Altice USA, Inc. (Optimum and Suddenlink) — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. The filing is by Altice USA, Inc., whose Optimum brand serves the New York metropolitan area. Amounts below are in U.S. dollars; financial figures are rounded to millions unless stated otherwise.
Business context and key results
Altice USA provides residential and business broadband, video, telephony, mobile, news and advertising services. It reported approximately 5.0 million customer relationships and 8.8 million homes passed across 21 states. The company reports one operating segment.
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $2,450.3m | $2,396.6m | +2.2% |
| Operating income | $448.6m | $442.5m | +1.4% |
| Operating margin | 18.3% | 18.5% | Down 0.2 pts |
| Adjusted EBITDA (non-GAAP) | $1,031.4m | $1,032.9m | Essentially flat |
| Net loss attributable to Altice USA stockholders | $0.9m | $25.0m | Loss narrowed |
| Cash from operating activities | $593.6m | $504.0m | +17.8% |
| Cash capital expenditures | $299.1m | $340.4m | Down $41.3m |
| Free cash flow (non-GAAP company measure) | $294.5m | $163.6m | Up $130.9m |
Adjusted EBITDA margin was approximately 42.1%, versus 43.1% a year earlier. Altice USA reported a $455.5m loss on investments and a $439.9m gain on derivative contracts, primarily reflecting offsetting fair-value movements related to Comcast shares and associated equity derivatives. These items, along with interest-rate swap effects, materially affected GAAP earnings.
Revenue mix and operating trends
- Broadband revenue rose 14% to $885.5m; management attributed growth to rate and service-tier changes and more broadband customers.
- Video revenue fell 7% to $947.1m, and telephony revenue fell 19% to $125.0m, reflecting customer losses and lower average revenue per customer.
- Business services and wholesale revenue increased 4% to $364.5m; news and advertising rose 11% to $105.5m. Mobile revenue was $18.4m; the service had approximately 110,000 lines at quarter-end.
- Residential broadband customers increased to 4.24m from 4.15m at March 31, 2019, while video customers declined to 3.14m from 3.28m and telephony customers to 2.36m from 2.51m. Reported customer metrics include adjustments for COVID-19-related service pledges and free student broadband offers.
- Programming and other direct costs rose 6% to $864.5m, mainly due to programming rate increases and mobile-related costs. Management expects programming rates to continue increasing.
Liquidity, debt and capital allocation
- Altice USA had $244.5m of cash and cash equivalents at March 31, 2020, down from $701.9m at year-end. Current assets were $927.6m versus current liabilities of $1,881.6m.
- Debt carrying value was $24.45bn, including $1.59bn of collateralized indebtedness related to Comcast-share monetizations. Long-term debt, net of current maturities, was $24.27bn. The company disclosed $2.30bn of undrawn revolving credit availability, subject to covenant limitations.
- Debt maturities, excluding finance leases, include $129.0m in 2020, $1.08bn in 2021 and $2.93bn in 2023. Management stated that cash, operating cash flows and revolver availability should fund the operating plan, planned capital expenditures and debt service for the next 12 months; it also warned that longer-term funding may depend on capital-market access.
- Operating cash flow improved, while lower cash capital spending contributed to higher free cash flow. Financing cash outflow was $752.8m, primarily reflecting $726.0m of cash share repurchases. The company repurchased 31.2m shares for approximately $750.0m during the quarter and had about $4.06bn remaining under its $5bn incremental repurchase authorization.
- Management targets a year-end net leverage ratio of 4.5x–5.0x; the filing does not provide a current-quarter ratio in the provided text. The company reported compliance with its debt covenants at March 31, 2020.
Outlook, risks and unusual items
Management said Q1 results had not been significantly affected by COVID-19, but could not reasonably estimate the pandemic’s eventual impact. It identified possible customer cancellations or nonpayment, lower advertising revenue, operational and supplier disruption, and delays to capital investment. It also cited government measures affecting service, collections, pricing or rebates. The filing provides no specific full-year revenue or earnings guidance.
The company is investing in a fiber-to-the-home network and mobile services, and disclosed a pending agreement to acquire certain New Jersey cable assets for approximately $150m, subject to regulatory approval. It expects further restructuring charges as it continues organizational changes. The quarter included approximately $7.3m of restructuring and other expense.
Material risks include intense broadband and video competition, continued video and telephony customer losses, rising programming costs, substantial debt and refinancing needs, interest-rate and market risks, and uncertainty from COVID-19. The filing also describes IPO-related securities litigation and Sprint patent lawsuits; management said it would defend the claims and did not expect the IPO matter to materially harm financial position, while noting the Sprint matters could be material to results or cash flow in an individual period. No loss range is provided.
Important facts for investors to verify
- Whether COVID-19 affected collections, customer churn, advertising, service obligations or capital spending after March 31, 2020, and how management’s risk assessment evolved.
- Whether broadband growth and pricing can offset ongoing video and telephony subscriber and revenue declines, while absorbing programming-cost increases.
- Cash availability and revolver access under applicable covenants, upcoming maturities and the company’s ability to refinance or repay obligations.
- The sustainability of reported free cash flow, including the effects of working-capital movements, accrued capital spending and the large share repurchase program.
- Developments in litigation, the proposed New Jersey asset acquisition, and potential restructuring charges or other contingencies.