Optimum Communications/Altice USA — Q1 2021 Form 10-Q
Business context and period: The filing is by Altice USA, Inc., which operates primarily through CSC Holdings. Optimum is one of its residential brands; the company also operates Suddenlink and Lightpath. It provides broadband, video, telephony, mobile, business services, news and advertising. Results cover the unaudited three months ended March 31, 2021, compared with the same period in 2020. Dollar amounts below are in millions unless stated otherwise.
Key financial metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $2,478.8 | $2,450.3 | +1.2% |
| Operating income | $608.5 | $448.6 | +35.6% |
| Operating margin | 24.5% | 18.3% | +6.2 percentage points |
| Adjusted EBITDA (non-GAAP) | $1,074.8 | $1,031.4 | +4.2% |
| Adjusted EBITDA margin | 43.4% | 42.1% | +1.2 percentage points |
| Net income (loss) | $278.5 | $(1.5) | Improved |
| Net income (loss) attributable to Altice USA stockholders | $274.1 | $(0.9) | Improved |
| Operating cash flow | $749.6 | $593.6 | +26.3% |
| Cash capital expenditures | $212.8 | $299.1 | −28.9% |
| Free cash flow (non-GAAP) | $536.8 | $294.5 | +82.3% |
Revenue mix: Broadband revenue rose 10% to $970.6 million; video fell 4% to $905.8 million; telephony fell 14% to $107.0 million. Business services and wholesale revenue increased 1% to $367.2 million. Mobile revenue was $19.2 million, up 5%; mobile lines increased to approximately 174,000 from 110,000. Residential broadband customers increased to 4.371 million from 4.237 million a year earlier, while video customers declined to 2.907 million from 3.138 million. Total customer relationships were approximately 5.023 million, nearly unchanged year over year.
Margins and earnings quality: Operating income benefited in part from depreciation and amortization falling 21% to $434.9 million, primarily because certain assets became fully depreciated or amortized and certain customer-relationship amortization had been accelerated in 2020. Net income also reflects volatile investment and derivative remeasurement items: Q1 2021 included a $73.5 million investment gain, a $53.6 million derivative loss and a $75.7 million interest-rate-swap gain. The prior-year quarter included large offsetting investment, derivative and swap movements. Adjusted EBITDA excludes these items and is a non-GAAP measure.
Balance sheet, debt and liquidity
- At March 31, 2021, cash and cash equivalents were $220.6 million; total assets were $33.17 billion and total liabilities were $34.55 billion. Stockholders’ deficiency was $1.39 billion.
- Total debt carrying value was approximately $26.69 billion, including $1.26 billion classified as current and $25.43 billion long term. Debt maturities, excluding finance leases, included approximately $1.17 billion in 2021 and $734.7 million in 2022, with the largest listed amount, $18.74 billion, due thereafter.
- The CSC Holdings revolving facility had $1.76 billion undrawn and available, subject to covenant limitations; $137.9 million was reserved for letters of credit. The company reported compliance with applicable financial covenants.
- Management stated that cash, operating cash flows and revolving-credit availability were expected to fund the current operating plan, planned capital expenditures and debt service for the next 12 months. It also cautioned that longer-term funding may depend on capital-market access and refinancing.
- The CSC Holdings debt silo has a stated year-end target leverage ratio of 4.5x–5.0x, calculated using net debt and a specified adjusted-EBITDA measure. No other explicit full-year earnings or revenue guidance is provided in the supplied filing text.
Material changes and notable items
- Operating cash flow increased to $749.6 million, while cash capital expenditures declined to $212.8 million. Management attributed higher free cash flow primarily to stronger operating cash flow and lower capital spending.
- Capital spending on an accrual basis was $311.5 million, including $212.8 million of cash purchases. The company said its FTTH network build was underway and is intended to support speeds exceeding 10 Gbps.
- Altice USA repurchased 15.18 million Class A shares for approximately $522.7 million during the quarter; cash-flow financing outflows included $503.6 million of share repurchases. Approximately $1.47 billion remained authorized. No cash dividend was declared.
- CSC Holdings distributed $501.0 million in cash to its parent during the quarter.
- In April 2021, after quarter-end, the company completed its acquisition of Morris Broadband cable assets in North Carolina for $310 million, subject to closing adjustments, funded with CSC Holdings revolver borrowings.
- Programming and other direct costs decreased 1% to $851.9 million, but management expects programming rates to continue increasing. Winter Storm Uri contributed to higher utility costs; the filing also cites increased repairs, marketing and legal costs.
Outlook, risks and contingencies
- Management could not reasonably estimate the ultimate business impact of COVID-19. Risks cited include customer nonpayment or cancellations, lower advertising, vendor disruption and delayed capital investment. New York legislation expected to be enacted could require service to continue for certain non-paying customers and deferred payment plans; New Jersey measures also affected service and collections.
- Competition, declining video and telephony subscriptions, rising programming costs, execution of the FTTH build, substantial indebtedness, refinancing needs, interest-rate changes and capital-market access are material risks. Management cautioned that actual results may differ from forward-looking statements.
- Commitments and contingencies not reflected on the balance sheet were approximately $6.31 billion at March 31, 2021, down from approximately $6.78 billion at year-end, mainly due to programming payments, partly offset by renewed multi-year programming agreements.
- Stockholder litigation relating to the IPO was subject to a February 2021 memorandum of understanding to settle, still requiring final documentation and court approval. A separate derivative suit alleges improper equity awards to Patrick Drahi. The company intends to defend these matters.
- Patent-infringement lawsuits brought by Sprint concern VoIP and video-on-demand services. Management said outcomes cannot be predicted; resolution could be material to results or cash flows in a single period. Other patent claims and legal proceedings are also pending.
- The company uses Comcast shares and related prepaid-forward/equity-derivative contracts for monetization and risk management. At quarter-end, Comcast securities were valued at $2.32 billion and collateralized indebtedness was $1.68 billion; the equity-collar component was a $301.4 million net liability. The filing reported no early-termination shortfall.
Important facts for investors to verify
- Confirm the distinction between GAAP results and non-GAAP Adjusted EBITDA and free cash flow, and assess how recurring operating performance compares with reported net income amid large fair-value movements.
- Track broadband customer growth and pricing against continued video and telephony subscriber declines, including the effect on customer relationships, penetration and ARPU.
- Review debt maturities, covenant headroom, revolver availability and refinancing assumptions, particularly given the company’s high debt balance and stated reliance on future market access.
- Assess whether lower Q1 capital expenditures are sustainable while the FTTH build and other network investment plans proceed.
- Monitor COVID-19 collection and service requirements, programming-cost commitments, the legal matters and the financing and integration of the Morris Broadband acquisition.