Business context and reporting period
The supplied 10-Q is for Altice USA, Inc., not a registrant named Optimum Communications, Inc. It covers the quarter and six months ended June 30, 2018. Altice USA provides broadband, pay-TV, telephony, business connectivity, content and advertising services through Cablevision and Cequel; it reported about 4.9 million customer relationships and 8.7 million homes passed.
On June 8, Altice N.V. distributed substantially all of its ownership in Altice USA to its shareholders, ending its majority ownership. The filing’s 2017 comparisons reflect retrospective accounting adjustments and the addition of ATS, a business under common control.
Financial results and key metrics
Amounts below are in millions of dollars unless stated otherwise.
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $2,364.2 | $2,322.4 | $4,693.9 | $4,624.6 |
| Operating income | $335.1 | $253.3 | $648.1 | $503.4 |
| Operating margin | 14.2% | 10.9% | 13.8% | 10.9% |
| Adjusted EBITDA (non-GAAP) | $1,005.5 | $990.5 | $1,986.5 | $1,934.1 |
| Net loss | $(98.0) | $(479.9) | $(227.0) | $(556.1) |
| Net loss per share | $(0.13) | $(0.73) | $(0.31) | $(0.85) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $1,159.2 | $811.1 |
| Capital expenditures, cash basis | $240.7 | $206.2 | $498.3 | $463.6 |
Revenue increased 1.8% in Q2 and 1.5% for the first half. Broadband growth was partly offset by declines in pay TV and telephony. Adjusted EBITDA grew 1.5% in Q2 and 2.7% year to date; Q2 Adjusted EBITDA margin was approximately 42.5% versus 42.7% a year earlier. First-half operating cash flow less cash capital expenditures was approximately $660.9 million, versus $347.5 million in 2017; this is a simple cash-flow measure, not a company-reported free-cash-flow metric.
At June 30, cash and cash equivalents were $381.1 million; total debt, including collateralized indebtedness, was approximately $23.0 billion, implying roughly $22.6 billion of debt net of cash. Revolving credit facilities had about $2.5 billion undrawn and available, subject to covenant limitations. Total assets were $33.9 billion and total liabilities $29.9 billion. The company reported covenant compliance. The current ratio was approximately 0.32, based on current assets of $958.2 million and current liabilities of $2,956.9 million.
Material changes versus the prior comparable period
- Operating income rose 32% in Q2 and 29% for the first half, while revenue growth was modest. Lower depreciation and amortization and reduced restructuring costs contributed to the improvement.
- Broadband revenue rose 11% in Q2, supported by rate and service-tier changes and customer growth. Pay-TV revenue fell 3% and telephony revenue fell 8%; customer counts also showed ongoing pay-TV losses.
- Programming and other direct costs rose 5% in Q2 and 4% for the first half. Management attributed increases in part to programming rates, new channel launches and advertising content costs.
- First-half net loss improved, but comparisons were affected by substantial non-operating and unusual items. In 2017, debt extinguishment included a $513.7 million premium on affiliate notes converted at the IPO; in 2018, gains and losses on investments and derivatives materially affected results.
- Debt financing and refinancing included $1.0 billion of 5.375% notes due 2028 and a $1.5 billion incremental term loan. The company issued $1.05 billion of 7.5% notes due 2028 to redeem $1.05 billion of 6.375% notes due 2020. It paid a $1.5 billion dividend in June and authorized a $2.0 billion share repurchase program.
Outlook, management commentary, risks and contingencies
- No quantified full-year revenue, earnings or cash-flow guidance is provided. Management expects programming costs to increase at a high-single-digit rate in 2018 and anticipates further restructuring expense.
- Management targets long-term net leverage of 4.5x–5.0x and said cash, operating cash flow and revolver availability should support operations, planned capital expenditures and debt service for the next 12 months. It cautioned that longer-term funding depends on continued access to capital and credit markets.
- Altice USA has begun FTTH construction, aiming to deliver speeds above 10 Gbps across the Optimum footprint and part of Suddenlink. Management cautioned that costs, delays and execution challenges could exceed expectations. A 2018 migration of Cequel’s billing system to the Cablevision platform was also planned.
- Key risks include broadband and video competition, continued pay-TV customer losses, rising programming costs, substantial debt and refinancing needs, interest-rate exposure, and execution of network investment plans. Management cited a 4.5x–5.0x leverage target; the filing does not provide a clear actual consolidated net leverage figure here.
- Commitments and contingencies not reflected on the balance sheet were approximately $7.9 billion, primarily programming commitments. A Fox-programming customer class action settlement received final court approval in May 2018; the filing noted the amount ultimately paid could exceed the previously recorded $6 million estimate. The company was discussing resolution of a New York Attorney General investigation into advertised internet speeds and said it did not expect a material adverse effect, while noting the outcome was uncertain.
- In July 2018, the company repaid $500 million of notes due that month using revolving credit borrowings. The filing also describes Comcast-share monetization contracts and derivatives; early termination could create repayment exposure, although no shortfall existed at June 30.
Important facts for investors to verify
- Confirm the issuer identity: the supplied filing is Altice USA, Inc.’s 10-Q, despite the request metadata naming Optimum Communications, Inc.
- Track subscriber trends and revenue quality, especially broadband additions versus pay-TV and telephony declines, and whether broadband growth offsets programming-cost inflation.
- Review debt maturities, refinancing costs, revolver availability and covenant headroom, including the post-quarter $500 million repayment funded with revolver borrowings.
- Assess the cash and leverage effects of the $1.5 billion dividend and the $2.0 billion repurchase authorization; the filing does not establish that the authorized buyback had been completed.
- Monitor FTTH capital spending, execution and the planned billing-system migration, as well as the potential settlement and regulatory outcomes disclosed in the filing.