Altice USA, Inc. (Optimum and Suddenlink) — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless noted. The filing is by Altice USA, Inc., which operates under the Optimum and Suddenlink brands, rather than a registrant named Optimum Communications, Inc. Amounts below are in U.S. dollars.
Business context and operating performance
Altice USA provides broadband, video, telephony, business services, content, and advertising across 21 states. At quarter-end it reported approximately 4.94 million customer relationships and 8.76 million homes passed.
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $2,396.6 million | $2,329.7 million | +2.9% |
| Operating income | $442.5 million | $313.0 million | +41.4% |
| Operating margin | 18.5% | 13.4% | +5.1 percentage points |
| Adjusted EBITDA (non-GAAP) | $1,032.9 million | $981.0 million | +5.3% |
| Adjusted EBITDA margin | 43.1% | 42.1% | +1.0 percentage point |
| Net loss attributable to Altice USA stockholders | $25.0 million | $129.0 million | Loss narrowed |
| Basic and diluted loss per share | $0.04 | $0.17 | Loss per share narrowed |
| Cash from operating activities | $504.0 million | $431.0 million | +$73.0 million |
| Capital expenditures, cash basis | $340.4 million | $257.6 million | +32.1% |
Operating cash flow less cash capital expenditures was approximately $163.6 million, compared with $173.3 million a year earlier; this is a simple calculation, not a company-defined free-cash-flow measure.
Revenue and material changes
- Broadband revenue increased 11% to $775.6 million, reflecting higher revenue per customer and customer growth. Residential broadband customers rose to 4.16 million from 4.07 million a year earlier.
- Business services and wholesale revenue rose 5% to $350.7 million; advertising revenue rose 7% to $93.5 million.
- Video revenue declined 2% to $1,017.3 million as customer losses outweighed rate increases. Video customers fell to 3.30 million from 3.38 million.
- Telephony revenue declined 7% to $154.5 million, reflecting lower customer counts and average revenue per customer.
- Programming and other direct costs increased 3% to $813.0 million, principally due to contractual programming-rate increases. Programming costs alone rose to $682.4 million from $652.4 million.
- Other operating expenses decreased 3% to $564.4 million, partly due to lower share-based compensation, marketing costs, and the absence of Altice Europe management fees incurred in the prior-year period.
- Depreciation and amortization decreased 13% to $561.4 million, primarily because certain assets became fully depreciated or amortized.
Cash, debt, and liquidity
- At March 31, 2019, cash and cash equivalents were $123.0 million, down from $298.8 million at December 31, 2018. Cash, cash equivalents, and restricted cash totaled $123.3 million.
- Reported long-term debt, net of current maturities, was $23.14 billion; current debt was $124.0 million. The debt schedule reports total debt of $23.26 billion including collateralized indebtedness. Cash interest paid during the quarter was $475.1 million.
- The company reported $2.10 billion of undrawn revolving credit availability, subject to covenant limitations; $163.0 million of the facility was reserved for letters of credit. It stated that it was in compliance with its financial covenants.
- Net cash used in financing activities was $339.6 million. Financing included $586.8 million of cash share repurchases, debt repayments and redemptions, and new debt proceeds. Operating cash flow and capital expenditures were both higher than in Q1 2018.
- The company reported total assets of $33.56 billion and total liabilities of $30.36 billion at quarter-end.
Outlook, risks, contingencies, and unusual items
- Management expects programming rates to increase by high single digits in 2019. It also expects further restructuring expenses as it continues organizational changes.
- The company is building a fiber-to-the-home network, intended to enable speeds above 10 Gbps across the Optimum footprint and part of Suddenlink’s footprint. It planned to begin offering full-service mobile voice and data in summer 2019. Management cautioned that these initiatives could involve higher-than-expected capital spending, delays, or failure to achieve anticipated benefits.
- Management said cash, operating cash flow, and revolver availability should support the operating plan, planned capital expenditures, and debt service for the next 12 months. It also cautioned that longer-term funding depends on operating performance and capital-market access; if funding is unavailable, possible responses include deferring capital expenditures, selling assets, seeking investment, or reducing or stopping repurchases.
- Q1 included a $157.9 million loss on debt extinguishment and financing-cost write-offs, primarily related to redemption of high-coupon notes. The company also recorded a $254.7 million gain on investments and a $177.0 million derivative loss, largely associated with Comcast stock and related contracts; these fair-value movements substantially offset one another.
- In January and February 2019, the company issued additional 6.5% senior guaranteed notes due 2029 and refinanced credit facilities and notes. These transactions extended certain maturities but generated the reported extinguishment loss.
- The company had approximately $8.90 billion in commitments and contingencies not reflected on the balance sheet, including programming commitments. This amount had declined from approximately $9.46 billion at December 31, 2018.
- Legal matters include class-action suits concerning the company’s IPO disclosures and Sprint patent-infringement claims concerning VoIP and video-on-demand services. Management said outcomes cannot be predicted; it did not expect the matters to materially affect financial position, but noted the Sprint litigation could materially affect results or cash flows in a single period.
- After quarter-end, Altice USA agreed to acquire digital news company Cheddar for $200 million, subject to closing adjustments and regulatory approval.
- ASC 842 lease accounting was adopted January 1, 2019, adding operating lease right-of-use assets and liabilities to the balance sheet; management reported no material effect on the income statement.
Most important facts for investors to verify
- Whether broadband growth and rate increases can continue to offset video and telephony customer declines.
- Whether programming-cost inflation and planned network and mobile investment pressure margins, capital needs, and cash generation.
- Debt maturities, refinancing terms, interest costs, covenant headroom, and the availability of the revolver under stressed market conditions.
- The cash and leverage effects of continued share repurchases, alongside the planned Cheddar acquisition and capital expenditures.
- Progress on FTTH deployment and mobile launch, and any updates on the IPO-related and Sprint litigation.