Altice USA, Inc. (Optimum and Suddenlink) — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. The filing is for Altice USA, Inc., which provides broadband, video, telephony, business and advertising services under the Optimum and Suddenlink brands. Results are consolidated in one operating segment. Dollar amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $2.451 billion | $2.364 billion | $4.848 billion | $4.694 billion |
| Operating income | $482.5 million | $335.1 million | $925.0 million | $648.1 million |
| Operating margin | 19.7% | 14.2% | 19.1% | 13.8% |
| Adjusted EBITDA (non-GAAP) | $1.079 billion | $1.006 billion | $2.112 billion | $1.986 billion |
| Net income (loss) attributable to Altice USA stockholders | $86.4 million | $(97.9) million | $61.4 million | $(226.8) million |
| Diluted earnings (loss) per share | $0.13 | $(0.13) | $0.09 | $(0.31) |
Q2 revenue rose 3.7% year over year; Adjusted EBITDA increased 7.3%. Adjusted EBITDA margin was 44.0% versus 42.5% in Q2 2018 (43.6% versus 42.3% for the half year). Adjusted EBITDA is a non-GAAP measure and should be considered alongside GAAP results.
Revenue mix and operating trends
- Q2 broadband revenue increased 13% to $806.3 million, reflecting customer growth, rate increases and service-level changes. Residential broadband customers were 4.168 million, up from 4.082 million a year earlier.
- Video revenue fell 2% to $1.018 billion, primarily due to fewer video customers; residential video customers declined to 3.277 million from 3.351 million.
- Telephony revenue declined 8% to $150.2 million, with lower revenue per customer and fewer customers. Business services and wholesale revenue rose 6% to $357.8 million; advertising revenue rose 3% to $113.0 million.
- Total customer relationships were 4.942 million, nearly flat year over year. Average residential revenue per customer (ARPU) was $144.27, versus $140.19. Residential triple-play penetration decreased to 48.4% from 49.8%.
- Programming and other direct costs increased 3% in Q2, primarily from contractual programming rate increases. Management said programming rates were expected to increase by high single digits.
Cash flow, debt and liquidity
- For the six months, operating cash flow was $1.293 billion, compared with $1.159 billion. Capital expenditures were $657.3 million, up from $498.3 million; operating cash flow less cash capital expenditures was approximately $635.7 million, versus $660.9 million.
- Investing activities used $829.9 million, including $657.3 million of capital expenditures and $172.7 million for acquisitions. Financing activities used $622.6 million, including $1.200 billion of share repurchases.
- Cash and cash equivalents were $138.7 million at June 30, down from $298.8 million at year-end 2018. The company reported $1.674 billion of undrawn revolving credit availability, subject to covenant limitations; $178.0 million of the facility was reserved for letters of credit.
- Debt carrying value was $23.641 billion, including $1.418 billion of collateralized indebtedness related to Comcast stock monetizations. Current debt was $660.2 million and long-term debt was $22.980 billion. Six-month interest expense was $769.5 million.
- Management stated a year-end net leverage target of 4.5x–5.0x and said cash, operating cash flow and revolver availability were expected to support the operating plan, planned capital spending and debt service for the next 12 months. The filing cautions that longer-term funding needs may depend on capital-market access and refinancing.
Material changes, outlook and risks
- Operating income and net income improved from the prior-year quarter, while earnings also reflected volatile investment and derivative marks. Q2 included a $103.1 million net gain on investments and affiliate interests, partly offset by a $49.6 million derivative loss and a $26.9 million interest-rate-swap loss. Six-month results included a $357.9 million investment gain, a $226.7 million derivative loss and a $159.1 million debt-extinguishment loss, including $154.7 million related to refinancing.
- In June, the company acquired digital news company Cheddar Inc. for approximately $200 million in cash and stock; purchase-price allocation remained preliminary. The company also began a new restructuring initiative in May and recorded $5.5 million of related costs for the six-month period.
- Management was constructing a fiber-to-the-home network, intended to enable speeds above 10 Gbps across the Optimum footprint and part of Suddenlink’s footprint. Altice Mobile was described as on track for a summer 2019 launch. The filing warns that these initiatives could require more capital than anticipated, be delayed or fail to deliver expected benefits. No specific revenue or earnings guidance was provided.
- After quarter-end, CSC Holdings issued $1.0 billion of 5.75% senior notes due 2030, using proceeds primarily to repay revolver borrowings. The board also authorized a new $5 billion, three-year share repurchase program to begin after the existing program. By June 30, $1.7 billion of the existing $2.0 billion authorization had been used.
- Key risks include competition from broadband, wireless, satellite and internet-delivered video providers; rising programming costs; substantial debt and refinancing needs; execution of network and mobile initiatives; and litigation. The company reported compliance with debt covenants at June 30. It said the IPO-related securities lawsuits were not expected to materially affect financial position, while Sprint patent litigation could materially affect results or cash flows in a single period; outcomes and possible losses were not estimable from the filing.
Important facts for investors to verify
- Whether broadband growth and pricing can offset continued video and telephony customer declines and escalating programming costs.
- Progress, spending and returns from the FTTH build and Altice Mobile launch, including capital needs relative to cash generation.
- Debt maturities, refinancing terms, leverage, covenant headroom and actual availability under the revolving credit facility.
- The sustainability of reported earnings: investment and derivative fair-value changes, refinancing losses and other excluded items materially affected GAAP results.
- Cheddar’s final purchase accounting and performance, the pace and cost of restructuring, and the implications of continued repurchases—including the announced future $5 billion program—for liquidity and leverage.
- Developments in the IPO-related and Sprint patent cases, for which final outcomes and potential financial effects remain uncertain.