Business context and reporting period
Altice USA, Inc. (NYSE: ATUS) filed this 10-K for the fiscal year ended December 31, 2017; it is an annual report, not a standalone “2017 Q4” filing. The company provides broadband, pay-TV, telephony, business communications and advertising services through its Optimum/Cablevision and Suddenlink/Cequel operations, serving about 4.9 million customer relationships across 21 states.
Comparability is limited: 2017 includes a full year of Cablevision, acquired June 21, 2016, while 2016 includes Cablevision only from the acquisition date. The filing’s 2016 consolidated figures therefore are not a full-year comparable base.
Financial and operating metrics
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $9.327 billion | $6.017 billion |
| Operating income | $865 million | $460 million |
| Adjusted EBITDA | $4.006 billion; 42.9% of revenue | $2.415 billion; 40.1% of revenue |
| Net income (loss) attributable to stockholders | $1.520 billion | $(832) million |
| Cash provided by operating activities | $2.002 billion | $1.184 billion |
| Capital expenditures, cash basis | $991 million | $626 million |
| Total debt, carrying value | $21.941 billion | $24.030 billion |
| Cash and cash equivalents at year-end | $273 million | $487 million |
Adjusted EBITDA less capital expenditures was $3.014 billion, or 32.3% of revenue, versus $1.789 billion, or 29.7%, in 2016. This is a company-defined non-GAAP measure. Interest expense, net, was $1.601 billion. Cash interest paid was $1.765 billion.
2017 net income reflects a $2.853 billion income tax benefit, including a provisional, noncash $2.338 billion benefit from remeasuring deferred taxes following the federal corporate tax rate reduction. Before tax, the company recorded a $1.331 billion loss. A $600 million loss on debt extinguishment and deferred financing costs also weighed on results, including a $514 million premium associated with converting affiliate and related-party notes into equity.
Year-end customer relationships were 4.906 million, up 14,000 (0.3%). Broadband customers increased by 83,000 to 4.046 million, while pay-TV customers decreased by 129,000 to 3.406 million. Residential ARPU was $140.15, compared with $138.07 in 2016. The fourth quarter generated $2.365 billion of revenue and $2.255 billion of net income; the latter was substantially affected by the tax benefit.
Material changes versus the prior period
- Revenue and EBITDA rose substantially, but much of the reported year-over-year increase reflects the inclusion of a full year of Cablevision in 2017 versus only about six months in 2016.
- On a segment basis, Cequel revenue grew about 4% to $2.665 billion and Adjusted EBITDA grew about 9% to $1.255 billion. Cablevision’s reported increase is not directly comparable because of the acquisition-period difference.
- Within the combined business, broadband revenue increased to $2.564 billion and business services and wholesale revenue to $1.299 billion. Pay-TV customer losses continued; Cequel telephony revenue fell 15% and Cequel advertising revenue fell 17%.
- Operating cash flow increased, while capital expenditures rose to $991 million, reflecting greater investment, including in Cablevision network infrastructure.
- Total debt declined about $2.1 billion from year-end 2016, and the company refinanced or repaid debt during 2017. The comparison also reflects the conversion of $1.75 billion of affiliate notes, accrued interest and premium into equity.
Outlook, management commentary, risks and unusual items
- Management said it expects 2018 programming costs to rise by high single digits. Higher programming and retransmission costs, especially for sports and broadcast content, may pressure margins if they cannot be passed on to customers.
- The company began a five-year fiber-to-the-home build-out intended to enable speeds above 10 Gbps across the Optimum footprint and parts of Suddenlink. Spending, timing and expected cost savings are uncertain. Altice One began rolling out in Optimum during Q4 2017.
- A multi-year Sprint agreement is intended to support nationwide mobile voice and data offerings and use Altice USA’s broadband network to densify Sprint’s network. Rollout and commercial benefits are not assured.
- Management stated that cash, operating cash flow and revolving-credit availability should support the operating plan and debt service for the next 12 months, but also said it expects to depend on capital markets over the longer term to fund investment and obligations. At year-end, approximately $1.734 billion on the Cablevision revolver and $337 million on the Cequel revolver were undrawn, subject to covenant limitations. The company targets long-term net leverage of 4.5x–5.0x.
- Leverage, variable-rate exposure, restricted cash flows between the separately financed Optimum and Suddenlink groups, and substantial contractual commitments are significant risks. Contractual obligations included $30.4 billion of debt payments including interest and $8.4 billion of purchase obligations, primarily programming commitments.
- After year-end, Altice N.V. announced a planned separation and distribution of substantially all its Altice USA interest. Conditions included regulatory and shareholder approvals and a proposed $1.5 billion pre-distribution dividend. Altice USA also authorized a $2.0 billion share repurchase program effective after separation. The company cautioned the separation might not occur; terms and timing remained subject to conditions.
- Other notable items include the January 2018 acquisition of 70% of Altice Technical Services US Corp. for $1, with an expectation of acquiring the remainder before the distribution; a new $1.5 billion term loan and $1.0 billion notes issued in January 2018; and February 2018 repayment of $1.05 billion of near-term notes. The new financing was also intended to help fund the proposed dividend.
- Starz services were removed from lineups effective January 1, 2018 after a carriage dispute, then began to be restored following a new agreement on February 13, 2018. The New York Attorney General’s investigation into advertised internet speeds was ongoing; the company said it was discussing resolution and did not then expect a material adverse effect.
- Competition from fiber, satellite, wireless and internet video providers, franchise renewals, regulation, cybersecurity, vendor dependence and customer churn remain material risks. The Town of Hempstead franchise had expired and was operating under temporary authority; the New York City Lightpath franchise renewal process was ongoing.
Important facts for investors to verify
- Use comparable full-year segment results to separate underlying operating trends from the acquisition-related reporting-period mismatch.
- Assess earnings excluding the $2.338 billion noncash tax benefit, debt-extinguishment loss and other non-operating investment and derivative effects; review the company’s Adjusted EBITDA reconciliation.
- Track broadband additions, pay-TV losses, ARPU, churn and whether broadband growth offsets video declines and rising programming costs.
- Review debt maturities, variable-rate exposure, covenant headroom, restricted-group cash mobility and the funding implications of the proposed dividend, repurchase program and fiber investment.
- Confirm progress, costs and customer adoption for the FTTH build, Altice One and Sprint mobile offering, as well as completion and terms of the Altice N.V. separation.
- Review the audited financial statements and notes for debt, commitments, contingencies, related-party arrangements and tax estimates. The filing states disclosure controls were effective; the company did not provide an internal-control attestation because of the transition period for newly public companies.