Business context and reporting period
This is Altice USA, Inc.’s Form 10-K for the fiscal year ended December 31, 2018; Optimum is one of its consumer brands. The company provides broadband, pay television, telephony, business connectivity, content and advertising under the Optimum and Suddenlink brands. It reported one operating segment, approximately 4.9 million customer relationships and 8.7 million homes passed. The filing’s annual results are audited; fourth-quarter data are unaudited.
Financial and operating metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | $9.567 billion | $9.307 billion | +2.8% |
| Operating income | $1.682 billion | $841.0 million | +100% |
| Operating margin | 17.6% | 9.0% | +8.6 percentage points |
| Adjusted EBITDA | $4.163 billion | $3.981 billion | +4.6% |
| Adjusted EBITDA margin | 43.5% | 42.8% | +0.7 percentage points |
| Net income attributable to stockholders | $18.8 million | $1.493 billion | Down sharply |
| Net cash from operating activities | $2.508 billion | $2.018 billion | +24.3% |
| Cash capital expenditures | $1.154 billion | $951.3 million | +21.3% |
| Net interest expense | $1.545 billion | $1.601 billion | −3.5% |
| Total debt at year-end | $22.813 billion | $21.941 billion | +$871 million |
| Cash and cash equivalents at year-end | $298.8 million | $329.8 million | −$31.1 million |
Operating cash flow less cash capital expenditures was approximately $1.355 billion in 2018; this is a simple subtraction, not a company-reported free-cash-flow measure. Adjusted EBITDA less cash capital expenditures was $3.009 billion, or 31.5% of revenue, versus $3.030 billion, or 32.6%, in 2017. At year-end, $1.902 billion of the revolving facility was undrawn and available, subject to covenant limits. Management stated that cash, operating cash flow and revolver availability were expected to meet operating, planned capital expenditure and debt-service needs for the next 12 months.
Revenue mix and trends: residential broadband revenue rose 11% to $2.887 billion; business services and wholesale revenue rose 5% to $1.363 billion; advertising increased 23% to $482.6 million. Pay TV revenue fell 3% to $4.156 billion and telephony revenue fell 7% to $652.9 million. Customer relationships increased by 13,300, but residential pay TV customers declined by 98,000; broadband customers increased by 71,900 and telephony customers declined by 26,200. Residential ARPU rose to $142.44 from $139.75, while total homes-passed penetration decreased to 56.3% from 56.9%.
Fourth-quarter 2018 revenue was $2.455 billion and operating income was $528.7 million. Net income was $213.8 million, including a $52.9 million non-cash deferred tax benefit for the quarter.
Material changes versus the prior period
- Net income attributable to stockholders fell from $1.493 billion to $18.8 million. The 2017 result included a $2.333 billion non-cash tax benefit from federal tax-rate remeasurement; 2018 included a $52.9 million deferred tax benefit. The reported earnings comparison is therefore substantially affected by tax items.
- Operating income improved despite higher programming and direct costs, principally as depreciation and amortization declined 19% to $2.382 billion and restructuring expense fell to $38.5 million from $152.4 million. Programming and other direct costs rose 5% to $3.173 billion.
- Operating cash flow increased, while capital expenditures also rose. Cash financing uses included a $1.500 billion shareholder dividend and $500 million of share repurchases.
- Altice Europe distributed substantially all of its interest in Altice USA in June 2018. The company also combined the Optimum and Suddenlink credit structures under one credit silo in October 2018, including an exchange of approximately $5.5 billion of notes and a new $1.275 billion term loan.
Outlook, risks and unusual items
- Management expected programming costs to increase by high single digits in 2019. It cited contractual rate increases and continuing competitive pressure, particularly in video.
- The company expected to launch mobile voice and data services in 2019 using Sprint’s network and its own mobile core. It also expected 1 Gbps broadband availability across the Optimum footprint in 2019 through network upgrades. These are plans, not guaranteed results.
- Management is building a fiber-to-the-home network intended to support speeds above 10 Gbps in the Optimum footprint and parts of Suddenlink. Execution, timing, capital needs and expected returns remain uncertain; no clear total future investment guidance is provided in the filing.
- Key risks include intense competition from fiber, wireless and online video providers; rising programming costs and potential carriage disputes; substantial leverage and variable-rate debt exposure; and dependence on capital markets and refinancing. The company reported approximately $22.8 billion of debt and said its debt ratings were below investment grade.
- Other risks include regulatory and franchise renewal uncertainty, privacy and cybersecurity exposure, vendor reliance, labor negotiations, and litigation. The Town of Hempstead franchise had expired but was operating under temporary authority; the Lightpath New York City franchise renewal remained ongoing. IPO-related securities litigation and Sprint patent suits were pending. The company said the ultimate outcomes could not be predicted; it considered the IPO litigation not expected to materially affect its financial position, while Sprint litigation could be material to results or cash flows in a single period.
- In January and February 2019, the company issued additional 2029 notes, refinanced its revolver and entered into a $1.0 billion term loan, with proceeds used for debt repayment and refinancing. These subsequent events affect the post-year-end debt and liquidity picture.
- The 2018 $1.500 billion dividend was a special distribution associated with the separation. The company said it had no current plan to pay cash dividends for the foreseeable future; debt covenants also restrict distributions.
Important facts for investors to verify
- Reconcile reported GAAP earnings to underlying performance, especially the substantial 2017 tax benefit and 2018 non-cash tax effects; treat Adjusted EBITDA as a non-GAAP measure.
- Review debt maturities, post-year-end refinancing, floating-rate exposure, covenant limits and actual available revolver capacity.
- Assess whether broadband growth and ARPU gains can offset video and telephony customer losses, competition and the forecast high-single-digit programming-cost increases.
- Track FTTH, 1 Gbps and mobile launch spending, timing, customer uptake and returns against rising capital expenditures.
- Monitor the outcomes of franchise renewals, litigation, and any other material contingencies; confirm subsequent debt transactions and their effect on leverage and liquidity.