Altice USA: Do not Purchase Into 22% Rebound Since Q2 Outcomes (NYSE:ATUS)

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Introduction

Altice USA, Inc. (NYSE:ATUS) reported Q2 2022 outcomes after markets closed final Thursday (August 3). ATUS shares rose 21.5% the next day and have remained at roughly that stage since.

We downgraded our ranking on ATUS from Purchase to Maintain in November 2021, after we noticed our authentic funding case as having damaged. ATUS inventory is at the moment 37% down from the extent on the time of our downgrade:

Librarian Capital ATUS Score vs. Share Value (Final 1 12 months)

Librarian Capital ATUS Rating vs. Share Price (Last 1 Year)

Supply: Searching for Alpha (12-Aug-22).

We thought of the rebound in ATUS shares merely a results of the levered nature of its fairness. Q2 outcomes didn’t present any significant enchancment, with each buyer numbers and income down once more. ATUS has made progress in initiatives resembling its fiber roll-out, however we’re unconvinced concerning the efficacy of no less than a few of them. We proceed to see ATUS fundamentals as a lot weaker than business leaders Constitution (CHTR) and Comcast (CMCSA). Most positively for the sector, administration feedback supported our views concerning the sector’s Q2 seasonality and Fastened Wi-fi being a restricted menace.

ATUS appears to be like superficially low-cost with a double-digit Free Money Circulate (“FCF”) Yield, however the draw back dangers are too excessive. We reiterate our Maintain ranking on ATUS and keep away from the inventory.

Altice USA Impartial Case Recap

Our downgrade was based mostly on considerations across the fundamentals in ATUS’s enterprise:

  • Competitors in ATUS markets is already intensifying
  • ATUS’ providing could also be basically uncompetitive
  • EBITDA and FCF will possible decline
  • Administration’s turnaround initiatives is probably not profitable

We consider these issues are particular to ATUS, owing to poor administration, together with previous extreme price cuts and unhealthy strategic decisions. Specifically, we consider ATUS’ singular deal with fiber is misguided, as a result of velocity is barely one of many areas on which broadband suppliers compete; we choose the technique at Constitution and Comcast, the place in addition they goal associated choices resembling {hardware} and cellular, and softer components resembling service high quality and automation.

ATUS has been in a turnaround since final September, after the abrupt exit of its COO and a warning of additional broadband subscriber losses. Administration’s technique to enhance efficiency contains accelerating its Fiber-To-The-House (“FTTH”) roll-out, relaunching its Cellular providing and rebuilding its stores and door-to-door salesforce.

ATUS expects a low-single-digit decline in revenues and a mid-single-digit decline in EBITDA in 2022, based mostly on feedback by CEO Dexter Goei on the UBS convention in December 2021.

Q2 2022 outcomes don’t point out any significant enchancment within the firm’s efficiency.

No Enchancment in Q2 Outcomes

ATUS misplaced one other 40k clients in residential Broadband in Q2 2022, and in addition misplaced clients in Video and Telephony, although it gained 33k clients in Cellular:

ATUS Buyer Numbers (Q2 2022 vs. Prior Intervals)

ATUS Customer Numbers (Q2 2022 vs. Prior Periods)

Supply: ATUS outcomes launch (Q2 2022).

The 40k loss in Broadband clients is after a 23k web achieve with FTTH, which suggests non-FFTH web loss was 63k.

12 months-on-year, ATUS’ buyer rely is down 1.5% in Broadband, and down greater than 10% in every of Video and Telephony, regardless of its whole passings having grown 1.8%.

Together with Q2 2022, ATUS has now solely gained Broadband subscribers in a single out of seven quarters since This autumn 2020:

ATUS Residential Buyer Web Provides by Product (Since 2019)

ATUS Residential Customer Net Adds by Product (Since 2019)

Supply: ATUS outcomes releases.

NB. Excludes web provides from Service Electrical and Morris Broadband acquisitions.

Buyer losses have led to weak income progress, with group revenues down 2.1% year-on-year (or down 1.9% excluding prior-year Air Strand revenues) and EBITDA down 8.8% (accelerating from a 7.7% decline in Q1):

ATUS Revenue & Loss (Q2 2022 vs. Prior Intervals)

ATUS Profit & Loss (Q2 2022 vs. Prior Periods)

Supply: ATUS outcomes releases.

Broadband revenues have been nonetheless up 1.1% year-on-year and 1.7% sequentially in Q2, displaying that subscriber web losses don’t all the time result in income declines.

Sequentially, whole revenues have been up 1.7% from Q1, helped by stronger Information & Promoting and Cellular revenues, and EBITDA was up 1.5%. As a result of Information & Promoting revenues had traditionally been seasonally a lot bigger in Q2 than Q1, we don’t consider the small sequential progress in Q2 is adequate proof that the enterprise has stabilized.

Some Progress in Strategic Initiatives

ATUS has made some progress in its strategic initiatives, however we’re unconvinced concerning the efficacy of a few of them.

ATUS has began to expertise sooner progress at its Cellular enterprise, with buyer rely up 28% (51k) year-on-year and up 17% (33k) from Q1. An expanded MVNO settlement was signed with T-Cellular (TMUS), enabling ATUS to supply extra enticing promotions resembling multiline reductions. Administration had acknowledged previously that it was not capable of compete with Verizon’s (VZ) Fios plus cellular bundles, so these adjustments ought to assist.

In its fiber roll-out, ATUS elevated its FTTH passings by 270k in Q2, greater than the full achieved in all of 2021; whole FFTH passings stood at 1.587m on the finish of the quarter:

ATUS Fiber Passings, Penetration & Buyer Depend (Since Q2 2021)

ATUS Fiber Passings, Penetration & Customer Count (Since Q2 2021)

Supply: ATUS outcomes presentation (Q2 2022).

FTTH uptake amongst ATUS clients remained low, with simply 104k FTTH clients on the finish of Q2, or 6.6% of the 1.587m FTTH passings. Contemplating that 0.9m of those passings have been already in place two years in the past at Q2 2020, the penetration price is disappointingly low. Administration said that they traditionally solely marketed FTTH to subscribers who might in any other case depart, however we observe that ATUS nonetheless had a complete broadband web lack of 68k previously 4 quarters. Administration said that they’re now actively migrating clients to fiber and want to see as near 200k fiber clients by year-end as attainable.

ATUS additionally disclosed that its broadband clients had a median obtain velocity of simply 400 Mbps as of Q2 2022, with 45% of them on speeds of 200 Mbps or decrease, regardless that 1 Gbps+ velocity has been obtainable on 90%+ of its community since late 2020. Since a considerable variety of its clients aren’t upgrading to even the speeds which have lengthy been obtainable, making even sooner speeds obtainable might not make a lot of a distinction.

ATUS has additionally made progress in rebuilding its distribution footprint, increasing its door-to-door gross sales pressure to the low-end of its 400-500 goal vary, and taking its retail places whole to 108 by the tip of June:

ATUS Distribution Channels (2017-22E)

ATUS Distribution Channels (2017-22E)

Supply: ATUS outcomes presentation (Q2 2022).

Whether or not the restoration of ATUS’ distribution would make a cloth distinction stays to be seen.

Administration expects broadband subscribers to “come again to progress” in H2 2022, however related steering previously had disillusioned.

Nonetheless A lot Weaker than Constitution and Comcast

On a year-on-year foundation, ATUS did a lot worse in each buyer rely and revenues than Constitution and Comcast; sequentially, ATUS additionally did about 1-1.5 ppt worse than Constitution, however did barely higher than Comcast on revenues:

U.S. Cable Residential Broadband & Cellular Development (Q2 2022 vs. Prior Intervals)

U.S. Cable Residential Broadband & Mobile Growth (Q2 2022 vs. Prior Periods)

Supply: Firm filings.

NB. Figures embody SMBs. Cellular revenues embody system gross sales. Constitution misplaced 59k Web clients in Q2 2022 in a transition between federal subsidy packages.

We consider ATUS stays a a lot weaker participant in cable than Constitution and Comcast.

Learn-Throughout on Seasonality and Fastened Wi-fi

Most positively for the sector, administration feedback supported our views about Q2 seasonality and Fastened Wi-fi being a restricted menace.

In our evaluation of Constitution’s Q2 outcomes, we described how a part of the sequential deterioration in broadband web provides was attributable to seasonality, with residents leaving faculty cities earlier than the summer season. This sample was recurrently seen within the years earlier than COVID-19, disappeared throughout the pandemic, however was noticed by Constitution administration to have returned this 12 months. ATUS executives made the identical commentary on their earnings name.

ATUS CEO Dexter Goei additionally noticed their two totally different footprints, Suddenlink and Optimum, have been dealing with very totally different aggressive dynamics. The extra rural Suddenlink footprint was seeing increased churn, which he attributed to telco fiber overbuild and Fastened Wi-fi (“FWA”) merchandise; the extra city Optimum footprint, then again, continued to see low churn and far more restricted exercise from Fastened Wi-fi merchandise:

The place we do not see decrease exercise from a gross add standpoint is in our Suddenlink footprint … However we do see an uptake in churn, attributable to aggressive atmosphere, whether or not be at FWA or fiber overbuilders. We are able to isolate to the markets the place we see fiber overbuilders and inform you that we now have incremental churn that in all probability results in a majority of the affect that we’re seeing in Suddenlink on a quarterly foundation … After which, the affect at FWA, we will not put our finger on it precisely the place it could be hitting through which markets, as a result of most of our markets in Suddenlink are uncovered to FWA. However we do see the identical gross add exercise, however we do see increased churn. So it have to be coming some coming from the aggressive pressures of FWA.”

“In our extra city areas, which is on the Optimum facet, our gross add exercise is decrease however our churn may be very secure. And we additionally consider that the publicity to FWA in our extra city areas is quite a bit decrease than it’s in Suddenlink when it comes to what we expect the know-how can do and the place it’s and the place we expect it is marketed.”

Dexter Goei, ATUS CEO (Q2 2022 earnings name)

As we defined in our Constitution article, fiber overbuild by AT&T (T) and Verizon has had little affect on their total broadband web provides, so we consider the headwind ATUS confronted from them was particular to its weaker aggressive positioning within the beforehand less-contested Suddenlink footprint. We additionally consider Fastened Wi-fi merchandise to be inherently inferior and solely appropriate for the low-end of the market and/or traditionally underserved segments, and the comparatively secure churn in ATUS’ Optimum footprint is in line this view.

Suddenlink Sale Course of Is Unsure

ATUS administration confirmed that there’s an ongoing sale course of for the Suddenlink a part of its community, however declined to share any actual particulars. We consider the sale course of was unplanned, solely occurred due to both in-bound queries or stress from controlling shareholder Patrick Drahi, and its end result stays unsure.

The unplanned nature of the method is obvious from how ATUS has solely simply rebranded Suddenlink to the Optimum model final week, “to unify our advertising efforts and create a constant buyer and worker expertise”. As CEO Dexter Goei mentioned on the decision:

Individuals have been asking us is why are you doing a rebrand if you’re participating in strategic discussions as a result of the strategic discussions might quantity to nothing. And we’ll proceed to run the enterprise as ordinary till we do not have to.”

Goei additionally referenced the earlier sale course of involving the Lightpath fiber enterprise enterprise, which in the end noticed ATUS offered a 49.99% stake to a personal fairness agency and retained management. ATUS could also be pursuing an identical transaction for Suddenlink, which might imply a decrease valuation and smaller money proceeds than a full sale.

Double-Digit FCF Yield However Extremely Levered

ATUS generated $1.28bn of Working Cashflows and $322m of Free Money Circulate in H1 2022, each considerably decrease year-on-year, due to a decline in its income, increased CapEx for its FTTH roll-out, and exhaustion of previous tax losses:

ATUS EBITDA & Cashflows (Since 2019)

ATUS EBITDA & Cashflows (Since 2019)

Supply: ATUS firm filings.

With each buyer numbers and EBITDA in decline, there’s a threat that Working Cashflows will proceed to say no.

Administration continues to count on $1.7-1.8bn of CapEx in 2022, together with $0.3-0.4bn of further FTTH CapEx and $0.1-0.2bn of further new-build CapEx in comparison with 2021. Up to now, ATUS had talked of CapEx normalizing all the way down to under $1bn after the subsequent few years, utilizing 2026 for instance date.

Annualizing H1 2022 FCF of $322m would give a full-year determine of $644m, which suggests an FCF Yield of 12.3%.

Nonetheless, ATUS’s fairness is very levered, with present market capitalization of $5.22bn being a fraction of its $24.1bn web debt. As a result of fairness solely represents 18% of ATUS’ Enterprise Worth, a 5% change in ATUS’s EBITDA, assuming EV/EBITDA would stay unchanged, might change the share worth by roughly 28%. This implies ATUS is a inventory with outsized dangers and rewards.

Web Debt / EBITDA was at 5.7x on a last-twelve-month foundation and 6.0x on a last-two-quarter foundation, each considerably increased than ATUS’s historic 4.5-5.0x goal. Web Debt has solely fallen by 3% ($741m) previously 4 quarters, regardless of administration having suspended buybacks to deal with deleveraging.

Is Altice USA a Purchase? Conclusion

We stay uncomfortable with ATUS’s fundamentals, and the draw back dangers are too excessive. Inside U.S. Cable, we proceed to choose Constitution and Comcast. We reiterate our Maintain ranking on ATUS and keep away from the inventory.