Business context and reporting period
Altice USA, Inc. (NYSE: ATUS) filed this Form 10-K for the fiscal year ended December 31, 2019; it is an annual report, not a standalone fourth-quarter filing. The company provides broadband, video, telephony, business connectivity, news and advertising services, primarily through Optimum and Suddenlink. Altice Mobile launched in September 2019. At year-end, the network passed 8.8 million homes and served approximately 4.9 million fixed-service customer relationships. The filing identifies Altice USA as the registrant; “Optimum Communications, Inc.” is not the registrant name shown in the filing.
Financial and operating results
Amounts below are rounded to millions of dollars except per-share and customer metrics.
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $9,761 million | $9,567 million | Up 2% |
| Operating income | $1,824 million | $1,682 million | Up 8% |
| Net income attributable to Altice USA stockholders | $139 million | $19 million | Up $120 million |
| Adjusted EBITDA (non-GAAP) | $4,265 million | $4,163 million | Up 2%; 43.7% and 43.5% of revenue, respectively |
| Cash from operating activities | $2,554 million | $2,508 million | Up 2% |
| Capital expenditures, cash basis | $1,355 million | $1,154 million | Up 17% |
| Free cash flow (operating cash flow less cash capex) | $1,199 million | $1,355 million | Down 12% |
| Total debt carrying value | $24,420 million | $22,813 million | Up $1,608 million |
Operating margin was approximately 18.7% in 2019, compared with 17.6% in 2018; net margin attributable to stockholders was approximately 1.4% and 0.2%, respectively. Interest expense, net, was $1,531 million, modestly below 2018. Cash and cash equivalents were $702 million at year-end, and $2,297 million of the revolving credit facility was undrawn and available, subject to covenant limitations. Current liabilities exceeded current assets.
Revenue mix and trends: residential broadband revenue rose 12% to $3,223 million; video fell 4% to $3,998 million; telephony fell 8% to $599 million; business services and wholesale rose 5% to $1,429 million; and news and advertising declined 2% to $476 million. Mobile revenue was $21 million, with approximately 69,000 mobile lines at year-end. Residential broadband customers increased by 71,900, while video customers declined by 106,900 and telephony customers by 131,300. Residential triple-product penetration fell to 46.8% from 49.8%; ARPU was $142.65 versus $143.22.
Material changes versus the prior comparable period
- Revenue and Adjusted EBITDA increased, led by broadband pricing, service-level changes and customer additions, as well as growth in business services.
- Video and telephony continued to lose customers and revenue, reflecting competition and changing consumer preferences. Higher broadband revenue did not prevent total residential fixed-service penetration from declining.
- Programming and other direct costs rose 4% to $3,301 million; programming costs alone increased to $2,723 million. Management cited contractual rate increases, partly offset by fewer video customers.
- Cash capital expenditures increased by $202 million, principally as network infrastructure spending rose to $620 million. Operating free cash flow declined to $2,910 million from $3,009 million.
- Year-end debt increased from $22,813 million to $24,420 million. The company refinanced or redeemed multiple notes and term loans, and issued new notes, including 5.75% notes due 2030 and 6.50% guaranteed notes due 2029.
- Altice USA repurchased 72.7 million Class A shares for approximately $1,687 million in 2019. It paid no shareholder dividend in 2019; a new $5 billion repurchase authorization became effective after the prior program ended.
Outlook, commentary, risks and unusual items
- Outlook: The filing gives no quantified revenue, earnings or cash-flow guidance. Management expects programming costs to continue rising and capital expenditures to remain significant while it builds FTTH and upgrades its HFC network. Management stated that cash, operating cash flows and revolver availability should support the operating plan, planned capex and debt service for the next 12 months, while warning that longer-term funding may require refinancing or capital-market access.
- Leverage and funding: Management targets year-end net leverage of 4.5x–5.0x, calculated using net debt and the last two quarters’ Adjusted EBITDA annualized. The company reported approximately $24.4 billion of debt and substantial contractual commitments, including $8.2 billion of purchase obligations, primarily programming and equipment commitments. Much debt has variable-rate exposure; covenant restrictions and refinancing conditions may constrain flexibility.
- Network investment and competition: FTTH deployment, Altice One and mobile adoption involve execution, cost and customer-uptake risks. Competition from fiber providers, wireless broadband and streaming services is a continuing risk, particularly for video. Mobile also depends on wholesale network access; the Sprint–T-Mobile merger could affect the price and availability of that access despite regulatory conditions intended to benefit Altice USA.
- Unusual earnings items: 2019 net income included a $473 million gain on investments and affiliate interests, primarily related to Comcast stock, partly offset by a $283 million loss on related derivatives. Debt extinguishments and financing-cost write-offs were $244 million. By comparison, 2017 net income included a $2.3 billion non-cash deferred tax benefit from federal tax reform, so reported net income across these years is not directly comparable.
- Legal and cyber matters: The company disclosed securities litigation relating to its 2017 IPO and Sprint patent litigation concerning VoIP and video-on-demand. Management did not expect the ultimate resolution to materially harm financial position, but noted the Sprint matter could materially affect results or cash flows in a period. A November 2019 phishing attack exposed information in employee email accounts, including personal information of some employees and customers; a putative class action was filed in February 2020.
- Other items: Cheddar was acquired in June 2019 for approximately $199 million in cash and stock. The company began a further restructuring initiative in 2019 and said additional restructuring costs may occur. It also adopted lease accounting standard ASC 842 in 2019, recording operating lease right-of-use assets and liabilities. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Whether broadband growth and FTTH investment can offset continuing video and telephony subscriber losses, and whether the decline in triple-product penetration persists.
- Actual leverage, maturity and refinancing profile, floating-rate exposure, covenant headroom and the availability of revolving credit under stressed conditions.
- Returns on the increased network capital spending and the economics of Altice Mobile, including subscriber growth, wholesale access terms and integration of the Sprint–T-Mobile merger conditions.
- Whether programming-cost inflation can be passed through to customers without increasing churn, and the effect of upcoming programming renewals.
- The sustainability of free cash flow after capital expenditures, debt service and large share repurchases, and the company’s allocation of funds between repurchases, investment and debt reduction.
- Developments in the disclosed securities, patent and cybersecurity matters, as well as franchise renewals in Hempstead and New York City.