Altice USA Reports Third Quarter 2019 Results

NEW YORK–(BUSINESS WIRE)–Altice USA (NYSE: ATUS) today reported results for the third quarter ended September 30, 2019.

Dexter Goei, Altice USA Chief Executive Officer, said: “In the third quarter, Altice USA made significant progress against our strategic growth initiatives, including the launch of Altice Mobile, further adoption of Altice One, completion of the Suddenlink and Optimum integration through the BSS/OSS transformation, capital structure simplification, and ongoing construction of our fiber to the home network. We’re pleased that our customer-focused initiatives are already contributing to strong underlying customer trends, reflecting the benefits of our increased investments in our networks, products and the customer experience. As we now turn our focus to scaling our efforts, we look forward to accelerating our revenue and Adjusted EBITDA growth in 2020 as we begin to realize the benefits of our investments.”

Key Financial Highlights

• Revenue growth +0.9% YoY in Q3 2019 to $2.44 billion, driven by Residential revenue growth of +0.5%, Business services revenue growth of +3.9% and News and Advertising revenue decline of -4.7%.
• Net income attributable to stockholders of $77 million in Q3 2019, or $0.12/share (from net income of $33 million in Q3 2018, or $0.04/share).
• Adjusted EBITDA⁽¹⁾ flat YoY at $1.07 billion, an Adjusted EBITDA margin of 43.8% in Q3 2019 (+0.7% YoY Adjusted EBITDA growth and 44.3% Adjusted EBITDA margin, each excluding mobile losses⁽²⁾).
• Free Cash Flow⁽¹⁾ declined 40% YoY in Q3 2019 to $166 million mainly reflecting higher investment in key growth initiatives and the timing of working capital outflow, partly offset by lower interest costs.
• FY 2019 revenue outlook updated: the company now expects revenue growth of approximately +2.5% YoY based on the initial contribution from Altice Mobile, having not yet launched handset sales online, which is expected to be a key driver of Altice USA’s anticipated accelerated growth in 2020. Guidance for Adj. EBITDA margin, Capex, Free Cash Flow growth, and the company’s Leverage target, remain unchanged.
• Share repurchases of $487 million in Q3 2019 (totalling approximately $1.7 billion YTD through Q3 2019, exceeding the prior target for 2019).

Key Operational Highlights

• Altice One has supported resilient video customer trends, including in Q3 2019 adjusting for the estimated one-time impact of the OSS / BSS migration⁽³⁾. Altice USA’s ongoing network investment and Altice One’s advanced WiFi experience supported improved residential broadband trends as well in the quarter. Altice USA reached 492k unique Altice One customers as of Q3 2019 (approximately 15% of total video customers, up from 7% at the end of Q3 2018).

• Total unique Residential customer relationships grew +0.7% YoY in Q3 2019 and were flat compared to the prior quarter (vs. -5k net losses in Q3 2018) on a reported basis, supporting Residential revenue growth of 0.5% YoY. Adjusted for the impact of the OSS / BSS migration, unique Residential customer relationship net additions estimated to have been +8k.
  • Residential Video RGU quarterly net losses of -32k in Q3 2019 (vs. -28k in Q3 2018) on a reported basis; adjusted for the impact of the OSS / BSS migration, video net additions estimated to have been -28k, in line with the prior year.
  • Residential Broadband RGU quarterly net additions of +15k (vs. +14k in Q3 2018) on a reported basis; adjusted for the impact of the OSS / BSS migration, broadband net additions estimated to have been +24k, significantly ahead of the prior year.
  • Residential ARPU per unique customer was flat (-0.1%) YoY at $143.63 in Q3 2019 due to timing of prior year rate event.

• Business services revenue growth of +3.9% YoY in Q3 2019 with growth in Enterprise & Carrier of +2.1% YoY and SMB +4.9% YoY.

• News and Advertising revenue decline of -4.7% YoY in Q3 2019 due to political advertising cycle (+7.4% growth ex-political), offset by revenues from Cheddar and Altice USA’s advanced advertising platform a4.

• Continued network investment is supporting increased demand for higher speed tiers and significant growth in data usage. The average broadband speed taken by Altice USA’s customer base has increased approximately fourfold in the past three years to 208 Mbps at the end of Q3 2019 (from 56Mbps at the end of Q3 2016) and average household data usage was over 290GB per month (growth over 20% YoY).

FY 2019 Outlook Updated

For the full year 2019, the company now expects revenue growth of approximately 2.5% YoY based on the initial contribution from Altice Mobile, having not yet launched handset sales online, which is expected to be a key driver of Altice USA’s anticipated accelerated growth in 2020. Guidance for Adjusted EBITDA margin, Capex, Free Cash Flow growth, and the company’s Leverage target, remain unchanged:

• Revenue growth of approximately +2.5% YoY.

• Adjusted EBITDA margin expansion (ex-mobile).

• Increased investment for the continued rollout of Altice One, FTTH, and new mobile network with annual Capex within a range of $1.3 billion to $1.4 billion.

• Free Cash Flow expected toexceed the $1.35 billion in FY 2018, including mobile-related costs.

• Year-end Leverage target 4.5x to 5.0x net debt / Adjusted EBITDA (L2A basis)

• Share repurchases of approximately $1.7 billion (approximately $1.7 billion buyback complete YTD through Q3 2019, exceeding prior target for repurchases of $1.5 billion).

Additional Q3 2019 Highlights

Altice Mobile

On September 5, Altice USA launched Altice Mobile, which offers one simple plan with ‘unlimited everything’. For Altice’s Optimum and Suddenlink customers, Altice Mobile is $20 per line per month for each line with a ‘price for life’ commitment. Altice Mobile is also available to non-Optimum and Suddenlink customers who live in or near the company’s 21-state footprint, including throughout New York City, for $30 per line per month.

Altice Mobile delivers advanced LTE coverage by combining Altice’s own fiber and mobile core infrastructure with two of the best networks in the U.S., giving consumers fast and reliable wireless coverage wherever they are. Altice Mobile will also evolve to include new wireless technologies, including 5G.

Consumers can bring their own phone to Altice Mobile. Additionally, eligible Optimum and Suddenlink customers can purchase the latest smartphones, including phones from Apple, Samsung and Motorola, at Optimum and Suddenlink retail stores where they can choose between paying in full or attractive zero-down, zero-interest, 36-month financing.

At the end of Q3 2019, Altice Mobile had 15k active mobile lines and generated revenue of $3m for the quarter. The initial focus since the launch has been on optimizing customer service and the onboarding process. The company is currently preparing for the launch of online handset sales / eCommerce and other sales channels to broaden the Altice Mobile offering.

Completed Operating Support System (OSS) / Billing System Support (BSS) Migration

In September 2019, Altice USA successfully migrated Suddenlink to the Optimum OSS / BSS platforms, simplifying the company’s internal and customer-facing tools and systems. Unified platforms will enable the company to launch new services and offers across markets more efficiently, support simplified customer bills which is expected to reduce billing inquiries, and simplify reporting with integrated analytical tools.

Altice One

In the third quarter Altice USA announced plans to launch Amazon Prime Video on Altice One, providing seamless access to the entire Prime Video catalog alongside a user’s live, on demand, and other streaming video services.

The integration of Prime Video is the latest enhancement to Altice One, which continues to evolve with new features and functionalities that simplify and improve the user experience, such as the recent launch of an all-new sports hub that gets fans to their must-see games faster and a refreshed home screen for faster navigation to popular live content.

Altice News and Advertising

To better serve clients and advertisers with a compelling combination of services, the company also recently integrated the Altice News and Advertising divisions, naming Jon Steinberg President of News and Advertising. The unified group comprises the a4 advanced advertising unit, News 12, Cheddar and i24NEWS, and will be focused on delivering high-quality news and information while providing advertisers with solutions to better reach their audiences.

In the quarter, the News team continued to make significant progress in expanding its reach with partnerships such as Cheddar’s launch on Amazon Fire’s new News app.

Share Repurchases

From July 1 through September 30, 2019 Altice USA repurchased an aggregate of 18,414,037 shares for a total purchase price of approximately $487 million, equivalent to an average price of $26.44 per share. The acquired shares were retired and the cost for these shares was recorded in paid-in capital in Altice USA’s consolidated balance sheet. As of September 30, 2019, Altice USA had 636,827,486 combined Class A and Class B shares outstanding.

On July 30, 2019, the Altice USA Board of Directors authorized a new incremental three-year share repurchase program of $5 billion, which took effect following completion of the prior $2 billion repurchase program in Q3 2019. For the nine months ending September 2019, Altice USA repurchased an aggregate of 72,668,712 shares for a total purchase price of approximately $1.7 billion, at an average price of $23.21, exceeding the prior target for 2019 ($1.5 billion).

Other Significant Events

Refinancing Activity

In July 2019, Altice USA’s wholly-owned subsidiary CSC Holdings issued $1.0 billion in aggregate principal amount of senior notes which bear interest at a rate of 5.75% and will mature on January 15, 2030. The net proceeds from the sale of these notes were used to repay outstanding borrowings under CSC Holdings’ revolving credit facility in full, along with accrued interest and pay fees associated with the transactions. The remaining proceeds were used for general corporate purposes.

In October 2019, CSC Holdings entered into an eleventh amendment to its credit facilities agreement with new incremental term loan (TLB-5) commitments in an aggregate principal amount of $3 billion maturing on April 15, 2027 at an effective rate of LIBOR+250 priced at par. The initial proceeds of the TLB-5 were used to repay approximately $2.5 billion of the outstanding term loans under the credit agreement (TLB-2 and TLB-4), and the proceeds of the delayed draw tranche of the TLB-5 were used to distribute $500 million in cash to Cablevision, the proceeds of which were used to redeem Cablevision’s 8.00% senior notes due 2020, representing the entire aggregate principal amount outstanding, and in each case, paying related fees, costs and expenses in connection with such transactions, with the remainder being used to fund cash on the balance sheet.

In October 2019, CSC Holdings also issued an additional $1.25 billion aggregate principal amount of its 5.75% senior notes. These additional notes were issued at 104% of the principal amount, bear interest at a rate of 5.75% and will pay interest semi-annually beginning on January 15, 2020 (maturing on January 15, 2030). The proceeds of these additional notes were used to redeem $1.24 billion aggregate principal amount of CSC Holdings 5.125% senior notes due 2021, representing the entire aggregate principal amount outstanding, and to pay accrued interest, fee, costs and expenses associated with these transactions.

Pro forma for these refinancing transactions, Altice USA’s weighted average interest cost was reduced to 6.0% and the weighted average life was extended to 6.8 years as of the end of September 2019.

Further Simplified Debt Capital Structure

On November 1, 2019, Altice USA’s wholly-owned subsidiary CSC Holdings assumed all of the rights and obligations of Cablevision under the Cablevision 2022 Senior Notes and other legacy Cequel notes which were not exchanged into CSC Holdings notes with the credit silo combination which occurred at the end of 2018. These actions further streamlined the company’s debt capital structure, which is expected to simplify Altice USA’s financing strategy and financial reporting requirements.

Financial and Operational Review

For the quarter ended September 30, 2019, compared to the quarter ended September 30, 2018

• Reported revenue growth for Altice USA of +0.9% to $2.439 billion.
• Net income attributable to stockholders of $77 million in Q3 2019, or $0.12/share (from net income of $33 million in Q3 2018, or $0.04/share).
• Adjusted EBITDA flat (-0.2% YoY) to $1.068 billion, an Adjusted EBITDA margin of 43.8% in Q3 2019 (+0.7% YoY Adjusted EBITDA growth and 44.3% Adjusted EBITDA margin, each excluding mobile losses⁽²⁾).
• Cash capex for Altice USA was $375 million in Q3 2019, representing 15.4% of revenue (~11% excluding mobile and FTTH / new home build capex).
• Operating Free Cash Flow⁽⁴⁾ declined -5.8% to $693 million, mostly reflecting increased investment in FTTH, new home build, DOCSIS 3.1 and mobile. Free Cash Flow⁽⁴⁾ was $166 million in Q3 2019, partly impacted by the timing of working capital outflow related to the OSS / BSS migration which is expected to reverse in Q4 2019 (Free Cash Flow was $801m YTD through Q3 2019).
• Residential revenue increased +0.5%, supported by Residential customer relationship growth of +0.7% YoY and flat ARPU (-0.1% YoY).

• Business services revenue increased +3.9% with the SMB segment growing +4.9% and Enterprise & Carrier revenue growing +2.1%. Altice USA continues to have success with our managed services suite of products including security, Smart WiFi, and hosted voice services for both SMB and mid-market enterprise customers. The overall SMB customer base grew by 1.2% driven by increased demand for higher broadband speed tiers.
• News and Advertising revenue declined -4.7% YoY in Q3 2019 due to the political advertising cycle (+7.4% growth ex-political), offset by the growth of Cheddar and the growth of local and national multi-screen targeted advertising solutions provided by a4.
• Programming costs increased 3.7% due primarily to an increase in contractual programming rates, partially offset by the decrease in video customers. Programming costs per video customer are still expected to increase by high single digits going forward (6.1% in Q3 2019).
• Net debt at the end of the third quarter was $22.655 billion on a reported basis⁽⁵⁾, an increase of $316 million from the end of the second quarter of 2019 reflecting $487 million of share repurchases, offset by free cash flow generation. This represents consolidated L2QA net leverage of 5.3x on a reported basis at the end of September 2019 (5.3x LTM). The year-end leverage target remains 4.5-5.0x net debt to EBITDA.
• Pro forma for the new $3 billion Term Loan B-5 and $1.25 billion additional 2030 senior notes, net debt was $22.605 billion⁽⁵⁾, the blended weighted average cost of debt was 6.0%, and the blended weighted average life was 6.8 years at the end of September 2019. There are no maturities above $1.1 billion until 2025 (with no bond maturities in 2019 and 2020) and near-term maturities in the next three years could be covered by ~$2.5 billion revolving credit facility.

Reconciliation of Non-GAAP Measures:

We define Adjusted EBITDA, which is a non-GAAP financial measure, as net income (loss) excluding income taxes, other non-operating income or expenses, loss on extinguishment of debt and write-off of deferred financing costs, gain (loss) on interest rate swap contracts, gain (loss) on derivative contracts, gain (loss) on investments and sale of affiliate interests, net, interest expense (including cash interest expense), interest income, depreciation and amortization (including impairments), share-based compensation expense or benefit, restructuring expense or credits and transaction expenses.

We believe Adjusted EBITDA is an appropriate measure for evaluating the operating performance of the Company. Adjusted EBITDA and similar measures with similar titles are common performance measures used by investors, analysts and peers to compare performance in our industry. Internally, we use revenue and Adjusted EBITDA measures as important indicators of our business performance, and evaluate management’s effectiveness with specific reference to these indicators. We believe Adjusted EBITDA provides management and investors a useful measure for period-to-period comparisons of our core business and operating results by excluding items that are not comparable across reporting periods or that do not otherwise relate to the Company’s ongoing operating results. Adjusted EBITDA should be viewed as a supplement to and not a substitute for operating income (loss), net income (loss), and other measures of performance presented in accordance with GAAP. Since Adjusted EBITDA is not a measure of performance calculated in accordance with GAAP, this measure may not be comparable to similar measures with similar titles used by other companies.

We also use Operating Free Cash Flow (defined as Adjusted EBITDA less cash capital expenditures), and Free Cash Flow (defined as net cash flows from operating activities less cash capital expenditures) as indicators of the Company’s financial performance. We believe these measures are one of several benchmarks used by investors, analysts and peers for comparison of performance in the Company’s industry, although they may not be directly comparable to similar measures reported by other companies.

Consolidated Net Debt as of September 30, 2019, Actual and Proforma⁽¹⁰⁾

Contacts

Head of Investor Relations
Nick Brown: +1 917 589 9983 / nick.brown@alticeusa.com

Head of Communications
Lisa Anselmo: +1 929 418 4362 / lisa.anselmo@alticeusa.com

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