Business context and reporting period
The supplied filing is Altice USA, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2017; it is not titled Optimum Communications, Inc. Altice USA provides broadband, pay-TV, telephony, business services and advertising through Cablevision (New York metropolitan area) and Cequel (south-central U.S.). The 2016 comparison is not fully comparable: Cablevision was acquired on June 21, 2016, so reported 2016 results include only ten days of Cablevision operations. Management also presents pro forma comparisons as if the acquisition had occurred at the start of 2016.
Financial results and key metrics
Amounts below are in millions of dollars unless stated otherwise.
| Metric | Q2 2017 | Six months 2017 |
|---|---|---|
| Revenue | $2,328.3 | $4,634.0 |
| Operating income | $256.8 | $505.0 |
| Adjusted EBITDA (non-GAAP) | $994.0 | $1,935.8 |
| Net loss attributable to Altice USA stockholders | $(475.2) | $(551.6) |
| Net loss per share | $(0.72) | $(0.84) |
| Operating cash flow | Not separately stated | $700.9 |
| Capital expenditures | $202.2 | $459.7 |
Operating margin was approximately 11.0% in Q2 and 10.9% for the half year; Adjusted EBITDA margin was approximately 42.7% and 41.8%, respectively. On a pro forma basis, revenue rose 0.6% in Q2 and 1.0% for the half year versus 2016, while Adjusted EBITDA increased 22% and 24%. The company reported a $241.3 million excess of operating cash flow over capital expenditures for the first half; this is a simple calculation, not a company-defined free-cash-flow measure.
At June 30, cash and cash equivalents were $274.9 million, with another $350.4 million classified as restricted cash. Current assets were $1,169.1 million versus current liabilities of $3,650.0 million. Reported debt, including collateralized indebtedness, was approximately $22.84 billion carrying value; total liabilities were $32.39 billion. Revolver availability was approximately $1.89 billion, subject to covenant limitations. Fixed-rate debt fair value exceeded carrying value by approximately $1.93 billion.
Material changes versus comparable periods
- Compared with pro forma 2016, Q2 broadband revenue increased 11%, business services and wholesale increased 6%, pay-TV was approximately flat, and telephony declined 5%. For the half year, the same categories changed by +11%, +6%, +1%, and -5%, respectively.
- Customer relationships declined by 8,800 in Q2; residential pay-TV customers fell by 37,100, while broadband customers increased by 1,600. Total residential triple-product penetration was 50.1%, down from 51.6% a year earlier.
- Adjusted EBITDA growth reflected higher revenue and lower operating costs. Pro forma operating expenses also benefited from restructuring and headcount reductions, including workforce transfers to Altice Technical Services (ATS).
- Depreciation and amortization rose, partly because the planned global brand replacement shortened the remaining useful lives of Optimum and Lightpath trade names. The company estimated approximately $545.8 million of 2017 amortization for those trade names.
Outlook, risks, contingencies and unusual items
- No specific revenue, earnings or cash-flow guidance was provided. Management said cash, operating cash flow and revolver availability should support the operating plan, planned capital expenditures and debt service for the next 12 months. It also said longer-term needs will require continued access to capital and credit markets, refinancing or other actions.
- The five-year FTTH buildout is intended to enable speeds above 10 Gbps across the Cablevision footprint and part of Cequel. Management cautioned that the plan may cost more than expected, be delayed or fail to deliver anticipated benefits.
- Key business risks include intense broadband, video and telephony competition; pay-TV customer losses; rising programming costs (expected to increase at a high-single-digit rate); economic and advertising weakness; substantial debt and refinancing needs; interest-rate exposure; and execution, technology and cybersecurity risks.
- Q2 and first-half net loss included a $561.4 million debt-extinguishment and financing-cost charge, largely related to a $513.7 million premium when $1.75 billion of affiliate notes were converted into equity, plus debt refinancing costs. The company also recorded significant fair-value movements on Comcast-related investments and derivatives.
- The June IPO generated approximately $349.2 million of net proceeds for the company; most were subsequently used in July to redeem $315.8 million principal amount of 10.875% notes, plus a $34.3 million call premium. Separately, the company distributed $839.7 million to shareholders during the first half, including $500 million funded with revolving-credit borrowings.
- A proposed settlement in the Cablevision consumer litigation was subject to court approval; $6.0 million was accrued, and the ultimate payment could be higher. Patent lawsuits and other proceedings remain; the company could not estimate a possible loss range for certain patent matters.
- Related-party arrangements include ATS construction and field services, executive services, and other affiliate transactions. Management noted such transactions may not reflect arm’s-length terms. The company reported compliance with its financial covenants at June 30, 2017.
Important facts for investors to verify
- Confirm that this Altice USA filing is the intended filing, given the request’s different company name.
- Assess underlying performance using pro forma comparisons, customer trends and segment results rather than reported year-over-year figures alone.
- Verify debt maturities, refinancing capacity, covenant headroom and the sustainability of revolver availability; reported total debt includes Comcast-share collateralized obligations.
- Track FTTH spending, programming-cost inflation, pay-TV attrition and the timing and scale of trade-name amortization.
- Review the use of IPO proceeds, shareholder distributions and related-party service costs, as well as the resolution and final cost of litigation contingencies.