Business context and reporting period
The filing is Altice USA, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2020. Altice USA operates Optimum and Suddenlink residential broadband and video services, as well as business services, news, advertising, and Altice Mobile. The filing’s financial results are consolidated company-wide, not Optimum-only.
Financial performance
Dollar amounts below are in millions unless stated otherwise.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $2,475 | $2,451 | $4,925 | $4,848 |
| Operating income | $509 | $483 | $957 | $925 |
| Net income attributable to Altice USA shareholders | $111 | $86 | $110 | $61 |
| Adjusted EBITDA (non-GAAP) | $1,106 | $1,079 | $2,137 | $2,112 |
| Cash flow from operations | $936 | $789 | $1,530 | $1,293 |
| Capital expenditures, cash basis | $229 | $317 | $528 | $657 |
| Free cash flow (non-GAAP) | $707 | $472 | $1,002 | $636 |
Q2 operating margin was approximately 20.6%, compared with 19.7% a year earlier; six-month operating margin was approximately 19.4%, versus 19.1%. Adjusted EBITDA margin was approximately 44.7% in Q2 versus 44.0% in Q2 2019. Adjusted EBITDA, operating free cash flow, and free cash flow are non-GAAP measures.
Revenue and operating trends
- Q2 revenue increased about 1%. Broadband revenue grew 14% to $920 million, reflecting higher average revenue per customer and more broadband customers.
- Video revenue fell 6% to $953 million and telephony revenue fell 22% to $117 million, primarily due to customer declines and lower revenue per customer.
- Business services and wholesale revenue rose 2% to $366 million. News and advertising revenue declined 16% to $97 million, mainly due to lower advertising spending. Mobile revenue was $20 million; the company reported approximately 144,000 mobile lines.
- Programming and other direct costs rose 5% in Q2, including higher programming costs, mobile device costs, and mobile-related call completion and transport costs. Restructuring and other expense increased to $41 million, including $40 million of contractual payments for terminated employees.
Cash, debt, and liquidity
- At June 30, cash and cash equivalents were $1.952 billion. Total debt carrying value was $26.186 billion, including $1.601 billion of collateralized indebtedness; long-term debt was $24.326 billion and current debt was $1.859 billion.
- The revolving credit facility had $2.333 billion undrawn and available, subject to covenant limitations. The company said cash, operating cash flow, and facility availability were expected to fund its operating plan, planned capital spending, and debt service for the next 12 months. It reported compliance with financial covenants at quarter-end.
- Six-month operating cash flow increased to $1.530 billion, while cash capital expenditures declined to $528 million. Financing cash flow included $1.725 billion of senior note issuance and $1.381 billion of share repurchases. Cash rose from $702 million at year-end 2019.
- In June, CSC Holdings issued $1.725 billion of notes due in 2030 at 4.125% and 4.625%. In July, proceeds were used to redeem notes due 2023 and 2025; the company expects a $62 million extinguishment loss.
Material changes, outlook, and risks
- Q2 and six-month net income increased year over year, but results include substantial fair-value movements: Q2 included a $198 million investment gain and a $152 million derivative loss; the six-month period included a $258 million investment loss and a $288 million derivative gain. These largely relate to Comcast shares and associated equity derivatives.
- The company made no specific full-year earnings or revenue guidance in the provided filing. It targets a year-end net leverage ratio of 4.5x to 5.0x and expects to use free cash flow and financing availability to extend maturities or reduce debt.
- Management said COVID-19’s ultimate financial impact could not be reasonably estimated. Potential effects include customer nonpayment or cancellations, weaker advertising, vendor disruption, and delayed capital investment. Customer metrics included accounts protected from disconnection under COVID-related pledges and New Jersey rules; 56,100 customers with past-due balances had requested or received protection at June 30.
- The company continued FTTH construction and identified possible higher-than-expected spending, execution delays, and failure to achieve expected benefits as risks. Programming costs were expected to rise with contractual rate increases.
- In July, the company completed a New Jersey cable-asset acquisition for approximately $150 million. It also agreed to sell 49.99% of Lightpath at an implied enterprise value of $3.2 billion, expecting approximately $2.3 billion in gross proceeds; about $1.1 billion of after-tax net proceeds were expected to repay debt. Closing was expected in Q4 2020, subject to conditions and regulatory approvals; Altice USA planned to retain control.
- Contingencies include IPO-related shareholder litigation, a derivative lawsuit concerning equity awards, and Sprint patent litigation. Management said it did not expect the shareholder matters to materially affect financial position or ability to meet obligations; it noted Sprint litigation could be material to results or cash flow in a particular period.
Important facts for investors to verify
- Whether Lightpath’s proposed transaction closed on expected terms and how proceeds were ultimately allocated to debt repayment.
- Post-quarter debt refinancing, the expected $62 million extinguishment loss, and upcoming maturities, including the current debt classified at June 30.
- Whether customer payment protections, bad-debt trends, advertising conditions, and COVID-19 effects altered revenue, cash flow, or capital plans.
- Underlying operating momentum in broadband versus continuing video and telephony customer losses, and the sustainability of reported margins and non-GAAP cash-flow measures.
- Developments in the disclosed litigation and any material changes in covenant compliance or access to revolving-credit liquidity.