Altice USA, Inc. — Form 10-Q summary
Entity note: The supplied filing is for Altice USA, Inc., not a registrant named Optimum Communications, Inc. Optimum was a brand within its Cablevision segment. The unaudited reporting period ended September 30, 2017; the filing was signed November 3, 2017.
Business context and reporting period
Altice USA provided broadband, pay television, telephony, Wi-Fi, content and advertising services through Cablevision in the New York metropolitan area and Cequel in south-central U.S. markets. It reported approximately 4.9 million customer relationships and 8.6 million homes passed. Comparisons for the nine months require care: 2016 reported results include Cablevision only from its June 2016 acquisition date, so management also presents pro forma 2016 figures as if the acquisition occurred January 1.
Financial performance
| Metric | Q3 2017 | Comparison | Nine months 2017 | Comparison |
|---|---|---|---|---|
| Revenue | $2,327.2 million | Up 3.0% from Q3 2016 | $6,961.2 million | Up 1.6% from pro forma 2016 |
| Operating income | $134.9 million | Down from $142.8 million | $639.9 million | Up from $314.4 million pro forma |
| Adjusted EBITDA | $1,026.6 million | Up 18.9% from Q3 2016 | $2,962.4 million | Up 22.3% from pro forma 2016 |
| Net loss attributable to Altice USA stockholders | $182.2 million | Versus $172.8 million loss | $733.8 million | Versus $527.7 million pro forma loss |
| Basic and diluted loss per share | $0.25 | Versus $0.27 loss | $1.08 | Versus $0.81 pro forma loss |
Q3 operating margin was approximately 5.8% and Adjusted EBITDA margin approximately 44.1%, compared with approximately 6.3% and 38.2%, respectively, a year earlier. Nine-month EBITDA margin was approximately 42.6%, versus 35.4% pro forma. Adjusted EBITDA is a non-GAAP measure and should not be treated as a substitute for GAAP earnings or cash flow.
Q3 revenue growth was led by broadband, up 11.7% year over year, and business services and wholesale, up 5.0%. Pay TV was nearly flat; telephony fell 5.3%, and advertising declined 4.8%. For the first nine months versus pro forma 2016, broadband rose 11.5% and business services 5.7%, while telephony declined 5.1%, advertising 0.5%, and other revenue 75.3%, principally reflecting the prior-year consolidation of Newsday before its sale of a 75% interest.
Programming and direct costs were $755.1 million in Q3, up 2.3%. Other operating expenses declined 15.1% to $560.5 million, while depreciation and amortization rose 22.7% to $823.3 million, in part because the announced future global-brand change accelerated amortization of Optimum and Lightpath trade names.
Cash flow, debt and liquidity
- For the nine months, operating cash flow was $1,217.0 million, compared with $530.9 million in 2016. Capital expenditures were $763.3 million, leaving approximately $453.7 million of operating cash flow less capital expenditures. Investing cash outflow was $834.0 million; financing cash outflow was $290.7 million.
- At September 30, cash and cash equivalents were $550.1 million and restricted cash $45.2 million. Total debt was approximately $22.64 billion, including $1.31 billion of collateralized indebtedness associated with Comcast-share monetization contracts. The balance sheet reported total liabilities of $31.97 billion.
- Revolving facilities had approximately $1.00 billion and $333.4 million undrawn and available for Cablevision and Cequel, respectively, subject to covenant limits. Management said cash, operating cash flow and facility availability were expected to fund the operating plan, planned capital spending and debt service for the next 12 months. It also cautioned that longer-term obligations and capital spending would require continued access to capital or credit markets.
- Nine-month interest expense was $1,232.7 million. The company reported compliance with applicable financial covenants at September 30. Its stated long-term net leverage target was 5.0x.
- Subsequent to quarter-end, CSC Holdings made voluntary revolving-credit repayments of $50 million in October and $500 million on October 31, 2017.
Material changes, outlook and risks
- Revenue and operating comparisons are affected by the 2016 Cablevision acquisition. The filing’s pro forma comparison is the more informative nine-month operating comparison.
- Customer trends were mixed: Q3 total customer relationships declined by 6,100 year over year; pay-TV customers fell by 126,000, while broadband customers increased by 94,000. Residential triple-product penetration was 50.2%, down from 50.9% a year earlier. Management cited competition, including online video, Verizon and satellite providers.
- Management expected programming rates to increase by high single digits and said programming costs would also vary with pay-TV subscriber counts. It provided no specific consolidated revenue, earnings or cash-flow guidance in the supplied filing.
- The five-year FTTH buildout is a major investment initiative, intended to enable speeds above 10 Gbps across the Cablevision footprint and part of Cequel. Management cautioned that execution could involve higher-than-expected capital costs, delays or failure to realize anticipated benefits.
- Nine-month debt-extinguishment and deferred-financing write-off expense was $600.2 million, including a $513.7 million premium related to converting affiliate notes into equity and costs associated with refinancing and redemptions. The company also recorded $154.3 million of derivative losses for the nine months; fair-value movements can make reported earnings volatile.
- The June IPO generated $348.5 million net proceeds for the company; approximately $350.1 million was used in July to redeem $315.8 million principal of 10.875% notes and pay the call premium. Separately, the company distributed $839.7 million to stockholders during the nine months, including $500 million funded by revolving-credit borrowing.
- Commitments and contingencies not reflected on the balance sheet were approximately $8.313 billion, primarily related to multi-year programming agreements. Disclosed matters included a proposed Fox-programming class-action settlement, an ongoing New York Attorney General investigation into advertised internet speeds, and patent litigation; management did not expect the cited matters to materially affect the company, while acknowledging uncertain outcomes.
- Management identified substantial indebtedness, competition, rising programming costs, customer demand, refinancing and capital-market access, network and cybersecurity disruption, and FTTH execution as significant risks. It also expected adoption of the new revenue standard in 2018 to affect the timing of residential installation revenue and commission expense recognition.
Important facts for investors to verify
- Use the pro forma 2016 baseline when assessing nine-month growth, and distinguish it from reported historical comparisons.
- Track broadband additions against pay-TV and telephony customer losses, and assess whether broadband growth and pricing can sustain revenue and EBITDA.
- Review debt maturities, interest costs, covenant headroom, collateralized Comcast-share obligations and the company’s ongoing need to refinance or access capital markets.
- Assess the returns, spending pace and execution risks of the FTTH program, including related-party contractor arrangements with Altice Technical Services.
- Separate recurring operating performance from accelerated brand amortization, restructuring, debt-extinguishment charges and derivative fair-value changes.