Editor's Note: Below is Hedgeye Communications analyst Andrew Freedman's analysis on his short Altice (ATUS) call, which over -8% following a disappointing Q2 earnings.

Watch Freedman break down his key post-earnings takeaways on The Call and read his research note from February 2021 in which he highlights his short thesis. For more info on Communications Pro research click HERE.

FROM THE CALL 7/29/21

Freedman's note from 2/07/21

Takeaway: We remain short Altice USA (ATUS) in the Hedgeye Communications Position Monitor

Altice USA (ATUS) is scheduled to report earnings and provide 2021 guidance on 2/10. It seems management pulled every lever they could in 2020 (e.g., tuck-in acquisition, hostile (failed) takeover, lightpath divestiture, dutch auction, refinancing, further headcount reductions under the guise of COVID). The company had to halt Capex programs, which significantly boosted cash flow and canceled sporting events helped lower programming expenses.

While advertising got hit hard in the 1H20, it quickly rebounded in the 2H21 due to political campaigns. Meanwhile, COVID pulled-forward broadband adoption and drove subscribers to higher-speed plans. Overall, we see more headwinds than tailwinds influencing management's guidance for 2021. 

FACTORS INFLUENCING 2021 

  • Pull-forward of broadband adoption due to work-from-home (WFH) / Increase in broadband ARPU due to speed upgrades
  • Altice USA broadband adoption as of Q3 was 93.6% (# broadband subs / unique resi customers)
  • Unwind of FCC pledge to Keep America Connected (As of the end of Q3, the Company’s reported subscriber counts include 20.9k customers covered by the Pledge or by the NJ Order who have outstanding balances that are more than 90 days past due.)
  • Eventually, these subs will convert to paid or Altice will have to write them off; Note Charter actually took a write-down related to these customers in 2Q20, but Altice hasn't done anything yet.

  • Either way, it was a boost to reported numbers and will make for a more difficult comparison in 2021; and we would expect these subs to roll-off starting in Q4.
  • Comparing against a sizeable price increase in 1H21 (price increase 1H20)

    • Not to say they can't raise prices again, but we do think it will be harder for them to pass through an increase in this economic backdrop, and doing so will only add to the bad PR after their mishandling of the storms from the summer/fall. Altice is also facing greater competition in parts of their Optimum footprint, which will limit their ability to raise prices.

    • The 2020 price increase was about 4-5% gross across the entire base (the company expected a 50% flow through to ARPU... so 2-3% net), which was a bit higher than the 3% price increase in 2019. The price increases are on schedule for the first time in 2020 - so they raise are raising price the same time in 2019 as in 2020. Price increases are more toward the high-end in Optimum and low-end in Suddenlink.
    • On the broadband side, they increased the relative value of the 300Mbps plan by cutting the price and raising the price on lower-tier speeds to encourage people to upgrade.

  • Boost from political advertising in 2020, followed by easy COVID comparisons 1H21

    • Company has said ~$50M political advertising boost in 2020 (management expects for advertising revs to be flat YoY in 2021)

  • Service Electric acquisition in New Jersey (closed July 2020) - will they announce another deal?

    • Approximately $40-50M in annualized revenue / $15-20M in Adjusted EBITDA

    • ~40k residential customers / ~30k residential broadband customers