Business context and reporting period
Altice USA, Inc. (NYSE: ATUS) filed this unaudited Form 10-Q for the quarter ended September 30, 2020. The filing identifies Optimum as one of Altice USA’s consumer brands, serving the New York metropolitan area; the company also operates Suddenlink and business-service brands. Altice USA reports one operating segment and serves approximately 5.0 million residential and business customer relationships across 21 states.
Unless noted otherwise, financial amounts below are in millions of dollars. The filing includes supplemental CSC Holdings statements; the primary figures summarized here are Altice USA consolidated results.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $2,434 | $2,439 | $7,359 | $7,286 |
| Operating income | $549 | $472 | $1,507 | $1,397 |
| Operating margin | 22.6% | 19.3% | 20.5% | 19.2% |
| Adjusted EBITDA (non-GAAP) | $1,127 | $1,068 | $3,264 | $3,180 |
| Net income (loss) attributable to Altice USA stockholders | $(5) | $77 | $106 | $139 |
| Diluted earnings (loss) per share | $(0.01) | $0.12 | $0.18 | $0.21 |
| Operating cash flow | Not stated in the presented comparative table | Not stated in the presented comparative table | $2,189 | $1,834 |
| Free cash flow (non-GAAP) | $458 | $166 | $1,459 | $801 |
| Capital expenditures, cash basis | $202 | $375 | $729 | $1,033 |
At September 30, 2020, total assets were $33.9 billion and total liabilities were $33.1 billion. Debt was $25.7 billion carrying value, including $226 million current and $25.5 billion long-term. Cash and cash equivalents were $119 million; restricted cash was $865 million, principally proceeds held in escrow for the Lightpath transaction. The company also reported $2.14 billion undrawn and available under its revolving credit facility, subject to covenant limitations. Management stated that cash, operating cash flow and revolver availability should fund operations, planned capital expenditures and debt service for the next 12 months.
Material changes versus prior comparable periods
- Q3 revenue was nearly flat year over year, while nine-month revenue increased 1%. Broadband revenue rose 16% in Q3 and 15% year to date; video revenue fell 13% and 9%, respectively, and telephony revenue declined 22% and 21%.
- Residential broadband customers increased to 4.36 million from 4.18 million a year earlier, while video customers fell to 3.04 million from 3.22 million and telephony customers to 2.28 million from 2.45 million. Reported residential ARPU was $138.16 versus $143.63 a year earlier; Q3 2020 ARPU included an anticipated $5.51 reduction related to sports-network credits.
- Operating income and Adjusted EBITDA improved despite flat Q3 revenue. Nine-month operating cash flow increased, while lower capital spending contributed to higher free cash flow.
- Q3 net loss replaced prior-year profit. Results included a $250 million debt-extinguishment loss, a $262 million derivative-contract loss and a $314 million investment gain; these significant non-operating items made reported earnings volatile.
- Debt increased from $24.4 billion carrying value at December 31, 2019 to $25.7 billion at September 30, 2020. The company refinanced higher-coupon notes, issuing new notes at lower rates and extending maturities, while recognizing $250 million of extinguishment and financing-cost losses.
Outlook, management commentary, risks and unusual items
- No specific revenue, earnings or cash-flow guidance is provided. Management targets a year-end leverage ratio of 4.5x–5.0x for the CSC Holdings debt silo and says future refinancing, free cash flow and revolver availability may be used to extend or reduce debt.
- The company expected the sale of 49.99% of its Lightpath fiber enterprise business to close in Q4 2020, subject to conditions including regulatory approval. The stated implied enterprise value was $3.2 billion and expected gross proceeds from the sale and related financing were approximately $2.3 billion. Altice USA planned to retain 50.01% and control, and therefore continue consolidating Lightpath. The proceeds could fund debt repayment, share repurchases or investments.
- COVID-19 effects remained uncertain. Management cited possible customer nonpayment or cancellations, lower advertising, vendor and service disruption, and delays to capital investment. The filing notes that customer counts included some accounts protected from disconnection under pandemic-related programs.
- Other material risks include intense competition, rising programming costs, substantial indebtedness and refinancing needs, execution risks for the fiber-to-the-home build and new services, regulatory requirements, cyber and network disruption, and litigation. Management reported covenant compliance at quarter-end.
- Q3 revenue included estimated customer credits of approximately $76.7 million related to sports programming shortfalls, with corresponding expected programming credits; management said these credits did not affect Adjusted EBITDA. Restructuring and other expense was $40 million in Q3, including lease-asset impairments, employee-related costs and transaction costs.
- Legal matters include securities and derivative stockholder lawsuits and Sprint patent-infringement claims. Management does not expect the cited matters to materially affect financial position or ability to meet obligations, but states the Sprint matter could materially affect results or cash flows in a single period.
Important facts for investors to verify
- Confirm the expected timing, regulatory status, proceeds and final terms of the Lightpath transaction, including the debt and cash held in escrow.
- Assess whether broadband growth can offset continuing video and telephony customer and revenue declines, and how customer credits and pandemic-related non-disconnection programs affect reported metrics and collections.
- Review debt maturities, interest costs, covenant headroom and the availability of the revolving facility; distinguish restricted cash from funds available for general use.
- Reconcile reported earnings with non-GAAP Adjusted EBITDA and free cash flow, including the effects of investment and derivative remeasurement, debt-refinancing charges, restructuring and share-based compensation.
- Monitor capital spending and execution of the fiber-to-the-home plan, as well as the company’s substantial share repurchases and distributions to its parent relative to debt reduction and investment needs.
- Track COVID-19 impacts, programming-cost changes, litigation developments and the company’s ability to refinance obligations under future market conditions.