPD to distribute the channel so we're confident that we'll continue to improve our financial performance there even though the US channel only just started in the last year.

Separately, remember that following the spinoff in June, Altice USA no longer pays the $30 million of annual management fees to Altice N.V., of which we had $5.8 million in the second quarter, which we'll not realize from the third quarter onwards.

And lastly, we also had certain costs from Altice Technical Services US, which will not be incurred in future periods, following the transfer of the business to Altice USA in connection with the spinoff.

So excluding all those items, our EBITDA would have been $26 million higher and growing at 4.2% year-over-year in the quarter, which would represent an EBITDA margin of 43.6% and an operating free cash flow margin of 33.4%. Our total programming expenses in the quarter grew 4.5% year-over-year.

That's 8.2% per video customer, and we're still guiding to expect high single-digit increases per customer here going forward. As we expect an acceleration of revenue growth in the second half, we also expect higher margins for the rest of this year.

On Slide 11, we show an overview of our cash capital expenditures, which increased to $241 million from $206 million in the second quarter of last year. CapEx will be higher throughout the rest of 2018 and that relates to the fiber and MVNO network rollouts as well as the expansion of the Altice One rollout and, lastly, new home builds.

On Slide 12, we show a view of our underlying free cash flow. In the second quarter you can see that we generated $488 million of free cash flow, which is after $29 million of cash restructuring costs that's up 73% year-over-year. So year-to-date we've generated a total of $661 million.

I would note that cash interest costs are normally lower in the second and fourth quarters due to the timing of coupon payments, but interest is also lower year-over-year because we had the capitalization of our shareholder loan pre-IPO, which meant a higher than usual payment last year. There was also no M&A in the quarter.

And cash tax was just $10 million in the second quarter. Recall that following the tax reform, Altice USA is not expected to be a significant cash tax payer until 2020. Financing activities and the change in cash does reflect the payment of the $1.5 billion dividend, which was paid immediately prior to the spinoff in June.

And as a reminder, we have authorization for $2 billion of share buybacks following the spinoff. And so as we see further deleveraging from EBITDA and free cash flow growth, we have opportunities for additional shareholder returns.

On Slide 13, on the right, you can see Altice USA's leverage has come down rapidly to 5.3 times on a reported trailing 12 month basis as of the second quarter from a starting point of 7 to 7.5 times when we closed the Optimum and Suddenlink acquisitions. On a last two quarter annualized basis, leverage was 5.4 times in the second quarter.

Those numbers include the $1.5 billion cash dividend. If we hadn't paid that, our leverage would already be at the high end our target leverage range of 4.5 to 5 times. We still intend to be within that range by the end of the year even taking into account any potential share repurchases.

We maintain a strong liquidity position of $2.3 billion, and our current weighted average cost of debt is 6.4%. Slide 14 is a summary of our debt maturity profile pro forma for our recent revolver draw for the repayment of a 2018 maturity at Optimum.

The weighted average life of our debt is 6.3 years, and we've got no major maturities at Suddenlink until 2021, any near term maturities at Optimum are covered by our revolving credit facility as well as, of course, our free cash flow generation.

And then just to finish on Slide 15 as well as our full year 2018 guidance, which we're reiterating today. We expect total revenue growth of approximately 2.5% to 3% compared to 2017 and we expect further acceleration in the second half, as we've just outlined, and annual CapEx we still expect to be approximately $1.3 billion in 2018.

Over the medium to long-term, we still expect further expansion of Altice USA's adjusted EBITDA and cash flow margins including an expansion of EBITDA margin in 2018 with very strong free cash flow generation this year. And with that, I'll turn it back to Dexter or open the line for Q&A..

[Operator Instructions]. Your first question comes from Philip Cusick with JP Morgan. Your line is open..

A couple if I can. First, can you talk more about the fiber rollout; where you are, what the early learnings are? And then second, talk to us about the buyback nothing in the second quarter. And remind us what the leverage calculation is as you think about that five times at the end of the year.

Is that trailing 12 months or last two quarters annualized?.

Sure. On the fiber rollout listen, we're progressing well. As we've highlighted in the past few quarters, we've had a nice, good teething pains getting up and running on the fiber rollout really driven by the permitting process that took longer than we expected. But we're now nicely rolling out Fiber-to-the-Home in the Optimum footprint.

We have over 400,000 cabled homes today and over 120,000 ready for service homes. We will continue to accelerate those nicely throughout the rest of this year and into 2019. We have already beta tested amongst a small subset of our employees and have already soft launched it in certain areas where we already - homes are ready for service.

So we are on track for launching a commercial offering in Q3, as we've stated in last quarter. So I know we're excited about it. It's 1 gig ready up to, technically, 2.4 gigs a day based on the modems' capacity that we have.

And it is going to be GPON-based, but effectively to the extent we want to upgrade to 10 gigs either on NG-PON2 or an XGS-GPON, we can do that if we want. So this is a very flexible architecture for us and so we can be 10 gig ready if we want to make that investment or to the necessity of our clients very shortly.

Regarding the buybacks, we had approximately 10 trading days post the spin when we could buy back shares.

We didn't think there was any need for us to sprint out of the gate and then stop right before our blackout period particularly given all the technical movements around our stock and the fact that we didn't really understand whether the flow back had occurred or not has occurred pre-spin. So we thought it would be more prudent to wait.

We've been relatively, I guess, fortuitous or prescient or lucky that the stock really is slightly off relative to where it was on the spin anyways. So we haven't lost any opportunity cost there. In terms of how we think about it, listen, our 4.5 to five times target, today L2QA and the last 12 months are right in line with each other.

As we get into the third quarter and the fourth quarter of the year where you expect L2QA to increase and that's where our dentures [ph] are based off of, I think we're really going to make a judgment call based on our confidence in our free cash flow going into 2019.

We feel very good about our free cash flow generation this year, as we mentioned on the Q1 earnings call. And so as we get into Q3 and Q4 and we deliver or we expect to deliver, I think we'll start looking at the disparity between L2QA and LTM and make that judgment call at that point in time..

Got it. That's helpful. Thank you..

Your next question comes from the line of Brett Feldman with Goldman Sachs. Your line is open..

And just for the sake of clarifying, when you're talking about making a judgment call, is it a judgment call around what the right way to assess your leverage is when determining buybacks or a judgment call as to whether you're going to buy any stock back at all in the second half? Because it sounded like, from your comments during the script that you do anticipate it's probable you'll be repurchasing shares in the back half.

Is that fair?.

Yes. I think it's fair, Brett. It's highly probable that we're buying back shares. The question is how much are we buying back.

And that's what I just answered to Phil is do we push towards more comfort level on a L2QA basis because we know going into 2019 we're even deleveraging that much more and we feel that we can be thoughtful about being opportunistic given the price levels..

Got it, okay. So then let me ask you a question about the business. It was great to hear that you expect to be at a higher margin level in the second half of the year. Obviously you're going to get operating leverage off the improved revenue trajectory.

Can you walk us through some of the other factors that are going to drive margins in the back half? You've done a great job saving costs.

Are there additional costs you think that can come out of the business? And then on the flip side of that, is there anything that we have to model coming in, maybe prep costs on the MVNO?.

So on further cost reductions, I mean I think these are the themes that we've talked about regularly. As we continue to accelerate Fiber-to-the-Home, we'll start seeing OpEx and CapEx costs coming out of the business. We've got facilities integration that we continue to work on.

We've got the BSS/OSS migration, which will start kicking off in October of this year and go through the rest of the year, which will position us very nicely for 2019 in terms of a large cost reduction.

There are customer care related issues in terms of geographies that we focused on in terms of trying to be thoughtful about being efficient with our capital allocation there. So all of those things, and then some, continue to drive further improvement in our margins.

I don't want to be super specific in a very short period of time between now and year end. We are seeing the operating leverage obviously from the price increase, and the acceleration of the ad market going to the second half is clearly going to drive improved EBITDA.

But we've got so many other projects up in the air, we've inherited i24, we've got the MVNO launch, that being very specific around EBITDA margins for the next six months probably doesn't make a lot of sense given that we're already in the middle of the year. But we're really positioning ourselves for a great 2019..

Great. Thanks for the color..

Your next question comes from Craig Moffett with MoffettNathanson. Your line is open..

Dexter, I wonder if you could just talk about the growth runway for broadband particularly in the legacy Cablevision territories just given how relatively fully penetrated they are already.

Is that a business where you think you can continue to grow units? Or is that primarily going to be a pricing story now that you've been in the market for a while and sort of seen the dynamics?.

Well listen, I think we continue to grow units in the Optimum footprint and I think with the continued roll out of Fiber-to-the-Home we're going to have opportunities to push more penetration and potentially take market share back in places where we have competitive areas.

Clearly, given what we're seeing from a data usage standpoint and speed upgrades standpoint, we're going to continue to have momentum, very good momentum in upselling better products at better price levels. And so you've seen that in our Q2 numbers where I think we're about 10% revenue growth on the Optimum side on data.

We don't see that abating in any shape or form, putting aside seasonality in the businesses. So that is not something where we're seeing anything slowing down in terms of our overall momentum of our data businesses both over at Optimum nor at Suddenlink..

And have you seen any changes in the competitive posture of Verizon FiOS if particularly, again, in the Optimum footprint?.

No. I mean listen, we see pockets. Obviously they took advantage in the first quarter of our Starz impact, as we had taken advantage of their Univision impact and their strike impact in the previous years. So putting that aside, we're not seeing anything abnormal in their behavior.

There are some times when they are super promotional for very short periods of time, as we may be in certain cases, also very focused I think both of our organizations are very focused on retention of our customers. But nothing abnormal per se post the first quarter blips that we had that were very specific to the Starz and the storms..

That's helpful. Thank you..

Your next question comes from the line of Jason Bazinet with Citi. Your line is open..

I was just looking at my model and my free cash flow per share number this year fully taxed implies that your stock is trading below 10 times levered cash flow. And that seems very unusual to me given where your peer cable companies trade.

And the only thing I can infer is that the market is just very nervous that the Altice way, in terms of whatever you're doing, will sort of have negative ramifications for the top line and you run into issues like you did in Europe.

So can you just spend a second and talk about what the similarities and differences are between Europe and the US that might moderate some of the anxiety that might be out there on the buy side?.

I guess I've never heard that question before, but I'll repeat an answer. I think there are no similarities is probably the best answer for you between the European markets where we operate and the US market.

To be very specific, in the three European markets where we are, we have three or four fully converged fixed wireless players that are, one, regulated on a wholesale basis from the infrastructure player in that market - players in those markets, which have been driving unbelievable promotional activity.

These are national players, end-to-end both on fixed and on wireless, either on a wholesale basis or on an infrastructure ownership basis.

And so the fact that you have a very highly regulated infrastructure market with the ability for larger balance sheets to be very aggressive and also smaller players to simply start a business up on the back of someone's infrastructure just with a little bit of money has driven unbelievable promotional activity in France, in Portugal and in Israel.

We do not see any of those trends in this market where there is no wholesale market on the B2C side nor do you see any aggressive over building in any shape or form in any of our existing footprints today. So based off of that, you really kind of have a black versus white type of competitive dynamics and regulatory dynamics in the market.

Putting that aside, when you we don't really understand the continued comment on; are we doing things on the Altice way that could damage the market? The Altice way has been Fiber-to-the-Home, which we are the only MVPD that has announced a Fiber-to-the-Home program.

We have a facilities based MVNO so we're the only MVPD that has gone ahead and invested in our own mobile infrastructure to do a facilities based MVNO. We are the only MVPD who has aggressively invested in the recent years in an advertising platform to do that.

And we are the only MVPD who has an Altice One all-in-one communications platform that is going to significantly enhance user experience and reduce the clutter in the home by eliminating the set-top boxes. On top of that, I guess going public was one thing. Doing two acquisitions and integrating was another thing over two years.

So we've been busy, and, yes, and it's given us the advantage and the capacity to take costs out of places where they were superfluous, but we also have been investing heavily in our IT systems, our processes, our infrastructure, which have really been able to drive the efficiencies in our business and not at all be a zero sum negative game of taking costs out and not replacing it with better services.

So I hope that answers a portion of your question or all of your question. But happy to be more specific if you want..

No, it does. That's very helpful. Thank you..

Your next question comes from the line of James Ratcliffe with Evercore ISI. Your line is open..

Two if I could. First of all, any color on the response you've seen thus far to the price increase over the course of the last month and how that compares to previous cycles? And secondly, on content strategy, you've got a couple major MVPDs in the US buying or trying to buy global content assets.

You've got Charter saying they really are only interested in content that's local and helps them drive subscribership, like local news or maybe RSNs.

What's your thinking on content ownership? And in particular how does i24 fit in with that?.

On the price increases, I think we spoke about it in terms of where our anticipated effect was in the first quarter, which we thought that we were expecting at least a 50% retention of our price increase. I think we are doing better than that as of now in the price increase so it's going as planned, let's call it, in terms of our expectations.

So we feel very good as to the revenue trajectory of our business going forward into the third and fourth quarter of this year. Relating to the content strategy, we inherited a hyper-local news business, which is just a fantastic business, on News 12.

We've been able to invest in that platform and hang certain things off of that and work with other content providers to improve the programming there and diversify it a little bit.

We have kicked off i24 last February here in the US, a platform that has been existent for the better part of three years now and continues to get good traction overseas, but has seen a very accelerated traction here in the US We've seen better than expected performance on viewership, on stickiness of the viewers and on carriage.

We have signed up another large MVPD just recently and we are cautiously optimistic that we'll be able to add other distributors during the balance of this year, which would take us to really national coverage on i24, which we think will drive some attractive economics going forward; maybe not in 2019, but clearly in 2020 onwards.

Listen, our content strategy is very simple, which is we don't have a content strategy per se, outside of news. We like the news for its hyper-localness. We've taken advantage of the Altice N.V.'s investment in i24.

And we think that the opportunity for i24 is significant in the US, which is why we've incorporated that into our portfolio here in the US as opposed to keeping that part of the Altice Europe portfolio. And lastly, on the other stuff that's out there, whether it be general entertainment, RSN, original production, we're not interested in it today.

That is not something that is core to our business and we don't think that the business model pertains to what we do today.

And, frankly speaking, arguably, many of those content businesses, albeit maybe something that you can have as part of your portfolio, are probably better managed as two separate businesses in any case where the real there is really not that many synergies between the two pieces..

Thank you..

Your next question comes from the line of Jonathan Chaplin with New Street Research. Your line is open..

I'm wondering if you can just remind us where you're taking the rate increase, what products specifically prices are going up on. And then I'm wondering if you can give us a little bit of context around where the ARPU pressure on CVCs, video line is coming from.

Is that a function of discounts you're giving people as you go through the transition process? Or is it subs spinning down to skinny bundles? Or is there something else impacting that product line?.

No listen, we have, on average, an slightly above a 3% price increase across our residential and business customer base.

There is no good answer to your question in terms of where it's coming from because it comes across the entire base on base management related issues; so converging to a higher package for certain people to increases in re-trans fees to increases in set-top boxes or the sports premium surcharges.

There is a bunch of stuff that we look at literally line by line, offer by offer across each one of our states that allows us to do it.

A lot of it has been helped by the BSS/OSS migration preparation where, on the Suddenlink side, which is where we're doing the big migration onto a new BSS/OSS platform, we've been able to take about 3,000 different offers down to about 300 we'll have when we launch the BSS/OSS migration.

So that is driving some of the price increases as we migrate people to better packages at slightly higher costs. In terms of the context of the ARPU pressure on video at Optimum, it's all the things you mentioned. There is some retention in there. There is some downgrading and there's some churn.

But as you saw through our numbers in the second quarter, we've performed spot-on relative to last year in terms of the video RGUs, units, and it's really about a mix. And as we think about our customer onboarding and what we're mixing up with them, we continue to look at different types of video packages.

But overall, as you can see, the overall ARPU, which is what we really manage to is the overall ARPU base, continues to increase..

So, Dexter, if I could just follow up there.

Given the pressures on video ARPU in CVC in Optimum, how much of that 3% price increase do you think you'll be able to hang on to in that business?.

I don't have the granularity right here next to me so we could probably take this offline the next time I see you and we could chat about it. But you know, overall, most of the price increases relates to video in one shape or form on the video side of it.

So when we talk about planning to a 50% plus retention of it, we feel as if we're going to be retaining 50% plus of it on the video side..

Got it. Thanks that's really helpful..

Your next question comes from the line of Bryan Kraft with Deutsche Bank. Your line is open..

I guess two things. Charlie, I just wanted to confirm that you said margins, I think, would increase in the second half of the year, and I think you also said they'd increase for 2018 on the whole.

I just wanted to confirm that and also just that you meant they would increase year-over-year in the second half on a reported basis as opposed to sequential or on an adjusted basis. And then the other thing I wanted to ask you about is you called out $26 million in legal costs and i24 costs from the consolidation.

How much of those are one-time versus the i24 costs that are now part of the cost base? And how quickly I know, Dexter, you had mentioned it depends on the distribution that you get, but just curious if you can give us any color on how quickly you expect i24 to get to breakeven as the revenue ramps up.

Or even just comment on when some of the contracts you've already signed actually start to generate revenue..

Hey, Bryan. It's Charlie. So the answer on your two margin questions I think is yes and yes. We certainly expect margins to expand in the second half of the year.

There's a variety of factors behind that, but I think Dexter mentioned the price increase is something that naturally drives margin enhancement beyond all the things that he also mentioned that we're working on and driving.

It can be a little tricky to predict it in a given quarter, but generally that expectation is certainly true as well as on a year-over-year basis.

The reason we called out the $26 million is because sometimes it looks like the margins are somewhat flat year-over-year, but, in fact, that doesn't really tell the story because there's different it so happens that we had legal accruals in the second quarter, which we didn't have the previous year. That was unusual, an unusual event.

Secondly, i24, given that we bought it in April, it's the first quarter we've had those in and those were not in the numbers last year.

And then lastly, the management fees and some of the ATS cost of that consolidation that were really things that were only in the second quarter and are not recurring in the third quarter will naturally reduce our cost base as a function of that. So we called those things out specifically for that reason. And I think you asked specifically about i24.

I mean about $10 million of the $26 million is i24-related. Certainly we still expect losses in that business because it's a startup, effectively, in going forward. But it is growing quickly and so obviously we're looking to drive that not just to breakeven, but well better than that in the periods ahead.

The other $16 million, which is the legal fees and the things I mentioned, are effectively things that we don't expect to recur in the third and fourth quarters..

Okay, thanks Charlie. That's very helpful..

Your next question comes from the line of Amy Yong with Macquarie. Your line is open..

I was wondering if you could talk about the curve of CapEx spending and maybe update us on the budget for your rollout, your fiber rollout, and also the migration to IP.

And then can you talk about how CapEx will come down over time as you probably gain operational efficiencies and as it normalizes?.

Sure. It's Charlie. We've always talked about our CapEx spending in this $1.3 billion, $1.35 billion range, and we're certainly comfortable with that, including our fiber build. We haven't given any specific guidance on the MVNO yet.

As we move towards launch, we'll have more to say about that, but that's really a next year event for all intents and purposes. And you've seen our CapEx tick up already in the first few quarters as we've begun to invest in the fiber especially, as well as the Altice One.

And you can look at the uptick in CapEx spending levels to give you a sense for the incremental spending that we got.

You're absolutely right that as we bring especially our fiber project comes to pass, as we see the benefit of that being expressed not just in customer experience and new products and so on, but also really in efficiency around capital and as well as operating expenses.

So that will come into play gradually as those customers come online and as we can realize those cost savings. We've talked about certainly a multi-year investment in our fiber build so it's not that's not a trend that we think will materialize next year, but it's absolutely what we're shooting for.

And if you look at, as I said, our CapEx levels over the last several quarters, you'll already see that those were meaningfully lower before we started these incremental investments..

Thank you..

Your next question comes from the line of Kannan Venkateshwar with Barclays. Your line is open..

Maybe we have a mute issue or something. Perhaps we can go to the next question and come back to Kannan afterwards..

Hello?.

Oh, there we go..

Sorry about that. So the question was more about the demographics across the different states and how that reflects on - or how that flows through pricing. So you have a very different base within Optimum and Suddenlink from a demographics perspective.

So as you've taken these price increases, has the behavior been different? And what does that tell you more about long-term pricing power across these two different bases?.

Well the overall marketing approach and offers are pretty similar across our entire Altice USA base. So if you look at our Triples and our Single data offers at Optimum and at Suddenlink, they're virtually identical, save for every now and then certain regions may be a little different particularly on the Suddenlink side.

So then it really just becomes in terms of the mix. Obviously we continue to see a 60% to 65% of our sell-in gross adds at Optimum take video and it's a lot less over at Suddenlink, which obviously drives a material difference in the ARPU levels.

So I don't know if that answers your question, but it's really mathematical and we are very focused on trying to grow our video penetration on the Suddenlink side because if you actually look at our average Triple Play sell in prices at Suddenlink, they actually are higher than our Optimum sell-in prices on Triple Play when you add in all the various features and those types of things in terms of the on average as to when someone gross adds..

Thank you..

Your next question comes from the Ben Swinburne with Morgan Stanley. Your line is open..

Maybe, Dexter, just shifting over to B2B, I'm wondering if you could talk about the opportunity there. Particularly at Optimum, you inherited the Lightning business, which has been a pretty mature business for a while, but I'm wondering if you see an opportunity to really accelerate that growth and, if so, any sort of comment on strategy and timing.

And just for Charlie, as we think about the back half, is that $11 million of i24 contribution a good kind of run rate? Or is that more of a seasonal business where Q4 is bigger? And if you could just remind us the management fee relief you guys are going to get in the back half that would be helpful..

Well Ben, on the B2B side, and I'll just correct you. It's Lightpath as opposed to Lightning. Although I do like the Lightning..

Oh, sorry. It should have been Lightning..

So we inherited a business that was doing about 1% revenue growth and was doing probably around $100 million of EBITDA minus CapEx. Today, that business does about 2.5% to 3% revenue growth and about $120 million to $130 million of EBITDA minus CapEx.

So we have been very focused on right-sizing that business and being thoughtful about where we invest our CapEx to drive better revenue growth.

Now it hasn't escaped us that there is a whole world out there of infrastructure investors that are very focused on growing top line and EBITDA over and above free cash flow, which could be a strategy for us to think about driving a significant amount of value relative to what traditional B2C MVPDs are worth today.

And so we are in the throes of thinking about what's the best way to do that. It's not a lot of money. It's just more thoughts about where is it that we want to spend incremental CapEx and what are we really trying to achieve for. But that's a business that we like a lot. It's also a business that third parties like a lot.

So we'll think about all that stuff in due time, but it's on our radar screen..

You asked about i24, Ben. The $10 million, $11 million that we talked about in this quarter is not a bad kind of run rate for now. What really changes that and drives the profitability, the cost base is as it is, but we're really ramping distribution and, by extension, audience and, by extension, the top line.

And then that's really what drives us there. So we're very encouraged by what we're seeing in that area. And we see the US as an absolute critical component, if not the most critical component, to delivering that opportunity, which is why we bought the business in the first place.

So we're driving in that direction and we'll keep you apprised of it as we ramp it..

Anything on management fees for the..

Oh, sorry. You asked about that. Yes it was $30 million a year so $7.5 million a quarter. And that's now so $15 million in the back half of the year that we would have had last year that we won't this year..

And Ben, just on i24, we're very focused on turning that into a profitable business. This is not a business of any project in any shape or form. This is something that we think we can drive good value for shareholders going forward..

Makes sense. Thanks a lot..

Your next question comes from Matthew Harrigan with Buckingham Research. Your line is open..

Actually, two questions. Firstly, you're taking a different network topology than your peers and you've got a different MVNO partner in Sprint. Is there any constraints on your ability to work with Charter and Comcast and even CableLabs on things like I think Cisco has a new LTE over DOCSIS approach the bandwidth reports it's pretty interesting.

Some of the other operators are looking at it. Is there anything just inherent in migrating to DOCSIS QAM to IP that's going to cause some issues there? And then secondly, I guess you're probably not going be picking up Charter's New York business in 60 days, as much as you'd like to get it.

But is there anything happening on the regulatory side? You said that some of the permitting process was a little slower on the fiber than you expected, but I would think that with the aggressive upgrades that New York regulators at least must be pretty pleased with you..

Yes. I think, listen on generically, on the MVNO side, we have two not only two different MNO partners, but we have two different approaches here. Ours is a facility based. Theirs is a light MVNO, which makes it a little bit difficult today to cooperate specifically around infrastructure.

We clearly can cooperate around whether it be marketing, cross-marketing, maybe some supplier acquisition stuff. But as you know, we are so active globally or historically as a group and we've maintained very good relationships on a global level with the key suppliers that we've been able to go ahead and do a lot of this stuff on our own.

But I don't ever eliminate the possibilities or the attractiveness of teaming up with our friends from Charter and Comcast on anything relating to that. I think with regards to fixed line infrastructure, we have veered slightly left relative to them. That doesn't mean we don't want to cooperate.

And by the way, I don't think we're so off-base relative to what they want to do. They realized that they want to go a lot deeper in fiber and, in many instances, our friends from Comcast I know have rolled out some Fiber-to-the-Home in some of their footprints.

I think if they were able to get attractive cost points on that side, they would most likely veer closer to where we're heading towards on that. And there's a reason why we're very focused on the Optimum footprint given the density levels and the aerial side over the network here in New York.

Now on the permitting process, it has nothing to do with the state permitting processes of the regulator. It has everything to do with the local communities. And so that is just a community-by-community bootstrapping exercise we have to do. Some communities are - get the joke immediately and just say, “This is fantastic.

We want to do everything we can to be helpful.” Others use other approaches to what we want to do and those discussions are a little bit more difficult and timely. And so you can imagine there's different shades of grey everywhere along the permitting process.

But I think we are well-equipped and in-tune to accelerate nicely in the second half of this year. And 2019 we're going to be ambitious in terms of how many homes will be ready for service..

And then you have no concerns, I take it, with the state level..

No. We have zero concerns at the state level. Obviously we have a bunch of regulatory elements that were part of our merger condition, which primarily had to do with upgraded speeds and some new homes build.

We have already, two months into our closing of our transaction actually, October, so technically a little under four months after our closing of the transaction we met the regulatory commitment on upgrading of the network. We did that 12 months before we needed to.

And secondly, we did everything to do with low income broadband ahead of schedule as well. And we have some new build commitments, which we are clearly ahead of schedule on as well. Outside of that, we had some employment related stuff relating to customer facing personnel. That has never been an issue with us.

And those were the biggest merger issues that we had to deal with and we are ahead by a long shot on all of them and have had no issues on any of the other stuff that are maintenance related stuff..

Thanks Dexter..

Your next question comes from Doug Mitchelson with Credit Suisse. Your line is open..

This is Brian Russo for Doug. Two questions. One on the mobile strategy. Just curious if you can talk a little bit about what the go-to-market offering is going to look like.

Is it going to resemble, more or less, what we've seen from Comcast? And what kind of products you're going to require to be bundled with it and do they need to take at least broadband or are you thinking about a couple more things with that? And the second question is on video. I just wanted to get your thoughts on skinny bundles.

Do these make sense for you to offer as a product? Or are you kind of preferring richer video offerings given your investments in Altice One and the focus you've got on growing the advertising business?.

So on mobile, I think, not to do this in jest, but I think we're going to have to discuss that a lot closer to our launch. There are - I think we're considering a whole host of different strategies. The most important of those strategies is that we want to make this a profitable standalone business.

So we don't anticipate, even in our first year of operation, to lose money on this. There may be working capital timing differences relative to handsets and how we treat those, but in terms of losing money, we are not going to lose money.

So I think the whole question for us is, to your point in the color of your question, how we're going to treat our existing customers versus new customers. And unclear yet whether we follow what our friends over at Comcast and Charter have done or do something different or more in tune with potentially what some of the MNOs are doing.

Relating to video, I think we're focused on offering what our clients want. And I think our clients want choice and I think many of our clients do want skinnier offerings. And so whether that's us providing a Altice branded skinny bundle or us offering a third party's bundle on our Altice One platform, we are open to absolutely both.

And we have Netflix already on our Altice One platform. As you may imagine, we're in discussions with all the virtual MVPDs out there, the larger ones, about onboarding them onto our Altice One platform.

So the key is to enhance the whole customer experience, continue to drive a good customer service experience, which will drive stickiness and reduce churn. Where the ultimate gross margin dollars go to, obviously we care, but we're primarily first focused on making sure what our clients want we are able to offer in a very attractive platform..

Understood. If I could just ask a follow-up on the mobile side.

When you say you don't expect to lose money, should we be thinking about that on an EBITDA basis or an EBITDA less CapEx basis or both?.

I think probably safer to say EBITDA given I don't - there's some lumpiness and everything in that. But our CapEx outlay, putting handsets aside, which is really an accounting issue, is not very much. So I would not anticipate losing money on an EBITDA minus CapEx basis either..

Perfect. Appreciate that..

Your last question comes from the line of Brandon Nispel with KeyBanc Capital Markets..

I was wondering, in the press release it says something to the effect of accelerated rollout of network expansion in the Suddenlink footprint.

Can you remind us what you're targeting in terms of new household passings this year and maybe more broadly over the next several years?.

Yes. I mean I think it's clear that the last several years of integration have kept us focused on the exact integration part of the business and not so much on the extension of our footprint business. And so we have made that a priority in the second half of this year going into 2019. We haven't publicly talked about what we're going to do.

Historically in the last two years we've done about 40,000 between Optimum and Suddenlink in terms of extensions; about 20,000 in the Optimum side and likewise in the Suddenlink side. I think in 2018 we'd expect to be higher than that. I don't want to pinpoint a number to you.

I think we're really going to be ready for 2019, which we think will be a significantly higher number than what we've seen in '16, '17 and in '18. And I think we'll talk about it more publicly at that point in time..

Thanks for taking the question..

I will now turn the call back over to the company for closing remarks..

Thank you for joining. Do let us know if you have follow-up questions. Otherwise, we look forward to seeing you in the next few weeks. Thank you..

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