Optimum Communications, Inc. annual report, FY2020

Business context and reporting period

Altice USA, Inc. (NYSE: ATUS) filed this Form 10-K for the fiscal year ended December 31, 2020, with financial comparisons to 2019 and 2018. The filing describes the Optimum and Suddenlink businesses; the supplied filing is for Altice USA, not an entity named Optimum Communications, Inc. Altice USA provides broadband, video, telephony, mobile, business connectivity, news and advertising services across 21 states. Its network passed approximately 9.0 million homes at year-end.

Financial performance and key metrics

Operating margin was approximately 21.4%, versus 18.7% in 2019. Net income included volatile investment and derivative results and substantial debt-extinguishment costs; it is not a direct measure of recurring operating performance. Adjusted EBITDA and free cash flow are non-GAAP measures and should be considered alongside GAAP results.

Revenue mix and customer metrics

Broadband revenue grew 14% to $3.689 billion; video revenue declined 8% to $3.671 billion; telephony revenue fell 22% to $469 million. Business services and wholesale revenue rose 2% to $1.455 billion, while news and advertising revenue rose 9% to $519 million, primarily on higher political revenue and affiliate fees. Mobile revenue was $78 million; the company reported approximately 169,000 mobile lines.

Residential broadband customers increased by 171,900 to 4.359 million, while video customers declined by 218,200 to 2.961 million and telephony customers fell by 184,800 to 2.214 million. Total customer relationships rose 2.2% to 5.025 million, but reported penetration edged down to 55.6% from 55.7%. Residential ARPU decreased to $140.09 from $142.65; 2020 ARPU included an anticipated $1.26 reduction for sports-programming-related customer credits. Customer counts include some accounts retained under COVID-era non-disconnection arrangements and payment plans.

Liquidity, debt and capital allocation

Year-end cash and cash equivalents were $278 million, down from $702 million. The CSC Holdings revolving facility had $1.712 billion undrawn and available, subject to covenant limitations; the company stated that cash, operating cash flow and facility availability should fund its operating plan, planned capital expenditures and debt service for the next 12 months. Total debt included approximately $1.618 billion of collateralized indebtedness related to Comcast share monetizations. Debt obligations including interest were reported at $34.958 billion, with $2.402 billion scheduled for 2021. The company reported compliance with applicable financial covenants at year-end and a target year-end leverage ratio of 4.5x–5.0x for the CSC Holdings debt silo.

Altice USA refinanced higher-coupon notes during 2020, issuing new notes at lower stated rates and recording $250 million of debt-extinguishment losses. It completed a transaction involving the sale of a 49.99% Lightpath interest at a stated $3.2 billion implied enterprise value, retaining 50.01% and control. The transaction generated approximately $2.355 billion of gross proceeds including related financing; net proceeds from the minority-interest sale were approximately $880 million. Proceeds helped fund a $2.327 billion tender offer. Total 2020 share repurchases were approximately $4.817 billion. Year-end stockholders’ equity was negative $1.203 billion, compared with positive equity of $2.279 billion a year earlier.

Material changes, outlook and risks

• Management reported continued broadband growth and ongoing FTTH construction, alongside persistent declines in video and telephony customers. The company said 1 Gbps broadband availability would continue expanding during 2021 and its FTTH build is intended to support speeds above 10 Gbps. No quantified 2021 revenue, earnings or cash-flow guidance is provided.
• COVID-19 affected workforce arrangements and customer collection and disconnection practices. Management said the pandemic’s ultimate financial impact could not then be reasonably estimated; weaker customer payment, lower demand or advertising, and delayed investment were identified as potential impacts.
• Programming costs remain a significant expense and are expected to increase with contractual rate escalators. The 2020 video revenue and programming-cost results included anticipated sports-network credits, offsetting each other for Adjusted EBITDA purposes. Storm-related outages and Louisiana system rebuilding also affected results and capital spending.
• Key risks include intense competition from fiber, wireless and streaming providers; high leverage and refinancing needs; variable interest rates and LIBOR transition; programming renewals and rising content costs; franchise renewals; regulatory and privacy changes; cyber incidents; and execution, cost and timing risks for FTTH and mobile initiatives.
• The filing identifies ongoing securities litigation related to the 2017 IPO, a derivative suit concerning equity awards, and Sprint patent-infringement cases involving VoIP and video-on-demand services. Management said it intended to defend the matters and did not believe their ultimate resolution would materially harm financial position, while noting a Sprint case could be material to results or cash flows in an individual period.
• KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Revenue recognition for residential and SMB customers was identified as a critical audit matter; the auditor reported no separate qualification on that matter.

Most important facts for investors to verify

• Whether broadband additions and higher broadband revenue can offset continued video and telephony losses, including the effect of promotional pricing and customer credits.
• The sustainability and cash conversion of Adjusted EBITDA growth, particularly after capital expenditure requirements and interest costs.
• Debt maturities, refinancing terms, covenant headroom and actual availability under revolving facilities, while distinguishing debt at CSC Holdings and Lightpath from parent-level liquidity.
• The economics and use of Lightpath transaction proceeds, including the associated financing, retained control and cash devoted to the tender offer and other repurchases.
• How much reported customer growth reflects durable paying customers rather than accounts retained under COVID-related policies or payment arrangements.
• Potential cash, earnings or customer consequences of programming disputes, franchise renewals, litigation, storm recovery and regulatory developments.