Altice USA Stock: 70% Below Peak After More Bad News From Q4 Earnings (NYSE:ATUS)

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Introduction: Why is Altice USA Stock Down?

Altice USA, Inc. (ATUS) shares closed at a new all-time low on Friday (February 18), falling 20% after Q4 2021 results released post-market on Wednesday.

We downgraded our rating on ATUS from Buy to Neutral in November 2021; since then ATUS shares have fallen 36.5% to 70% below their May peak:

ATUS Share Price (Since Spin-Off)

ATUS Share Price (Since Spin-Off)

Source: Google Finance (18-Feb-22).

We believe the ATUS investment case is broken. Q4 results showed operational performance has continued to deteriorate, any success in its turnaround remains distant, and its cashflows and balance sheet will remain pressured through the next few years. We would avoid ATUS stock.

Altice USA Neutral Case Recap

To recap, Altice USA is a distant #3 player in U.S. Cable, behind market leaders Comcast (CMCSA) and Charter (CHTR):

U.S. Cable Residential Broadband Subscribers (Since 2018)

U.S. Cable Residential Broadband Subscribers (Since 2018)

Source: Company filings.

ATUS has been in a turnaround since last September, after the abrupt exit of its COO and a warning of further broadband subscriber losses.

Management’s strategy to improve performance includes accelerating its Fiber-To-The-Home (“FTTH”) roll-out, relaunch its Mobile offering and rebuilding its distribution network of retail outlets and door-to-door salespeople.

Our downgrade was based on concerns about fundamentals in ATUS’ business:

  • Competition in ATUS markets is already intensifying
  • ATUS’ offering may be fundamentally uncompetitive
  • EBITDA and Free Cash Flow (“FCF”) will likely decline
  • Management’s turnaround initiatives may not be successful

We believe these problems are specific to ATUS, owing to poor management, including past excessive cost cuts and bad strategic choices.

As of December 2021, ATUS expected a low-single-digit decline in revenues and a mid-single-digit decline in EBITDA in 2022, according to CEO Dexter Goei when he appeared at an UBS conference that month.

ATUS’ Q4 results did not reduce any of our concerns.

Another Broadband Subscriber Loss in Q4

In Q4 2021, ATUS had a net loss of 2k in residential Broadband subscribers, while losses in Video and Telephony also continued; year-on-year, residential Broadband subscribers were up 0.6%, but would be down 0.1% (3k) excluding the Morris Broadband acquisition in April:

ATUS Customer Numbers (Q4 2021 vs. Prior Periods)

ATUS Customer Numbers (Q4 2021 vs. Prior Periods)

Source: ATUS results release (Q4 2021).

ATUS residential Broadband subscribers have been down or flat sequentially every quarter since Q4 2020, except for a small (12k) increase in Q1 2021:

ATUS Residential Customer Net Adds by Product (Since 2019)

ATUS Residential Customer Net Adds by Product (Since 2019)

Source: ATUS results releases.

NB. Excludes net adds from Service Electric and Morris Broadband acquisitions.

Management attributed ATUS’ Broadband net losses partly to COVID pulled-forward demand and higher move-churn in its markets. They again stated only markets overlapping with Verizon’s (VZ) FIOS fiber network had net losses:

“Exceptional customer gains in 2020 … in hindsight was partially a pull-forward of demand, which depressed growth in 2021. This has also reduced visibility into our business trends, which have not yet fully normalized, including lower gross add activity for the past 2 to 3 quarters and higher move-churn than normal across the New York tri-state area

We continue to see growth at Optimum in non-Fios areas and across Suddenlink in 2021, which was close to 2018 and 2019 levels. We only saw customer losses in Optimum areas where we overlap with Fios”

Dexter Goei, ATUS CEO (Q4 2021 earnings call)

We are less sure. While overall U.S. broadband subscriber growth has been decelerating, Comcast and Charter continue to have positive net adds:

Wireline & Fixed Wireless Broadband Net Adds – Key Players (Since 2019)

Wireline & Fixed Wireless Broadband Net Adds - Key Players (Since 2019)

Source: Company filings.

NB. TMUS figures only disclosed from Q3 2021.

ATUS’ broadband penetration rate has also been falling, while Comcast’s and Charter’s have continued to climb:

U.S. Cable Residential Broadband Subscribers / Total Passings

U.S. Cable Residential Broadband Subscribers / Total Passings

Source: Company filings.

We also expect a step-up in competitive intensity, especially from fixed wireless offerings in ATUS’ more rural Suddenlink footprint, following the activation of C-band spectrum for Verizon and AT&T (T) in January 2022.

At Q4 results, management described ATUS’ Broadband net adds in January and February so far as “relatively stable relative to last year”, but “churn rates are in line to slightly higher” depending on local competition.

ATUS’ specific problems were also visible in its P&L and Mobile results.

Broadband Revenues Worse Than Net Losses

ATUS’ relatively small Broadband net loss in Q4 was achieved at the expense of revenues. Broadband revenues fell 1.7% sequentially in Q4:

ATUS Residential Broadband Revenues vs. Subscribers

ATUS Residential Broadband Revenues vs. Subscribers

Source: ATUS results releases.

The sequential decline began in Q3, when it was down 0.3%. Management acknowledged Broadband revenues have been reduced by promotions (gift cards and streaming packages) in Q3 and Q4.

EBITDA Decline Accelerated in Q4

Video and Telephony revenues also fell sequentially in Q4, offset by seasonally strong News & Advertising revenues; total revenues fell 2.1% from Q3:

ATUS Profit & Loss (Q4 2021 vs. Prior Periods)

ATUS Profit & Loss (Q4 2021 vs. Prior Periods)

Source: ATUS results releases.

NB. Air Strand termination fees were $100.1m of the year-on-year increase in 2021 and $31.1m of the year-on-year increase in Q4. $69.3m was paid in Q3.

(Business Services revenues fell sequentially primarily due to different amounts of one-off termination fees related to Air Strand in Q3 and Q4.)

Year-on-year, Q4 Broadband revenues were 3.3% higher, helped by the Morris Broadband acquisition in April 2021. Total revenues fell 0.6%, or 2.4% excluding Regional Sports Networks COVID rebates and Air Strand.

Q4 EBITDA was 7.0% lower from Q3 and 5.9% lower year-on-year; excluding Air Strand, it was 4.0% lower from Q3 and 8.6% lower year-on-year. The prior-year quarter also benefited from U.S. election ad spend. Excluding all one-offs, Q4 EBITDA was likely down a high-single-digit year-on-year.

Year-on-year, group EBITDA was up 0.3% as reported, but down an estimated 2.0% after excluding Air Strand termination fees:

ATUS Profit & Loss (2021 vs. Prior Year)

ATUS Profit & Loss (2021 vs. Prior Year)

Source: ATUS results releases.

We expect EBITDA to decline again in 2022.

Mobile Making Little Progress

ATUS has cited its lack of a competitive Mobile offering as one of the reasons behind its Broadband losses to Verizon, and relaunched its Mobile product in January 2022. However, progress has remained limited.

ATUS Mobile had a net add of just 5k in Q4, and its penetration (among its Broadband subscribers) was a fraction of those at Comcast and Charter:

U.S. Cable Wireless Subscribers as % of Cable Subscribers

U.S. Cable Wireless Subscribers as % of Cable Subscribers

Source: Company filings.

ATUS stated its Mobile churn rate was in the “mid 30s”, improving from “mid-60s to 70% last year” after being migrated to the T-Mobile (TMUS) network.

More Fiber Roll-Out, But It May Not Help

ATUS announced large FTTH roll-out targets for the next few years, but the benefit of these may be limited.

New targets include FTTH passings of 6.5m by 2025 year-end, with 4.0m in its Optimum footprint (covering all of its overlap with Fios and Frontier (FYBR)) and 2.5m in its Suddenlink footprint (8-10% overlapping with AT&T fiber):

ATUS Fiber Roll-Out Targets

ATUS Fiber Roll-Out Targets

Source: ATUS results presentation (Q4 2021).

The 2022 year-end FTTH passings target remains unchanged at 2.5m.

One reason FTTH may not help is that ATUS FTTH’s penetration remains low, at just 5.9% of passings as of Q4 2021. ATUS has historically only actively sold FTTH to new customers or existing customers on the verge of leaving (though ATUS “will start to do more migrations later this year):

ATUS Fiber Penetration (Q4 2021 vs. Prior Periods)

ATUS Fiber Penetration (Q4 2021 vs. Prior Periods)

Source: ATUS results presentation (Q4 2021).

NB. Definition of penetration rate changed in Q4 2021.

Another reason is that we believe speed is only one of the factors that influence consumer decisions; the others include price, bundled products like Mobile and WiFi routers, as well as softer factors such as service quality. A sign of this is that only 50% of ATUS’ new broadband subscribers, and 15% of all its broadband subscribers, are taking speeds of 1 Gbps or more.

A third reason is that the FTTH passings targets may not be met. For 2021, compared to an original target of 1.5m, ATUS ultimately only delivered 1.17m passings ready to serve customers; a few hundred thousand were constructed but not yet ready, for example due to the lack of power connectivity.

Expanding Distribution Will Be Slow

ATUS expects to add 400-500 door-to-door salespeople and 150-170 retail locations in 2022, reversing the cuts since 2019, as announced previously:

ATUS Distribution Channels (2017-22E)

ATUS Distribution Channels (2017-22E)

Source: ATUS results presentation (Q4 2021).

Each salesperson is expected to cost $75-100k annually, while each retail location is expected to take $0.9m in CapEx and $0.5-0.6m in annual OpEx.

The benefit of this expansion will be slow at best. Management expects “most” of the new retail locations to open in H2 2022. While the targets were originally announced on 4 November, ATUS had added just 26 sales people and 1 retail location during Q4.

2022 Guidance Limited to CapEx and Costs

ATUS is expecting $100m of incremental OpEx in 2022 for the initiatives above as well as other rebranding and marketing efforts.

ATUS is also expecting an approx. $500m increase in CapEx in 2022:

ATUS Capital Expenditures (2017-22E)

ATUS Capital Expenditures (2017-22E)

Source: ATUS results presentation (Q4 2021).

Management is not providing other 2022 financial guidance because they “want to maintain maximum flexibility to invest more”.

Cashflows & Balance Sheet Under Pressure

ATUS’s FCF was $1.52bn in 2021, down year-on-year from cash taxes (after tax losses were exhausted), higher CapEx and working capital outflows:

ATUS EBITDA & Cashflows (2017-21)

ATUS EBITDA & Cashflows (2017-21)

Source: ATUS company filings.

All things being equal in 2022, the higher OpEx and CapEx described above would reduce FCF by $550-650m year-on-year to $875-975m (approx. $2 per share). More Broadband net losses would reduce revenues and FCF further.

ATUS expects to see “improved EBITDA growth from 2023”, though CapEx is expected to peak in 2023 and 2024, “a couple hundred million dollars at the most higher” again, before falling back in 2025.

Net Debt / Last-2-Quarters EBITDA was at 5.4x at 2021 year-end, compared to 4.5-5.0x targeted, and would get worse if EBITDA were to fall. Consolidated Net Debt was $24.4bn, down slightly from Q3 ($24.6bn) and the prior year ($25.0bn). We expect all of ATUS’ FCF in 2022 to be used to pay down debt, though this would only reduce Net Debt / EBITDA ratio slightly.

With shares at $11.52, ATUS has a market capitalization of $5.24bn. While this implies a double-digit FCF Yield compared to the FCF figures above, the $24.4bn of net debt means that the equity is extremely high risk.

Investment Story is Speculative & Slow

The ATUS investment story, as articulated by CEO Dexter Goei, is for a $4 FCF/Share in 2026, from EBITDA recovering and CapEx normalizing:

“If we get back down to a sub-$1bn CapEx number in 2026, we’re really looking at if we get back to EBITDA numbers that are similar to last year or the years before, we’re looking at $1.7bn to $2bn of Free Cash Flow. And on 450 million shares, it’s not a bad kind of $4 per share of Free Cash Flow”

Given the structural challenges facing ATUS, we believe this is speculative at best. And, even if ATUS’ turnaround initiatives were to succeed, the benefit of most of them would not be visible until H2 2022 or even 2023.

Absent an extraneous, sector-wide improvement in Broadband net adds, we do not see any good news coming through for Altice USA in H1 2021.

Is Altice USA Stock Cheap Enough?

We believe the ATUS investment case is broken. Its problems are structural, and the risks to shareholders are too high.

In Broadband, subscribers fell 2k in Q4, but revenues fell 1.7% sequentially. Group EBITDA was down a high-single-digit year-on-year.

The core of ATUS’ turnaround strategy is to roll out more fiber, but this may not actually help. Other initiatives will take until H2 or later.

ATUS expects $100m more OpEx and $500m more CapEx in 2022; cashflows will be much worse, and leverage is too high at 5.4x.

We would avoid Altice USA stock.



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