Altice USA, Inc. — Q1 2018 Form 10-Q
Entity note: The supplied filing is for Altice USA, Inc., not a registrant named Optimum Communications, Inc. The company operates the Optimum and Suddenlink brands. Reporting period: three months ended March 31, 2018; filed May 14, 2018. Amounts below are in U.S. dollars.
Business context and reporting period
Altice USA provides broadband, pay-TV, telephony, business communications, content and advertising services through Cablevision, serving the New York metropolitan area, and Cequel, serving principally south-central U.S. markets. At quarter-end it reported approximately 4.9 million customer relationships and 8.6 million homes passed.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $2.330 billion | $2.302 billion |
| Operating income | $313.0 million | $250.1 million |
| Operating margin | 13.4% | 10.9% |
| Adjusted EBITDA (non-GAAP) | $981.0 million | $943.6 million |
| Adjusted EBITDA margin | 42.1% | 41.0% |
| Net loss attributable to Altice USA stockholders | $129.0 million | $76.4 million |
| Cash provided by operating activities | $431.0 million | $244.1 million |
| Capital expenditures, cash basis | $257.6 million | $257.4 million |
Operating cash flow less cash capital expenditures was approximately $173.3 million, versus negative $13.3 million a year earlier. Cash and cash equivalents were $1.428 billion at March 31, 2018, compared with $329.8 million at December 31, 2017. Total debt, including collateralized indebtedness, was approximately $22.974 billion; reported total liabilities were $29.648 billion. The company reported $2.184 billion undrawn on the Cablevision revolver and $336.5 million undrawn on the Cequel revolver, subject to covenant limitations. It was in compliance with its financial covenants.
Material changes versus the prior comparable period
- Revenue rose 1.2%. Broadband revenue increased 12.1% to $701.6 million, while pay-TV revenue declined 4.6% to $1.034 billion and telephony revenue declined 8.2% to $166.0 million. Business services and wholesale increased 4.3% to $333.1 million.
- Adjusted EBITDA increased 4.0%; Cablevision grew while Cequel declined. Programming and other direct costs rose 3.8%, including higher programming costs; other operating expenses fell 4.1%.
- Net loss widened despite higher operating income. Results included a $248.6 million net loss on investments and affiliate interests and a $168.4 million gain on derivatives, alongside a $31.9 million interest-rate-swap loss. These largely reflect fair-value movements associated with Comcast shares and related derivatives.
- Operating cash flow increased by $186.9 million year over year. Financing activities provided $958.5 million, principally reflecting new borrowing and note issuance, partly offset by debt repayments and redemptions.
Outlook, management commentary, risks and unusual items
- Management gave no quantified full-year revenue or earnings guidance in the supplied text. It expects programming rates to increase by high single digits and anticipates additional restructuring costs.
- The company is pursuing a five-year fiber-to-the-home buildout, targeting speeds above 10 Gbps across the Optimum footprint and part of Suddenlink’s footprint. It cautioned that costs, timing and expected benefits may differ from plans.
- Altice N.V. planned to distribute substantially all of its Altice USA ownership, subject to conditions including shareholder and regulatory approvals. A proposed one-time $1.5 billion pre-distribution dividend was expected to be financed through available cash and new or revolving borrowings. A $2.0 billion share repurchase program was authorized to take effect after separation.
- January financing included a $1.5 billion incremental term loan and $1.0 billion of 5.375% senior notes due 2028. In April, Cequel issued $1.05 billion of 7.5% notes due 2028 to redeem $1.05 billion of 6.375% notes due 2020.
- Competition, particularly in pay TV, programming-cost inflation, substantial leverage, refinancing and capital-market access, execution of the fiber buildout, and customer demand are key risks. Management said it expects cash, operating cash flows and revolver availability to support the next 12 months, but noted longer-term funding depends on continued capital-market access.
- Commitments and contingencies not reflected on the balance sheet were approximately $8.425 billion, primarily programming commitments. A proposed settlement in a customer class action related to a 2010 Fox programming interruption had an estimated $6 million liability at year-end 2017; the final amount could be higher. The New York Attorney General’s investigation into advertised internet speeds remained unresolved; management did not expect a material adverse effect.
- ASC 606 was adopted retrospectively and did not materially affect financial position or results. ATS was acquired from entities under common control for nominal consideration; its results and balances were combined for applicable periods.
Important facts for investors to verify
- Confirm the registrant and ticker: this filing identifies Altice USA, Inc. (ATUS), despite the request naming Optimum Communications, Inc.
- Review debt maturities, restricted-group structures, interest costs and covenant headroom; reported debt is substantial, and management expects ongoing refinancing or capital-market access to meet longer-term obligations.
- Assess the funding and final terms of the proposed $1.5 billion pre-distribution dividend and the post-separation $2.0 billion buyback, including their effect on leverage and liquidity.
- Track broadband growth against continued pay-TV and telephony customer declines, programming cost inflation, and execution and spending on the FTTH plan.
- Separate recurring operating trends from volatile Comcast investment and derivative fair-value movements when evaluating the quarterly net loss.
- Monitor the class-action settlement, regulatory discussions, and the company’s $8.425 billion of commitments and contingencies.