Optimum Communications / Altice USA, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; unaudited. The filing registrant is Altice USA, Inc., which operates residential services under the Optimum and Suddenlink brands. It reports one operating segment and serves more than five million residential and business customers.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $2.516B | $2.475B | $4.995B | $4.925B |
| Operating income | $626.8M | $508.7M | $1.235B | $957.3M |
| Net income attributable to Altice USA shareholders | $197.7M | $111.3M | $471.8M | $110.4M |
| Adjusted EBITDA (non-GAAP) | $1.105B | $1.106B | $2.179B | $2.137B |
| Cash from operations | $729.5M | $936.0M | $1.479B | $1.530B |
| Cash capital expenditures | $323.1M | $228.7M | $535.9M | $527.8M |
| Free cash flow (non-GAAP as defined by company) | $406.4M | $707.3M | $943.3M | $1.002B |
Margins: Q2 operating margin was approximately 24.9% versus 20.6%; Adjusted EBITDA margin was approximately 43.9% versus 44.7%. First-half operating margin was approximately 24.7% versus 19.4%, while Adjusted EBITDA margin was approximately 43.6% versus 43.4%.
Balance sheet at June 30: Cash and cash equivalents were $221.3M, down from $278.4M at December 31, 2020. Total debt carrying value was approximately $26.99B, including $1.30B current and $25.69B long-term debt, versus approximately $26.72B at year-end. Total liabilities were $34.88B and stockholders’ deficiency was $1.35B. The company reported $2.01B undrawn and available under the CSC Holdings revolving facility, subject to covenant limitations.
Changes, drivers and capital allocation
- Q2 revenue increased 1.7%; first-half revenue increased 1.4%. Broadband revenue rose 8% in Q2 and 9% year to date, supported by rate and service-level changes and customer growth. Video revenue fell 6% in Q2 and 5% year to date, reflecting subscriber losses and lower on-demand and pay-per-view revenue. Telephony revenue fell 12% in Q2 and 13% year to date.
- News and advertising revenue increased $35.1M in Q2, mainly recovering from weaker pandemic-period advertising in 2020. Business services and wholesale revenue rose 2% in Q2. Mobile revenue rose 4%; the company reported approximately 180,000 mobile lines, versus 144,000 a year earlier.
- Q2 Adjusted EBITDA was nearly flat as revenue growth was offset by higher operating costs, including marketing, repairs and maintenance, legal costs, and winter-storm-related utilities. First-half Adjusted EBITDA increased 2.0%. Programming and other direct costs declined modestly, though management expects programming rates to continue rising.
- First-half operating cash flow declined approximately 3%, and free cash flow declined approximately 6%, reflecting lower operating cash generation and higher cash capex. Q2 cash capex increased to $323.1M from $228.7M.
- Altice USA repurchased 21.0M shares for $725.5M in the first half; approximately $1.27B remained authorized. No cash dividends were declared.
Outlook, financing, risks and unusual items
- No quantified full-year revenue or earnings guidance is provided. Management targets a year-end leverage ratio of 4.5x–5.0x for the CSC Holdings debt silo and says cash, operating flows and revolving-credit availability should support the operating plan, planned capex and debt service for the next 12 months. That assessment depends on operating performance and access to credit markets.
- The FTTH build is underway, intended to support speeds above 10 Gbps; the company cautions that investment costs, timing and expected benefits may differ from plan. The network passed approximately 9.2M homes at June 30.
- In May, CSC Holdings issued $2.0B of notes due 2031 and used proceeds principally to redeem $1.499B of 5.5% notes due 2026, repay revolving borrowings and for general corporate purposes, including share repurchases. The refinancing produced a $51.7M extinguishment loss. The filing lists $1.135B of debt principal maturities in the remainder of 2021, excluding finance leases.
- Acquisitions included Morris Broadband cable assets in North Carolina in April (approximately $312.2M cash) and a Lightpath acquisition in June (approximately $28.4M). First-half acquisition payments totaled $340.6M.
- COVID-19 effects remain uncertain, including customer payment and disconnection trends, advertising demand, vendor availability and possible delays to investment. New York’s temporary service protections ended in June, after which normal disconnect policies resumed; certain customers affected by storms and prior protections remained in reported customer metrics.
- Key risks include intense broadband, video and telephony competition, rising programming costs, substantial leverage and refinancing needs, interest-rate and capital-market exposure, execution of FTTH and mobile plans, and litigation. An IPO-related stockholder class settlement was documented in July 2021 but remained subject to court approval. Sprint patent cases could be material to results or cash flows in a single period; management says it intends to defend them.
- Reported earnings included volatile fair-value movements related to Comcast stock and associated derivatives. In the first half, the company recorded a $198.5M investment gain and a $152.4M derivative loss, as well as a $54.1M gain on interest-rate swaps; these items are not equivalent to recurring operating performance.
Important facts for investors to verify
- Whether broadband customer growth, pricing and mix can offset continued video and telephony subscriber declines, including after temporary customer-protection measures.
- Underlying operating and free-cash-flow trends, separating recurring performance from non-GAAP adjustments, working-capital movements and fair-value gains or losses.
- Debt maturity, covenant and refinancing exposure, including available revolver capacity, the 2021 maturities, leverage target and funding needs for FTTH and other investment.
- Whether programming-cost increases, competitive pressure and higher operating expenses constrain margins, and whether FTTH investment meets its cost, timing and return expectations.
- Outcomes and potential financial effects of the pending settlement approval, Sprint patent litigation and other contingencies; the filing does not provide a clear estimate of possible losses for several claims.