Business context and reporting period
This summary covers the unaudited quarter and nine months ended September 30, 2018. The supplied filing is for Altice USA, Inc., not an entity named Optimum Communications, Inc. Altice USA provides broadband, pay television, telephony, business communications, content and advertising through its Cablevision and Cequel segments. It reported approximately 4.9 million customer relationships and 8.7 million homes passed.
Financial and operating highlights
Amounts below are in millions of dollars unless otherwise noted. Prior-period comparisons are to the corresponding 2017 period.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $2,417.8 | $2,322.5 | $7,111.7 | $6,947.1 |
| Operating income | $505.6 | $120.6 | $1,153.7 | $624.0 |
| Operating margin | 20.9% | 5.2% | 16.2% | 9.0% |
| Adjusted EBITDA (non-GAAP) | $1,070.5 | $1,012.3 | $3,057.0 | $2,946.5 |
| Net income (loss) attributable to Altice USA stockholders | $32.6 | ($192.6) | ($194.3) | ($749.3) |
| Cash from operating activities | Not presented by quarter in this filing | $1,770.3 | $1,282.4 | |
| Capital expenditures, cash basis | $334.5 | $255.3 | $832.8 | $718.9 |
- Q3 revenue rose 4.1%; nine-month revenue rose 2.4%. Broadband and business services, along with advertising, drove growth; pay-TV and telephony revenue declined.
- Adjusted EBITDA increased 5.8% in Q3 and 3.8% for the nine-month period. Adjusted EBITDA margin was approximately 44.3% and 43.0%, respectively; it is a non-GAAP measure.
- Operating income improved substantially, while depreciation and amortization fell to $536.1 million in Q3 from $823.3 million. Management attributed the decline principally to assets becoming fully depreciated or amortized.
- Nine-month operating cash flow less cash capital expenditures was approximately $937.4 million, versus $563.5 million in 2017; this is a simple calculation, not a company-reported free-cash-flow measure.
- At September 30, cash and cash equivalents were $486.2 million. Reported debt, including $1.40 billion of collateralized indebtedness related to Comcast stock monetizations, was approximately $23.08 billion. Revolver availability was approximately $1.93 billion, subject to covenant limitations. The company reported covenant compliance.
- Customer relationships were 4.91 million versus 4.90 million a year earlier. Residential broadband customers increased to 4.10 million from 4.02 million, while pay-TV customers decreased to 3.32 million from 3.43 million. Residential ARPU was $142.96 versus $139.77.
Material changes and notable items
- Revenue mix shifted toward broadband: Q3 broadband revenue increased about 11%, while pay-TV revenue declined about 1% and telephony declined about 6%. Advertising revenue rose about 38%, led by Cablevision digital, linear and data-analytics advertising.
- Programming and other direct costs increased 5% in Q3 and 4% year to date. Management expects programming rates to increase by high single digits and notes that costs are also affected by customer counts and channel launches.
- Nine-month financing included $2.05 billion of senior-note issuance and $2.22 billion of net credit-facility proceeds, alongside debt repayments, a $1.50 billion shareholder dividend and $226.8 million of share repurchases. The $2.0 billion repurchase authorization had approximately $1.76 billion remaining at quarter-end.
- In October, the company completed substantial exchanges of Cequel notes and obtained a new $1.275 billion term loan as part of its planned credit-silo combination. It also reported a $125 million voluntary revolver repayment. The company was assessing whether refinancing-related costs would be written off in Q4.
- Q3 results included a $111.7 million gain on investments and affiliate interests, offset in part by $79.6 million of derivative losses and $19.6 million of interest-rate-swap losses. These fair-value items were volatile; the company said investment and derivative movements related to Comcast stock and associated contracts.
- Q3 income-tax expense included a $49.1 million charge from revaluing deferred tax liabilities following New Jersey tax-law changes. For the nine months, the company recorded a $29.7 million tax expense despite a pretax loss.
Outlook, risks and contingencies
Management stated that cash, operating cash flows and revolver availability should fund its current operating plan, planned capital expenditures and debt service for the next 12 months. It also said longer-term needs are expected to exceed cash generated from operations, leaving the company dependent on continued access to capital and credit markets and refinancing. Management targets long-term net leverage of 4.5x–5.0x and expects to use free cash flow and revolver availability, as well as refinancing, to extend maturities or reduce debt.
The company is building a fiber-to-the-home network intended to enable speeds above 10 Gbps across the Optimum footprint and part of the Suddenlink footprint. Management cautioned that costs could exceed expectations, benefits may not be realized, and implementation could be delayed or disrupted. Other disclosed risks include competition and customer losses, rising programming costs, substantial debt and interest exposure, capital-market access, technology and cybersecurity failures, regulation, and litigation.
Contingencies include a settled Fox-programming customer class action for which the recorded estimate may be exceeded; discussions with the New York Attorney General regarding advertised internet speeds; and patent and other legal matters whose outcomes or potential losses the company could not reasonably estimate. Management did not expect the cited matters to have a material adverse effect, while noting uncertainty.
Important facts for investors to verify
- Confirm the issuer and security being analyzed: this filing identifies Altice USA, Inc. (NYSE: ATUS), not Optimum Communications, Inc.
- Review the debt structure, maturities, covenant restrictions, and October 2018 note exchanges and term-loan refinancing; reported debt includes collateralized stock-monetization obligations.
- Assess whether broadband growth and pricing can offset ongoing pay-TV and telephony subscriber declines and higher programming costs.
- Track FTTH investment, capital-spending levels, and execution against expected network benefits; no specific full-year revenue, earnings or capital-expenditure guidance is provided here.
- Evaluate the effect of share repurchases and the large dividend on liquidity and leverage, alongside management’s stated reliance on future capital-market access.
- Monitor volatile Comcast investment and derivative valuations, tax effects, the potential Q4 debt-refinancing charge, and legal and regulatory outcomes.