Optimum Communications / Altice USA, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; filed August 2, 2023. The filing is by Altice USA, Inc., which operates residential services under the Optimum brand. Unless stated otherwise, dollar amounts below are rounded to millions.
Business context and financial performance
Altice USA provides broadband, video, telephony, mobile, business communications, news and advertising services across 21 states. Its operations are reported as one segment.
| Metric | Q2 2023 | Q2 2022 | Change |
|---|---|---|---|
| Revenue | $2,324 million | $2,463 million | Down 5.6% |
| Operating income | $482 million | $522 million | Down 7.6% |
| Operating margin | 20.7% | 21.2% | Down 0.5 percentage points |
| Net income attributable to Altice USA stockholders | $78 million | $106 million | Down 26.3% |
| Adjusted EBITDA | $922 million | $1,007 million | Down 8.5% |
| Operating free cash flow | $448 million | $522 million | Down 14.1% |
| Free cash flow | $(35) million | $191 million | Turned negative |
| Interest expense, net | $407 million | $310 million | Up $96 million |
For the six months ended June 30, revenue was $4,618 million, down 5.5%; operating income was $907 million, down 12.3%; net income attributable to stockholders was $104 million, down 65.6%; and Adjusted EBITDA was $1,790 million, down 10.4%. Operating cash flow was $856 million, compared with $1,277 million, while cash capital expenditures rose to $1,056 million from $877 million. Six-month free cash flow was negative $201 million, versus positive $399 million.
Revenue, customers and operating trends
- Q2 residential revenue declined $110 million. Broadband revenue fell 4%, video 8% and telephony 10%; mobile revenue increased 8%.
- News and advertising revenue decreased 15%, primarily due to lower linear advertising. Business services and wholesale revenue declined 2%.
- Residential broadband customers were 4.23 million, down from 4.33 million a year earlier; video customers were 2.31 million, down from 2.57 million. Total customer relationships fell to 4.81 million from 4.95 million.
- Mobile lines increased to 264,200 from 231,300. FTTH passings expanded to 2.66 million from 1.59 million, and FTTH customer relationships rose to 249,700 from 104,400.
- Q2 ARPU was $137.44, compared with $141.36 a year earlier. Lower broadband and video customer counts pressured revenue, partly offset by video rate increases and mobile growth.
- Programming costs declined with fewer video customers, partly offset by contractual rate increases. Management expects programming rates to continue increasing.
Balance sheet, debt and liquidity
- At June 30, cash and cash equivalents were $219 million, down from $305 million at December 31, 2022. Total current assets were $736 million and current liabilities $3,007 million.
- Debt carrying value was approximately $25.1 billion, including $1.1 billion classified as current; stockholders’ deficiency was $403 million. Net interest expense for the first half increased to $796 million, primarily because of higher interest rates.
- In April, CSC Holdings issued $1.0 billion of 11.25% senior guaranteed notes due 2028 and used the proceeds to repay revolving-credit borrowings. The filing reports $1.51 billion of undrawn revolving capacity available, subject to covenant limitations; $139 million was reserved for letters of credit.
- Management stated that cash, operating cash flows and revolver availability should fund the current operating plan, planned capital expenditures and debt service for the next 12 months. It also cautioned that longer-term funding may depend on capital-market access and refinancing.
- Cash capital expenditures were $1.06 billion in the first half, including $586 million for network infrastructure. The company identified its FTTH build as an ongoing investment priority.
Outlook, risks and unusual items
- The filing provides no specific revenue, earnings or cash-flow guidance for 2023. Management expects programming rates to rise and plans continued FTTH investment.
- Key risks include competition from fiber, wireless and fixed-wireless providers; customer losses and changing video preferences; higher programming costs; substantial debt and interest-rate exposure; and the need to access capital markets to refinance or meet longer-term obligations.
- The company reported $34.9 million of restructuring and other operating items for the first half, including $29.2 million of terminated-employee payments and $9.1 million of lease-asset impairment, partly offset by a $6.3 million contingent-consideration remeasurement credit.
- In January, the company settled Comcast-share collateralized debt by delivering the shares and related derivatives; it received approximately $50.5 million net cash, including dividends, and recognized a $4.4 million debt-extinguishment gain.
- A copyright lawsuit alleges that subscribers infringed more than 7,700 works and seeks to hold the company liable. Management intends to defend the claims and said the ultimate outcome is uncertain; other intellectual-property matters and ordinary-course proceedings are also disclosed.
- Management concluded disclosure controls were effective as of June 30, 2023, with no material change in internal control over financial reporting during the first half.
Important facts for investors to verify
- Whether broadband and video customer losses continue, and whether FTTH and mobile growth can offset them.
- How higher debt costs, refinancing needs and the 11.25% notes affect interest expense, liquidity and covenant headroom.
- Whether operating cash flow recovers enough to cover elevated capital spending and sustain free cash flow.
- Actual progress, costs and customer uptake from the FTTH build, alongside future programming-rate increases.
- Developments in the copyright litigation and any other contingencies that could materially affect a period’s results or cash flows.