PART I
Item 1. Business
Altice USA, Inc. ("Altice USA" or the "Company") was incorporated in Delaware on September 14, 2015. As of December 31, 2017, Altice USAThrough June 8, 2018, the Company was majority‑ownedmajority-owned by Altice Europe N.V. ("Altice Europe"), a public company with limited liability (naamloze vennootshcap)("naamloze vennootshcap") under Dutch law ("Altice N.V." and Altice N.V. and its subsidiaries, the "Altice Group"). Upon the completion of the Altice N.V. distribution discussed below, the Company will no longer be majority-owned by Altice N.V.
Altice USA is one of the largest broadband communications and video services providers in the United States. We deliver broadband, pay television, telephony services, proprietary content and advertising services to approximately 4.9 million residential and business customers. Our footprint extends across 21 states through a fiber-rich broadband network with more than 8.6 million homes passed as of December 31, 2017.
We acquired Cequel Corporation ("Suddenlink" or "Cequel") on December 21, 2015 and Cablevision Systems Corporation ("Optimum" or "Cablevision") onlaw. On June 21, 2016. These acquisitions are referred to throughout this document as the "Suddenlink Acquisition" (or the "Cequel Acquisition") and the "Optimum Acquisition (or the "Cablevision Acquisition"), respectively, and collectively as the "Acquisitions." We are a holding company that does not conduct any business operations of our own. We serve our customers through two business segments: Optimum, which operates in the New York metropolitan area, and Suddenlink, which principally operates in markets in the south-central United States.
Following the Acquisitions, we began to simplify our organizational structure, reduce management layers, streamline decision-making processes and redeploy resources with a focus on network investment, customer service enhancements and marketing support. As a result, we have made significant progress in integrating the operations of Optimum and Suddenlink, centralizing our business functions, reorganizing our procurement processes, eliminating duplicative management functions, terminating lower-return projects and non-essential consulting and third-party service arrangements, and investing in our employee relations and our culture. Improved operational efficiency has allowed us to redeploy physical, technical and financial resources towards upgrading our network and enhancing the customer experience to drive customer growth. This focus is demonstrated by reduced network outages since the Acquisitions, which we believe improves the consistency and quality of the customer experience. In addition, we have expanded, and intend to continue expanding, our e-commerce channels for sales and marketing.
Since the Acquisitions, we have quadrupled the maximum available broadband speeds we are offering to our Optimum customers from 101 Mbps to 400 Mbps for residential customers and 450 Mbps for business customers and expanded our 1 Gbps broadband service to approximately 72% of our Suddenlink footprint from approximately 40% prior to the Suddenlink Acquisition. In addition, we have commenced a plan to build a fiber-to-the-home ("FTTH") network, which will enable us to deliver more than 10 Gbps broadband speeds across our entire Optimum footprint and part of our Suddenlink footprint. We believe this FTTH network will be more resilient with reduced maintenance requirements, fewer service outages and lower power usage, which we expect will drive further cost efficiencies in our business. In order to further enhance the customer experience, during the fourth quarter, we introduced a new home communications hub, Altice One, and we have begun rolling it out across our Optimum footprint. Our new home communications hub is an innovative, integrated platform with a dynamic and sophisticated user interface, combining a set-top box, Internet wireless router and cable modem in one device, and is our most advanced home communications hub. We are also beginning to offer managed data and communications services to our business customers and more advanced advertising services, such as targeted multi-screen advertising and data analytics, to our advertising and other business clients. In the fourth quarter of 2017, we and Sprint Corporation ("Sprint") entered into a multi-year strategic agreement pursuant to which we will utilize Sprint's network to provide mobile voice and data services to our customers throughout the nation, and our broadband network will be utilized to accelerate the densification of Sprint's network. We believe this additional product offering will enable us to deliver greater value and more benefits to our customers.
The following table presents certain financial data and metrics for the Company and its segments:
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| | | | | | | | | | | | | | | | | | | | | | | |
| Years ended December 31, |
| Altice USA | | Optimum Segment | | Cequel Segment |
(in thousands except percentage data) | 2017 | | 2016 (a) | | 2017 | | 2016 (b) | | 2017 | | 2016 |
Customer Relationships | 4,906 |
| | 4,892 |
| | 3,156 |
| | 3,141 |
| | 1,750 |
| | 1,751 |
|
% growth | 0.3 | % | | | | 0.5 | % | | | | (0.1 | )% | | |
Revenue | $ | 9,326,570 |
| | $ | 6,017,212 |
| | $ | 6,664,788 |
| | $ | 3,444,052 |
| | $ | 2,664,574 |
| | $ | 2,573,160 |
|
Adjusted EBITDA (c) | $ | 4,005,690 |
| | $ | 2,414,735 |
| | $ | 2,751,121 |
| | $ | 1,259,844 |
| | $ | 1,254,569 |
| | $ | 1,154,891 |
|
% of Revenue | 42.9 | % | | 40.1 | % | | 41.3 | % | | 36.6 | % | | 47.1 | % | | 44.9 | % |
Adjusted EBITDA less capital expenditures (c) | $ | 3,014,326 |
| | $ | 1,789,194 |
| | $ | 2,039,689 |
| | $ | 961,487 |
| | $ | 974,637 |
| | $ | 827,707 |
|
% of Revenue | 32.3 | % | | 29.7 | % | | 30.6 | % | | 27.9 | % | | 36.6 | % | | 32.2 | % |
Net income (loss) attributable to stockholders (d) | $ | 1,520,031 |
| | $ | (832,030 | ) | | | | | | | | |
| |
(a) | The 2016 amounts for Altice USA include the operating results of Cablevision from the date of the Cablevision Acquisition. |
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(b) | Amounts reflect the operating results of Cablevision from the date of the Cablevision Acquisition and include results for Newsday Media Group ("Newsday"). Altice USA sold a 75% stake in Newsday in July 2016. Newsday's revenue, for the period from June 21, 2016 through its sale in July 2016, was approximately $8.8 million. |
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(c) | For additional information regarding Adjusted EBITDA, including a reconciliation of Adjusted EBITDA to Net Income (Loss), please refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations." |
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(d) | Pursuant to the enactment of the Tax Cuts & Jobs Act ("Tax Reform") on December 22, 2017, the Company recorded a noncash deferred tax benefit of $2,337,900 to remeasure the net deferred tax liability to adjust for the reduction in the corporate federal income tax rate from 35% to 21% which is effective on January 1, 2018. |
Altice N.V. Distribution
On January 8, 2018, Altice N.V. announced plans for the separation of the Company from Altice N.V. Altice N.V. will distributeEurope distributed substantially all of its equity interest in the Company through a distribution in kind to holders of Altice N.V.'sEurope's common shares A and common shares B (the “Distribution”). Following the Distribution, Altice N.V. will no longer own a controlling equity interest in theThe Company and the Company will operate independently from Altice N.V. Altice N.V. is ultimately controlled by Patrick Drahi through Next AltAlt. S.a.r.l. (‘‘("Next Alt’’Alt"). As
Altice USA is a holding company that does not conduct any business operations of its own. Altice Europe, through a subsidiary, acquired Cequel Corporation ("Cequel" or "Suddenlink") on December 21, 2015 (the "Cequel Acquisition") and Cequel was contributed to Altice USA on June 9, 2016. Altice USA acquired Cablevision Systems Corporation ("Cablevision" or "Optimum") on June 21, 2016 (the "Cablevision Acquisition").
The Company principally provides broadband communications and video services in the United States and markets its services primarily under two brands: Optimum, in the New York metropolitan area, and Suddenlink, principally in markets in the south-central United States. We deliver broadband, video, telephony, and mobile services to more than five million residential and business customers. Our footprint extends across 21 states through a fiber-rich hybrid-fiber coaxial ("HFC") broadband network and a fiber-to-the-home ("FTTH") network with more than 9 million homes passed as of December 31, 2017, Next Alt held 60.31%2020. Additionally, we offer news programming and content, and advertising services. The Company launched Altice Mobile, our full service mobile offering, to consumers across our footprint in September 2019.
Our FTTH network build, which would enable us to deliver more than 10 Gbps broadband speeds to meet the growing data needs of residential and business customers, is underway. Concurrent to our FTTH network deployment, we also continue to upgrade our existing HFC network through the outstanding share capitaldeployment of digital and voting rights of Altice N.V., representing 49.5% of the economic rights and 66% of the voting powerdata over cable service interface specification ("DOCSIS") 3.0 technology in general meetings. Mr. Drahi has informed us that Next Alt will electorder to receive 100% of the shares of Altice USAroll out enhanced broadband services to which it is entitledcustomers. One Gbps broadband services are available in the Distribution in the formmajority of Altice USA Class B common stockour footprint and will be subjectcontinue to proration, inexpand across our service areas throughout 2021. Altice USA’s broadbandservice provides a connectivity experience to support the same manner as other Altice N.V. shareholders, in the event the number of shares of Altice USA Class B common stock elected to be received by Altice N.V. shareholders exceeds a cap of 247.7 million shares (the "Class B Cap"most data-intensive activities, including streaming 4K ultra-high-definition ("UHD"). As a result of Next Alt’s intended election, and voting agreements that Next Alt will enter into with certain members of Altice N.V.high-definition ("HD") video on multiple devices, online multi-player video game streaming platforms, video chatting, streaming music, high-quality virtual-and augmented reality experiences, and Altice USA management with respect to all shares of Altice USA common stock they own, Mr. Drahi will control Altice USA immediately after giving effect to the Distribution regardless of the elections made by other Altice N.V. shareholders.downloading large files.
The implementationfollowing table presents certain financial data and metrics for Altice USA:
| | | | | | | | | | | | | | | | | |
| Years ended December 31, |
| 2020 | | 2019 | | 2018 |
| (in thousands, except percentage data) |
Customer Relationships (a) | 5,024.6 | | | 4,916.3 | | | 4,899.5 | |
% growth | 2.2 | % | | 0.3 | % | | 0.3 | % |
Revenue | $ | 9,894,642 | | | $ | 9,760,859 | | | 9,566,608 | |
Adjusted EBITDA (b) | $ | 4,414,814 | | | $ | 4,265,471 | | | $ | 4,163,078 | |
% of Revenue | 44.6 | % | | 43.7 | % | | 43.5 | % |
| | | | | |
| | | | | |
Net income attributable to Altice USA, Inc. stockholders | $ | 436,183 | | | $ | 138,936 | | | $ | 18,833 | |
(a)Customer metrics do not include Altice Mobile customers.
(b)For additional information regarding Adjusted EBITDA, including a reconciliation of the Distribution is expectedNet Income to be subjectAdjusted EBITDA, please refer to certain conditions precedent being satisfied or waived. Although Altice N.V."Management's Discussion and the Company have not yet negotiated the final termsAnalysis of the DistributionFinancial Condition and related transactions, the Company expects that the following will be conditions to the Distribution:Results of Operations."
Approval of Altice N.V. shareholders of (i) the distribution in kind and (ii) the board resolution approving the change in identity and character of the business of Altice N.V. resulting from the Distribution;
Receipt of certain U.S. regulatory approvals, which could take up to 180 days;
The Registration Statement filed on January 8, 2018, as amended, being declared effective by the U.S. Securities and Exchange Commission (the ‘‘Commission’’);
The entry into a separation agreement (the "Master Separation Agreement") and the entry into, amendments to or termination of various arrangements between Altice N.V. and the Company, such as a license to use the Altice brand, the stockholders’ agreement among Altice USA, Altice N.V. and certain other parties and the management agreement pursuant to which the Company pays a quarterly management fee to Altice N.V.; and
The declaration and payment of a one-time $1.5 billion dividend to Altice USA stockholders as of a record date prior to the Distribution (the ‘‘Pre-Distribution Dividend’’).
Prior to Altice N.V.'s announcement of the Distribution, the Board of Directors of Altice USA, acting through its independent directors, approved in principle the payment of the Pre-Distribution Dividend to all shareholders immediately prior to completion of the separation. Formal approval of the Pre-Distribution Dividend and setting of a record date are expected to occur in the second quarter of 2018. The payment of the Pre-Distribution Dividend will be funded with available Cablevision revolving facility capacity and available cash from new financings, completed in January 2018, at CSC Holdings LLC ("CSC Holdings"), a wholly-owned subsidiary of Cablevision. In addition, the Board of Directors of Altice USA has authorized a share repurchase program of $2.0 billion, effective following completion of the separation.
Our Products and Services
We provide broadband, pay televisionvideo and telephony services to both residential and business customers. We also provide enterprise-grade fiber connectivity, bandwidth and managed services to enterprise customers through Optimum’s Lightpath business (also marketed as Altice Business) and provide advertising time and services to advertisers. In addition, we offer various news programming through traditional linear and digital platforms. In September 2019, the Company launched Altice Mobile, a full service mobile offering, to consumers across our footprint.
The prices we charge for our services vary based on the number of services and associated service level or tier our customers choose, coupled with any promotions we may offer. As part of our marketing strategy our customers are increasingly choosing to bundle their subscriptions to two (‘‘double product’’) or three (‘‘triple product’’) of our services at the same time. Customers who subscribe to a bundle generally receive a discount from the price of buying each of these services separately, as well as the convenience of receiving multiple services from a single provider, all on a single monthly bill. For example, we offer ana ‘‘Optimum Triple Play’’ package that is a special promotion for new customers or eligible current customers where Optimumour broadband, pay televisionvideo and telephony services are each available at a reduced rate for a specified period when purchased together. Approximately 50% of our residential customers were triple product customers as of December 31, 2017.
Residential Services
We offer broadband, pay television and telephony services to residential customers through both our Optimum and Suddenlink segments. The following tables showtable shows our residential customer relationships for broadband, video and telephony services provided to residential customers.
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| December 31, |
| 2020 | | 2019 | | 2018 |
| (in thousands) |
Total residential customer relationships: | 4,648.4 | | | 4,533.3 | | | 4,518.1 | |
Broadband | 4,359.2 | | | 4,187.3 | | | 4,115.4 | |
Video | 2,961.0 | | | 3,179.2 | | | 3,286.1 | |
Telephony | 2,214.0 | | | 2,398.8 | | | 2,530.1 | |
The following table shows our revenues by service offerings for each of our Optimumbroadband, video and Suddenlink segments as well as on a combined basis.telephony services provided to residential customers.
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| December 31, 2017 | | December 31, 2016 |
| Optimum | | Suddenlink | | Total | | Optimum | | Suddenlink | | Total |
| (in thousands) |
Total Residential customers relationships | 2,893 |
| | 1,642 |
| | 4,535 |
| | 2,879 |
| | 1,649 |
| | 4,528 |
|
Pay TV | 2,363 |
| | 1,042 |
| | 3,406 |
| | 2,428 |
| | 1,107 |
| | 3,535 |
|
Broadband | 2,670 |
| | 1,376 |
| | 4,046 |
| | 2,619 |
| | 1,344 |
| | 3,963 |
|
Telephony | 1,965 |
| | 592 |
| | 2,557 |
| | 1,962 |
| | 597 |
| | 2,559 |
|
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| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2017 | | December 31, 2016 |
| Optimum | | Suddenlink | | Total | | Optimum | | Suddenlink | | Total |
| (dollars in thousands) |
Residential revenue: | | | | |
|
| | | | | |
|
|
Pay TV | $ | 3,113,238 |
| | $ | 1,101,507 |
| | $ | 4,214,745 |
| | $ | 1,638,691 |
| | $ | 1,120,525 |
| | $ | 2,759,216 |
|
Broadband | 1,603,015 |
| | 960,757 |
| | 2,563,772 |
| | 782,615 |
| | 834,414 |
| | 1,617,029 |
|
Telephony | 693,478 |
| | 130,503 |
| | 823,981 |
| | 376,034 |
| | 153,939 |
| | 529,973 |
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| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2020 | | 2019 | | 2018 |
Residential revenue: | (in thousands) |
Broadband | $ | 3,689,159 | | | $ | 3,222,605 | | | $ | 2,887,455 | |
Video | 3,670,859 | | | 3,997,873 | | | 4,156,428 | |
Telephony | 468,777 | | | 598,694 | | | 652,895 | |
Broadband Services
We offer a variety of broadband service tiers tailored to meet the different needs of our residential customers. Current customer offers include four tiers with download speeds ranging from 60 Mbps to 400 Mbps for our Optimum residential customers and 5020 Mbps to 1 Gbps for our Suddenlink residential customers. Our broadband services also include the Optimum wireless router, as well as Internet security software, including anti-virus, anti-spyware, personal firewall and anti-spam protection. Substantially all of our hybrid fiber-coaxial ("HFC")HFC network is digital and data over cable service interface specification ("DOCSIS")DOCSIS 3.0 compatible, with approximately 275266 homes per node and a bandwidth capacity of at least 750 MHz throughout. This network allows us to provide our customers with advanced broadband, pay televisionvideo and telephony services. Since the Acquisitions, we have quadrupled the maximum available broadband speeds we are offering to our Optimum customers from 101 Mbps to 400 Mbps for residential customers and 450 Mbps for business customers and expanded our 1 Gbps broadband service to approximately 72% of our Suddenlink footprint from approximately 40% prior to the Suddenlink Acquisition. We have also commenced a plan to build a FTTH network, which will enable us to deliver more than 10 Gbps broadband speeds across our entire Optimum footprint and part of our Suddenlink footprint.
In addition, we have deployed Wi-FiWiFi across our OptimumNew York metropolitan service area with approximatelyand have started a WiFi deployment program across the rest of our footprint providing for over 2.1 million Wi-Fitotal WiFi hotspots as of December 31, 2017.2020. The Optimum Wi-FiWiFi network allows Optimum broadband customers to access the serviceInternet connectivity while they are away from their home or office. Wi-FiWiFi is delivered via wireless access points mounted on our Optimum broadband network, in certain retail partner locations, certain NJ Transit rail stations, New York City parks and other public venues. Similarly,Our wireless router product and our "Optimum wireless router" product includesAltice One device include a second network that enables all Optimum broadband customers to access the Optimum Wi-Fi network.WiFi network throughout the neighborhoods we serve. Access to the Optimum Wi-FiWiFi network is offered as a free value-added benefit to Optimum broadband customers and for a fee to non-customers in certain locations. Our Wi-FiWiFi service also allows our Optimum broadband customers to access the Wi-FiWiFi networks of Comcast Corporation ("Comcast"), Charter Communications, Inc. ("Charter")(within the legacy Time Warner Cable and Bright House Networks footprints) and Cox Communications.Communications, Inc. Through these relationships we offer our Optimum customers complimentary access to approximately 350,000 additional hotspots nationwide.
Pay TelevisionVideo Services
We currently offer a variety of pay televisionvideo services, which include delivery of broadcast stations and cable networks, over the top ("OTT") services such as Netflix, YouTube and others, and advanced digital pay televisionvideo services, such as video-on-demand ("VOD"), high-definition ("HD")HD channels, digital video recorder ("DVR") and pay-per-view, to our residential markets. Depending on the market and level of service, our pay televisionvideo services include, among other programming, local broadcast networks and independent television stations, news, information, sports and entertainment channels, regional sports networks, international channels and premium services such as HBO, Showtime, Cinemax, Starz, and The Movie Channel. Our residential customers pay a monthly charge based on the pay televisionvideo programming level of service, tier or
package they receive and the type of equipment they select. Customers who subscribe to seasonal sports packages, international channels and premium services may be charged an additional monthly amount. We may also charge additional fees for pay-per-view programming and events, DVR and certain VOD services.
As of December 31, 2017, Optimum2020, our residential customers were able to receive upbetween 470 to 605 digital channels and Suddenlink residential customers were able to receive up to 438592 digital channels depending on their market and level of service. Optimum offers upIn addition, depending on the service area, we offer between 156 to 174 HD channels and Suddenlink offers up to 139188 HD channels which represent the most widely watched programming, including all major broadcast networks, as well as most leading national cable networks, premium channels and regional sports networks. HDTV features high-resolution picture quality, digital sound quality and a wide-screen, theater-like display when using an HDTV set and an HD-capable converter. We also continue to launch additional HD channels to continuously improve our customer's viewing experience. As of December 31, 2017, approximately 95% of our residential Optimum pay television customers subscribe to HDTV services. As of December 31, 2017, approximately 81% of Suddenlink pay television customers were digital pay television customers and approximately 95% of those digital pay television customers subscribe to HDTV services.
We also provide advanced services, such as pay-per-view and VOD, that give residential pay televisionvideo customers control over when they watch their favorite programming. Our pay-per-view service allows customers to pay to view single showings of programming on an unedited, commercial-free basis, including feature films, live sporting events,
concerts and other special events. Our VOD service provides on-demand access to movies, special events, free prime time content and general interest titles. Subscription-based VOD premium content such as HBO and Showtime is made available to customers who subscribe to one of our premium programming packages. Our customers have the ability to start the programs at whatever time is convenient, as well as pause, rewind and (for most content) fast forward both standard definition and HD VOD programming. As of December 31, 2017,2020, pay-per-view services were available for all Optimum andto over 99% of Suddenlink pay televisionall our video customers and VOD services were available to all of our Optimum pay television customers andover 95% of our Suddenlink pay televisionvideo customers, and we offeredoffer thousands of HD titles on-demand for Optimum and Suddenlink customers, respectively.on-demand.
For a monthly fee, we offer DVR services through the use of digital converters, the majority of which are HDTV-capable and have video recording capability. As of December 31, 2017, approximately 50% of our residential Optimum pay television customers and 37% of our Suddenlink pay television customers utilized DVR services. Optimum customersHDTV-capable. Customers can choose either a set-top box DVR with the ability to record, pause and rewind live television or the Cloud DVR Plus with remote-storage capability to record 15 shows simultaneously while watching any live or pre-recorded show, and pause and rewind live television. Depending on the service area and market, Suddenlink customers have the option to use a set-top box DVR or a TiVo HD/DVR converter. The TiVo converter which delivers multi-room DVR capability using TiVo Mini devices that allow customers to pause and rewind live television, manage recordings from different television locations and play them back throughout the home. In addition, TiVo Stream service, which allows customers to stream live television channels and recorded programming wirelessly throughout their home to Android and iOS devices, and, subject to copyright restrictions, download previously recorded content to these devices so that it can be viewed outside the home, is provided to current TiVo DVR customers.
We also introduced a new home communications and entertainment hub duringDuring the fourth quarter of 2017, we introduced an entertainment and connectivity platform, called Altice One. Altice One which is our most advanced home hub, and we have begun rolling it out across our Optimum footprint. This new hub is an innovative, integrated platform with a dynamic and sophisticatedmodern user interface combiningthat combines a set-top box, Internet wireless router and cable modem in one device. It is based on LaBox, which Altice N.V. has successfully deployed in France, the Dominican Republic and Israel, and is initially offered to new customers subscribing to our double and triple-product packages. It is capable of delivering broadband Internet, Wi-Fi,WiFi, digital television services, over-the-top ("OTT")OTT services and fixed-line telephony and supports 4K video and a remote-storageCloud DVR with the capacity to record 15 television programs simultaneously and the ability to rewind live television on the last two channels watched. Additional features include a point-anywhere voice-command remote control and a companion Altice One mobile app that allows viewing of all television content including DVR streaming. Additional televisions will beare paired with "minis,"Minis." which can also actSince launch, we have and continue to update Altice One and its companion mobile apps with new features, including the ability to watch Cloud DVR content on the go, access to the YouTube Kids application, the ability to use voice search on YouTube to discover videos, more 4K content for a vivid viewing experience, and more advanced features for customers such as Wi-Fi extendersthe introduction of our new sports hub, enhanced home screen and additional applications. During the first quarter of 2020 we introduced the Altice One App for an advanced Wi-Fi experience throughoutApple TV, providing customers with the home.ability to watch live, On Demand and DVR content on that platform.
We also offer alternative viewing platforms for our pay televisionvideo programming through mobile applications. OurAltice One customers have access to the Altice One mobile application and Optimum customers have access to the Optimum App,TV application, available for the iPad, iPhone, iPod touch, personal computers, Kindle Fire and select Android phones and tablets, and our Suddenlink customers have access to the Suddenlink2GO available for personal computers and select phones and tablets.website. Depending on the platform, the Optimum AppTV application features include the ability to watch live television, stream on-demand titles from various networks and use the device as a remote to control the customer's digital set-top box while inside the home. Suddenlink customers have access to the Suddenlink2GO website, which enables Suddenlink customers to watch over 300,000 movies, shows and clips from over 200 networks on a personal computer once authenticated via the Suddenlinka customer portal and select television shows and movies on their mobile devices.
Telephony Services
Through voice over Internet protocol ("VoIP") telephone service we also offer unlimited local, regional and long-distance calling within the United States, Canada, Puerto Rico and the Virgin Islands and Canada for a flat monthly rate, including
popular calling features such as caller ID with name and number, call waiting, three-way calling, enhanced emergency 911 dialing and television caller ID. We also offer additional options designed to meet our customers' needs, including directory assistance, voicemail services and international calling. Discount and promotional pricing are available when our telephony services are combined with our other service offerings.
Mobile
In September 2019, we commercially launched Altice Mobile, a mobile service providing data, talk and text to consumers in or near our wired service footprint. The service is delivered over a nationwide network with long-term evolution ("LTE") and 5G (where available) coverage through our network partners, including our infrastructure-based mobile virtual network operator ("MVNO") agreement with T-Mobile U.S. Inc. ("T-Mobile") which acquired Sprint Corporation (“Sprint”) in 2020. We have densified the fourth quarterSprint network coverage in our Optimum footprint with the mounting of 2017, we and Sprint entered into a multi-year strategic agreement pursuant to which we will utilize Sprint's network to provide mobile voice and data services to our customers throughout the nation, and19,000 airstrands on our broadband infrastructure and now benefit from the full combined coverage of the “T-Mobile” and “Sprint” networks. We also have a direct roaming agreement with AT&T Inc. ("AT&T") and some regional partners. We offload mobile traffic using our Optimum Wi-Fi network will be utilized to accelerateof hotspots in the densification of Sprint's network. We believe this additional product
offering will enableNew York metropolitan area as well as select customer premises equipment (“CPE”) across our footprint. Our full infrastructure MVNO agreement with T-Mobile is differentiated from other light MVNOs in that it gives us full access control over our own core network, as well as the Home Location Register and subscriber identification module ("SIM") cards. This allows us to deliver greater valuefully control seamless data offloading and more benefits tothe handover between the fixed and wireless networks. We also have full product, features and marketing flexibility with our customers,mobile service.
Altice Mobile is sold at Optimum and Suddenlink stores as well as online. Consumers can bring their own devices or buy or finance a variety of phones directly from us, including by offering "quad play" offerings that bundle broadband, pay television, telephonyApple, Samsung and mobile voice and data services to our customers.Motorola devices.
Business Services
Both our Optimum and Suddenlink segmentsWe offer a wide and growing variety of products and services to both large enterprise and small and medium-sized business ("SMB") customers, including broadband, telephony, networking and pay televisionvideo services. For the year ended December 31, 2017, business services accounted for approximately 14% of the revenue for both our Optimum and Suddenlink segments, respectively, and accounted for approximately 14% of our consolidated revenue. As of December 31, 2017, our Optimum segment2020, we served approximately 263,000376,000 SMB customers andacross our Suddenlink segment served 109,000 SMB customers.footprint. We serve enterprise customers primarily through our Lightpath business, a subsidiary of Cablevision.business.
Enterprise Customers
Lightpath provides Ethernet, data transport, IP-based virtual private networks, Internet access, telephony services, including session initiated protocol ("SIP") trunking and VoIP services to the business market.market in the New York metropolitan area. Our Lightpath bandwidth connectivity service offers download speeds up to 100 Gbps. Lightpath also provides managed services to businesses, including hosted telephony services (cloud based SIP-based private branch exchange), managed Wi-Fi,WiFi, managed desktop and server backup and managed collaboration services including audio and web conferencing. Through Lightpath, we also offer fiber-to-the-tower ("FTTT") services to wireless carriers for cell tower backhaul and enablethat enables wireline communications service providers to connect to customerstowers that their own wireline networks do not reach. Lightpath's enterprise customers include companies in health care, financial, education, legal and professional services, and other industries, as well as the public sector and communication providers, incumbent local exchange carriers ("ILEC"), and competitive local exchange carriers ("CLEC"). As of December 31, 2017,2020, Lightpath had over 9,10011,800 locations connected to its fiber network. Our Lightpath advanced fiber optic network, extendswhich currently includes more than 7,100 route miles, which includes approximately 361,00018,800 miles of fiber throughoutsheaths (“route miles”) (approximately 9,000 owned route miles and approximately 9,800 route miles pursuant to an indefeasible right of use (“IRU”) from Altice USA.
In December 2020, the New York metropolitan area.Company completed the sale of a 49.99% interest in its Lightpath fiber enterprise business (the "Lightpath Transaction") based on an implied enterprise value of $3.2 billion. The Company retained a 50.01% interest in the Lightpath business and maintained control of Cablevision Lightpath LLC, the entity holding the interest in the Lightpath business. Accordingly, the Company continues to consolidate the operating results of the Lightpath business.
ForIn our Suddenlink footprint, for enterprise and larger commercial customers, Suddenlink offers high capacity data services, including wide area networking and dedicated data access and advanced services such as wireless mesh networks. Suddenlink also offers enterprise class telephone services which include traditional multi-line phone service over DOCSIS and trunking solutions via SIP for our Primary Rate Interface ("PRI") and SIP trunking applications. Similar to Lightpath, Suddenlink also offers FTTT services. These Suddenlink services are offered on a standalone basis or in bundles that are developed specifically for our commercial customers.
SMB Customers
Both our Optimum and Suddenlink segmentsWe provide broadband, pay televisionvideo and telephony services to SMB customers. In addition to these services, we also offer managed services, including business e-mail, hosted private branch exchange, web space storage and network security monitoring for SMB customers. We also offerTelephony services include Optimum Voice for Business, providing for up to 24 voice lines for SMB customersSuddenlink Business Class Phones, Business Hosted Voice and 20 business calling features at no additional charge. Optimum Voice for Business offers business trunking services with support for application programming interfaces.Trunking (SIP and PRI). Optional telephony add-on services such asinclude international calling and toll free callingnumbers.
News and virtual receptionists, are also available for business customers.
Advertising Sales
As part of the agreements under which we acquire pay television programming, we typically receive an allocation of scheduled advertising time during such programming, generally two minutes per hour, into which our systems can insert commercials, subject, in some instances, to certain subject matter limitations. Our advertising sales infrastructure includes in-house production facilities, production and administrative employees and a locally-based sales force, and is part of Altice Media Solutions ("AMS"), the advertising sales division of Altice USA.
AMS offers data-driven television, digital and other multi-platform advertising to clients ranging from Fortune 500 brands to local businesses. AMS provides national and local businesses with television and digital advertising opportunities targeted within specific geographies, including in New York City, and throughout the Suddenlink footprint. AMS offers clients opportunities to use interactive television products to reach their customers and provide a deeper level of audience engagement.
In several of the markets in which we operate, we have entered into agreements commonly referred to as interconnects with other cable operators to jointly sell local advertising, simplifying our clients' purchase of local advertising and expanding their geographic reach. In some of these markets, we represent the advertising sales efforts of other cable operators; in other markets, other cable operators represent us. For instance, AMS manages the New York Interconnect, a partnership between AMS and Comcast that provides national brands with television and digital advertising opportunities over a broader portion of the New York designated market area ("DMA") than AMS's local offerings. The New York Interconnect is the largest interconnect in the country, with a footprint of over 3.2 million households. In the larger DMAs in the Suddenlink footprint, we participate in a number of interconnects managed by others, such as the Houston and Dallas interconnects. In December 2017, Altice USA, Charter Communications and Comcast announced a preliminary agreement to form a new Interconnect in the New York market that would provide a single solution to reach more than 6.2 million households across the New York DMA. The new New York Interconnect is expected to launch in early second quarter 2018.
For the year ended December 31, 2017, advertising sales accounted for approximately 5% and 3% of the revenue for our Optimum and Suddenlink segments, respectively, and accounted for approximately 4% of our consolidated revenue.
Data Analytics
The Advanced Data Analytics business, which was launched by Optimum in 2013, provides data-driven, audience-based advertising solutions to the media industry, including AMS, programmers and multichannel video programming distributors ("MVPDs"). Total Audience Data, its flagship portfolio of products, consists of advanced analytics tools providing granular measurement of consumer groups, accurate hyper-local ratings and other insights into target audience behavior not available through traditional sample-based measurement services. These tools allow us and our clients to more precisely optimize our product offerings, target and deliver ads more efficiently, and provide accurate measurement to our clients and partners.
Our March 2017 acquisition of Audience Partners, a leading provider of data-driven, audience-based digital advertising solutions, expands the scope of targeted advertising solutions we offer from television to include digital, mobile and tablets. In addition, the acquisition expands our audience-based advertising services to include further advanced analytics tools within key and growing segments, including political, advocacy, healthcare, automotive, and programming.
News 12 Networks
Our News 12 Networks consists of seven 24-hour local news channels in the New York metropolitan area—the Bronx, Brooklyn, Connecticut, Hudson Valley, Long Island, New Jersey and Westchester—providing each with complete access to hyper-local breaking news, traffic, weather, sports, and more. In addition, News 12 Networks also includes five traffic and weather channels that offer constantly updated information; the award-winning News12.com, the premier destination for local news on the web; News 12 Interactive, channel 612 on Optimum TV, providing local news on demand; and News 12 To Go, the network's mobile app for phones and tablets.
Since launching in 1986, News 12 Networks has been widely recognized by the news industry with numerous prestigious honors and awards, including over 230 Emmy Awards, plus multiple Edward R. Murrow Awards, NY Press Club Awards, and more. We derive revenue from our News 12 Networks for the sale of advertising and affiliation fees paid by cable operators.
Cheddar
Cheddar consists of the Cheddar Business News network covering business, politics, headline news, popular culture, and innovative products, technologies, and services. Cheddar Business News broadcasts live a total of 11 hours a day across traditional linear television delivery systems and OTT platforms.
Cheddar was acquired in June 2019, and we consolidated Cheddar's results of operations and its assets and liabilities as of June 1, 2019.
i24NEWS
i24NEWS consists of three 24-hour global channels that provide global breaking news and world stories with a focus on the Middle East and Israel. i24NEWS launched in English, French, and Arabic in July 2013.
a4 Advertising revenue
a4 Advertising is includedthe advanced advertising and data solutions subsidiary of Altice USA. It provides audience-based, IP-authenticated cross-screen advertising solutions to local, regional and national businesses and advertising clients. a4 enables advertisers to reach U.S. households across their devices through cable networks, on-demand and addressable inventory.
New York Interconnect
In many markets, we have entered into agreements commonly referred to as “Interconnects” with other cable operators to jointly sell local advertising. This simplifies our clients' purchase of local advertising and expands their geographic reach. In some markets, we represent the advertising sales efforts of other cable operators; in "Advertising"other markets, alternative cable operators represent us. For example, NY Interconnect, LLC ("NYI") is a joint venture that was launched in the second quarter 2018 between Altice USA, Charter and affiliation fees chargedComcast. NYI provides a wide range of television and digital advertising opportunities for brands looking to reach over 7.5 million households and 20+ million people across the programming are included in "Other."New York designated market area ("DMA").
Franchises
As of December 31, 2017,2020, our systems operated in more than 1,300 communities pursuant to franchises, permits and similar authorizations issued by state and local governmental authorities. Franchise agreements typically require the payment of franchise fees and contain regulatory provisions addressing, among other things, service quality, cable service to schools and other public institutions, insurance and indemnity. Franchise authorities generally charge a franchise fee of not more than 5% of certain of our cable service revenues that are derived from the operation of the system within such locality. We generally pass the franchise fee on to our customers.
Franchise agreements are usually for a term of 5 to 15 years from the date of grant, (a majority of which are for 10 years), however, approximately 400460 of Altice’sAltice USA’s communities are now served under perpetual state-issued franchises.located in states (Connecticut, Kansas, Missouri, Nevada, North Carolina and Texas) where by law franchise agreements do not have an expiration date. Franchise agreements are usually terminable only if the cable operator fails to comply with material provisions and then
only after the franchising authority complies
with substantive and procedural protections afforded by the franchise agreement and federal and state law. Prior to the scheduled expiration of most franchises, we generally initiate renewal proceedings with the granting authorities. This process usually takes less than three years but can take a longer period of time. The Communications Act of 1934, as amended (the "Communications Act"), which is the primary federal statute regulating interstate communications, provides for an orderly franchise renewal process in which granting authorities may not unreasonably withhold renewals. See "Regulation—Cable Television—Franchising." In connection with the franchise renewal process, many governmental authorities require the cable operator to make certain commitments, such as building out certain franchise areas, meeting customer service requirements and supporting and carrying public access channels.
Historically, we have been able to renew our franchises without incurring significant costs, although any particular franchise may not be renewed on commercially favorable terms or otherwise. We expect to renew or continue to operate under all or substantially all of these franchises. For more information regarding risks related to our franchises, see "Risk Factors—Risk Factors Relating to Regulatory and Legislative Matters—Our cable system franchises are subject to non-renewal or termination. The failure to renew a franchise in one or more key markets could adversely affect our business." Proposals to streamline cable franchising recently have been adopted at both the federal and state levels. For more information, see "Regulation—Cable Television—Franchising."
Programming
We design our channel line-ups for each system according to demographics, programming contract requirements, market research, viewership, local programming preferences, channel capacity, competition, price sensitivity and local regulation. We believe offering a wide variety of programming influences a customer's decision to subscribe to and retain our pay televisionvideo services. We obtain programming, including basic, expanded basic, digital, HD, 4K UHD, VOD and broadband content, from a number of suppliers, including broadcast and cable networks.
We generally carry cable networks pursuant to written programming contracts, which continue for a fixed period of time, usually from three to five years, and are subject to negotiated renewal. Cable network programming is usually made available to us for a license fee, which is generally paid based on the number of customers who subscribe to the level of service that provides such programming. Such license fees may include "volume" discounts available for higher numbers of customers, as well as discounts for channel placement or service penetration. Where possible, we negotiate volume discount pricing structures. For home shopping channels, we receive a percentage of the revenue attributable to our customers' purchases, as well as, in some instances, incentives for channel placement.
We typically seek flexible distribution terms that would permit services to be made available in a variety of retail packages and on a variety of platforms and devices in order to maximize consumer choice. Suppliers typically insist that their most popular and attractive services be distributed to a minimum number or percentage of customers, which limits our ability to provide consumers full purchasing flexibility. Suppliers also typically seek to control or limit the terms on which we are able to make their services available on various platforms and devices yet this has become more flexible each year.
Our cable programming costs for broadcast stations and cable networks have increased in excess of customary inflationary and cost-of-living type increases. We expect programming costs to continue to increase due to a variety of factors including annual increases imposed by stations and programmers and additional programming being provided to customers, including HD, 4K UHD, digital and VOD programming. In particular, broadcast and sports programming costs have increased significantly over the past several years. In addition, contracts to purchase sports programming sometimes provide for optional additional programming to be available on a surcharge basis during the term of the contract. These increases have coincided with a significant increase in the quality of the programming, from high production value original cable series to enhanced camera and statistical data technology in sports broadcasts, and more flexible rights to make the content available on various platforms and devices.
We have programming contracts that have expired and others that will expire in the near term. We will seek to renegotiate the terms of these agreements, but there can be no assurance that these agreements will be renewed on favorable or comparable terms. To the extent that we are unable to reach agreement with certain programmers on terms that we believe are reasonable, we have been, and may in the future be, forced to remove such programming channels from our line-up, which may result in a loss of customers. For example, in 2017, we were unable to reach agreement with Starz on acceptable economic terms, and effective January 1, 2018, all Starz services were removed from our lineups
in our Optimum and Suddenlink segments, and we launched alternative networks offered by other programmers under new long-term contracts. On February 13, 2018, we and Starz reached a new carriage agreement and we started restoring the Starz services previously offered by Optimum and Suddenlink. Also in our Suddenlink segment, we were unable to reach agreement with Viacom on acceptable economic terms for a long-term contract renewal, and effective October 1, 2014, all Viacom networks were removed from our channel lineups in our Suddenlink segment, and we launched alternative networks offered by other programmers under new long-term contracts. We and Viacom did not reach a new agreement to include certain Viacom networks in the Suddenlink channel lineup until May 2017. For more information, see "Risk Factors—Risk Factors Relating to Our Business—Programming and retransmission costs are increasing and we may not have the ability to pass these increases on to our customers. Disputes with programmers and the inability to retain or obtain popular programming can adversely affect our relationship with customers and lead to customer losses.losses, which could materially adversely affect our business, financial condition and results of operations."
Sales and Marketing
Sales are managed centrally and multiple sales channels are leveragedallow us to reach each current and potential customers in a variety of ways, including in-bound customer care centers, outbound telemarketing, stores, field technician sales and door-to-door sales. E-commerce is also managed centrally on behalf of the organization and is a growing and dynamic part of our business and is our fastest growing sales channel. For the three months ended December 31, 2017, 27% of our gross adds were via our online sales channel, compared to 14% for the three months ended December 31, 2016. We also use mass media, including broadcast television, digital media, radio, newspaper and outdoor advertising, to attract customers and direct them to our in-bound customer care centers or website. Our sales and service employees use a variety of sales tools as they work to match customers' needs with our best-in-class products, with a focus on building and enhancing customer relationships.
Because of our local presence and market knowledge, we invest heavily in targeted marketing. Our strategic focus is on building new customer relationships and bundling broadband, pay televisionvideo and telephony services. Our promotional materials and messaging focus on how our products and services that deliver innovative solutions to customer pain points. Much of our advertising is developed centrally and customized for our regions. Among other factors, we monitor customer perceptions, marketing tactic impact and competition, to increase our responsiveness and the effectiveness of our efforts. Our footprint has several large college markets where we market specialized products and services to students for multiple dwelling units ("MDUs"), such as dormitories and apartment complexes.
We have separate dedicated sales teams for our SMB and enterprise offerings and dedicated service teams to support SMB and enterprise clients.
Altice Technical Services
In January 2018, the Company acquired 70% of the equity interests in Altice Technical Services US Corp. ("ATS") for $1.00 (the "ATS Acquisition") and the Company expects to become the owner of 100% of the equity interests in ATS prior to the Distribution. ATS was previously owned by Altice N.V. and a member of ATS's management through a holding company. In light of Altice N.V.'s determination to focus on businesses other than the Company, we and Altice N.V. concluded it is in Altice N.V.'s and the Company's interests for Altice USA to own and operate ATS. The ATS Acquisition was approved by our Audit Committee pursuant to the Company's related-party transaction approval policy.
ATS has and will continue to provide technical operating services to the Company, including field services, such as dispatch, customer installations, disconnects, service changes and other customer service visits, outside plant maintenance services and design and construction services for HFC and FTTH infrastructure pursuant to an Independent Contractor Agreement and Transition Services Agreement with the Company.
Customer Experience
We believe customer service is thea cornerstone of our business. Our strategy is to demonstrate that we are reliable, technical experts, that we are simple to interact with and that, in the event of a service failure, we are responsive and courteous as we work to resolve the issue. Accordingly, we make a concerted effort to continually improve each customer's experience and have made significant investments in our people, processes and technology to enhance our customers' experience and to reduce the number of timesneed for customers need to contact us.
The insights from operational customer service metrics help us focus our product and network improvement efforts. For example,Listening to and acting upon feedback is a major pillar in our customer experience program and as such we link internal sales incentives to early churn and product mix,review feedback as opposed to more traditional criteriapart of new sales, in order to refocus our organization away from churn retention to churn prevention.daily operations.
Our customer care centers are managed and operated locally, with the deployment and execution of end-to-end care strategies and initiatives conducted on a site-by-site basis. We have residential and commercial customer care centers located throughout our footprint, including in Newark, NJ; Jericho, NY; Bronx, NY; Melville, NY; Tyler, TX; and Lubbock, TX. Our customer care centers function as an integrated system and utilize software programs that provide increased efficiencies and limited wait-times for customers requiring support.
We provide technical service to our customers 24 hours a day, seven days a week, and we have systems that allow our customer care centers to be accessed and managed remotely in the event that systems functionality is temporarily lost, which provides our customers access to customer service with limited disruption.
We are prioritizing the growth and development of new self-service and digital care options while simultaneously simplifying and improving our agent toolset to better serve our customer needs. We strive to offer a premium customer care experience through traditional and digital methods.
We also utilize our customer portal to enable our customers to view and paymanage their billsbill online, obtain usefulservice information and perform various equipment troubleshooting procedures. Our customers may also obtain support through our online bot, chat e-mail functionality and social media websites, including Twitter and Facebook.
Network Management
Our cable systems are generally designed with an HFC architecture that has proven to be highly flexible in meeting the increasing needs of our customers. We deliver our signals via laser-fed fiber optic cable from control centers known as headends and hubs to individual nodes. Each node is connected to the individual homes served by us. A primary benefit of this design is that it pushes fiber optics closer to our customers' homes, which allows us to subdivide our systems into smaller service groups and make capital investments only in service groups experiencing higher than average service growth.
As of December 31, 2017,2020, approximately 96%95% of our basic pay televisionvideo customers were served by systems with a capacity of at least 750 MHz and approximately 275266 homes per node. Our OptimumWe have upgraded our networks, both through the deployment of our fiber to the home network has been upgraded to nearly four times the maximum available broadband speedsand through new DOCSIS technologies, and we have expanded ourare delivering speeds of up to 1 Gbps broadband service to approximately 72%in many areas of our Suddenlink footprint, compared to approximately 40% prior to the Suddenlink Acquisition.footprint. More than 99% of our residential broadband Internet customers are connected to our national backbone with a presence in major carrier access points in New York, Dallas, Chicago, San Jose, Washington D.C. and Phoenix. This presence allows us to avoid significant Internet transit costs by establishing peering relationships with major Internet service and content providers enabling direct connectivity with them at these access points.
We also have a networking caching architecture that places highly viewed Internet traffic from the largest Internet-based content providers at the edge of the network closest to the customer to reduce bandwidth requirements across our national backbone, thus reducing operating expense. This collective network architecture also provides us with the capability to manage traffic across several Internet access points, thus helping to ensure Internet access redundancy and quality of service for our customers. Additionally, our national backbone connects most of our systems, which allows for an efficient and economical deployment of services from our centralized platforms that include telephone, VOD, network DVR, common pay televisionvideo content, broadband Internet, hosted business solutions, provisioning, e-mail and other related services.
We have also commenced a plan to build aOur FTTH network build, which willwould enable us to deliver more than 10 Gbps broadband speeds across our entire Optimum footprint and parta majority of our Suddenlink footprint.footprint, is underway. We believe this FTTH network will be more resilient with reduced maintenance requirements, fewer service outages and lower power usage, which we expect will drive further structural cost efficiencies.
We have also focused on system reliability and disaster recovery as part of our national backbone and primary system strategy. For example, to help ensure a high level of reliability of our services, we implemented redundant power capability, as well as fiber route and carrier diversity in our networks serving most of our customers. With respect to disaster recovery, we invested in our telephone platform architecture for geo-redundancy to minimize downtime in the event of a disaster to any single facility. Additionally, we are working to implement a geo-redundant disaster recovery environment for our network operations center supporting both residential and business customers.
In addition, we have expanded and refined our bandwidth utilization in capacity constrained systems in order to meet demand for new and improved advanced services. A key component to reclaim bandwidth was the digital delivery of pay televisionvideo channels that were previously distributed in analog through the launch of digital simulcast, which duplicates analog channels as digital channels. Additionally, the deployment of lower-cost digital customer premises equipment, such as HD digital transport adapters, enabled the use of more efficient digital channels instead of analog
channels, thus allowing the reclamation of expanded basic analog bandwidth in the targeted systems. This reclaimed analog bandwidth could then be repurposed for other advanced services such as additional HDTV services and faster Internet access speeds. This technology has
To support our mobile business, we built a nationwide mobile core network with five main interconnection points (Texas, California, Illinois, and two in New York), as well as the added benefit of providing improved picturenecessary interconnection points for our network partners T-Mobile and sound quality to customers for most of their pay television programming.AT&T.
Information Technology
Our IT systems consist of billing, customer relationship management, business and operational support and sales force management systems. We are updatingcontinue to update and simplifyingsimplify our IT infrastructure through further investments, focusing on cost efficiencies, improved system reliability, functionality and scalability and enhancing the ability of our IT infrastructure to meet our ongoing business objectives. Further, we have made significant progress in integrating and consolidating the IT platforms and systems and streamlining the processes of Optimum and Suddenlink, which has driven operating efficiencies. Additionally, through investment in our IT platforms and focus on process improvement, we have simplified and harmonized our service offering bundles optimizedand improved our technical service delivery and improved customer service.service capabilities. We contract with managed service providers to deliver certain core Business Support Systems and Operations Support Systems. These services are integrated into our overall IT ecosystems to ensure an efficient operation. Backup services are provided through alternate systems and infrastructure.
Suppliers
Customer Premise and Network Equipment
We purchase set-top boxes and other customer premise equipment from a limited number of vendors because each of our cable systems usesuse one or two proprietary technology architectures. We also buy HD, HD/DVRs and VOD equipment, routers, including the components of our new home communications hub, and other network equipment from a limited number of suppliers, including Altice Labs, Altice N.V.'sEurope's technology, services and innovation center. See "Risk Factors—Risk Factors Relating to Our Business—We rely on network and information systems for our operations and a disruption or failure of, or defects in, those systems may disrupt our operations, damage our reputation with customers and adversely affect our results of operations."
Broadband and Telephone Connectivity
We deliver broadband and telephony services through our HFC and fiber network. We use circuits that are either owned by us or leasedrented from third parties to connect to the Internet and the public switched telephone network. We
pay fees for leasedrented circuits based on the amount of capacity available to it and pay for Internet connectivity based on the amount of IP-based traffic received from and sent over the other carrier's network.
Mobile Voice and Data Equipment We purchase for resale mobile handsets from a number of original equipment manufacturers including Apple, Samsung, and Motorola. Customers of our mobile service are able to purchase these handsets with upfront payments or financed without interest over a 36-month period.
Intellectual Property
We rely on our patents, copyrights, trademarks and trade secrets, as well as licenses and other agreements with our vendors and other parties, to use our technologies, conduct our operations and sell our products and services. We also rely on our access to the proprietary technology of Altice Europe, including through Altice Labs, and licenses to the name “Altice” and derivatives from Next Alt. However, no single patent, copyright, trademark, trade secret or content license is material to our business. We believe we own or have the right to use all of the intellectual property that is necessary for the operation of our business as we currently conduct it.
Competition
We operate in a highly competitive, consumer-driven industry and we compete against a variety of broadband, pay televisionvideo, mobile and fixed-line telephony providers and delivery systems, including broadband communications companies, wireless data and telephony providers, satellite delivered video signals, Internet-delivered video content and broadcast television signals available to residential and business customers in our service areas. We believe our leading market positionsposition in our footprint, technologically advanced network infrastructure, including our FTTH build-out, Altice One, our entertainment and connectivity platform, our new home communications hubmobile service, and our focus on enhancing the customer experience favorably position us to compete in our industry. See also "Risk Factors—Risk Factors Relating to Our Business—We operate in a highly competitive business environment which could materially adversely affect our business, financial condition, results of operations and liquidity."
Broadband Services Competition
Our broadband services face competition from broadband communications companies' digital subscriber line ("DSL"), FTTHFTTH/Fiber to the Premises ("FTTP") and wireless broadband offerings, as well as from a variety of companies that offer other forms of online services, including satellite-based broadband services. AT&T and Verizon Communications Inc.'s ("Verizon") Fios are our primary FTTH competitors. Current and future fixed and wireless Internet services, such as 3G, 4G, LTE and 5G fixed and(and variants) wireless broadband services and Wi-FiWiFi networks, and devices such as wireless data cards, tablets and smartphones, and mobile wireless routers that connect to such devices, may also compete with our broadband services both for in premises broadband service and mobile broadband. All major wireless carriers offer unlimited data plans, which could, in some cases, become a substitute for the fixed broadband services we provide. The Federal Communications Commission ("FCC") is likely to continue to make additional radio spectrum available for these wireless Internet access services, which in time could expand the quality and reach of these services.
Pay TelevisionVideo Services Competition
We face intense competition from broadband communications companies with fiber-based networks, primarily Verizon, Communications Inc. ("Verizon"), which has constructed a FTTH network plant that passes a significant number of households in our Optimum service area, and AT&T, which has constructed an FTTP/Fiber to the Node ("FTTN") infrastructure in parts of our Suddenlink service area. We estimate that Verizon is currently able to sell a fiber-based pay television
video service, as well as broadband and VoIP services, to at least half of the households in our Optimum service area. In addition, Frontier Communications Corporation ("Frontier") offers pay televisionvideo service in competition with us in most of our Connecticut service area.
We also compete with direct broadcast satellite ("DBS") providers, such as DirecTV (a subsidiary of AT&T Inc.)&T) and DISH Network Corporation ("DISH Network"DISH"). DirecTV and DISH offer one-way satellite-delivered pre-packaged programming services that are received by relatively small and inexpensive receiving dishes. DirecTV has exclusive arrangements with the National Football League that give it access to programming that we cannot offer. In 2018 AT&T also has an agreement to acquireacquired Time Warner Inc. ("Time Warner"), which owns a number of cable networks, including TBS, CNN and HBO, andas well as Warner Bros. Entertainment, which produces television, film and home-video content. However, weAT&T's and DirecTV's access to Time Warner programming and studio assets provides AT&T and DirecTV the ability to offer competitive promotional packages. We believe cable-delivered VOD services, which include HD programming,the ability to bundle
additional services such as broadband, offer a competitive advantage to DBS service because cable headends can provide two-way communication to deliver a large volume of programming which customers can access and control independently, whereas DBS technology can only make available a much smaller amount of programming with DVR-like customer control.independently.
Our pay televisionvideo services also face competition from a number of other sources, including companies that deliver movies, television shows and other pay televisionvideo programming, including extensive on demand, live content, serials, exclusive and original content, over broadband Internet connections to televisions, computers, tablets and mobile devices, such as Netflix, Hulu, iTunes,Apple TV+, YouTube TV, Amazon Prime, Netflix, YouTube, Playstation Vue, DirecTV NowSling TV, AT&T TV, Locast and Sling TV.others. In addition, our programming partners continue to launch direct to consumer streaming products, delivering content to consumers that was formerly only available via video, such as HBO Max, Discovery+ and Disney+.
Telephony Services Competition
Our telephony service competes with wireline, wireless and OTTVoIP phone service providers, such as Vonage, Skype, GoogleTalk, Facetime, WhatsApp and magicJack, as well as companies that sell phone cards at a cost per minute for both national and international service. In addition, weWe also compete with other forms of communication, such as text messaging on cellular phones, instant messaging, social networking services, video conferencing and email. The increase in theincreased number of different technologies capable of carrying telephony services and the number of alternative communication options available to customers as well as the replacement of wireline services by wireless have intensified the competitive environment in which we operate our telephony services.
Mobile Wireless Competition
Our mobile wireless service, launched in September 2019, faces competition from a number of national incumbent network-based mobile service providers (like AT&T, Verizon, T-Mobile US, Inc. ("T-Mobile")) and smaller regional service providers, as well as a number of reseller or MVNO providers (such as Tracfone, Boost Mobile and Cricket Wireless, among others). We believe that our approach to the mobile wireless service offering, including the construction and operation of our own "mobile core" and the ability to bundle and promote the product to our existing customer base, gives us advantages over pure MVNO resellers, and differentiates us from incumbent network-based operators. Improvements by incumbent and reseller mobile service providers on price, features, speeds, and service enhancements will continue to impact the competitiveness and attractiveness of our mobile service, and we will need to continue to invest in our services, product and marketing to answer that competition. Our mobile wireless strategy depends on the availability of wholesale access to radio access networks ("RAN") from one or more network-based providers with whom we are likely to compete. Our mobile service is vulnerable to constraints on the availability of wholesale access or increases in price from the incumbents. Consolidation among wholesale RAN access providers could impair our ability to sustain our mobile service. In April 2020, Sprint and T-Mobile merged, subject to certain conditions imposed by the United States Department of Justice and the FCC. While the conditions attached to the combination may benefit our mobile service in the medium term, the reduction of competition among mobile wireless network-based providers likely will negatively impact the price and availability of wholesale RAN access to the Company generally, certain of the conditions imposed upon the merger parties by the U.S. Justice Department and the FCC have the potential to ameliorate those effects and to enhance the coverage, quality and cost structure for our mobile services while those conditions are in effect.
Business Services Competition
We operate in highly competitive business telecommunications market and compete primarily with local incumbent telephone companies, especially AT&T, CenturyLink, Inc. ("Centurylink"), Frontier and Verizon, as well as fromwith a variety of other national and regional business services competitors.
Advertising Sales Competition
We provide advertising and advanced targeted digital advertising services on television and digital platforms, both directly and indirectly, within and outside our television service area. We face intense competition for advertising revenue across many different platforms and from a wide range of local and national competitors. Advertising competition has increased and will likely continue to increase as new formats seek to attract the same advertisers. We compete for advertising revenue against, among others, local broadcast stations, national cable and broadcast networks, radio stations, print media, social network platforms (such as Facebook and Instagram), and online advertising companies (such as Google) and content providers.providers (such as Disney).
Regulation
General Company Regulation
Our cable, related and relatedother services are subject to a variety of federal, state and local law and regulations.regulations, as well as, in instances where we operate outside of the U.S., the laws and regulations of the countries and regions where we operate. The Communications Act, and the rules, regulations and policies of the Federal Communications Commission ("FCC"),FCC, as well as other federal, state and stateother laws governing cable television, communications, consumer protection, privacy and related matters, affect significant aspects of the operations of our cable, systemrelated and services operations.other services.
The following paragraphs describe the existing legal and regulatory requirements we believe are most significant to our cable system operations today. Our business can be dramatically impacted by changes to the existing regulatory framework, whether triggered by legislative, administrative or judicial rulings.
Cable Television
Franchising. The Communications Act requires cable operators to obtain a non-exclusive franchise from state or local franchising authorities to provide cable service. Although the terms of franchise agreements differ from jurisdiction to jurisdiction, they typically require payment of franchise fees and contain regulatory provisions addressing, among other things, use of the right of way, service quality, cable service to schools and other public institutions, insurance, indemnity and sales of assets or changes in ownership. State and local franchising authority, however, must be exercised consistent
with the Communications Act, which sets limits on franchising authorities' powers, including limiting franchise fees to no more than 5% of gross revenues from the provision of cable service, prohibiting franchising authorities from requiring us to carry specific programming services, and protecting the renewal expectation of franchisees by limiting the factors a franchising authority may consider and requiring a due process hearing before denying renewal. Even when franchises are renewed, however, the franchise authority may, except where prohibited by applicable law, seek to impose new and more onerous requirements as a condition of renewal. Similarly, if a franchising authority's consent is required for the purchase or sale of a cable system, the franchising authority may attempt to impose more burdensome requirements as a condition for providing its consent. Cable franchises generally are granted for fixed terms and, in many cases, include monetary penalties for noncompliance. They may also be terminable if the franchisee fails to comply with material provisions.
In recent years, the traditional local cable franchising regime underwenthas undergone significant change as a result of various federal and state actions.action. Several states have reduced or eliminated the role of local or municipal government in franchising in favor of statestate- or system-wide franchises, and the trend has been toward consolidation of franchising authority at the state level, in part to accommodate the interests of new broadband and cable entrants over the last decade. At the same time, the FCC has adopted rules that streamline entry for new competitors (such as those affiliated with broadband communications companies) and reduce certain franchising burdens for these new entrants. TheIn 2019, the FCC adopted more modest relief foralso extended to existing cable operators, but a recent federal court decision curtailed a portion of thisproviders relief that relatesfrom certain fees and other regulatory requirements imposed by franchising authorities, including subjecting certain fees for access to the right-of-way and certain in-kind payments obligations to the statutory cap on in-kind payments tofranchise fees, as well as preempting franchising authorities.authorities from regulating cable operators’ non-cable services. The FCC’s order is currently being challenged on appeal.
Pricing and Packaging. The Communications Act and the FCC's rules limit the scope of price regulation for cable television services. Among other limitations, franchising authorities may regulate rates for only "basic" cable service. In 2015, the FCC adopted an order reversing its historic approach to this local rate regulation. Previously, rate regulation was in effect in a community unless and untilrule establishing a cable operator successfully petitioned the FCC for relief by showing the existence of "effective competition" (as defined under federal law) in the community. The FCC reversed that presumption barring franchise authorityagainst rate regulation absent an affirmative showing by the franchising authority that there is an absence of effective competition. AsBased on the 2015 FCC rule, none of our franchise authorities have filed the necessary rate regulation certification, none of our pay televisionvideo customers are currently subject to basic rate regulation.
There have been frequent calls to impose further rate regulation on the cable industry. It is possible that Congress or the FCC may adopt new constraints on the retail pricing or packaging of cable programming. For example, there has been legislative and regulatory interest in requiring cable operators to offer historically bundled programming services on an à la carte basis. In addition, the FCC recently initiated a proceeding exploring how programming practices involving MVPDs affect the availability of diverse and independent programming. As we attempt to respond to a changing marketplace with competitive marketing and pricing practices, we may face regulations that impede our ability to compete. In addition, a number of state and local regulatory authorities have imposed or seek to impose price- or price-related regulation that we believe is inconsistent with FCC direction, and these efforts if successful, will diminish the benefits of deregulation and hamper our ability to compete with our largely unregulated competitors. We brought a challenge in federal court against one such attempt to regulate our pricing by the New Jersey Board of Public Utilities, and in January 2020 we won a preliminary injunction in federal court in the District of New Jersey enjoining that agency from enforcing its regulation.
Must-Carry/Retransmission Consent. Cable operators are required to carry, without compensation, programming transmitted by most local commercial and noncommercial broadcast television stations that elect "must carry" status.
Alternatively, local commercial broadcast television stations may elect "retransmission consent," giving up their must-carry right and instead negotiating with cable systems the terms on which the cable systems may carry the station's programming content. Cable systems generally may not carry a broadcast station that has elected retransmission consent without the station's consent. The terms of retransmission consent agreements frequently include the payment of compensation to the station.
Broadcast stations must elect either "must carry" or retransmission consent every three years. A substantial number of local broadcast stations currently carried by our cable systems have elected to negotiate for retransmission consent. In the most recent retransmission consent negotiations, popular television stations have demanded substantial compensation increases, thereby increasing our operating costs.
Ownership Limitations. Federal regulation of the communications field traditionally included a host of ownership restrictions, which limited the size of certain media entities and restricted their ability to enter into competing enterprises. Through a series of legislative, regulatory, and judicial actions, most of these restrictions have been either eliminated or substantially relaxed. In 2017, the FCC relaxed some broadcast media ownership rules, and the broadcast industry subsequently experienced consolidation. The FCCFCC’s order relaxing these rules was vacated by a federal appeals court, but the appeals court decision is currently considering substantial changes in this area,being reviewed by the U.S. Supreme Court. Depending on the outcome of that case or the FCC’s current quadrennial review of ownership rules, the broadcast industry could consolidate further, which could alterimpact the business environment in whichfees we operate.pay broadcasters to license their signals.
Set-Top Boxes. The Communications Act includes a provision that requires the FCC to take certain steps to support the development of a retail market for "navigation devices," such as cable set-top boxes. As a result,Several years ago, the FCC has adopted certain mandates, from timebegan a proceeding to time, to requireconsider requiring cable operators to accommodate third partythird-party navigation devices, sometimes imposingwhich have imposed substantial development and operating requirements on the industry. From time to time, the FCC has proposed additional rules to effectuate this mandate, thoughThough there is currently no currently active effort to advance these proposals. Nevertheless,proposals, the FCC may in the future consider implementing other measures to promote the competitive availability of retail set-top boxes or third partythird-party navigation options that could impact our customers' experience, our ability to capture user interactions to refine and enhance our services, and our ability to provide a consistent customer support environment.
PEG and Leased Access. Franchising authorities may require that we support the delivery and support for public, educational, or governmental ("PEG") channels on our cable systems. In addition to providing PEG channels, we must make a limited number of commercial leased access channels available to third parties (including parties with potentially competitive pay televisionvideo services) at regulated rates. The FCC adopted revised rules several years ago mandating a significant reduction in the rates that operators can charge commercial leased access users. These rules were stayed, however, by a federal court, pending a cable industry appeal. This matter currently remains pending, and the revised rules are not yet in effect. Although commercial leased access activity historically has been relatively limited, increased activity in this area could further burden the channel capacity of our cable systems.
Pole Attachments. The companyCompany makes extensive use of utility poles and conduitconduits owned by other utilities to attach and install the facilities that are integral to our network and services. The Communications Act requires most utilities to provide cable systems with access to poles and conduits for access to attach such facilities at regulated rates. StatesThe FCC (or where states choose nota state, if it chooses to regulate, the FCC) regulateregulate) regulates utility company rates for the rental of pole and conduit space used by companies, including operators like us, to provide cable, telecommunications services, and Internet access services, unless states establish their own regulations in this area.services. Many states in which we operate have elected to set their own pole attachment rules.
In 2011 and again in 2015, the FCC amended its pole attachment rules to promote broadband deployment. The 2011 order allows for new penalties in certain cases involving unauthorized attachments, but generally strengthens the cable industry's ability to access investor-owned utility poles on reasonable rates, terms and conditions. Additionally, the 2011 order reduces the federal rate formula previously applicable to "telecommunications" attachments to closely approximate the more favorable rate formula applicable to "cable" attachments. The 2015 Order continues this rate reconciliation, effectively closing a remaining "loophole" that potentially allowed for significantly higher rates for telecommunications attachments in certain scenarios. Neither the 2011 order nor the 2015 Order directly affects the rate in states that self-regulate (rather than allowing the FCC to regulate) pole rates, but many of those states have substantially the same rate for cable and telecommunications attachments. Adverse changes to the pole attachment rate structure, rate,rates, classifications, and classificationsaccess could significantly increase our annual pole attachment costs.
Program Access. The program access rules generally prohibit a cable operator from improperly influencing an affiliated satellite-delivered cable programming service to discriminate unfairly against an unaffiliated distributor where the purpose or effect of such influence is to significantly hinder or prevent the competitor from providing satellite-delivered cable programming. FCC rules also allow a competing distributor to bring a complaint against a cable-affiliated terrestrially-delivered programmer or its affiliated cable operator for alleged violations of this rule, and seek reformed terms of carriage as a remedy.
Program Carriage. The FCC's program carriage rules prohibit us from requiring that an unaffiliated programmer grant us a financial interest or exclusive carriage rights as a condition of its carriage on our cable systems and prohibit us from unfairly discriminating against unaffiliated programmers in the terms and conditions of carriage on the basis of their nonaffiliation.
On October 12, 2011, Game Show Network ("GSN") filed a program carriage complaint against Cablevision, alleging that we discriminated against it in the terms and conditions of carriage based on GSN's lack of affiliation with us. Although the Enforcement Bureau of the FCC recommended on October 15, 2015, that the administrative law judge adjudicating this dispute find in our favor because GSN had not satisfied its burden of proving that we discriminated against it on the basis of affiliation, the administrative law judge issued his initial decision in GSN's favor on November 23, 2016, requiring that we restore GSN to the expanded basic tier. The FCC reversed that decision and denied GSN's complaint on July 13, 2017. GSN initiated review of that decision in a federal appeals court on September 11, 2017. We believe GSN's claims are without merit and intervened in GSN's appeal to support the FCC's decision on October 11, 2017. On December 28, 2017, we entered into a binding settlement agreement with GSN. On January 25, 2018, the federal court of appeals entered dismissal of the action.
Exclusive Access to Multitenant Buildings. The FCC has prohibited cable operators from entering into or enforcing exclusive agreements with owners of multitenant buildings under which the operator is the only MVPDmultichannel video
programming distributor ("MVPD") with access to the building. The FCC is currently considering whether to adopt additional rules regarding access to multitenant environments by providers of broadband service.
CALM Act. The FCC's rules require us to ensure that all commercials carried on our cable service comply with specified volume standards.
Privacy and Data Security. In the course of providing our services, we collect certain information about our customers and their use of our services. We also collect certain information regarding potential customers and other individuals. Our collection, use, disclosure and other handling of information is subject to a variety of federal and state privacy requirements, including those imposed specifically on cable operators and telecommunications service providers by the Communications Act. We are also subject to data security obligations, as well as requirements to provide notice to individuals and governmental
entities in the event of certain data security breaches, and such breaches, depending on their scope and consequences, may lead to litigation and enforcement actions with the potential of substantial monetary forfeitures or to adversely affect our brand.
As cable operators provide interactive and other advanced services, additional privacy and data security requirements may arise through legislation, regulation or judicial decisions. For example, the Video Privacy Protection Act of 1988 has been extended to cover online interactive services through which customers can buy or rent movies. In addition, Congress, the Federal Trade Commission ("FTC"), and other lawmakers and regulators are all considering whether to adopt additional measures that could impact the collection, use, and disclosure of customer information in connection with the delivery of advertising and other services to consumers customized to their interests. In October 2016, the FCC adopted new privacy and data security rules governing the use of customer information by broadband ISPs, including cable ISPs and providers of VoIP. These new rules permit the collection and use of non-sensitive customer information subject to the customers' ability to opt out, but require the customers' opt-in before access, use or disclosure of sensitive proprietary information. These new rules are more stringent than the FTC's privacy standards. The FCC suspended the data security portion of these rules in February. In March, both houses of Congress voted to overturn all of the rules. This legislation was signed by the President in April and it is now effective. Some states are now considering imposing similar rules, however.See "Privacy Regulations" below.
Federal Copyright Regulation. We are required to pay copyright royalty fees on a semi-annual basis to receive a statutory compulsory license to carry broadcast television content. These fees are subject to periodic audit by the content owners. The amount of a cable operator's royalty fee payments are determined by a statutory formula that takes into account various factors, including the amount of "gross receipts" received from customers for "basic" service, the number of "distant" broadcast signals carried and the characteristics of those distant signals (e.g., network, independent or noncommercial). Certain elements of the royalty formula are subject to adjustment from time to time, which can lead to increases in the amount of our semi-annual royalty payments. The U.S. Copyright Office, which administers the collection of royalty fees, has made recommendations to Congress for changes in or elimination of the statutory compulsory licenses for cable television carriage of broadcast signals and the U.S. Government Accountability Office is conducting a statutorily-mandated inquiry into whether the cable compulsory license should be phased out. Changes to copyright regulations could adversely affect the ability of our cable systems to obtain such programming and could increase the cost of such programming. Similarly, we must obtain music rights for locally originated programming and advertising from the major music performing rights organizations. These licensing fees have been the source of litigation in the past, and we cannot predict with certainty whether license fee disputes may arise in the future.
Access for Persons with Disabilities. The FCC's rules require us to ensure that persons with disabilities can more fully access the programming we carry. We are required to provide closed captions and pass through video description to customers on some networks we carry, and to provide an easy means of activating closed captioning and to ensure the audio accessibility of emergency information and on-screen text menus and guides provided by our navigation capabilities of our video offerings.devices.
Other Regulation. We are subject to various other regulations, including those related to political broadcasting; home wiring; the blackout of certain network and syndicated programming; prohibitions on transmitting obscene programming; limitations on advertising in children's programming; and standards for emergency alerts, as well as telemarketing and general consumer protection laws and equal employment opportunity obligations. For example, the Television Viewer Protection Act of 2019 imposes obligations on cable and fixed broadband providers, including required disclosures at the point of sale and in electronic billing and prohibitions on certain equipment charges. The FCC also imposes various technical standards on our operations.In the aftermath of Superstorm Sandy, the FCC and the states are examining whether new requirements are necessary to improve the resiliency of communications networks, potentially including cable networks. Further, following certain extreme weather events in 2020, several states have undertaken examinations of storm resiliency, recovery, and customer impacts, which investigations could lead to additional regulation of the industry. Each of these regulations restricts (or could restrict) our business practices to varying degrees. The FCC can aggressively enforce compliance with its regulations and consumer protection policies, including through the imposition of substantial monetary sanctions. It is possible that Congress or the FCC will expand or modify its regulations of cable systems in the future, and we cannot predict at this time how that might impact our business.
Broadband
Regulatory Classification. Broadband Internet access services were traditionally classified by the FCC as "information services" for regulatory purposes, a type of service that is subject to a lesser degree of regulation than "telecommunications services." In 2015, the FCC reversed this determination and classified broadband Internet access services as "telecommunications services." This reclassification had subjected our broadband Internet access service to greater regulation, although the FCC did not apply all telecommunications service obligations to broadband Internet access service. The 2015 Order (as defined below) could have had a material adverse impact on our business. In December 2017, the FCC adopted an order that in large part reversed again the 2015 Order and reestablished the "information service" classification for broadband Internet access service. The 2017 Order has not yet gone into effect, however, and the 2015 Order will remain binding until(as defined below) was affirmed in part on appeal in October 2019 insofar as it classified broadband Internet access services as information services subject to lesser federal regulation. However, the 2017 Order takes effect. The 2017 Orderwas also vacated in part on appeal insofar as it preempted states from subjecting broadband Internet access services to any requirements more stringent than the federal requirements. As a result, the precise extent to which state rules may impose such requirements on broadband Internet access service providers is not fully settled. Additionally, the FCC is expected to be subject to legal challenge that may delay its effect or overturn it.revisit the appropriate regulatory classification of broadband in 2021.
Net Neutrality. The 2015 Order also established a new "Open Internet" framework that expanded disclosure requirements on Internet service providers ("ISPs") such as cable companies, prohibited blocking, throttling, and paid prioritization of Internet traffic on the basis of the content, and imposed a "general conduct standard" that prohibits unreasonable interference with the ability of end users and edge providers to reach each other. The FCC's 2017 Order eliminates these rules except for certain disclosure requirements. As noted above, however, we cannot be certain when or if the 2017 Order will take effect. Additionally, Congress and some states are considering legislation that may codify "net neutrality" rules.“net neutrality” rules, which could include prohibitions on blocking, throttling and prioritizing Internet traffic. A number of states, including California and New York, have adopted legislation and/or executive orders that apply “net neutrality” rules to Internet service providers ("ISPs"). The California legislation is currently being challenged in court.
Access for Persons with Disabilities. The FCC's rules require us to ensure that persons with disabilities have access to "advanced communications services" ("ACS"), such as electronic messaging and interoperable video conferencing. They also require that certain pay televisionvideo programming delivered via Internet Protocol include closed captioning and require entities distributing such programming to end users to pass through such captions and identify programming that should be captioned.
Other Regulation. The 2015 Order also subjected broadband providers' Internet traffic exchange rates and practices to potential FCC oversight and created a mechanism for third parties to file complaints regarding these matters. In addition, our provision of Internet services also subjects us to the limitations on use and disclosure of user communications and records contained in the Electronic Communications Privacy Act of 1986. Broadband Internet access service is also subject to other federal and state privacy laws applicable to electronic communications.
Additionally, providers Providers of broadband Internet access services must comply with the Communications Assistance for Law Enforcement Act (‘‘CALEA’’("CALEA"), which requires providers to make their services and facilities accessible for law enforcement intercept requests. Various other federal and state laws apply to providers of services that are accessible through broadband Internet access service, including copyright laws, telemarketing laws, prohibitions on obscenity, and a ban on unsolicited commercial e-mail, and privacy and data security laws. Online content we provide is also subject to some of these laws.
Other forms of regulation of broadband Internet access service currently being considered by the FCC, Congress or state legislatures include consumer protection requirements, cyber securitybilling and notifications requirements, cybersecurity requirements, consumer service standards, requirements to contribute to universal service programs and requirements to protect personally identifiable customer data from theft. Pending and future legislation in this area could adversely affect our operations as an Internet service providerISP and our relationship with our Internet customers.
Additionally, from time to time the FCC and Congress have considered whether to subject broadband Internet access services to the federal Universal Service Fund ("USF") contribution requirements. Any contribution requirements adopted for Internet access services would impose significant new costs on our broadband Internet service. At the same time, the FCC is changing the manner in which Universal Service funds are distributed. By focusing on broadband and wireless deployment, rather than traditional telephone service, the changes could assist some of our competitors in more effectively competing with our service offerings.
Telephony Services - VoIP
We provide telephony services using VoIP technology ("interconnected VoIP"). and traditional switched telephony via our CLEC subsidiaries.
The FCC has adopted several regulations for interconnected VoIP services, as have several states, especially as it relates to core customer and safety issues such as E911, local number portability, disability access, outage reporting, universal service contributions, and regulatory reporting requirements. The FCC has not, however, formally classified interconnected VoIP services as either information services or telecommunications services. In this vacuum, some states have asserted more expansive rights to regulate interconnected VoIP services, while others have adopted laws that bar the state commission from regulating VoIP service.
Universal Service. Interconnected VoIP services must contribute to the USF used to subsidize communication services provided to low incomelow-income households, to customers in rural and high cost areas, and to schools, libraries, and
rural health care providers. The amount of universal service contribution required of interconnected VoIP service providers is based on a percentage of revenues earned from interstate and international services provided to end users. We allocate our end user revenues and remit payments to the universal service fund in accordance with FCC rules. The FCC has ruled that states may impose state universal service fees on interconnected VoIP providers.
Local Number Portability. The FCC requires interconnected VoIP service providers and their "numbering partners" to ensure that their customers have the ability to port their telephone numbers when changing providers. We also contribute to federal funds to meet the shared costs of local number portability and the costs of North American Numbering Plan Administration.
Intercarrier Compensation. In an October 2011 reform order and subsequent clarifying orders, the FCC revised the regime governing payments among providers of telephony services for the exchange of calls between and among different networks ("intercarrier compensation") to, among other things, explicitly include interconnected VoIP. In that Order, the FCC determined that intercarrier compensation for all terminating traffic, including VoIP traffic exchanged in time-division
multiplexing ("TDM") format, will be phased down over several years to a "bill-and-keep" regime, with no compensation between carriers for most terminating traffic by 2018. The FCC is considering further reform in this area, which could reduce or eliminate compensation for originating traffic as well.
Other Regulation. Interconnected VoIP service providers are required to provide enhanced 911 emergency services to their customers; protect customer proprietary network information from unauthorized disclosure to third parties; report to the FCC on service outages; comply with telemarketing regulations and other privacy and data security requirements; comply with disabilities access requirements and service discontinuance obligations; comply with call signaling requirements; and comply with CALEA standards. In August 2015, the FCC adopted new rules to improve the resiliency of the communications network. Under the new rules, providers of telephony services, including interconnected VoIP service providers, must make available eight hours of standby backup power for consumers to purchase at the point of sale. The rules also require that providers inform new and current customers about service limitations during power outages and steps that consumers can take to address those risks.
Telephony Services - Traditional
We operateprovide traditional telecommunications services under the trade name Lightpath in various statestates through our operating subsidiaries, and those services are largely governed under rules established for CLECs under the Communications Act. The Communications Act entitles our CLEC subsidiaries to certain rights, but as telecommunications carriers, it also subjects them to regulation by the FCC and the states. Their designation as telecommunications carriers also results in other regulations that may affect them and the services they offer.
Interconnection and Intercarrier Compensation. The Communications Act requires telecommunications carriers to interconnect directly or indirectly with other telecommunications carriers.carriers and networks, including VoIP. Under the FCC's intercarrier compensation rules, we are entitled, in some cases, to compensation from carriers when they use our network to terminate or originate calls and in other cases are required to compensate another carrier for using its network to originate or terminate traffic. The FCC and state regulatory commissions, including those in the states in which we operate, have adopted limits on the amounts of compensation that may be charged for certain types of traffic. As noted above,In an October 2011 Order, the FCC has determined that intercarrier compensation for all terminating traffic, willincluding VoIP traffic exchanged in time-division multiplexing ("TDM") format, would be phased down over several years to a "bill-and-keep" regime, with no compensation between carriers for most terminating traffic by 2018, and2018. The FCC is considering further reform that could reduce or eliminate compensation for originating traffic as well.
Universal Service. Our CLEC subsidiaries are required to contribute to the USF. The amount of universal service contribution required of us is based on a percentage of revenues earned from interstate and international services provided to end users. We allocate our end user revenues and remit payments to the universal service fund in accordance with FCC rules. The FCC has ruled that states may impose state universal service fees on CLEC telecommunications services.
Other Regulation. Our CLEC subsidiaries' telecommunications services are subject to other FCC requirements, including protecting the use and disclosure of customer proprietary network information; meeting certain notice requirements in the event of service termination; compliance with disabilities access requirements; compliance with CALEA standards; outage reporting; and the payment of fees to fund local number portability administration and the North American Numbering Plan. As noted above, the FCC and states are examining whether new requirements are necessary to improve the resiliency of communications networks.networks, including heightened backup power requirements within the provider's network. Communications with our customers are also subject to FCC, FTC and state regulations on telemarketing and the sending of unsolicited commercial e-mail and fax messages, as well as additional privacy and data security requirements.
State Regulation. Our CLEC subsidiaries' telecommunications services are subject to regulation by state commissions in each state where we provide services. In order to provide our services, we must seek approval from the state regulatory commission or be registered to provide services in each state where we operate and may at times require local approval to construct facilities. Regulatory obligations vary from state to state and include some or all of the following requirements: filing tariffs (rates, terms and conditions); filing operational, financial, and customer service reports; seeking approval to transfer the assets or capital stock of the broadband communications company; seeking approval to issue stocks, bonds and other forms of indebtedness of the broadband communications company;
reporting customer service and quality of service requirements; outage reporting; making contributions to state universal service support programs; paying regulatory and state Telecommunications Relay Service and E911 fees; geographic build-out; and other matters relating to competition.
In September 2019, we launched Altice Mobile, our mobile service using our own core infrastructure and our infrastructure mobile virtual network operator ("iMVNO") agreements with Sprint and other roaming partners, including AT&T. Our mobile wireless service is subject to most of the same FCC and consumer protection regulations as typical, network-based wireless carriers (such as E911 services, local number portability, privacy protection, and constraints on billing and advertising practices). The FCC or other regulatory authorities may adopt new or different regulations that apply to our services or similarly situated providers, impose new taxes or fees, or modify the obligations of other network-based carriers to provide wholesale RAN access to providers like Altice USA.
Other Services
We may provide other services and features over our cable system, such as games and interactive advertising that may be subject to a range of federal, state and local laws such as privacy and consumer protection regulations. We also maintain various websites that provide information and content regarding our businesses. The operation of these websites is also subject to a similar range of regulations.
Environmental Regulations
Our business operations are subject to environmental laws and regulations, including regulations governing the use, storage, disposal of, and exposure to, hazardous materials, the release of pollutants into the environment and the remediation of contamination. In part as a result of the increasing public awareness concerning the importance of environmental regulations, these regulations have become more stringent over time. Amended or new regulations could impact our operations and costs.
Employees and Labor Relations
As of December 31, 2017, we had 9,047 full-time (5,962 in our Cablevision segment and 3,085 in our Suddenlink segment), 72 part-time (63 in our Cablevision segment and 9 in our Suddenlink segment) and 295 temporary employees (294 in our Cablevision segment and 1 in our Suddenlink segment) of which 208 (in our Cablevision segment) were covered under collective bargaining agreements and an additional 94 (in our Cablevision segment) were represented by a union. As of December 31, 2017, ATS had approximately 3,250 employees, none of which were covered under collective bargaining agreements or represented by a union. We believe our relations with employees are satisfactory.
Available Information and Website
We make available free of charge, through our investor relations section at our website, http://www.alticeusa.com, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the U.S. Securities and Exchange Commission ("SEC").
The public may read and copy any materials the Company files with the SEC at the SEC's Public Reference Room at 100 F Street, N.E., Washington, DC 20549. In addition, the public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at its web site http://www.sec.gov.
Item 1A. Risk Factors
Risk Factors Relating to Our Business
We operate in a highly competitive business environment which could materially adversely affect our business, financial condition, results of operations and liquidity.
We operate in a highly competitive, consumer-driven industry and we compete against a variety of broadband, pay television and telephony providers and delivery systems, including broadband communications companies, wireless data and telephony providers, satellite-delivered video signals, Internet-delivered video content and broadcast television signals available to residential and business customers in our service areas. Some of our competitors include AT&T and its DirecTV subsidiary, CenturyLink, DISH Network, Frontier and Verizon. In addition, our pay television services compete with all other sources of leisure, news, information and entertainment, including movies, sporting or other live events, radio broadcasts, home-video services, console games, print media and the Internet.
In some instances, our competitors have fewer regulatory burdens, easier access to financing, greater resources, greater operating capabilities and efficiencies of scale, stronger brand-name recognition, longstanding relationships with regulatory authorities and customers, more customers, more flexibility to offer promotional packages at prices lower than ours and greater access to programming or other services. This competition creates pressure on our pricing and has adversely affected, and may continue to affect, our ability to add and retain customers, which in turn adversely affects our business, financial condition and results of operations. The effects of competition may also adversely affect our liquidity and ability to service our debt. For example, we face intense competition from Verizon, which has constructed FTTH network infrastructure that passes a significant number of households in our New York metropolitan service area. We estimate that Verizon is currently able to sell a fiber-based triple play, including broadband, pay television and telephony services, to at least half of the households in our New York metropolitan service area and may expand these and other service offerings to more customers in the future. Any estimate of Verizon's build-out and sales activity in our New York metropolitan service area is difficult to assess because it is based on visual inspections and other limited estimating techniques and therefore serves only as an approximation.
Our competitive risks are heightened by the rapid technological change inherent in our business, evolving consumer preferences and the need to acquire, develop and adopt new technology to differentiate our products and services from those of our competitors, and to meet consumer demand. We may need to anticipate far in advance which technology we should use for the development of new products and services or the enhancement of existing products and services. The failure to accurately anticipate such changes may adversely affect our ability to attract and retain customers, which in turn could adversely affect our business, financial condition and results of operations. Consolidation and cooperation in our industry may allow our competitors to acquire service capabilities or offer products that are not available to us or offer similar products and services at prices lower than ours. For example, Comcast and Charter Communications have agreed to jointly explore operational efficiencies to speed their respective entries into the wireless market, including in the areas of creating common operating platforms and emerging wireless technology platforms. In addition, changes in the regulatory and legislative environments may result in changes to the competitive landscape.
In addition, certain of our competitors own directly or are affiliated with companies that own programming content or have exclusive arrangements with content providers that may enable them to obtain lower programming costs or offer exclusive programming that may be attractive to prospective customers. For example, DirecTV has exclusive arrangements with the National Football League that give it access to programming we cannot offer. AT&T also has an agreement to acquire Time Warner, which owns a number of cable networks, including TBS, CNN and HBO, as well as Warner Bros. Entertainment, which produces television, film and home-video content. AT&T's and DirecTV's potential access to Time Warner programming could allow AT&T and DirecTV to offer competitive and promotional packages that could negatively affect our ability to maintain or increase our existing customers and revenues. DBS operators such as DISH Network and DirecTV also have marketing arrangements with certain phone companies in which the DBS provider's pay television services are sold together with the phone company's broadband and mobile and traditional phone services.
Another source of competition for our pay television services is the delivery of video content over the Internet directly to customers, some of which is offered without charging a fee for access to the content. This competition comes
from a number of different sources, including companies that deliver movies, television shows and other video programming over broadband Internet connections, such as Netflix, Hulu, iTunes, YouTube, Amazon Prime, Sling TV, Playstation Vue, DirecTV Now and Go90. It is possible that additional competitors will enter the market and begin providing video content over the Internet directly to customers. Increasingly, content owners, such as HBO and CBS, are selling their programming directly to consumers over the Internet without requiring a pay-television subscription. The availability of these services has and will continue to adversely affect customer demand for our pay television services, including premium and on-demand services. Further, due to consumer electronics innovations, consumers are able to watch such Internet-delivered content on television sets and mobile devices, such as smartphones and tablets. Internet access services are also offered by providers of wireless services, including traditional cellular phone carriers and others focused solely on wireless data services. All wireless carriers have started to offer unlimited data plans, which could, in some cases, become a substitute for the fixed broadband services we provide. The FCC is likely to continue to make additional radio spectrum available for these wireless Internet access services.
Our pay television services also face competition from broadcast television stations, entities that make digital video recorded movies and programs available for home rental or sale, satellite master antenna television ("SMATV") systems, which generally serve large MDUs under an agreement with the landlord and service providers and open video system operators. Private cable systems can offer improved reception of local television stations and many of the same satellite-delivered program services that are offered by cable systems. SMATV systems currently benefit from operating advantages not available to franchised cable systems, including fewer regulatory burdens. Cable television has also long competed with broadcast television, which consists of television signals that the viewer is able to receive without charge using an "off-air" antenna. The extent of such competition is dependent upon the quality and quantity of broadcast signals available through "off-air" reception, compared to the services provided by the local cable system. The use of radio spectrum now provides traditional broadcasters with the ability to deliver HD television pictures and multiple digital-quality program streams. There can be no assurance that existing, proposed or as yet undeveloped technologies will not become dominant in the future and render our video service offering less profitable or even obsolete.
Most broadband communications companies, which already have wired networks, an existing customer base and other operational functions in place (such as billing and service personnel), offer DSL services. We believe DSL service competes with our broadband service and is often offered at prices lower than our Internet services. However, DSL is often offered at speeds lower than the speeds we offer. In addition, DSL providers may currently be in a better position to offer Internet services to businesses since their networks tend to be more complete in commercial areas. They may also increasingly have the ability to combine video services with telephone and Internet services offered to their customers, particularly as broadband communications companies enter into co-marketing agreements with other service providers. In addition, current and future fixed and wireless Internet services, such as 3G, 4G and 5G fixed and wireless broadband services and Wi-Fi networks, and devices such as wireless data cards, tablets and smartphones, and mobile wireless routers that connect to such devices, may compete with our broadband services.
Our telephony services compete directly with established broadband communications companies and other carriers, including wireless providers, as increasing numbers of homes are replacing their traditional telephone service with wireless telephone service. We also compete against VoIP providers like Vonage, Skype, GoogleTalk, Facetime, WhatsApp and magicJack that do not own networks but can provide service to any person with a broadband connection, in some cases free of charge. In addition, we compete against ILECs, other CLECs and long-distance voice-service companies for large commercial and enterprise customers. While we compete with the ILECs, we also enter into interconnection agreements with ILECs so that our customers can make and receive calls to and from customers served by the ILECs and other telecommunications providers. Federal and state law and regulations require ILECs to enter into such agreements and provide facilities and services necessary for connection, at prices subject to regulation. The specific price, terms and conditions of each agreement, however, depend on the outcome of negotiations between us and each ILEC. Interconnection agreements are also subject to approval by the state regulatory commissions, which may arbitrate negotiation impasses. We have entered into interconnection agreements with Verizon for New York, New Jersey and portions of Connecticut, and with Frontier for portions of Connecticut, which have been approved by the respective state commissions. We have also entered into interconnection agreements with other ILECs in New York and New Jersey. These agreements, like all interconnection agreements, are for limited terms and upon expiration are subject to renegotiation, potential arbitration and approval under the laws in effect at that time.
We also face competition for our advertising sales from traditional and non-traditional media outlets, including television and radio stations, traditional print media and the Internet.
We face significant risks as a result of rapid changes in technology, consumer expectations and behavior.
The broadband communications industry has undergone significant technological development over time and these changes continue to affect our business, financial condition and results of operations. Such changes have had, and will continue to have, a profound impact on consumer expectations and behavior. Our video business faces technological change risks as a result of the continuing development of new and changing methods for delivery of programming content such as Internet-based delivery of movies, shows and other content which can be viewed on televisions, wireless devices and other developing mobile devices. Consumers' video consumption patterns are also evolving, for example, with more content being downloaded for time-shifted consumption. A proliferation of delivery systems for video content can adversely affect our ability to attract and retain customers and the demand for our services and it can also decrease advertising demand on our delivery systems. Our broadband business faces technological challenges from rapidly evolving wireless Internet solutions. Our telephony service offerings face technological developments in the proliferation of telephony delivery systems including those based on Internet and wireless delivery. If we do not develop or acquire and successfully implement new technologies, we will limit our ability to compete effectively for customers, content and advertising. We cannot provide any assurance that we will realize, in full or in part, the anticipated benefits we expect from the introduction of our home communications hub, Altice One, or that it will be rolled out across our footprint in the timeframe we anticipate. In addition, we may be required to make material capital and other investments to anticipate and to keep up with technological change. These challenges could adversely affect our business, financial condition and results of operations.
In the fourth quarter of 2017, we entered into a multi-year strategic agreement with Sprint pursuant to which we will utilize Sprint's network to provide mobile voice and data services to our customers throughout the nation, and our broadband network will be utilized to accelerate the densification of Sprint's network. We believe this additional product offering will enable us to deliver greater value and more benefits to our customers, including by offering "quad play" offerings that bundle broadband, pay television, telephony and mobile voice and data services to our customers. Some of our competitors already offer, or have announced plans to offer, their own "quad-play" offerings that bundle broadband, pay television, telephony and mobile voice and data services. If our customers do not view our quad play offers as competitive with those offered by our competitors, we could experience increased customer churn. We cannot provide any assurance that we will realize, in full or in part, the anticipated benefits we expect from the introduction of our mobile voice and data services, or that they will be rolled out in the timeframe we anticipate. In addition, we may be required to make material capital and other investments to anticipate and to keep up with technological change. These challenges could adversely affect our business, financial condition and results of operations.
Programming and retransmission costs are increasing and we may not have the ability to pass these increases on to our customers. Disputes with programmers and the inability to retain or obtain popular programming can adversely affect our relationship with customers and lead to customer losses.
Programming costs are one of our largest categories of expenses. In recent years, the cost of programming in the cable and satellite video industries has increased significantly and is expected to continue to increase, particularly with respect to costs for sports programming and broadcast networks. We may not be able to pass programming cost increases on to our customers due to the increasingly competitive environment. If we are unable to pass these increased programming costs on to our customers, our results of operations would be adversely affected. Moreover, programming costs are related directly to the number of customers to whom the programming is provided. Our smaller customer base relative to our competitors may limit our ability to negotiate lower per-customer programming costs, which could result in reduced operating margins relative to our competitors with a larger customer base.
The expiration dates of our various programming contracts are staggered, which results in the expiration of a portion of our programming contracts throughout each year. We attempt to control our programming costs and, therefore, the cost of our video services to our customers, by negotiating favorable terms for the renewal of our affiliation agreements with programmers. On certain occasions in the past, such negotiations have led to disputes with programmers that have resulted in temporary periods during which we did not carry or decided to stop carrying a particular broadcast network or programming service or services. For example, in 2017, we were unable to reach agreement with Starz on acceptable economic terms, and effective January 1, 2018, all Starz services were removed from our lineups in our Optimum and
Suddenlink segments, and we launched alternative networks offered by other programmers under new long-term contracts. On February 13, 2018, we and Starz reached a new carriage agreement and we started restoring the Starz services previously offered by Optimum and Suddenlink. Also, in our Suddenlink segment, we were unable to reach agreement with Viacom on acceptable economic terms for a long-term contract renewal and, effective October 1, 2014, all Viacom networks were removed from our channel lineups in our Suddenlink footprint. We and Viacom did not reach a new agreement to include certain Viacom networks in the Suddenlink channel lineup until May 2017. To the extent we are unable to reach agreement with certain programmers on terms we believe are reasonable, we may be forced to, or determine for strategic or business reasons to, remove certain programming channels from our line-up and may decide to replace such programming channels with other programming channels, which may not be available on acceptable terms or be as attractive to customers. Such disputes, or the removal or replacement of programming, may inconvenience some of our customers and can lead to customer dissatisfaction and, in certain cases, the loss of customers, which could have a material adverse effect on our business, financial condition, results of operations and liquidity. There can be no assurance that our existing programming contracts will be renewed on favorable or comparable terms, or at all, or that the rights we negotiate will be adequate for us to execute our business strategy.
We may also be subject to increasing financial and other demands by broadcast stations. Federal law allows commercial television broadcast stations to make an election between "must-carry" rights and an alternative "retransmission consent" regime. Local stations that elect "must-carry" are entitled to mandatory carriage on our systems, but at no fee. When a station opts for retransmission consent, cable operators negotiate for the right to carry the station's signal, which typically requires payment of a per-customer fee. Our retransmission agreements with stations expire from time to time. Upon expiration of these agreements, we may carry some stations under short-term arrangements while we attempt to negotiate new long-term retransmission agreements. In connection with any negotiation of new retransmission agreements, we may become subject to increased or additional costs, which we may not be able to pass on to our customers. To the extent that we cannot pass on such increased or additional costs to customers or offset such increased or additional costs through the sale of additional services, our business, financial condition, results of operations and liquidity could be materially adversely affected. In addition, in the event contract negotiations with stations are unsuccessful, we could be required, or determine for strategic or business reasons, to cease carrying such stations' signals, possibly for an indefinite period. Any loss of stations could make our video service less attractive to our customers, which could result in a loss of customers, which could have a material adverse effect on our business, financial condition, results of operations and liquidity. There can be no assurance that any expiring retransmission agreements will be renewed on favorable or comparable terms, or at all.
We may not be able to successfully implement our growth strategy.
Our future growth, profitability and results of operations depend upon our ability to successfully implement our business strategy, which, in turn, is dependent upon a number of factors, including our ability to continue to:
simplify and optimize our organization;
reinvest in infrastructure and content;
invest in sales, marketing and innovation;
enhance the customer experience;
drive revenue and cash flow growth; and
opportunistically grow through value-accretive acquisitions.
There can be no assurance that we can successfully achieve any or all of the above initiatives in the manner or time period that we expect. Furthermore, achieving these objectives will require investments which may result in short-term costs without generating any current revenues and therefore may be dilutive to our earnings. We cannot provide any assurance that we will realize, in full or in part, the anticipated benefits we expect our strategy will achieve. The failure to realize those benefits could have a material adverse effect on our business, financial condition and results of operations. In addition, if we are unable to continue improving our operational performance and customer experience we may face a decrease in new customers and an increase in customer churn, which could have a material adverse effect on our business, financial condition and results of operations. In particular, there can be no assurance that we will be able to successfully implement our plan to build a FTTH network within the anticipated timeline or at all or within the cost
parameters we currently expect. Similarly, we may not be successful in deploying Altice One or the mobile voice and data services we intend to offer under our agreement with Sprint on our current timeline or realize, in full or in part, the anticipated benefits we expect from the introduction thereof, and we may face technological or other challenges in pursuing these or other initiatives.
The financial markets are subject to volatility and disruptions, which have in the past, and may in the future, adversely affect our business, including by affecting the cost of new capital and our ability to fund acquisitions or other strategic transactions.
The capital markets experience volatility and disruption. At times, the markets have exerted extreme downward pressure on stock prices and upward pressure on the cost of new debt, which has severely restricted credit availability for many companies.
Historical market disruptions have typically been accompanied by a broader economic downturn, which has historically led to lower demand for our products, such as video services, as well as lower levels of television advertising, and increased incidence of customers' inability to pay for the services we provide. A recurrence of these conditions may further adversely impact our business, financial condition and results of operations.
We rely on the capital markets, particularly for offerings of debt securities and borrowings under syndicated facilities, to meet our financial commitments and liquidity needs and to fund acquisitions or other strategic transactions. Disruptions or volatility in the capital markets could also adversely affect our ability to refinance on satisfactory terms, or at all, our scheduled debt maturities and could adversely affect our ability to draw on our revolving credit facilities.
Disruptions in the capital markets as well as the broader global financial market can also result in higher interest rates on publicly issued debt securities and increased costs under credit facilities. Such disruptions could increase our interest expense, adversely affecting our business, financial position and results of operations.
Our access to funds under our revolving credit facilities is dependent on the ability of the financial institutions that are parties to those facilities to meet their funding commitments. Those financial institutions may not be able to meet their funding commitments if they experience shortages of capital and liquidity or if they experience excessive volumes of borrowing requests within a short period of time. Moreover, the obligations of the financial institutions under our revolving credit facilities are several and not joint and, as a result, a funding default by one or more institutions does not need to be made up by the others.
Longer term, volatility and disruptions in the capital markets and the broader global financial market as a result of uncertainty, changing or increased regulation of financial institutions, reduced alternatives or failures of significant financial institutions could adversely affect our access to the liquidity needed for our businesses. Such disruptions could require us to take measures to conserve cash or impede or delay potential acquisitions, strategic transactions and refinancing transactions until the markets stabilize or until alternative credit arrangements or other funding for our business needs can be arranged.
We are highly leveraged and have substantial indebtedness, which reduces our capability to withstand adverse developments or business conditions.
Our subsidiaries have incurred substantial amounts of indebtedness to finance the Acquisitions, our operations, upgrades to our cable plant and acquisitions of other cable systems, sources of programming and other businesses. We have also incurred substantial indebtedness in order to offer new or upgraded services to our current and potential customers. At December 31, 2017, the carrying value of our total aggregate indebtedness, including collateralized indebtedness, was approximately $21.9 billion ($15.3 billion at our Cablevision segment and $6.6 billion at our Cequel segment). Because we are highly leveraged, our payments on our indebtedness are significant in relation to our revenues and cash flow, which exposes us to significant risk in the event of downturns in our businesses (whether through competitive pressures or otherwise), our industry or the economy generally, since our cash flows would decrease, but our required payments under our indebtedness would not.
Economic downturns may impact our ability to comply with the covenants and restrictions in our indentures, credit facilities and agreements governing our other indebtedness and may impact our ability to pay or refinance our indebtedness as it comes due. If we do not repay or refinance our debt obligations when they become due and do not otherwise comply with the covenants and restrictions in our indentures, credit facilities and agreements governing our other indebtedness,
we would be in default under those agreements and the underlying debt could be declared immediately due and payable. In addition, any default under any of our indentures, credit facilities or agreements governing our other indebtedness could lead to an acceleration of debt under any other debt instruments or agreements that contain cross-acceleration or cross-default provisions. If the indebtedness incurred under our indentures, credit facilities and agreements governing our other indebtedness were accelerated, we would not have sufficient cash to repay amounts due thereunder. To avoid a default, we could be required to defer capital expenditures, sell assets, seek strategic investments from third parties or otherwise reduce or eliminate discretionary uses of cash. However, if such measures were to become necessary, there can be no assurance that we would be able to sell sufficient assets or raise strategic investment capital sufficient to meet our scheduled debt maturities as they come due. In addition, any significant reduction in necessary capital expenditures could adversely affect our ability to retain our existing customer base and obtain new customers, which would adversely affect our business, financial position and results of operations.
Our overall leverage and the terms of our financing arrangements could also:
make it more difficult for us to satisfy obligations under our outstanding indebtedness;
limit our ability to obtain additional financing in the future for working capital, capital expenditures or acquisitions;
limit our ability to refinance our indebtedness on terms acceptable to us or at all;
limit our ability to adapt to changing market conditions;
restrict us from making strategic acquisitions or cause us to make non-strategic divestitures;
require us to dedicate a significant portion of our cash flow from operations to paying the principal of and interest on our indebtedness, thereby limiting the availability of our cash flow to fund future capital expenditures, working capital and other corporate purposes;
limit our flexibility in planning for, or reacting to, changes in our business and the broadband communications industry generally; and
place us at a competitive disadvantage compared with competitors that have a less significant debt burden.
In addition, a substantial portion of our indebtedness bears interest at variable rates. If market interest rates increase, our variable-rate debt will have higher debt service requirements, which could adversely affect our cash flows and financial condition. For more information, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Quantitative and Qualitative Disclosures About Market Risk—Interest Rate Risk." Although we have historically entered into, and may in the future enter into, hedging arrangements to limit our exposure to an increase in interest rates, such arrangements may not offer complete protection from this risk.
If we incur additional indebtedness, such indebtedness could further exacerbate the risks associated with our substantial indebtedness.
If we incur additional indebtedness, such indebtedness will be added to our current debt levels and the related risks we currently face could be magnified. Any decrease in our revenues or an increase in operating costs (and corresponding reduction in our cash flows) would also adversely affect our ability to pay our indebtedness as it comes due.
We have in past periods incurred substantial losses from continuing operations, and we may do so in the future, which may reduce our ability to raise needed capital.
We have in the past incurred substantial losses from continuing operations and we may do so in the future. Significant losses from continuing operations could limit our ability to raise any needed financing, or to do so on favorable terms, as such losses could be taken into account by potential investors, lenders and the organizations that issue investment ratings on our indebtedness.
A lowering or withdrawal of the ratings assigned to our subsidiaries' debt securities and credit facilities by ratings agencies may further increase our future borrowing costs and reduce our access to capital.
Credit rating agencies continually revise their ratings for companies they follow. The condition of the financial and credit markets and prevailing interest rates have fluctuated in the past and are likely to fluctuate in the future. In addition,
developments in our business and operations or the amount of indebtedness could lead to a ratings downgrade on our or our subsidiaries' indebtedness. The debt ratings for our subsidiaries' debt securities and credit facilities are currently below the "investment grade" category, which results in higher borrowing costs as well as a reduced pool of potential investors of that debt as some investors will not purchase debt securities or become lenders under credit facilities that are not rated in an investment grade rating category. In addition, there can be no assurance that any rating assigned will remain for any given period of time or that a rating will not be lowered or withdrawn entirely by a rating agency, if in that rating agency's judgment, future circumstances relating to the basis of the rating, such as adverse changes, so warrant. Any such fluctuation in the rating of us or our subsidiaries may impact our ability to access debt markets in the future or increase our cost of future debt which could have a material adverse effect on our business, financial condition and results of operations, which in return may adversely affect the market price of shares of our Class A common stock.
Our subsidiaries' ability to meet obligations under their indebtedness may be restricted by limitations on our other subsidiaries' ability to send funds.
Our subsidiaries that have incurred indebtedness under indentures and credit facilities are primarily holding companies whose ability to pay interest and principal on such indebtedness is wholly or partially dependent upon the operations of their respective subsidiaries and the distributions or other payments of cash, in the form of distributions, loans or advances, those other subsidiaries deliver to our indebted subsidiaries. Our subsidiaries are separate and distinct legal entities and, unless any such subsidiaries has guaranteed the underlying indebtedness, have no obligation, contingent or otherwise, to pay any amounts due on our indebted subsidiaries' indebtedness or to make any funds available to our indebted subsidiaries to do so. These subsidiaries may not generate enough cash to make such funds available to our indebted subsidiaries and in certain circumstances legal and contractual restrictions may also limit their ability to do so. Also, our subsidiaries' creditors, including trade creditors, in the event of a liquidation or reorganization of any subsidiary, would be entitled to a claim on the assets of such subsidiaries, including any assets transferred to those subsidiaries, prior to any of our claims as a stockholder and those creditors are likely to be paid in full before any distribution is made to us. To the extent that we are a creditor of a subsidiary, our claims could be subordinated to any security interest in the assets of that subsidiary and/or any indebtedness of that subsidiary senior to that held by us.
In addition, our Optimum and Suddenlink businesses are each currently financed on a standalone basis and constitute separate financing groups, which are subject to covenants that restrict the use of their respective cash flows outside their respective restricted groups. Consequently, cash flows from operations of Optimum and its subsidiaries may not be able to be applied to meet the obligations or other expenses of Suddenlink and its subsidiaries and cash flows from operations of Suddenlink may not be able to be applied to meet the obligations or other expenses of Optimum and its subsidiaries, except to the extent that the relevant restricted group is able to pay a dividend under the agreements governing their respective indebtedness.
Our ability to incur additional indebtedness and use our funds is limited by significant restrictive covenants in financing agreements.
The indentures, credit facilities and agreements governing the indebtedness of our subsidiaries contain various negative covenants that restrict our subsidiaries' (and their respective subsidiaries') ability to, among other things:
incur additional indebtedness and guarantee indebtedness;
pay dividends or make other distributions, or repurchase or redeem capital stock;
prepay, redeem or repurchase subordinated debt or equity;
issue certain preferred stock;
make loans and investments;
sell assets;
incur liens;
enter into transactions with affiliates;
create or permit any encumbrances or restrictions on the ability of their respective subsidiaries to pay dividends or make other distributions, make loans or advances or transfer assets, in each case to such subsidiary, or its other restricted subsidiaries; and
consolidate, merge or sell all or substantially all of their assets.
We are also subject to certain affirmative covenants under our subsidiaries' revolving credit facilities, which, among other things, require the relevant Cablevision and Cequel subsidiaries to each maintain a specified financial ratio if there are any outstanding utilizations. Our ability to meet these financial ratios may be affected by events beyond our control and, as a result, there can be no assurance that we will be able to meet these ratios.
Violation of these covenants could result in a default that would permit the relevant creditors to require the immediate repayment of the borrowings thereunder, which could result in a default under other debt instruments and agreements that contain cross-default provisions and, in the case of revolving credit facilities, permit the relevant lenders to restrict the relevant borrower's ability to borrow undrawn funds under such revolving credit facilities. A default under any of the agreements governing our indebtedness could materially adversely affect our growth, financial condition and results of operations.
As a result, we may be:
limited in how we conduct our business;
unable to raise additional debt or equity financing to operate during general economic or business downturns; or
unable to compete effectively or to take advantage of new business opportunities.
These restrictions could have a material adverse effect on our ability to grow in accordance with our strategy and on the value of our debt and equity securities. In addition, our financial results, substantial indebtedness and credit ratings could materially adversely affect the availability and terms of our financing.
We will need to raise significant amounts of funding over the next several years to fund capital expenditures, repay existing obligations and meet other obligations and the failure to do so successfully could adversely affect our business. We may also engage in extraordinary transactions that involve the incurrence of large amounts of indebtedness.
Our business is capital intensive. Operating and maintaining our cable systems requires significant amounts of cash payments to third parties. Capital expenditures were $991.4 million and $625.5 million in 2017 and 2016 and primarily included payments for customer premise equipment, network infrastructure, support and other costs. Capital expenditures were $711.4 million and $298.4 million in 2017 and for the period from the date of the Cablevision Acquisition through December 31, 2016, respectively, for our Cablevision segment and $279.9 million and $327.2 million in 2017 and 2016, respectively, for our Cequel segment.
We have commenced a plan to build a FTTH network, which will enable us to deliver more than 10 Gbps broadband speeds across our entire Optimum footprint and part of our Suddenlink footprint. We also introduced Altice One during the fourth quarter of 2017, which is our most advanced home communications hub, and we have begun rolling it out across our Optimum footprint. Also in the fourth quarter of 2017, we entered into a multi-year strategic agreement pursuant to which we will utilize Sprint's network to provide mobile voice and data services to our customers throughout the nation, and our broadband network will be utilized to accelerate the densification of Sprint's network. We may not be able to execute these initiatives within the anticipated timelines and we may incur greater than anticipated costs and capital expenditures, fail to realize anticipated benefits, experience business disruptions or encounter other challenges to executing either as planned. The failure to realize the anticipated benefits of these initiatives could have a material adverse effect on our business, financial condition and results of operations.
We expect these capital expenditures to continue to be significant as we further enhance our service offerings. We may have substantial future capital commitments in the form of long-term contracts that require substantial payments over a period of time. We may not be able to generate sufficient cash internally to fund anticipated capital expenditures, meet these obligations and repay our indebtedness at maturity. Accordingly, we may have to do one or more of the following:
refinance existing obligations to extend maturities;
raise additional capital, through debt or equity issuances or both;
cancel or scale back current and future spending programs; or
sell assets or interests in one or more of our businesses.
However, we may not be able to refinance existing obligations or raise any required additional capital or to do so on favorable terms. Borrowing costs related to future capital raising activities may be significantly higher than our current borrowing costs and we may not be able to raise additional capital on favorable terms, or at all, if financial markets experience volatility. If we are unable to pursue our current and future spending programs, we may be forced to cancel or scale back those programs. Our choice of which spending programs to cancel or reduce may be limited. Failure to successfully pursue our capital expenditure and other spending plans could materially and adversely affect our ability to compete effectively. It is possible that in the future we may also engage in extraordinary transactions and such transactions could result in the incurrence of substantial additional indebtedness.
We rely on network and information systems for our operations and a disruption or failure of, or defects in, those systems may disrupt our operations, damage our reputation with customers and adversely affect our results of operations.
Network and information systems are essential to our ability to deliver our services to our customers. While we have in place multiple security systems designed to protect against intentional or unintentional disruption, failure, misappropriation or corruption of our network and information systems, there can be no assurance that our efforts to protect our network and information systems will prevent any of the problems identified above. A problem of this type might be caused by events such as computer hacking, computer viruses, worms and other destructive or disruptive software, "cyber-attacks" and other malicious activity, defects in the hardware and software comprising our network and information systems, as well as natural disasters, power outages, terrorist attacks and similar events. Such events could have an adverse impact on us and our customers, including degradation of service, service disruption, excessive call volume to call centers and damage to our plant, equipment and data. Operational or business delays may result from the disruption of network or information systems and the subsequent remediation activities. Moreover, these events may create negative publicity resulting in reputation or brand damage with customers and our results of operations could suffer.
We also use certain vendors to supply some of the hardware, software and support of our network, some of which have been customized or altered to fit our business needs. Certain of these vendors and suppliers may have leverage over us considering that there are limited suppliers of certain products and services, or that there is a long lead time and/or significant expense required to transition to another provider. In addition, some of these vendors and suppliers do not have a long operating history or may not be able to continue to supply the equipment and services we desire. Some of our hardware, software and operational support vendors and some of our service providers represent our sole source of supply or have, either through contract or as a result of intellectual property rights, a position of some exclusivity. In addition, because of the pace at which technological innovations occur in our industry, we may not be able to obtain access to the latest technology on reasonable terms. Any delays or the termination or disruption in these relationships as a result of contractual disagreements, operational or financial failures on the part of our vendors and suppliers, or other adverse events that prevent such vendors and suppliers from providing the equipment or services we need, with the level of quality we require, in a timely manner and at reasonable prices, could result in significant costs to us and have a negative effect on our ability to provide services and rollout advanced services. Our ability to replace such vendors and suppliers may be limited and, as a result, our business, financial condition, results of operations and liquidity could be materially adversely affected.
If we experience a significant data security breach or fail to detect and appropriately respond to a significant data security breach, our results of operations and reputation could suffer.
The nature of our business involves the receipt and storage of information about our customers and employees. We have procedures in place to detect and respond to data security incidents. However, because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and may be difficult to detect for long periods of time, we may be unable to anticipate these techniques or implement adequate preventive measures. In addition, hardware, software or applications we develop or procure from third parties may contain defects in design or manufacture or other problems that could unexpectedly compromise information security. Unauthorized parties may
also attempt to gain access to our systems or facilities and to our proprietary business information. If our efforts to protect the security of information about our customers and employees are unsuccessful, a significant data security breach may result in costly government enforcement actions, private litigation and negative publicity resulting in reputation or brand damage with customers, and our financial condition and results of operations could suffer.
A portion of our workforce is represented by labor unions. Collective bargaining agreements can increase our expenses. Labor disruptions could adversely affect our business, financial condition and results of operations.
As of December 31, 2017, 208 Cablevision full-time employees were covered by collective bargaining agreements (primarily technicians in Brooklyn, New York) with the Communication Workers of America ("CWA"). Cablevision and the CWA entered into a collective bargaining agreement in 2015. This agreement was renewed in June 2016 for an additional three-year term. On March 10, 2017, the International Brotherhood of Electrical Workers ("IBEW") was certified to represent 100 employees in Oakland, New Jersey. We are currently negotiating a collective bargaining agreement with the IBEW relating to these employees and there can be no assurance that we will be able to reach an agreement on terms acceptable to us. The collective bargaining agreements with the CWA and IBEW covering these groups of employees or any other agreements with other unions may increase our expenses. In addition, any disruptions to our operations due to labor related problems could have an adverse effect on our business, financial condition and results of operations.
A significant amount of our book value consists of intangible assets that may not generate cash in the event of a voluntary or involuntary sale.
At December 31, 2017, we reported approximately $34.8 billion of consolidated total assets, of which approximately $26.1 billion were intangible ($18.4 billion at our Cablevision segment and $7.7 billion at our Cequel segment). Intangible assets primarily included franchises from city and county governments to operate cable systems, goodwill, customer relationships and trade names. While we believe the carrying values of our intangible assets are recoverable, we may not receive any cash in the event of a voluntary or involuntary sale of these intangible assets, particularly if we were not continuing as an operating business. We urge our stockholders to read carefully our consolidated financial statements contained herein, which provide more detailed information about these intangible assets.
We may engage in acquisitions and other strategic transactions and the integration of such acquisitions and other strategic transactions could materially adversely affect our business, financial condition and results of operations.
Our business has grown significantly as a result of acquisitions, including the Acquisitions, which entail numerous risks including:
distraction of our management team in identifying potential acquisition targets, conducting due diligence and negotiating acquisition agreements;
difficulties in integrating the operations, personnel, products, technologies and systems of acquired businesses;
difficulties in enhancing our customer support resources to adequately service our existing customers and the customers of acquired businesses;
the potential loss of key employees or customers of the acquired businesses;
unanticipated liabilities or contingencies of acquired businesses;
unbudgeted costs which we may incur in connection with pursuing potential acquisitions which are not consummated;
failure to achieve projected cost savings or cash flow from acquired businesses, which are based on projections that are inherently uncertain;
fluctuations in our operating results caused by incurring considerable expenses to acquire and integrate businesses before receiving the anticipated revenues expected to result from the acquisitions; and
difficulties in obtaining regulatory approvals required to consummate acquisitions.
We also participate in competitive bidding processes, some of which may involve significant cable systems. If we are the winning bidder in any such process involving significant cable systems or we otherwise engage in acquisitions or other strategic transactions in the future, we may incur additional debt, contingent liabilities and amortization expenses, which could materially adversely affect our business, financial condition and results of operations. We could also issue substantial additional equity which could dilute existing stockholders.
If our acquisitions, including the Acquisitions and the integration of the Optimum and Suddenlink businesses, do not result in the anticipated operating efficiencies, are not effectively integrated, or result in costs which exceed our expectations, our business, financial condition and results of operations could be materially adversely affected.
Significant unanticipated increases in the use of bandwidth-intensive Internet-based services could increase our costs.
The rising popularity of bandwidth-intensive Internet-based services poses risks for our broadband services. Examples of such services include peer-to-peer file sharing services, gaming services and the delivery of video via streaming technology and by download. If heavy usage of bandwidth-intensive broadband services grows beyond our current expectations, we may need to incur more expenses than currently anticipated to expand the bandwidth capacity of our systems or our customers could have a suboptimal experience when using our broadband service. In order to continue to provide quality service at attractive prices, we need the continued flexibility to develop and refine business models that respond to changing consumer uses and demands and to manage bandwidth usage efficiently. Our ability to undertake such actions could be restricted by regulatory and legislative efforts to impose so-called "net neutrality" requirements on broadband communication providers like us that provide broadband services. For more information, see "Regulation—Broadband."
Our business depends on intellectual property rights and on not infringing on the intellectual property rights of others.Intellectual Property
We rely on our patents, copyrights, trademarks and trade secrets, as well as licenses and other agreements with our vendors and other parties, to use our technologies, conduct our operations and sell our products and services. Our intellectual property rights may be challengedWe also rely on our access to the proprietary technology of Altice Europe, including through Altice Labs, and invalidated by third partieslicenses to the name “Altice” and may not be strong enough to provide meaningful commercial competitive advantage. Third parties have in the past, and may in the future, assert claims or initiate litigation related to exclusivederivatives from Next Alt. However, no single patent, copyright, trademark, and othertrade secret or content license is material to our business. We believe we own or have the right to use all of the intellectual property rights to technologies and related standards that are relevant to us. These assertions have increased over time as a resultis necessary for the operation of our growthbusiness as we currently conduct it.
Competition
We operate in a highly competitive, consumer-driven industry and we compete against a variety of broadband, video, mobile and fixed-line telephony providers and delivery systems, including broadband communications companies, wireless data and telephony providers, satellite delivered video signals, Internet-delivered video content and broadcast television signals available to residential and business customers in our service areas. We believe our leading market position in our footprint, technologically advanced network infrastructure, including our FTTH build-out, Altice One, our entertainment and connectivity platform, our new mobile service, and our focus on enhancing the general increase in the pace of patent claims assertions, particularly in the United States. Because of the existence of a large number of patents in the networking field, the secrecy of some pending patents and the rapid rate of issuance of new patents, we believe it is not possible to determine in advance whether a product or any of its components infringes or will infringe on the patent rights of others. Asserted claims and/or initiated litigation can include claims against us or our manufacturers, suppliers or customers, alleging infringement of their proprietary rights with respect to our existing or future products and/or services or components of those products and/or services.
Regardless of the merit of these claims, they can be time-consuming, result in costly litigation and diversion of technical and management personnel, or requirecustomer experience favorably position us to modifycompete in our industry. See also "Risk Factors—Risk Factors Relating to Our Business—We operate in a highly competitive business develop a non-infringing technology, be enjoined from use of certain intellectual property, use alternate technology or enter into license agreements. There can be no assurance that licenses will be available on acceptable terms and conditions, if at all, or that our indemnification by our suppliers will be adequate to cover our costs if a claim were brought directly against us or our customers. Furthermore, because of the potential for high court awards that are not necessarily predictable, it is not unusual to find even arguably unmeritorious claims settled for significant amounts. If any infringement or other intellectual property claim made against us by any third party is successful, if we are required to indemnify a customer with respect to a claim against the customer, or if we fail to modify our business, develop non-infringing technology, use alternate technology or license the proprietary rights on commercially reasonable terms and conditions,environment which could materially adversely affect our business, financial condition, and results of operations and liquidity."
Broadband Services Competition
Our broadband services face competition from broadband communications companies' digital subscriber line ("DSL"), FTTH/Fiber to the Premises ("FTTP") and wireless broadband offerings, as well as from a variety of companies that offer other forms of online services, including satellite-based broadband services. AT&T and Verizon Communications Inc.'s ("Verizon") Fios are our primary FTTH competitors. Current and future fixed and wireless Internet services, such as 4G, LTE and 5G (and variants) wireless broadband services and WiFi networks, and devices such as wireless data cards, tablets and smartphones, and mobile wireless routers that connect to such devices, may also compete with our broadband services both for in premises broadband service and mobile broadband. All major wireless carriers offer unlimited data plans, which could, be materially adversely affected.in some cases, become a substitute for the fixed broadband services we provide. The Federal Communications Commission ("FCC") is likely to continue to make additional radio spectrum available for these wireless Internet access services, which in time could expand the quality and reach of these services.
Video Services Competition
We may be liable for the materialface intense competition from broadband communications companies with fiber-based networks, primarily Verizon, which has constructed a FTTH network plant that content providers distribute overpasses a significant number of households in our networks.
The law relatingOptimum service area, and AT&T, which has constructed an FTTP/Fiber to the liabilityNode ("FTTN") infrastructure in parts of private network operators for information carried on, stored or disseminated through theirour Suddenlink service area. We estimate that Verizon is currently able to sell a fiber-based video service, as well as broadband and VoIP services, to at least half of the households in our Optimum service area. Frontier Communications Corporation ("Frontier") offers video service in competition with us in most of our Connecticut service area.
We also compete with direct broadcast satellite ("DBS") providers, such as DirecTV (a subsidiary of AT&T) and DISH Network Corporation ("DISH"). DirecTV and DISH offer one-way satellite-delivered pre-packaged programming services that are received by relatively small and inexpensive receiving dishes. DirecTV has exclusive arrangements with the National Football League that give it access to programming that we cannot offer. In 2018 AT&T acquired Time Warner Inc. ("Time Warner"), which owns a number of cable networks, is still unsettled. As such, we could be exposedincluding TBS, CNN and HBO, as well as Warner Bros. Entertainment, which produces television, film and home-video content. AT&T's and DirecTV's access to legal claims relatingTime Warner programming and studio assets provides AT&T and DirecTV the ability to content disseminated on our networks. Claims could challengeoffer competitive promotional packages. We believe cable-delivered services, which include the accuracy of materials on our network or could involve matters such as
ability to bundle
additional services such as broadband, offer a competitive advantage to DBS service because cable headends can provide two-way communication to deliver a large volume of programming which customers can access and control independently.
defamation, invasionOur video services also face competition from a number of privacyother sources, including companies that deliver movies, television shows and other video programming, including extensive on demand, live content, serials, exclusive and original content, over broadband Internet connections to televisions, computers, tablets and mobile devices, such as Netflix, Hulu, Apple TV+, YouTube TV, Amazon Prime, Sling TV, AT&T TV, Locast and others. In addition, our programming partners continue to launch direct to consumer streaming products, delivering content to consumers that was formerly only available via video, such as HBO Max, Discovery+ and Disney+.
Telephony Services Competition
Our telephony service competes with wireline, wireless and VoIP phone service providers, such as Vonage, Skype, GoogleTalk, Facetime, WhatsApp and magicJack, as well as companies that sell phone cards at a cost per minute for both national and international service. We also compete with other forms of communication, such as text messaging on cellular phones, instant messaging, social networking services, video conferencing and email. The increased number of technologies capable of carrying telephony services and the number of alternative communication options available to customers have intensified the competitive environment in which we operate our telephony services.
Mobile Wireless Competition
Our mobile wireless service, launched in September 2019, faces competition from a number of national incumbent network-based mobile service providers (like AT&T, Verizon, T-Mobile US, Inc. ("T-Mobile")) and smaller regional service providers, as well as a number of reseller or copyright infringement. IfMVNO providers (such as Tracfone, Boost Mobile and Cricket Wireless, among others). We believe that our approach to the mobile wireless service offering, including the construction and operation of our own "mobile core" and the ability to bundle and promote the product to our existing customer base, gives us advantages over pure MVNO resellers, and differentiates us from incumbent network-based operators. Improvements by incumbent and reseller mobile service providers on price, features, speeds, and service enhancements will continue to impact the competitiveness and attractiveness of our mobile service, and we will need to take costly measurescontinue to reduceinvest in our exposureservices, product and marketing to these risksanswer that competition. Our mobile wireless strategy depends on the availability of wholesale access to radio access networks ("RAN") from one or are required to defend ourselves against such claims, our business, reputation, financial condition and results of operations could be materially adversely affected.
Ifmore network-based providers with whom we are unablelikely to retain key employees,compete. Our mobile service is vulnerable to constraints on the availability of wholesale access or increases in price from the incumbents. Consolidation among wholesale RAN access providers could impair our ability to managesustain our business could be adversely affected.
Our operational results have depended,mobile service. In April 2020, Sprint and T-Mobile merged, subject to certain conditions imposed by the United States Department of Justice and the FCC. While the conditions attached to the combination may benefit our future resultsmobile service in the medium term, the reduction of competition among mobile wireless network-based providers likely will depend,negatively impact the price and availability of wholesale RAN access to the Company generally, certain of the conditions imposed upon the retention and continued performance of our management team. The competitive environment for management talent inmerger parties by the broadband communications industry could adversely impact our ability to retain and hire new key employees for management positions. The loss of the services of key members of managementU.S. Justice Department and the inability or delay in hiring new key employees could adversely affect our abilityFCC have the potential to manage our businessameliorate those effects and our future operationalto enhance the coverage, quality and financial results.
Impairment of Altice Group's or Mr. Drahi's reputation could adversely affect current and future customers' perception of Altice USA.
Our ability to attract and retain customers depends, in part, upon the external perceptions of Altice Group's and Mr. Drahi's reputation and the quality of Altice Group's products and its corporate and management integrity. The broadband communications and video services industry is by its nature more prone to reputational risks than other industries. This has been compounded in recent years by the free flow of unverified information on the Internet and, in particular, on social media. Impairment, including any loss of goodwill or reputational advantages, of Altice Group's or Mr. Drahi's reputation in markets in which we do not operate could adversely affect current and future customers' perception of Altice USA. The consummation of the Distribution may not lessen these risks.
Macroeconomic developments may adversely affect our business.
Our performance is subject to global economic conditions and the related impact on consumer spending levels. Continued uncertainty about global economic conditions poses a risk as consumers and businesses may postpone spending in response to tighter credit, unemployment, negative financial news, and/or declines in income or asset values, which could have a material negative effect on demandcost structure for our productsmobile services while those conditions are in effect.
Business Services Competition
We operate in highly competitive business telecommunications market and services. Ascompete primarily with local incumbent telephone companies, especially AT&T, CenturyLink, Inc. ("Centurylink"), Frontier and Verizon, as well as with a variety of other national and regional business services competitors.
Advertising Sales Competition
We provide advertising and advanced targeted digital advertising services on television and digital platforms, both directly and indirectly, within and outside our business depends on consumer discretionary spending, our resultstelevision service area. We face intense competition for advertising revenue across many different platforms and from a wide range of operations are sensitive to changes in macroeconomic conditions. Our customers may have less money for discretionary purchases as a result of job losses, foreclosures, bankruptcies,local and national competitors. Advertising competition has increased fuel and energy costs, higher interest rates, higher taxes, reduced access to credit, and lower home values. These and other economic factors could adversely affect demand for our products, which in turn could adversely affect our financial condition and results of operations.
Online piracy of entertainment and media content could result in reduced revenues and increased expenditures which could materially harm our business, financial condition and results of operations.
Online entertainment and media content piracy is extensive in many parts of the world and is made easier by technological advances. This trend facilitates the creation, transmission and sharing of high quality unauthorized copies of entertainment and media content. The proliferation of unauthorized copies of this content will likely continue to increase as new formats seek to attract the same advertisers. We compete for advertising revenue against, among others, local broadcast stations, national cable and if it does, could have an adverse effect on our business, financial conditionbroadcast networks, radio stations, print media, social network platforms (such as Facebook and results of operations because these products could reduce the revenue we receive for our products. Additionally, in order to contain this problem, we may have to implement elaborateInstagram), and costly securityonline advertising companies (such as Google) and antipiracy measures, which could result in significant expenses and losses of revenue. There can be no assurance that even the highest levels of security and anti-piracy measures will prevent piracy.
The AMC Networks Distribution could result in significant tax liability.
We have received private letter rulings from the Internal Revenue Service (the "IRS") to the effect that, among other things, the AMC Networks Distribution (whereby Cablevision distributed to its stockholders all of the outstanding common stock of AMC Networks, a company which consisted principally of national programming networks, including AMC, WE tv, IFC and Sundance Channel, previously owned and operated by Cablevision) and certain related transactions, will qualify for tax-free treatment under the Internal Revenue Code ("Code")content providers (such as Disney).
Although a private letter ruling from the IRS generally is binding on the IRS, if the factual representations or assumptions made in the letter ruling request are untrue or incomplete in any material respect, we will not be able to rely on the ruling. Furthermore, the IRS will not rule on whether a distribution satisfies certain requirements necessary
Regulation
to obtain tax-free treatment under the Code. Rather, the ruling is based upon our representations that these conditions have been satisfied, and any inaccuracy in such representations could invalidate the ruling.
If the AMC Networks Distribution does not qualify for tax-free treatment for U.S. federal income tax purposes, then, in general, we would be subject to tax as if we had sold the AMC Networks common stock, as the case may be, in a taxable sale for its fair value. Cablevision stockholders at the time of the distribution would be subject to tax as if they had received a distribution equal to the fair value of AMC Networks common stock that was distributed to them, which generally would be treated as a taxable dividend. It is expected that the amount of any such taxes to Cablevision's stockholders and us would be substantial.
Risk Factors Relating to Regulatory and Legislative MattersGeneral Company Regulation
Our business iscable, related and other services are subject to extensive governmental legislation and regulation, which could adversely affect our business, increase our operational and administrative expenses and limit our revenues.
Regulation of the cable, telephone, and broadband industries imposes operational and administrative expenses and limits their revenues. The Company operates in all of these industries and is therefore subject to, among other things:
rules governing the provisioning and marketing of cable equipment and compatibility with new digital technologies;
rules and regulations relating to data protection and customer and employee privacy;
rules establishing limited rate regulation of video service;
rules governing the copyright royalties that must be paid for retransmitting broadcast signals;
• rules governing when a cable system must carry a particular broadcast station and when it must first obtain retransmission consent to carry a broadcast station;
rules governing the provision of channel capacity to unaffiliated commercial leased access programmers;
rules limiting the ability to enter into exclusive agreements with MDUs and control inside wiring;
rules for cable franchise renewals and transfers;
other requirements covering a variety of operational areas such as equal employment opportunity, emergency alert systems, disability access, technical standards and customer service and consumer protection requirements;
rules, regulations and regulatory policies relating to the provision of broadband service, including "net neutrality" requirements; and
rules, regulations and regulatory policies relating to the provision of telephony services.
Many aspects of these regulations are currently the subject of judicial proceedings and administrative or legislative proposals. There are also efforts to amend or expand the federal, state and local regulationlaw and regulations, as well as, in instances where we operate outside of somethe U.S., the laws and regulations of the countries and regions where we operate. The Communications Act, and the rules, regulations and policies of the FCC, as well as other federal, state and other laws governing cable television, communications, consumer protection, privacy and related matters, affect significant aspects of the operations of our cable, systems, which may compoundrelated and other services.
The following paragraphs describe the regulatory risks we already face, and proposals that might make it easier for our employees to unionize. The Permanent Internet Tax Freedom Act prohibits many taxes on Internet access service, but certain states and localities are considering new taxes and fees on our provision of cable, broadband, and telecommunications taxes that could increase operating expenses. Certain states are also considering adopting energy efficiency regulations governing the operation of equipment that we use, which could constrain innovation. Congress periodically considers whether to rewrite the entire Communications Act of 1934, as amended (the "Communications Act") to account for changes in the communications marketplace or to adopt more focused changes. In response to recent data breaches and increasing concerns regarding the protection of consumers' personal information, Congress, states, and regulatory agencies are considering the adoption of new privacy and data security laws and regulations that could result in additional privacy, as well as network and information security, requirements for our business. These new laws, as well as existing legal and regulatory obligations, could requirerequirements we believe are most significant expenditures.
Additionally, there have been statements by federal government officials indicating that some laws and regulations applicable to our industry may be repealed or modified in a way that could be favorable to us and our competitors. There
operations today. Our business can be no assurance that any such repealdramatically impacted by changes to the existing regulatory framework, whether triggered by legislative, administrative or modification will be beneficialjudicial rulings.
Cable Television
Franchising. The Communications Act requires cable operators to us or will not be more beneficial to our current and future competitors.
Our cable system franchises are subject to non-renewal or termination. The failure to renewobtain a non-exclusive franchise in one or more key markets could adversely affect our business.
Our cable systems generally operate pursuant to franchises, permits and similar authorizations issued by afrom state or local governmentalfranchising authorities to provide cable service. Although the terms of franchise agreements differ from jurisdiction to jurisdiction, they typically require payment of franchise fees and contain regulatory provisions addressing, among other things, use of the right of way, service quality, cable service to schools and other public institutions, insurance, indemnity and sales of assets or changes in ownership. State and local franchising authority, controllinghowever, must be exercised consistent with the public rights-of-way. SomeCommunications Act, which sets limits on franchising authorities' powers, including limiting franchise fees to no more than 5% of gross revenues from the provision of cable service, prohibiting franchising authorities from requiring us to carry specific programming services, and protecting the renewal expectation of franchisees by limiting the factors a franchising authority may consider and requiring a due process hearing before denying renewal. Even when franchises establish comprehensive facilitiesare renewed, however, the franchise authority may, except where prohibited by applicable law, seek to impose new and servicemore onerous requirements as wella condition of renewal. Similarly, if a franchising authority's consent is required for the purchase or sale of a cable system, the franchising authority may attempt to impose more burdensome requirements as specific customer service standardsa condition for providing its consent. Cable franchises generally are granted for fixed terms and, in many cases, include monetary penalties for non-compliance. In many cases, franchises arenoncompliance. They may also be terminable if the franchisee fails to comply with significant provisions set forth inmaterial provisions.
In recent years, the franchise agreement governing system operations. Franchises are generally granted for fixed terms and must be periodically renewed. Franchising authorities may resist granting a renewal if either past performance or the prospective operating proposal is considered inadequate. Franchise authorities often demand concessions or other commitments as a condition to renewal. In some instances,traditional local franchises have not been renewed at expiration, and we have operated and are operating under either temporary operating agreements or without a franchise while negotiating renewal terms with the local franchising authorities.
As of December 31, 2017, one of our largest franchises, the Town of Hempstead, New York, comprising an aggregate of approximately 85,000 pay television customers, was expired. We are currently lawfully operating in the Town of Hempstead, New York franchise area under temporary authority recognized by the State of New York. Lightpath holds a franchise from New York City that expired on December 20, 2008 and the renewal process is ongoing. We believe New York City is treating the expiration date of this franchise as extended until a formal determination on renewal is made, but there can be no assurance that we will be successful in renewing this franchise on anticipated terms or at all. We expect to renew or continue to operate under all or substantially all of our franchises.
The traditional cable franchising regime is currently undergoinghas undergone significant change as a result of various federal and state actions. Some stateaction. Several states have reduced or eliminated the role of local or municipal government in franchising laws do not allow incumbent operators like us to immediately opt into favorable statewide franchising as quickly as new entrants, and often require us to retain certain franchise obligations that are more burdensome than those applied to new entrants.
There can be no assurance that we will be able to comply with all significant provisionsin favor of our franchise agreements and certain of our franchisors have from time to time alleged that we have not complied with these agreements. Additionally, although historically we have renewed our franchises without incurring significant costs, there can be no assurance that we will be able to renew,state- or to renew on terms as favorable, our franchises in the future. A termination of or a sustained failure to renew a franchise in one or more key markets could adversely affect our business in the affected geographic area.
Our cable system franchises are non-exclusive. Accordingly, local and state franchising authorities can grant additionalsystem-wide franchises, and create competitionthe trend has been toward consolidation of franchising authority at the state level, in market areas where none existed previously, resulting in overbuilds, which could adversely affect our resultspart to accommodate the interests of operations.
Cable systems are operated under non-exclusive franchises historically granted by local authorities. More than onenew broadband and cable system may legally be built inentrants over the last decade. At the same area, which is referred to as an overbuild. It is possible that a franchising authority might grant a second franchise to another cable operator and that such franchise might contain terms and conditions more favorable than those afforded to us. Although entry intotime, the cable industry involves significant cost barriers and risks, well-financed businesses from outside the cable industry, such as online service providers, or public utilities that already possess fiber optic and other transmission lines in the areas they serve, may over time become competitors. In addition, there are a few cities that have constructed their own cable systems, in a manner similar to city-provided utility services, and private cable companies not affiliated with established local exchange carriers have also demonstrated an interest in constructing overbuilds. We believe that for any potential competitor to be successful, such competitor's overbuild would need to be able to serve the homes and businesses in the overbuilt area with equal or better service quality, on a more cost-effective basis than we can.
In some cases, local government entities and municipal utilities may legally compete with us without securing a local franchise or on more favorable franchise terms. In recent years, federal legislative and regulatory proposals have sought to facilitate the ability of municipalities to construct and deploy broadband facilities that could compete with our cable systems. In addition, certain telephone companies have sought or are seeking authority to operate in communities
without first obtaining a local franchise. As a result, competing operators may build systems in areas in which we hold franchises. The FCC has adopted rules that streamline entry for new competitors (including(such as those affiliated with telephonebroadband communications companies) and reduce certain franchising burdens for these new entrants. TheIn 2019, the FCC subsequentlyalso extended more modest relief to incumbent cable operators like the Company, but a recent federal court decision curtailed a portion of this relief that relates to the cap on in-kind payments to franchising authorities. At the same time, a substantial number of states have adopted franchising laws designed to streamline entry for new competitors, and they often provide advantages for these new entrants that are not immediately available to existing operators.
We believe the markets we serve are not significantly overbuilt. However, the FCCcable providers relief from certain fees and some stateother regulatory commissions direct certain subsidies to entities deploying broadband to areas deemed to be "unserved" or "underserved." Many other organizations have applied for and received these funds, including broadband services competitors and new entrants into such services. We have generally opposed such subsidies when directed to areas that we serve and have deployed broadband capable networks. Despite those efforts, we could be placed at a competitive disadvantage if recipients use these funds to subsidize services that compete with our broadband services.
Local franchising authorities have the ability to impose additional regulatory constraints on our business, which could reduce our revenues or increase our expenses.
In addition to the franchise agreement, local franchising authorities in some jurisdictions have adopted cable regulatory ordinances that further regulate the operation of cable systems. This additional regulation increases the cost of operating our business. For example, some local franchising authorities impose minimum customer service standards on our operations. There are no assurances that the local franchising authorities will not impose new and more restrictive requirements.
Further regulation of the cable industry could restrict our marketing options or impair our ability to raise rates to cover our increasing costs.
The cable industry has operated under a federal rate regulation regime for more than three decades. Currently, rate regulationrequirements imposed by franchising authorities, is strictly limitedincluding subjecting certain fees for access to the basic service tierright-of-way and associated equipment and installation activities. A franchising authority that wishescertain in-kind payments obligations to regulate basic cable service offered by a particular cable system must certify and demonstrate that the cable system is not subject to "effective competition"statutory cap on franchise fees, as defined by federal law. Our franchise authorities have not certified to exercise this limited rate regulation authority. If any of our localwell as preempting franchising authorities obtain certification tofrom regulating cable operators’ non-cable services. The FCC’s order is currently being challenged on appeal.
Pricing and Packaging. The Communications Act and the FCC's rules limit the scope of price regulation for cable television services. Among other limitations, franchising authorities may regulate rates they would have the power to reduce rates and order refunds on the rates charged for basic service and equipment, which could reduce our revenues. The FCC and Congress also continue to be concerned that cable rate increases are exceeding inflation. It is possible that either the FCC or Congress will adopt more extensive rate regulation for our pay television services or regulate our other services, such as broadband and telephony services, which could impede our ability to raise rates, or require rate reductions. To the extent we are unable to raise our rates in response to increasing costs, or are required to reduce our rates, our business, financial condition, results of operations and liquidity will be materially adversely affected. There has been legislative and regulatory interest in requiring cable operators to offer historically bundled programming services on an à la carte basis. It is possible that new marketing restrictions could be adopted in the future. These restrictions could affect how we provide, and limit, customer equipment used in connection with our services and how we provide access to video programming beyond conventional cable delivery.
There also continues to be interest at the FCC and in Congress in proposals that would allow customers to receive cable service without having to rent a set-top box from their cable operator. These proposals could, if adopted, adversely affect our relationship with our customers and programmers and our operations. It is also possible that regulations will be adopted affecting the negotiations between MVPDs (like us) and programmers. While these regulations might provide us with additional rights and protections in our programming negotiations, they might also limit our flexibility in ways that adversely affect our operations.
We may be materially adversely affected by regulatory changes related to pole attachment costs.
Pole attachments are cable wires that are attached to utility poles. Cable system pole attachments to utility poles historically have been regulated at the federal or state level, generally resulting in favorable pole attachment rates for attachments used to provideonly "basic" cable service. Any changes in the current pole attachment approach could result in a substantial increase in our pole attachment costs.
Changes in channel carriage regulations could impose significant additional costs on us.
Cable operators also face significant regulation affecting the carriage of broadcast and other programming channels. We can be required to devote substantial capacity to the carriage of programming that we might not otherwise carry voluntarily, including certain local broadcast signals; local public, educational and governmental access programming; and unaffiliated, commercial leased access programming (channel capacity designated for use by programmers unaffiliated with the cable operator). Regulatory changes in this area could disrupt existing programming commitments, interfere with our preferred use of limited channel capacity and limit our ability to offer services that would maximize our revenue potential. It is possible that other legal restraints will be adopted limiting our discretion over programming decisions.
Increasing regulation of our Internet-based products and services could adversely affect our ability to provide new products and services.
On February 26,In 2015, the FCC adopted a rule establishing a presumption against rate regulation absent an affirmative showing by the franchising authority that there is an absence of effective competition. Based on the 2015 FCC rule, none of our video customers are currently subject to basic rate regulation.
There have been frequent calls to impose further rate regulation on the cable industry. It is possible that Congress or the FCC may adopt new "net neutrality"constraints on the retail pricing or Openpackaging of cable programming. As we attempt to respond to a changing marketplace with competitive marketing and pricing practices, we may face regulations that impede our ability to compete. In addition, a number of state and local regulatory authorities have imposed or seek to impose price- or price-related regulation that we believe is inconsistent with FCC direction, and these efforts if successful, will diminish the benefits of deregulation and hamper our ability to compete with our largely unregulated competitors. We brought a challenge in federal court against one such attempt to regulate our pricing by the New Jersey Board of Public Utilities, and in January 2020 we won a preliminary injunction in federal court in the District of New Jersey enjoining that agency from enforcing its regulation.
Must-Carry/Retransmission Consent. Cable operators are required to carry, without compensation, programming transmitted by most local commercial and noncommercial broadcast television stations that elect "must carry" status.
Alternatively, local commercial broadcast television stations may elect "retransmission consent," giving up their must-carry right and instead negotiating with cable systems the terms on which the cable systems may carry the station's programming content. Cable systems generally may not carry a broadcast station that has elected retransmission consent without the station's consent. The terms of retransmission consent agreements frequently include the payment of compensation to the station.
Broadcast stations must elect either "must carry" or retransmission consent every three years. A substantial number of local broadcast stations currently carried by our cable systems have elected to negotiate for retransmission consent. In the most recent retransmission consent negotiations, popular television stations have demanded substantial compensation increases, thereby increasing our operating costs.
Ownership Limitations. Federal regulation of the communications field traditionally included a host of ownership restrictions, which limited the size of certain media entities and restricted their ability to enter into competing enterprises. Through a series of legislative, regulatory, and judicial actions, most of these restrictions have been either eliminated or substantially relaxed. In 2017, the FCC relaxed some broadcast media ownership rules, and the broadcast industry subsequently experienced consolidation. The FCC’s order relaxing these rules was vacated by a federal appeals court, but the appeals court decision is currently being reviewed by the U.S. Supreme Court. Depending on the outcome of that case or the FCC’s current quadrennial review of ownership rules, the broadcast industry could consolidate further, which could impact the fees we pay broadcasters to license their signals.
Set-Top Boxes. The Communications Act includes a provision that requires the FCC to take certain steps to support the development of a retail market for "navigation devices," such as cable set-top boxes. Several years ago, the FCC began a proceeding to consider requiring cable operators to accommodate third-party navigation devices, which have imposed substantial development and operating requirements on the industry. Though there is currently no active effort to advance these proposals, the FCC may in the future consider implementing other measures to promote the competitive availability of retail set-top boxes or third-party navigation options that could impact our customers' experience, our ability to capture user interactions to refine and enhance our services, and our ability to provide a consistent customer support environment.
PEG and Leased Access. Franchising authorities may require that we support the delivery and support for public, educational, or governmental ("PEG") channels on our cable systems. In addition to providing PEG channels, we must make a limited number of commercial leased access channels available to third parties (including parties with potentially competitive video services) at regulated rates. The FCC adopted revised rules several years ago mandating a significant reduction in the rates that operators can charge commercial leased access users. These rules were stayed, however, by a federal court, pending a cable industry appeal. This matter currently remains pending, and the revised rules are not yet in effect. Although commercial leased access activity historically has been relatively limited, increased activity in this area could further burden the channel capacity of our cable systems.
Pole Attachments. The Company makes extensive use of utility poles and conduits owned by other utilities to attach and install the facilities that are integral to our network and services. The Communications Act requires most utilities to provide cable systems with access to poles and conduits to attach such facilities at regulated rates. The FCC (or a state, if it chooses to regulate) regulates utility company rates for the rental of pole and conduit space used by companies, including operators like us, to provide cable, telecommunications services, and Internet order (the "2015 Order"access services. Many states in which we operate have elected to set their own pole attachment rules. Adverse changes to the pole attachment rate structure, rates, classifications, and access could significantly increase our annual pole attachment costs.
Program Access. The program access rules generally prohibit a cable operator from improperly influencing an affiliated satellite-delivered cable programming service to discriminate unfairly against an unaffiliated distributor where the purpose or effect of such influence is to significantly hinder or prevent the competitor from providing satellite-delivered cable programming. FCC rules also allow a competing distributor to bring a complaint against a cable-affiliated terrestrially-delivered programmer or its affiliated cable operator for alleged violations of this rule, and seek reformed terms of carriage as a remedy.
Program Carriage. The FCC's program carriage rules prohibit us from requiring that an unaffiliated programmer grant us a financial interest or exclusive carriage rights as a condition of its carriage on our cable systems and prohibit us from unfairly discriminating against unaffiliated programmers in the terms and conditions of carriage on the basis of their nonaffiliation.
Exclusive Access to Multitenant Buildings. The FCC has prohibited cable operators from entering into or enforcing exclusive agreements with owners of multitenant buildings under which the operator is the only multichannel video
programming distributor ("MVPD") that: (1) reclassifiedwith access to the building. The FCC is currently considering whether to adopt additional rules regarding access to multitenant environments by providers of broadband service.
CALM Act. The FCC's rules require us to ensure that all commercials carried on our cable service comply with specified volume standards.
Privacy and Data Security. In the course of providing our services, we collect certain information about our customers and their use of our services. We also collect certain information regarding potential customers and other individuals. Our collection, use, disclosure and other handling of information is subject to a variety of federal and state privacy requirements, including those imposed specifically on cable operators and telecommunications service providers by the Communications Act. We are also subject to data security obligations, as well as requirements to provide notice to individuals and governmental entities in the event of certain data security breaches, and such breaches, depending on their scope and consequences, may lead to litigation and enforcement actions with the potential of substantial monetary forfeitures or to adversely affect our brand.
As cable operators provide interactive and other advanced services, additional privacy and data security requirements may arise through legislation, regulation or judicial decisions. For example, the Video Privacy Protection Act of 1988 has been extended to cover online interactive services through which customers can buy or rent movies. In addition, Congress, the Federal Trade Commission ("FTC"), and other lawmakers and regulators are all considering whether to adopt additional measures that could impact the collection, use, and disclosure of customer information in connection with the delivery of advertising and other services to consumers customized to their interests. See "Privacy Regulations" below.
Federal Copyright Regulation. We are required to pay copyright royalty fees on a semi-annual basis to receive a statutory compulsory license to carry broadcast television content. These fees are subject to periodic audit by the content owners. The amount of a cable operator's royalty fee payments are determined by a statutory formula that takes into account various factors, including the amount of "gross receipts" received from customers for "basic" service, the number of "distant" broadcast signals carried and the characteristics of those distant signals (e.g., network, independent or noncommercial). Certain elements of the royalty formula are subject to adjustment from time to time, which can lead to increases in the amount of our semi-annual royalty payments. The U.S. Copyright Office, which administers the collection of royalty fees, has made recommendations to Congress for changes in or elimination of the statutory compulsory licenses for cable television carriage of broadcast signals and the U.S. Government Accountability Office is conducting a statutorily-mandated inquiry into whether the cable compulsory license should be phased out. Changes to copyright regulations could adversely affect the ability of our cable systems to obtain such programming and could increase the cost of such programming. Similarly, we must obtain music rights for locally originated programming and advertising from the major music performing rights organizations. These licensing fees have been the source of litigation in the past, and we cannot predict with certainty whether license fee disputes may arise in the future.
Access for Persons with Disabilities. The FCC's rules require us to ensure that persons with disabilities can more fully access the programming we carry. We are required to provide closed captions and pass through video description to customers on some networks we carry, and to provide an easy means of activating closed captioning and to ensure the audio accessibility of emergency information and on-screen text menus and guides provided by our navigation devices.
Other Regulation. We are subject to various other regulations, including those related to political broadcasting; home wiring; the blackout of certain network and syndicated programming; prohibitions on transmitting obscene programming; limitations on advertising in children's programming; and standards for emergency alerts, as well as telemarketing and general consumer protection laws and equal employment opportunity obligations. For example, the Television Viewer Protection Act of 2019 imposes obligations on cable and fixed broadband providers, including required disclosures at the point of sale and in electronic billing and prohibitions on certain equipment charges. The FCC also imposes various technical standards on our operations.In the aftermath of Superstorm Sandy, the FCC and the states are examining whether new requirements are necessary to improve the resiliency of communications networks, potentially including cable networks. Further, following certain extreme weather events in 2020, several states have undertaken examinations of storm resiliency, recovery, and customer impacts, which investigations could lead to additional regulation of the industry. Each of these regulations restricts (or could restrict) our business practices to varying degrees. The FCC can aggressively enforce compliance with its regulations and consumer protection policies, including through the imposition of substantial monetary sanctions. It is possible that Congress or the FCC will expand or modify its regulations of cable systems in the future, and we cannot predict at this time how that might impact our business.
Broadband
Regulatory Classification. Broadband Internet access services were traditionally classified by the FCC as "information services" for regulatory purposes, a type of service that is subject to a lesser degree of regulation than "telecommunications services." In 2015, the FCC reversed this determination and classified broadband Internet access services as "telecommunications services." This reclassification had subjected our broadband Internet access service as a Title II common carrierto greater regulation, although the FCC did not apply all telecommunications service (2) applied certain existing Title II provisions and associated regulations; (3) forbore from applying a range of other existing Title II provisions and associated regulations, butobligations to varying degrees indicated that this forbearance may be only temporary and (4) issued new rules expanding disclosure requirements and prohibiting blocking, throttling, paid prioritization and unreasonable interference with the ability of end users and edge providers to reach each other.broadband Internet access service. The 2015 Order also subjected broadband providers' Internet traffic exchange rates and practices to potential FCC oversight and created(as defined below) could have had a mechanism for third parties to file complaints regarding these matters. The 2015 Order could limitmaterial adverse impact on our ability to efficiently manage our cable systems and respond to operational and competitive challenges.business. In December 2017, the FCC adopted an order (the "2017 Order") that in large part reversesreversed again the 2015 Order.Order and reestablished the "information service" classification for broadband Internet access service. The 2017 Order has not yet gone into effect, however, and the 2015 Order will remain binding until(as defined below) was affirmed in part on appeal in October 2019 insofar as it classified broadband Internet access services as information services subject to lesser federal regulation. However, the 2017 Order takes effect. The 2017 Orderwas also vacated in part on appeal insofar as it preempted states from subjecting broadband Internet access services to any requirements more stringent than the federal requirements. As a result, the precise extent to which state rules may impose such requirements on broadband Internet access service providers is not fully settled. Additionally, the FCC is expected to be subject to legal challenge that may delay its effect or overturn it. Additionally,revisit the appropriate regulatory classification of broadband in 2021.
Net Neutrality. Congress and some states are considering legislation that may codify "net neutrality" rules.“net neutrality” rules, which could include prohibitions on blocking, throttling and prioritizing Internet traffic. A number of states, including California and New York, have adopted legislation and/or executive orders that apply “net neutrality” rules to Internet service providers ("ISPs"). The California legislation is currently being challenged in court.
Offering telephone services may subjectAccess for Persons with Disabilities. The FCC's rules require us to additional regulatory burdens, causing usensure that persons with disabilities have access to incur additional costs."advanced communications services", such as electronic messaging and interoperable video conferencing. They also require that certain video programming delivered via Internet Protocol include closed captioning and require entities distributing such programming to end users to pass through such captions and identify programming that should be captioned.
Other Regulation. Providers of broadband Internet access services must comply with the Communications Assistance for Law Enforcement Act ("CALEA"), which requires providers to make their services and facilities accessible for law enforcement intercept requests. Various other federal and state laws apply to providers of services that are accessible through broadband Internet access service, including copyright laws, telemarketing laws, prohibitions on obscenity, a ban on unsolicited commercial e-mail, and privacy and data security laws. Online content we provide is also subject to some of these laws.
Other forms of regulation of broadband Internet access service currently being considered by the FCC, Congress or state legislatures include consumer protection requirements, billing and notifications requirements, cybersecurity requirements, consumer service standards, requirements to contribute to universal service programs and requirements to protect personally identifiable customer data from theft. Pending and future legislation in this area could adversely affect our operations as an ISP and our relationship with our Internet customers.
Additionally, from time to time the FCC and Congress have considered whether to subject broadband Internet access services to the federal Universal Service Fund ("USF") contribution requirements. Any contribution requirements adopted for Internet access services would impose significant new costs on our broadband Internet service. At the same time, the FCC is changing the manner in which Universal Service funds are distributed. By focusing on broadband and wireless deployment, rather than traditional telephone service, the changes could assist some of our competitors in more effectively competing with our service offerings.
Telephony Services
We offer telephoneprovide telephony services overusing VoIP technology ("interconnected VoIP") and traditional switched telephony via our broadband network and continue to develop and deployCLEC subsidiaries.
The FCC has adopted several regulations for interconnected VoIP services, as have several states, especially as it relates to core customer and safety issues such as E911, local number portability, disability access, outage reporting, universal service contributions, and regulatory reporting requirements. The FCC has not, however, formally classified interconnected VoIP services as either information services or telecommunications services. In this vacuum, some states have asserted more expansive rights to regulate interconnected VoIP services, while others have adopted laws that bar the state commission from regulating VoIP service.
Universal Service. Interconnected VoIP services must contribute to the USF used to subsidize communication services provided to low-income households, to customers in rural and high cost areas, and to schools, libraries, and
rural health care providers. The amount of universal service contribution required of interconnected VoIP service providers is based on a percentage of revenues earned from interstate and international services provided to end users. We allocate our end user revenues and remit payments to the universal service fund in accordance with FCC rules. The FCC has ruled that competitivestates may impose state universal service fees on interconnected VoIP providers.
Local Number Portability. The FCC requires interconnected VoIP service providers and their "numbering partners" to ensure that their customers have the ability to port their telephone companiesnumbers when changing providers. We also contribute to federal funds to meet the shared costs of local number portability and the costs of North American Numbering Plan Administration.
Other Regulation. Interconnected VoIP service providers are required to provide enhanced 911 emergency services to their customers; protect customer proprietary network information from unauthorized disclosure to third parties; report to the FCC on service outages; comply with telemarketing regulations and other privacy and data security requirements; comply with disabilities access requirements and service discontinuance obligations; comply with call signaling requirements; and comply with CALEA standards. In August 2015, the FCC adopted new rules to improve the resiliency of the communications network. Under the new rules, providers of telephony services, including interconnected VoIP service providers, must make available eight hours of standby backup power for consumers to purchase at the point of sale. The rules also require that supportproviders inform new and current customers about service limitations during power outages and steps that consumers can take to address those risks.
We provide traditional telecommunications services in various states through our operating subsidiaries, and those services are largely governed under rules established for CLECs under the Communications Act. The Communications Act entitles our CLEC subsidiaries to certain rights, but as telecommunications carriers, it also subjects them to regulation by the FCC and the states. Their designation as telecommunications carriers results in other regulations that may affect them and the services they offer.
Interconnection and Intercarrier Compensation. The Communications Act requires telecommunications carriers to interconnect directly or indirectly with other telecommunications carriers and networks, including VoIP. Under the FCC's intercarrier compensation rules, we are entitled, in some cases, to compensation from carriers when they use our network to terminate or originate calls and in other cases are required to compensate another carrier for using its network to originate or terminate traffic. The FCC and state regulatory commissions, including those in the states in which we operate, have adopted limits on the amounts of compensation that may be charged for certain types of traffic. In an October 2011 Order, the FCC determined that intercarrier compensation for all terminating traffic, including VoIP traffic exchanged in time-division multiplexing ("TDM") format, would be phased down over several years to a "bill-and-keep" regime, with no compensation between carriers for most terminating traffic by 2018. The FCC is considering further reform that could reduce or eliminate compensation for originating traffic as well.
Universal Service. Our CLEC subsidiaries are required to contribute to the USF. The amount of universal service contribution required of us is based on a percentage of revenues earned from interstate and international services such as thoseprovided to end users. We allocate our end user revenues and remit payments to the universal service fund in accordance with FCC rules. The FCC has ruled that we offerstates may impose state universal service fees on CLEC telecommunications services.
Other Regulation. Our CLEC subsidiaries' telecommunications services are subject to other FCC requirements, including protecting the use and disclosure of customer proprietary network information; meeting certain notice requirements in the event of service termination; compliance with disabilities access requirements; compliance with CALEA standards; outage reporting; and the payment of fees to fund local number portability administration and the North American Numbering Plan. As noted above, the FCC and states are examining whether new requirements are necessary to improve the resiliency of communications networks, including heightened backup power requirements within the provider's network. Communications with our customers are entitledalso subject to interconnect with incumbent providers of traditional telecommunications services, which ensures that our VoIP services can operate in the market. However, the scope of these interconnection rights are being reviewed in a current FCC, proceeding, which may affect our ability to compete in the provision of telephony services or result in additional costs. It remains unclear precisely to what extent federalFTC and state regulators will subject VoIPregulations on telemarketing and the sending of unsolicited commercial e-mail and fax messages, as well as additional privacy and data security requirements.
State Regulation. Our CLEC subsidiaries' telecommunications services to traditional telephone service regulation. Expanding our offering of these services may require us to obtain certain authorizations, including federal and state licenses. We may not be able to obtain such authorizations in a timely manner, or conditions could be imposed upon such licenses or authorizations that may not be favorable to us. The FCC has already extended certain traditional telecommunications requirements, such as E911 capabilities, USF contribution, CALEA, measures to protect Customer Proprietary Network Information, customer privacy, disability access, number porting, battery back-up, network outage reporting, rural call completion reporting and other regulatory requirements to many VoIP providers such as us. If additional telecommunications regulations are applied to our VoIP service, it could cause us to incur additional costs and may otherwise materially adversely impact our operations. In 2011, the FCC released an order significantly changing the rules governing intercarrier compensation for the origination and termination of telephone traffic between interconnected carriers. These rules have resulted in a substantial decrease in interstate compensation payments over a multi-year period. The FCC is currently considering additional reforms that could further reduce interstate compensation payments. Further, although the FCC recently declined to impose additional regulatory burdens on certain point to point transport ("special access") services provided by cable companies, that FCC decision has been appealed by multiple parties. If those appeals are successfully, there could be additional regulatory burdens and additional costs placed on these services.
We may be materially adversely affected by regulatory, legal and economic changes relating to our physical plant.
Our systems depend on physical facilities, including transmission equipment and miles of fiber and coaxial cable. Significant portions of those physical facilities occupy public rights-of-way and are subject to local ordinances and governmental regulations. Other portions occupy private property under express or implied easements, and many miles
ofregulation by state commissions in each state where we provide services. In order to provide our services, we must seek approval from the cable are attached to utility poles governed by pole attachment agreements. No assurances can be given that we will be able to maintain and use our facilities in their current locations and at their current costs. Changes in governmental regulations or changes in these relationships could have a material adverse effect on our business and our results of operations.
Certain aspects of Tax Reform could have an adverse impact on us or our stockholders
On December 20, 2017, the U.S. Congress passed Tax Reform, and on December 22, 2017, Tax Reform was signed into law. Tax Reform makes significant changes to the U.S. federal income tax rules applicable to both individuals and entities, including corporations. The details of any forthcoming regulations or guidance in connection with Tax Reform are uncertain and could have an adverse impact on our business and financial condition or on our stockholders. Our stockholders should consult with their tax advisors with respect to the potential effects of Tax Reform on their investment in our common stock.
Risk Factors Relating to Ownership of Our Class A Common Stock and Class B Common Stock
Prior to the Distribution, no market exists for our Class B common stock and we cannot assure you that an active, liquid trading market will develop for our Class B common stock following the Distribution. Following the Distribution, holders of shares of our Class B common stock may need to convert them into shares of our Class A common stock to realize their full potential value, which over time could further concentrate voting power with remaining holders of our Class B common stock.
Prior to the Distribution, our Class B common stock is held by Altice N.V. and is not listed on the NYSE or any other exchange. At the time of the Distribution, our Class B common stock will not be listed on the NYSE or any other stock exchange and we do not currently intend to list our Class B common stock on the NYSE or any other stock exchange. There is currently no trading market for the Class B common stock and we cannot assure you that an active trading market will developstate regulatory commission or be sustained following the Distribution. If an active market is not developed or sustained, the market price and liquidity of the Class B common stock may be adversely affected. Because the Class B common stock is unlisted, holders of shares of Class B common stock may need to convert them into shares of our Class A common stock, which is listed on the NYSE, in order to realize their full potential value. Sellers of a significant amount of shares of Class B common stock may be more likely to convert them into shares of Class A common stock and sell them on the NYSE. This could over time reduce the number of shares of Class B common stock outstanding and potentially further concentrate voting power with remaining holders of Class B common stock.
Our stockholders' percentage ownership in us may be diluted by future issuances of capital stock, which could reduce their influence over matters on which stockholders vote.
Pursuant to our amended and restated certificate of incorporation, our Board of Directors will have the authority, without action or vote of our stockholders, to issue all or any part of our authorized but unissued shares of Class A common stock, including shares issuable upon the exercise of options, Class B common stock, Class C common stock or shares of our authorized but unissued preferred stock. We may issue such capital stock to meet a number of our business needs, including funding any potential acquisitions or other strategic transactions. Future issuances of Class A common stock, Class B common stock or voting preferred stock could reduce our stockholders' influence over matters on which our stockholders vote and, in the case of issuances of preferred stock, would likely result in their interest in us being subject to the prior rights of holders of that preferred stock.
The market price of our Class A common stock or Class B common stock may be volatile after the Distribution.
Securities markets often experience significant price and volume fluctuations. Even if an active trading market develops for our Class B common stock after the Distribution, the market price of our Class B common stock may be highly volatile and could be subject to wide fluctuations. The market price of our Class A common stock may also be highly volatile after the Distribution, and the market prices of our Class A common stock and Class B common stock will be influenced by many factors, some of which are beyond our control, including those described above in "—Risk Factors Relating to Our Business" and include, but are not limited to, the following:
the failure of securities analysts to cover our business after the Distribution or changes in financial estimates by analysts;
the inability to meet the financial estimates of analysts who follow our business;
strategic actions by us or our competitors;
announcements by us or our competitors of significant contracts, acquisitions, joint marketing relationships, joint ventures or capital commitments;
introduction of new products or services by us or our competitors;
variations in our quarterly operating results and those of our competitors;
additions or departures of key personnel;
general economic and stock market conditions;
risks related to our business and our industry, including those discussed above;
changes in conditions or trends in our industry, markets or customers;
regulatory, legal or political developments;
changes in accounting principles;
changes in tax legislation and regulations;
litigation and governmental investigations;
terrorist acts;
future sales of Altice USA common stock or other securities;
default under agreements governing our indebtedness; and
investor perceptions of the investment opportunity associated with Altice USA common stock relative to other investment alternatives.
Following the Distribution, the market price for shares of our Class A common stock may be affected by factors different from those affecting the market price for shares of our Class B common stock. As a result of the above and other factors, holders of our Class A common stock or Class B common stock may not be able to resell their shares at or above the value at the time of the Distribution or may not be able to resell them at all. These broad market and industry factors may materially reduce the market price of our Class A common stock or Class B common stock, regardless of our operating performance. In addition, price volatility may be greater if the public float and trading volume of our Class A common stock and Class B common stock is low.
Because we have no current plans to pay cash dividends on our Class A common stock or Class B common stock following the Pre-Distribution Dividend and for the foreseeable future, our stockholders may not receive any return on investment unless they sell their Class A common stock or Class B common stock.
As a condition to the Distribution, our Board of Directors expects to declare and pay the Pre-Distribution Dividend. Other than this dividend, we intend to retain future earnings, if any, for future operations, expansion and debt repayment and have no other current plans to pay any cash dividends for the foreseeable future. The declaration, amount and payment of any future dividends on shares of Class A common stock and shares of Class B common stock will be at the sole discretion of our Board of Directors. Our Board of Directors may take into account general and economic conditions, our financial condition and results of operations, our available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax and regulatory restrictions and implications on the payment of dividends by us to our stockholders or by our subsidiaries to us and such other factors as our Board of Directors may deem relevant. In addition, our ability to pay dividends is limited by covenants contained in the agreements governing our existing indebtedness and may be limited by covenants contained in any future indebtedness we or our subsidiaries incur. As a result, our stockholders may not receive any return on an investment in our Class A common stock or Class B common stock unless our stockholders sell our Class A common stock or Class B common stock.
Future sales, or the perception of future sales, by us or our existing stockholders in the public market following the Distribution could cause the market price for our Class A common stock or Class B common stock to decline.
After the Distribution, the sale of substantial amounts of shares of our Class A common stock or Class B common stock, or the perception that such sales could occur, could cause the prevailing market price of shares of our Class A common stock or Class B common stock to decline. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.
As of December 31, 2017, we had a total of 246,982,292 shares of Class A common stock outstanding and 490,086,674 shares of Class B common stock outstanding. All of the shares of Class A common stock and Class B common stock distributed in the Distribution will be freely tradable without restriction or further registration under the Securities Act of 1933, as amended (the "Securities Act"), except for shares received by individuals who are our affiliates.
Any shares held by our affiliates, as that term is defined under Rule 144 of the Securities Act ("Rule 144"), including Next Alt and its affiliates, may be sold only in compliance with certain limitations.
The remaining shares will be "restricted securities" within the meaning of Rule 144 and subject to certain restrictions on resale following the Distribution. Restricted securities may be sold in the public market only if they are registered under the Securities Act or are sold pursuant to an exemption from registration such as Rule 144.
In addition, pursuant to a stockholders and registration rights agreement, our existing owners have the right, subject to certain conditions, to require us to register the sale of their shares of our Class A common stock, or shares of Class A common stock issuable on conversion of shares of Class B common stock under the Securities Act. By exercising their registration rights and selling a large number of shares, our existing owners could cause the prevailing market price of our Class A common stock to decline. In connection with the Distribution, we expect Next Alt to become a party to our stockholders and registration rights agreement with Altice N.V., funds advised by BC Partners LLP ("BCP") and entities affiliated with the Canada Pension Plan Investment Board ("CPPIB" and together with BCP, the "Sponsors"). We do not expect there will be any other material changes made to this agreement in connection with the Distribution. Registration of any of these outstanding shares of capital stock would result in such shares becoming freely tradable without compliance with Rule 144 upon effectiveness of the registration statement, except for shares received by individuals who are our affiliates.
As restrictions on resale end or if these stockholders exercise their registration rights, the market price of our Class A common stock or Class B common stock could drop significantly if the holders of Class A common stock or Class B common stock sell them or are perceived by the market as intending to sell them. These factors could also make it more difficult for us to raise additional funds through future offerings of our Class A common stock or Class B common stock or other securities. In the future, we may also issue our securities in connection with investments or acquisitions. The amount of shares of our Class A common stock, Class B common stock or Class C common stock issued in connection with an investment or acquisition could constitute a material portion of then-outstanding shares of our Class A common stock and Class B common stock. Any issuance of additional securities in connection with investments or acquisitions may result in additional dilution to our stockholders.
The tri-class structure of Altice USA common stock has the effect of concentrating voting control with Next Alt. This will limit or preclude our stockholders' ability to influence corporate matters, including the election of directors, amendments of our organizational documents and any merger, consolidation, sale of all or substantially all of our assets or other major corporate transaction requiring stockholder approval. Shares of Class B common stock will not automatically convert to shares of Class A common stock upon transfer to a third party.
Each share of Class B common stock is entitled to twenty-five votes per share and each share of Class A common stock is entitled to one vote per share. If we issue any shares of Class C common stock, they will be non-voting.
Because of the twenty-five to one voting ratio between our Class B common stock and Class A common stock, a majority of the combined voting power of our capital stock will be controlled by Altice N.V. prior to the Distribution and Next Alt following the Distribution. This will allow Altice N.V. and Next Alt to control all matters submitted to our stockholders for approval until the Distribution, in the case of Altice N.V., and until such date as Next Alt ceases to own, or to have the right to vote, shares of our capital stock representing a majority of the outstanding votes. This concentrated control will limit or preclude our stockholders' ability to influence corporate matters for the foreseeable future, including the election of directors, amendments of our organizational documents and any merger, consolidation, sale of all or
substantially all of our assets or other major corporate transaction requiring stockholder approval. The disparate voting rights of Altice USA common stock may also prevent or discourage unsolicited acquisition proposals or offers for our capital stock that our stockholders may feel are in their best interest as one of our stockholders.
Shares of our Class B common stock are convertible into shares of our Class A common stock at the option of the holder at any time. Our amended and restated certificate of incorporation does not provide for the automatic conversion of shares of Class B common stock upon transfer under any circumstances. The holders of Class B common stock thus will be free to transfer them without converting them into shares of Class A common stock.
Next Alt will control us after the Distribution and its interests may conflict with ours or our stockholders in the future.
The aggregate voting power of Next Alt following the Distribution will depend on the number of shares of Class B common stock distributed in the Distribution. If the number of shares of Class B common stock distributed to Altice N.V. shareholders other than Next Alt is maximized up to the Class B Cap, Next Alt will own 43% of our issued and outstanding Class A and Class B common stock which will represent approximately 51.2% of the voting power of our outstanding capital stock. If no shares of Class B common stock are distributed to Altice N.V. shareholders other than Next Alt, Next Alt will own 43% of our issued and outstanding Class A and Class B common stock which will represent approximately 93.7% of the voting power of our outstanding capital stock. So long as Next Alt continues to control a majority of the voting power of our capital stock, Next Alt and, through his control of Next Alt, Mr. Drahi, will be able to significantly influence the composition of our Board of Directors and thereby influence our policies and operations, including the appointment of management, future issuances of Altice USA common stock or other securities, the payment of dividends, if any, on Altice USA common stock, the incurrence or modification of debt by us, amendments to our amended and restated certificate of incorporation and amended and restated bylaws and the entering into extraordinary transactions, and their interests may not in all cases be aligned with our stockholders' interests. In addition, Next Alt may have an interest in pursuing acquisitions, divestitures and other transactions that, in its judgment, could enhance its investment or improve its financial condition, even though such transactions might involve risks to our stockholders. For example, Next Alt could cause us to make acquisitions that increase our indebtedness or cause us to sell revenue-generating assets.
In addition, Next Alt will be able to determine the outcome of all matters requiring stockholder approval and will be able to cause or prevent a change of control of the Company or a change in the composition of our Board of Directors and could preclude any unsolicited acquisition of the Company. The concentration of ownership could deprive our stockholders of an opportunity to receive a premium for their shares of our Class A common stock or Class B common stock as part of a sale of the Company and ultimately might affect the market price of our Class A common stock or Class B common stock.
If conflicts arise between us and Next Alt, these conflicts could be resolved in a manner that is unfavorable to us and as a result, our business, financial condition and results of operations could be materially adversely affected. In addition, if Next Alt ceases to control us, our business, financial condition and results of operations could be adversely affected.
Anti-takeover provisions in our organizational documents could delay or prevent a change of control transaction.
Certain provisions of our amended and restated certificate of incorporation and amended and restated bylaws may have an anti-takeover effect and may delay, defer or prevent a merger, acquisition, tender offer, takeover attempt or other change of control transaction that a stockholder might consider in its best interest, including those attempts that might result in a premium over the market price for the shares held by our stockholders.
These provisions provide for, among other things:
a tri-class common stock structure, as a result of which Next Alt generally will be able to control the outcome of all matters requiring stockholder approval, including the election of directors and significant corporate transactions, such as a merger or other sale of our company or its assets;
the ability of our Board of Directors to, without further action by our stockholders, fix the rights, preferences, privileges and restrictions of up to an aggregate of 100,000,000 shares of preferred stock in one or more series and authorize their issuance; and
the ability of stockholders holding a majority of the voting power of our capital stock to call a special meeting of stockholders.
These anti-takeover provisions could make it more difficult for a third party to acquire us, even if the third-party's offer may be considered beneficial by many of our stockholders. As a result, our stockholders may be limited in their ability to obtain a premium for their shares of our Class A common stock. In addition, so long as Next Alt controls a majority of our combined voting power it will be able to prevent a change of control of the Company.
Holders of a single class of Altice USA common stock may not have any remedies if an action by our directors has an adverse effect on only that class of Altice USA common stock.
Under Delaware law, the board of directors has a duty to act with due care and in the best interests of all of our stockholders, including the holders of all classes of Altice USA common stock. Principles of Delaware law established in cases involving differing treatment of multiple classes of stock provide that a board of directors owes an equal duty to all common stockholders regardless of class and does not have separate or additional duties to any group of stockholders. As a result, in some circumstances, our Board of Directors may be required to make a decision that could be viewed as adverse to the holders of one class of Altice USA common stock. Under the principles of Delaware law and the business judgment rule, holders may not be able to successfully challenge decisions that they believe have a disparate impact upon the holders of one class of our stock if our Board of Directors is disinterested and independent with respect to the action taken, is adequately informed with respect to the action taken and acts in good faith and in the honest belief that the board is acting in the best interest of all of our stockholders.
Following the Distribution, we will continue to be a "controlled company" within the meaning of the rules of the NYSE. As a result, we will qualify for, and intend to rely on, exemptions from certain corporate governance requirements that would otherwise provide protection to stockholders of other companies.
After completion of the Distribution, Next Alt will control a majority of the voting power of our capital stock. As a result, we will continue to be a "controlled company" within the meaning of the corporate governance standards of the NYSE. Under these rules, a company of which more than 50% of the voting power is held by an individual, group or another company is a "controlled company" and may elect not to comply with certain corporate governance requirements, including:
the requirement that a majority of our Board of Directors consists of "independent directors" as defined under the rules of the NYSE; and
the requirement that we have a governance and nominating committee.
Consistent with these exemptions, we will continue not to have a majority of independent directors on our Board of Directors or a nominating and governance committee. Accordingly, our stockholders will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the NYSE.
If securities or industry analysts do not publish research or reports about our business, if they adversely change their recommendations regarding our Class A common stock or Class B common stock, or if our operating results do not meet their expectations, the market price of our Class A common stock or Class B common stock could decline.
The trading market for our Class A common stock and Class B common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. We do not have any control over these analysts. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. Moreover, if one or more of the analysts who cover our company downgrades our Class A common stock or Class B common stock, or if our operating results do not meet their expectations, the market price of our Class A common stock or Class B common stock could decline.
We could be subject to securities class action litigation.
In the past, securities class action litigation has often been instituted against companies whose securities have experienced periods of volatility in market price. Securities litigation brought against us following volatility in the price of our Class A common stock or Class B common stock, regardless of the merit or ultimate results of such litigation, could result in substantial costs, which would hurt our financial condition and results of operations and divert management's attention and resources from our business.
Our amended and restated bylaws provides that the Court of Chancery of the State of Delaware is the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders' ability to obtain a favorable judicial forum for disputes with us or our directors, officers or other stockholders.
Our amended and restated bylaws provides that the Court of Chancery of the State of Delaware (or, if the Court of Chancery does not have jurisdiction, another state or federal court located in the State of Delaware) is the exclusive forum for: (i) any derivative action or proceeding brought in our name or on our behalf; (ii) any action asserting a breach of fiduciary duty; (iii) any action asserting a claim against us arising under the General Corporation Law of the State of Delaware ("DGCL"); (iv) any action regarding our amended and restated certificate of incorporation or our amended and restated bylaws; or (v) any action asserting a claim against us that is governed by the internal affairs doctrine. Our amended and restated bylaws permits our Board of Directors to approve the selection of an alternative forum. Unless waived, this exclusive forum provision may limit a stockholder's ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other stockholders, which may discourage such lawsuits against us and our directors, officers and other stockholders. Alternatively, if a court were to find this provision in our amended and restated bylaws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our business, financial condition and results of operations.
Risk Factors Relating to the Distribution
The Distribution will result in a taxable dividend to the U.S. Holders of Altice N.V. shares.
The Distribution will be taxable as a foreign-source dividend to the U.S. holders of Altice N.V. shares to the extent of the current and accumulated earnings and profits of Altice N.V. allocable to the Altice N.V. shares held by the respective U.S. holder. Non-corporate U.S. holders may benefit from the preferential long-term capital gains rate with respect to such dividend assuming they meet certain requirements. To the extent the fair market value of the Altice U.S. shares distributed to a U.S. holder of Altice N.V. shares pursuant to the Distribution exceeds the current and accumulated earnings and profits of Altice N.V. allocable to the Altice N.V. shares held by such U.S. Holder, such excess will be treated as a non-taxable return of capital to the extent of the U.S. holder’s basis in the Altice N.V. shares, and as a capital gain thereafter.
The terms of our arrangements with the Altice Group, or that we obtained because we were part of the Altice Group, may be more favorable than we will be able to obtain from an unaffiliated third party or following the Distribution when we are no longer a subsidiary of Altice N.V. We may be unable to replace the services, products and technology the Altice Group provides us in a timely manner or on comparable terms.
Prior to the Distribution, our business has been operated as part of the Altice Group. As part of the Altice Group, we entered into a variety of transactions and agreements with our affiliates, including:
Our acquisition of software and network equipment such as routers, power supply and transceiver modules, including equipment to be used in our new home communications hub;
Our procurement of services, such as for the design, development, integration, support and maintenance of the user interface software for our new home communications hub; access to an international communications backbone, international carrier services and call termination services; and real estate and real estate services;
Our purchase of customer and technical service support and services and licensing of intellectual property, including patents, trademarks and other rights; and
Our acquisition of content, including our agreement relating to i24 News, an international news channel majority owned by Altice N.V. in which we have a 25% investment in its U.S. business.
We negotiated these arrangements with the Altice Group in the context of a parent-subsidiary relationship. Although the Altice Group is contractually obligated to provide us with services, products and technology during the term of the relevant agreements, there can be no assurance that we will be able to replace these services, products or technology in a timely manner or on comparable terms. They also contain terms and provisions that may be more favorable than terms and provisions we might have obtained in arm’s-length negotiations with unaffiliated third parties. When Altice Group ceases to provide services in each state where we operate and products pursuantmay at times require local approval to those arrangements, our costs of procuring those servicesconstruct facilities. Regulatory obligations vary from third parties may increase. In addition, we may have received more favorable pricing or other terms from third party vendors
because we were part of the Altice Group. After the Distribution, when we are no longer a subsidiary of Altice N.V., we may not be ablestate to obtain equally favorable terms.
Our inter-company agreements are being negotiated while we are a subsidiary of Altice N.V.
In connection with the Distribution, we will enter into a Master Separation Agreementstate and certain agreements regarding, among other things, the license of the Altice brand, and amendments to certain commercial agreements between the Company, on the one hand, and Altice N.V. and its affiliates, on the other hand. The terms of these inter-company agreements are being established while we are a subsidiary of Altice N.V. and, therefore, may not be the result of arms’-length negotiations. We believe that the terms of these inter-company agreements are commercially reasonable and fair to all parties under the circumstances; however, conflicts could arise in the interpretation or any extension or renegotiation of the foregoing agreements after the Distribution. These inter-company arrangements are subject to compliance with the Altice USA Related-Party Transaction Approval Policy, which requires Audit Committee approval of certain agreements with Altice N.V.
We may not realize the potential benefits from the Distribution in the near term or at all.
We believe that, as an independent company, we will be able to, among other things, better focus our financial and operational resources on our specific business, implement and maintain a capital structure designed to meet our specific needs, design and implement corporate strategies and policies that are exclusively targeted to our business and more effectively respond to industry dynamics, and decouple our business from Altice N.V. as it focuses resources on addressing issues within other Altice Group businesses. However, by separating from Altice N.V., we may have less leverage with suppliers and we may experience other adverse events. In addition, we may be unable to achieveinclude some or all of the benefits that we expectfollowing requirements: filing tariffs (rates, terms and conditions); filing operational, financial, and customer service reports; seeking approval to achieve as an independent company intransfer the time we expect, if at all. The completionassets or capital stock of the Distribution will also require significant amounts of our management’s time and effort, which may divert management’s attention from operating and growing our business.
Altice N.V.’s board of directors may abandon the Distribution at any time.
No assurance can be given that the Distribution will occur, or if it occurs that it will occur on the terms described herein. In additionbroadband communications company; seeking approval to the conditions to the Distribution described herein (certain of which may be waived by the Altice N.V. board of directors in its sole discretion), the Altice N.V. board of directors may abandon the Distribution at any time prior to the Distribution Date for any reason or for no reason.
Following the Distribution, certain of our overlapping directors and officers will have relationships with Altice N.V., Next Alt and A4 S.A., which may result in the diversion of corporate opportunitiesissue stocks, bonds and other conflicts with respect to our business and executives.
Following the Distribution, fourforms of our directors, including Mr. Drahi, who is expected to join our Board of Directors as Chairman upon the completionindebtedness of the Distribution, will be employed by or affiliated with Altice N.V., Next Alt or A4 S.A., an entity controlled by the family of Mr. Drahi. These directors have fiduciary duties to us and, in addition, have duties to Altice N.V., Next Alt and A4 S.A. As a result, these directors and officers may face real or apparent conflicts of interest with respect to matters affecting both us and Altice N.V., Next Alt or A4 S.A., whose interests may be adverse to ours in some circumstances.
Our amended and restated certificate of incorporation recognizes that Mr. Drahi and certain directors, principals, officers, employees and/or other representatives of Altice N.V., Next Alt and A4 S.A. and their affiliates (each such director, principal, officer, employee and/or other representative, an ‘‘Altice Group Representative’’ and collectively, the ‘‘Altice Group Representatives’’) may serve as our directors, officers or agents and that Mr. Drahi, Next Alt, Altice N.V., A4 S.A., the Altice Group Representatives and their respective affiliates, and members of our Board of Directors designated by Next Alt and A4 S.A. pursuant to the stockholders’ agreement (the ‘‘Designated Directors’’), may now engage, may continue to engage and may in the future engage in the same or similar activities or related lines of business as those in which we, directly or indirectly, may engage and/or other business activities that overlap with or compete with those in which we, directly or indirectly, may engage. In the amended and restated certificate of incorporation we have renounced our rights to certain business opportunities and the amended and restated certificate of incorporation provides that none of Mr. Drahi, Next Alt, Altice N.V., A4 S.A., any Altice Group Representative, any Designated Director, or their respective affiliates, have any duty to refrain from, directly or indirectly, engaging in the same or similar business activities or lines of businesses in which we or any of our affiliates engage or are reasonably likely to engage,
broadband communications company;
or otherwise competing with us or any of our affiliates, or have any duty to communicate such opportunities to us, unless such opportunities arise in or are predominantly related to North America. The amendedreporting customer service and restated certificate of incorporation further provides that, to the fullest extent permitted by law, none of Mr. Drahi, Next Alt, Altice N.V., A4 S.A., any Altice Group Representative, any Designated Director (including any Designated Director who serves as one of our officers) or any of the foregoing persons’ affiliates shall be liable to us or our stockholders for breach of any fiduciary duty solely because they engage in such activities.
In connection with the Distribution, Altice USA will agree to indemnify Altice N.V. for certain liabilities and Altice N.V. will agree to indemnify Altice USA for certain liabilities, and such indemnities may not be adequate.
Pursuant to the Master Separation Agreement and other agreements with Altice N.V., including the Indemnification Agreement, Altice N.V. will agree to indemnify Altice USA for certain liabilities and Altice USA will agree to indemnify Altice N.V. for certain liabilities, in each case, for uncapped amounts. Indemnity payments that Altice USA may be required to pay to Altice N.V. may be significant and could negatively impact our business. There can be no assurance that the indemnity from Altice N.V. will be sufficient to protect Altice USA against the full amount of such liabilities or that Altice N.V. will be able to fully satisfy its indemnification obligations. Moreover, even if we ultimately succeed in recovering from Altice N.V. any amounts for which we are held liable, we may be temporarily required to bear these losses ourselves.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our headquarters are located in Long Island City, New York, where we currently lease approximately 170,000 square feet of office space under a lease expiring in 2021. We also own our former headquarters building located in Bethpage, New York, with approximately 558,000 square feet of space, where we continue to maintain administrative offices. In addition, we own or lease real estate throughout our operating areas where certain of our call centers, corporate facilities, business offices, earth stations, transponders, microwave towers, warehouses, headend equipment, hub sites, access studios, and microwave receiving antennae are located.
Our principal physical assets consist of cable operating plant and equipment, including signal receiving, encoding and decoding devices, headend facilities, fiber optic transport networks, coaxial and distribution systems and equipment at or near customers' homes or places of business for each of the systems. The signal receiving apparatus typically includes a tower, antenna, ancillary electronic equipment and earth stations for reception of satellite signals. Headend facilities are located near the receiving devices. Our distribution system consists primarily of coaxial and fiber optic cables and related electronic equipment. Customer premise equipment consists of set-top devices, cable modems, Internet routers, wireless devices and media terminal adapters for telephone. Our cable plant and related equipment generally are attached to utility poles under pole rental agreements with local public utilities; although in some areas the distribution cable is buried in underground ducts or directly in trenches. The physical components of the cable systems require maintenance and periodic upgrading to improve system performance and capacity. In addition, we operate a network operations center that monitors our network 24 hours a day, seven days a week, helping to ensure a high quality of service requirements; outage reporting; making contributions to state universal service support programs; paying regulatory and reliability for bothstate Telecommunications Relay Service and E911 fees; geographic build-out; and other matters relating to competition.
In September 2019, we launched Altice Mobile, our residentialmobile service using our own core infrastructure and commercial customers. We ownour infrastructure mobile virtual network operator ("iMVNO") agreements with Sprint and other roaming partners, including AT&T. Our mobile wireless service is subject to most of the same FCC and consumer protection regulations as typical, network-based wireless carriers (such as E911 services, local number portability, privacy protection, and constraints on billing and advertising practices). The FCC or other regulatory authorities may adopt new or different regulations that apply to our service vehicles.services or similarly situated providers, impose new taxes or fees, or modify the obligations of other network-based carriers to provide wholesale RAN access to providers like Altice USA.
We believe our properties, both owned and leased, are in good condition and are suitable and adequate for our operations.
Intellectual Property
We rely on our patents, copyrights, trademarks and trade secrets, as well as licenses and other agreements with our vendors and other parties, to use our technologies, conduct our operations and sell our products and services. We also rely on our access to the proprietary technology of Altice N.V.,Europe, including through Altice Labs.Labs, and licenses to the name “Altice” and derivatives from Next Alt. However, no single patent, copyright, trademark, trade secret or content license is material to our business. We believe we own or have the right to use all of the intellectual property that is necessary for the operation of our business as we currently conduct it.
Competition
We operate in a highly competitive, consumer-driven industry and we compete against a variety of broadband, video, mobile and fixed-line telephony providers and delivery systems, including broadband communications companies, wireless data and telephony providers, satellite delivered video signals, Internet-delivered video content and broadcast television signals available to residential and business customers in our service areas. We believe our leading market position in our footprint, technologically advanced network infrastructure, including our FTTH build-out, Altice One, our entertainment and connectivity platform, our new mobile service, and our focus on enhancing the customer experience favorably position us to compete in our industry. See also "Risk Factors—Risk Factors Relating to Our Business—We operate in a highly competitive business environment which could materially adversely affect our business, financial condition, results of operations and liquidity."
Broadband Services Competition
Our broadband services face competition from broadband communications companies' digital subscriber line ("DSL"), FTTH/Fiber to the Premises ("FTTP") and wireless broadband offerings, as well as from a variety of companies that offer other forms of online services, including satellite-based broadband services. AT&T and Verizon Communications Inc.'s ("Verizon") Fios are our primary FTTH competitors. Current and future fixed and wireless Internet services, such as 4G, LTE and 5G (and variants) wireless broadband services and WiFi networks, and devices such as wireless data cards, tablets and smartphones, and mobile wireless routers that connect to such devices, may also compete with our broadband services both for in premises broadband service and mobile broadband. All major wireless carriers offer unlimited data plans, which could, in some cases, become a substitute for the fixed broadband services we provide. The Federal Communications Commission ("FCC") is likely to continue to make additional radio spectrum available for these wireless Internet access services, which in time could expand the quality and reach of these services.
Video Services Competition
We face intense competition from broadband communications companies with fiber-based networks, primarily Verizon, which has constructed a FTTH network plant that passes a significant number of households in our Optimum service area, and AT&T, which has constructed an FTTP/Fiber to the Node ("FTTN") infrastructure in parts of our Suddenlink service area. We estimate that Verizon is currently able to sell a fiber-based video service, as well as broadband and VoIP services, to at least half of the households in our Optimum service area. Frontier Communications Corporation ("Frontier") offers video service in competition with us in most of our Connecticut service area.
We also compete with direct broadcast satellite ("DBS") providers, such as DirecTV (a subsidiary of AT&T) and DISH Network Corporation ("DISH"). DirecTV and DISH offer one-way satellite-delivered pre-packaged programming services that are received by relatively small and inexpensive receiving dishes. DirecTV has exclusive arrangements with the National Football League that give it access to programming that we cannot offer. In 2018 AT&T acquired Time Warner Inc. ("Time Warner"), which owns a number of cable networks, including TBS, CNN and HBO, as well as Warner Bros. Entertainment, which produces television, film and home-video content. AT&T's and DirecTV's access to Time Warner programming and studio assets provides AT&T and DirecTV the ability to offer competitive promotional packages. We believe cable-delivered services, which include the ability to bundle
additional services such as broadband, offer a competitive advantage to DBS service because cable headends can provide two-way communication to deliver a large volume of programming which customers can access and control independently.
Our video services also face competition from a number of other sources, including companies that deliver movies, television shows and other video programming, including extensive on demand, live content, serials, exclusive and original content, over broadband Internet connections to televisions, computers, tablets and mobile devices, such as Netflix, Hulu, Apple TV+, YouTube TV, Amazon Prime, Sling TV, AT&T TV, Locast and others. In addition, our programming partners continue to launch direct to consumer streaming products, delivering content to consumers that was formerly only available via video, such as HBO Max, Discovery+ and Disney+.
Telephony Services Competition
Our telephony service competes with wireline, wireless and VoIP phone service providers, such as Vonage, Skype, GoogleTalk, Facetime, WhatsApp and magicJack, as well as companies that sell phone cards at a cost per minute for both national and international service. We also compete with other forms of communication, such as text messaging on cellular phones, instant messaging, social networking services, video conferencing and email. The increased number of technologies capable of carrying telephony services and the number of alternative communication options available to customers have intensified the competitive environment in which we operate our telephony services.
Mobile Wireless Competition
Our mobile wireless service, launched in September 2019, faces competition from a number of national incumbent network-based mobile service providers (like AT&T, Verizon, T-Mobile US, Inc. ("T-Mobile")) and smaller regional service providers, as well as a number of reseller or MVNO providers (such as Tracfone, Boost Mobile and Cricket Wireless, among others). We believe that our approach to the mobile wireless service offering, including the construction and operation of our own "mobile core" and the ability to bundle and promote the product to our existing customer base, gives us advantages over pure MVNO resellers, and differentiates us from incumbent network-based operators. Improvements by incumbent and reseller mobile service providers on price, features, speeds, and service enhancements will continue to impact the competitiveness and attractiveness of our mobile service, and we will need to continue to invest in our services, product and marketing to answer that competition. Our mobile wireless strategy depends on the availability of wholesale access to radio access networks ("RAN") from one or more network-based providers with whom we are likely to compete. Our mobile service is vulnerable to constraints on the availability of wholesale access or increases in price from the incumbents. Consolidation among wholesale RAN access providers could impair our ability to sustain our mobile service. In April 2020, Sprint and T-Mobile merged, subject to certain conditions imposed by the United States Department of Justice and the FCC. While the conditions attached to the combination may benefit our mobile service in the medium term, the reduction of competition among mobile wireless network-based providers likely will negatively impact the price and availability of wholesale RAN access to the Company generally, certain of the conditions imposed upon the merger parties by the U.S. Justice Department and the FCC have the potential to ameliorate those effects and to enhance the coverage, quality and cost structure for our mobile services while those conditions are in effect.
Business Services Competition
We operate in highly competitive business telecommunications market and compete primarily with local incumbent telephone companies, especially AT&T, CenturyLink, Inc. ("Centurylink"), Frontier and Verizon, as well as with a variety of other national and regional business services competitors.
Advertising Sales Competition
We provide advertising and advanced targeted digital advertising services on television and digital platforms, both directly and indirectly, within and outside our television service area. We face intense competition for advertising revenue across many different platforms and from a wide range of local and national competitors. Advertising competition has increased and will likely continue to increase as new formats seek to attract the same advertisers. We compete for advertising revenue against, among others, local broadcast stations, national cable and broadcast networks, radio stations, print media, social network platforms (such as Facebook and Instagram), and online advertising companies (such as Google) and content providers (such as Disney).
Regulation
General Company Regulation
Our cable, related and other services are subject to a variety of federal, state and local law and regulations, as well as, in instances where we operate outside of the U.S., the laws and regulations of the countries and regions where we operate. The Communications Act, and the rules, regulations and policies of the FCC, as well as other federal, state and other laws governing cable television, communications, consumer protection, privacy and related matters, affect significant aspects of the operations of our cable, related and other services.
The following paragraphs describe the existing legal and regulatory requirements we believe are most significant to our operations today. Our business can be dramatically impacted by changes to the existing regulatory framework, whether triggered by legislative, administrative or judicial rulings.
Cable Television
Franchising. The Communications Act requires cable operators to obtain a non-exclusive franchise from state or local franchising authorities to provide cable service. Although the terms of franchise agreements differ from jurisdiction to jurisdiction, they typically require payment of franchise fees and contain regulatory provisions addressing, among other things, use of the right of way, service quality, cable service to schools and other public institutions, insurance, indemnity and sales of assets or changes in ownership. State and local franchising authority, however, must be exercised consistent with the Communications Act, which sets limits on franchising authorities' powers, including limiting franchise fees to no more than 5% of gross revenues from the provision of cable service, prohibiting franchising authorities from requiring us to carry specific programming services, and protecting the renewal expectation of franchisees by limiting the factors a franchising authority may consider and requiring a due process hearing before denying renewal. Even when franchises are renewed, however, the franchise authority may, except where prohibited by applicable law, seek to impose new and more onerous requirements as a condition of renewal. Similarly, if a franchising authority's consent is required for the purchase or sale of a cable system, the franchising authority may attempt to impose more burdensome requirements as a condition for providing its consent. Cable franchises generally are granted for fixed terms and, in many cases, include monetary penalties for noncompliance. They may also be terminable if the franchisee fails to comply with material provisions.
In recent years, the traditional local cable franchising regime has undergone significant change as a result of federal and state action. Several states have reduced or eliminated the role of local or municipal government in franchising in favor of state- or system-wide franchises, and the trend has been toward consolidation of franchising authority at the state level, in part to accommodate the interests of new broadband and cable entrants over the last decade. At the same time, the FCC has adopted rules that streamline entry for new competitors (such as those affiliated with broadband communications companies) and reduce certain franchising burdens for these new entrants. In 2019, the FCC also extended to existing cable providers relief from certain fees and other regulatory requirements imposed by franchising authorities, including subjecting certain fees for access to the right-of-way and certain in-kind payments obligations to the statutory cap on franchise fees, as well as preempting franchising authorities from regulating cable operators’ non-cable services. The FCC’s order is currently being challenged on appeal.
Pricing and Packaging. The Communications Act and the FCC's rules limit the scope of price regulation for cable television services. Among other limitations, franchising authorities may regulate rates for only "basic" cable service. In 2015, the FCC adopted a rule establishing a presumption against rate regulation absent an affirmative showing by the franchising authority that there is an absence of effective competition. Based on the 2015 FCC rule, none of our video customers are currently subject to basic rate regulation.
There have been frequent calls to impose further rate regulation on the cable industry. It is possible that Congress or the FCC may adopt new constraints on the retail pricing or packaging of cable programming. As we attempt to respond to a changing marketplace with competitive marketing and pricing practices, we may face regulations that impede our ability to compete. In addition, a number of state and local regulatory authorities have imposed or seek to impose price- or price-related regulation that we believe is inconsistent with FCC direction, and these efforts if successful, will diminish the benefits of deregulation and hamper our ability to compete with our largely unregulated competitors. We brought a challenge in federal court against one such attempt to regulate our pricing by the New Jersey Board of Public Utilities, and in January 2020 we won a preliminary injunction in federal court in the District of New Jersey enjoining that agency from enforcing its regulation.
Must-Carry/Retransmission Consent. Cable operators are required to carry, without compensation, programming transmitted by most local commercial and noncommercial broadcast television stations that elect "must carry" status.
Alternatively, local commercial broadcast television stations may elect "retransmission consent," giving up their must-carry right and instead negotiating with cable systems the terms on which the cable systems may carry the station's programming content. Cable systems generally may not carry a broadcast station that has elected retransmission consent without the station's consent. The terms of retransmission consent agreements frequently include the payment of compensation to the station.
Broadcast stations must elect either "must carry" or retransmission consent every three years. A substantial number of local broadcast stations currently carried by our cable systems have elected to negotiate for retransmission consent. In the most recent retransmission consent negotiations, popular television stations have demanded substantial compensation increases, thereby increasing our operating costs.
Ownership Limitations. Federal regulation of the communications field traditionally included a host of ownership restrictions, which limited the size of certain media entities and restricted their ability to enter into competing enterprises. Through a series of legislative, regulatory, and judicial actions, most of these restrictions have been either eliminated or substantially relaxed. In 2017, the FCC relaxed some broadcast media ownership rules, and the broadcast industry subsequently experienced consolidation. The FCC’s order relaxing these rules was vacated by a federal appeals court, but the appeals court decision is currently being reviewed by the U.S. Supreme Court. Depending on the outcome of that case or the FCC’s current quadrennial review of ownership rules, the broadcast industry could consolidate further, which could impact the fees we pay broadcasters to license their signals.
Set-Top Boxes. The Communications Act includes a provision that requires the FCC to take certain steps to support the development of a retail market for "navigation devices," such as cable set-top boxes. Several years ago, the FCC began a proceeding to consider requiring cable operators to accommodate third-party navigation devices, which have imposed substantial development and operating requirements on the industry. Though there is currently no active effort to advance these proposals, the FCC may in the future consider implementing other measures to promote the competitive availability of retail set-top boxes or third-party navigation options that could impact our customers' experience, our ability to capture user interactions to refine and enhance our services, and our ability to provide a consistent customer support environment.
PEG and Leased Access. Franchising authorities may require that we support the delivery and support for public, educational, or governmental ("PEG") channels on our cable systems. In addition to providing PEG channels, we must make a limited number of commercial leased access channels available to third parties (including parties with potentially competitive video services) at regulated rates. The FCC adopted revised rules several years ago mandating a significant reduction in the rates that operators can charge commercial leased access users. These rules were stayed, however, by a federal court, pending a cable industry appeal. This matter currently remains pending, and the revised rules are not yet in effect. Although commercial leased access activity historically has been relatively limited, increased activity in this area could further burden the channel capacity of our cable systems.
Pole Attachments. The Company makes extensive use of utility poles and conduits owned by other utilities to attach and install the facilities that are integral to our network and services. The Communications Act requires most utilities to provide cable systems with access to poles and conduits to attach such facilities at regulated rates. The FCC (or a state, if it chooses to regulate) regulates utility company rates for the rental of pole and conduit space used by companies, including operators like us, to provide cable, telecommunications services, and Internet access services. Many states in which we operate have elected to set their own pole attachment rules. Adverse changes to the pole attachment rate structure, rates, classifications, and access could significantly increase our annual pole attachment costs.
Program Access. The program access rules generally prohibit a cable operator from improperly influencing an affiliated satellite-delivered cable programming service to discriminate unfairly against an unaffiliated distributor where the purpose or effect of such influence is to significantly hinder or prevent the competitor from providing satellite-delivered cable programming. FCC rules also allow a competing distributor to bring a complaint against a cable-affiliated terrestrially-delivered programmer or its affiliated cable operator for alleged violations of this rule, and seek reformed terms of carriage as a remedy.
Program Carriage. The FCC's program carriage rules prohibit us from requiring that an unaffiliated programmer grant us a financial interest or exclusive carriage rights as a condition of its carriage on our cable systems and prohibit us from unfairly discriminating against unaffiliated programmers in the terms and conditions of carriage on the basis of their nonaffiliation.
Exclusive Access to Multitenant Buildings. The FCC has prohibited cable operators from entering into or enforcing exclusive agreements with owners of multitenant buildings under which the operator is the only multichannel video
programming distributor ("MVPD") with access to the building. The FCC is currently considering whether to adopt additional rules regarding access to multitenant environments by providers of broadband service.
CALM Act. The FCC's rules require us to ensure that all commercials carried on our cable service comply with specified volume standards.
Privacy and Data Security. In the course of providing our services, we collect certain information about our customers and their use of our services. We also collect certain information regarding potential customers and other individuals. Our collection, use, disclosure and other handling of information is subject to a variety of federal and state privacy requirements, including those imposed specifically on cable operators and telecommunications service providers by the Communications Act. We are also subject to data security obligations, as well as requirements to provide notice to individuals and governmental entities in the event of certain data security breaches, and such breaches, depending on their scope and consequences, may lead to litigation and enforcement actions with the potential of substantial monetary forfeitures or to adversely affect our brand.
As cable operators provide interactive and other advanced services, additional privacy and data security requirements may arise through legislation, regulation or judicial decisions. For example, the Video Privacy Protection Act of 1988 has been extended to cover online interactive services through which customers can buy or rent movies. In addition, Congress, the Federal Trade Commission ("FTC"), and other lawmakers and regulators are all considering whether to adopt additional measures that could impact the collection, use, and disclosure of customer information in connection with the delivery of advertising and other services to consumers customized to their interests. See "Privacy Regulations" below.
Federal Copyright Regulation. We are required to pay copyright royalty fees on a semi-annual basis to receive a statutory compulsory license to carry broadcast television content. These fees are subject to periodic audit by the content owners. The amount of a cable operator's royalty fee payments are determined by a statutory formula that takes into account various factors, including the amount of "gross receipts" received from customers for "basic" service, the number of "distant" broadcast signals carried and the characteristics of those distant signals (e.g., network, independent or noncommercial). Certain elements of the royalty formula are subject to adjustment from time to time, which can lead to increases in the amount of our semi-annual royalty payments. The U.S. Copyright Office, which administers the collection of royalty fees, has made recommendations to Congress for changes in or elimination of the statutory compulsory licenses for cable television carriage of broadcast signals and the U.S. Government Accountability Office is conducting a statutorily-mandated inquiry into whether the cable compulsory license should be phased out. Changes to copyright regulations could adversely affect the ability of our cable systems to obtain such programming and could increase the cost of such programming. Similarly, we must obtain music rights for locally originated programming and advertising from the major music performing rights organizations. These licensing fees have been the source of litigation in the past, and we cannot predict with certainty whether license fee disputes may arise in the future.
Access for Persons with Disabilities. The FCC's rules require us to ensure that persons with disabilities can more fully access the programming we carry. We are required to provide closed captions and pass through video description to customers on some networks we carry, and to provide an easy means of activating closed captioning and to ensure the audio accessibility of emergency information and on-screen text menus and guides provided by our navigation devices.
Other Regulation. We are subject to various other regulations, including those related to political broadcasting; home wiring; the blackout of certain network and syndicated programming; prohibitions on transmitting obscene programming; limitations on advertising in children's programming; and standards for emergency alerts, as well as telemarketing and general consumer protection laws and equal employment opportunity obligations. For example, the Television Viewer Protection Act of 2019 imposes obligations on cable and fixed broadband providers, including required disclosures at the point of sale and in electronic billing and prohibitions on certain equipment charges. The FCC also imposes various technical standards on our operations.In the aftermath of Superstorm Sandy, the FCC and the states are examining whether new requirements are necessary to improve the resiliency of communications networks, potentially including cable networks. Further, following certain extreme weather events in 2020, several states have undertaken examinations of storm resiliency, recovery, and customer impacts, which investigations could lead to additional regulation of the industry. Each of these regulations restricts (or could restrict) our business practices to varying degrees. The FCC can aggressively enforce compliance with its regulations and consumer protection policies, including through the imposition of substantial monetary sanctions. It is possible that Congress or the FCC will expand or modify its regulations of cable systems in the future, and we cannot predict at this time how that might impact our business.
Broadband
Regulatory Classification. Broadband Internet access services were traditionally classified by the FCC as "information services" for regulatory purposes, a type of service that is subject to a lesser degree of regulation than "telecommunications services." In 2015, the FCC reversed this determination and classified broadband Internet access services as "telecommunications services." This reclassification had subjected our broadband Internet access service to greater regulation, although the FCC did not apply all telecommunications service obligations to broadband Internet access service. The 2015 Order (as defined below) could have had a material adverse impact on our business. In December 2017, the FCC adopted an order that in large part reversed again the 2015 Order and reestablished the "information service" classification for broadband Internet access service. The 2017 Order (as defined below) was affirmed in part on appeal in October 2019 insofar as it classified broadband Internet access services as information services subject to lesser federal regulation. However, the 2017 Order was also vacated in part on appeal insofar as it preempted states from subjecting broadband Internet access services to any requirements more stringent than the federal requirements. As a result, the precise extent to which state rules may impose such requirements on broadband Internet access service providers is not fully settled. Additionally, the FCC is expected to revisit the appropriate regulatory classification of broadband in 2021.
Net Neutrality. Congress and some states are considering legislation that may codify “net neutrality” rules, which could include prohibitions on blocking, throttling and prioritizing Internet traffic. A number of states, including California and New York, have adopted legislation and/or executive orders that apply “net neutrality” rules to Internet service providers ("ISPs"). The California legislation is currently being challenged in court.
Access for Persons with Disabilities. The FCC's rules require us to ensure that persons with disabilities have access to "advanced communications services", such as electronic messaging and interoperable video conferencing. They also require that certain video programming delivered via Internet Protocol include closed captioning and require entities distributing such programming to end users to pass through such captions and identify programming that should be captioned.
Other Regulation. Providers of broadband Internet access services must comply with the Communications Assistance for Law Enforcement Act ("CALEA"), which requires providers to make their services and facilities accessible for law enforcement intercept requests. Various other federal and state laws apply to providers of services that are accessible through broadband Internet access service, including copyright laws, telemarketing laws, prohibitions on obscenity, a ban on unsolicited commercial e-mail, and privacy and data security laws. Online content we provide is also subject to some of these laws.
Other forms of regulation of broadband Internet access service currently being considered by the FCC, Congress or state legislatures include consumer protection requirements, billing and notifications requirements, cybersecurity requirements, consumer service standards, requirements to contribute to universal service programs and requirements to protect personally identifiable customer data from theft. Pending and future legislation in this area could adversely affect our operations as an ISP and our relationship with our Internet customers.
Additionally, from time to time the FCC and Congress have considered whether to subject broadband Internet access services to the federal Universal Service Fund ("USF") contribution requirements. Any contribution requirements adopted for Internet access services would impose significant new costs on our broadband Internet service. At the same time, the FCC is changing the manner in which Universal Service funds are distributed. By focusing on broadband and wireless deployment, rather than traditional telephone service, the changes could assist some of our competitors in more effectively competing with our service offerings.
Telephony Services
We provide telephony services using VoIP technology ("interconnected VoIP") and traditional switched telephony via our CLEC subsidiaries.
The FCC has adopted several regulations for interconnected VoIP services, as have several states, especially as it relates to core customer and safety issues such as E911, local number portability, disability access, outage reporting, universal service contributions, and regulatory reporting requirements. The FCC has not, however, formally classified interconnected VoIP services as either information services or telecommunications services. In this vacuum, some states have asserted more expansive rights to regulate interconnected VoIP services, while others have adopted laws that bar the state commission from regulating VoIP service.
Universal Service. Interconnected VoIP services must contribute to the USF used to subsidize communication services provided to low-income households, to customers in rural and high cost areas, and to schools, libraries, and
rural health care providers. The amount of universal service contribution required of interconnected VoIP service providers is based on a percentage of revenues earned from interstate and international services provided to end users. We allocate our end user revenues and remit payments to the universal service fund in accordance with FCC rules. The FCC has ruled that states may impose state universal service fees on interconnected VoIP providers.
Local Number Portability. The FCC requires interconnected VoIP service providers and their "numbering partners" to ensure that their customers have the ability to port their telephone numbers when changing providers. We also contribute to federal funds to meet the shared costs of local number portability and the costs of North American Numbering Plan Administration.
Other Regulation. Interconnected VoIP service providers are required to provide enhanced 911 emergency services to their customers; protect customer proprietary network information from unauthorized disclosure to third parties; report to the FCC on service outages; comply with telemarketing regulations and other privacy and data security requirements; comply with disabilities access requirements and service discontinuance obligations; comply with call signaling requirements; and comply with CALEA standards. In August 2015, the FCC adopted new rules to improve the resiliency of the communications network. Under the new rules, providers of telephony services, including interconnected VoIP service providers, must make available eight hours of standby backup power for consumers to purchase at the point of sale. The rules also require that providers inform new and current customers about service limitations during power outages and steps that consumers can take to address those risks.
We provide traditional telecommunications services in various states through our operating subsidiaries, and those services are largely governed under rules established for CLECs under the Communications Act. The Communications Act entitles our CLEC subsidiaries to certain rights, but as telecommunications carriers, it also subjects them to regulation by the FCC and the states. Their designation as telecommunications carriers results in other regulations that may affect them and the services they offer.
Interconnection and Intercarrier Compensation. The Communications Act requires telecommunications carriers to interconnect directly or indirectly with other telecommunications carriers and networks, including VoIP. Under the FCC's intercarrier compensation rules, we are entitled, in some cases, to compensation from carriers when they use our network to terminate or originate calls and in other cases are required to compensate another carrier for using its network to originate or terminate traffic. The FCC and state regulatory commissions, including those in the states in which we operate, have adopted limits on the amounts of compensation that may be charged for certain types of traffic. In an October 2011 Order, the FCC determined that intercarrier compensation for all terminating traffic, including VoIP traffic exchanged in time-division multiplexing ("TDM") format, would be phased down over several years to a "bill-and-keep" regime, with no compensation between carriers for most terminating traffic by 2018. The FCC is considering further reform that could reduce or eliminate compensation for originating traffic as well.
Universal Service. Our CLEC subsidiaries are required to contribute to the USF. The amount of universal service contribution required of us is based on a percentage of revenues earned from interstate and international services provided to end users. We allocate our end user revenues and remit payments to the universal service fund in accordance with FCC rules. The FCC has ruled that states may impose state universal service fees on CLEC telecommunications services.
Other Regulation. Our CLEC subsidiaries' telecommunications services are subject to other FCC requirements, including protecting the use and disclosure of customer proprietary network information; meeting certain notice requirements in the event of service termination; compliance with disabilities access requirements; compliance with CALEA standards; outage reporting; and the payment of fees to fund local number portability administration and the North American Numbering Plan. As noted above, the FCC and states are examining whether new requirements are necessary to improve the resiliency of communications networks, including heightened backup power requirements within the provider's network. Communications with our customers are also subject to FCC, FTC and state regulations on telemarketing and the sending of unsolicited commercial e-mail and fax messages, as well as additional privacy and data security requirements.
State Regulation. Our CLEC subsidiaries' telecommunications services are subject to regulation by state commissions in each state where we provide services. In order to provide our services, we must seek approval from the state regulatory commission or be registered to provide services in each state where we operate and may at times require local approval to construct facilities. Regulatory obligations vary from state to state and include some or all of the following requirements: filing tariffs (rates, terms and conditions); filing operational, financial, and customer service reports; seeking approval to transfer the assets or capital stock of the broadband communications company; seeking approval to issue stocks, bonds and other forms of indebtedness of the broadband communications company;
reporting customer service and quality of service requirements; outage reporting; making contributions to state universal service support programs; paying regulatory and state Telecommunications Relay Service and E911 fees; geographic build-out; and other matters relating to competition.
In September 2019, we launched Altice Mobile, our mobile service using our own core infrastructure and our infrastructure mobile virtual network operator ("iMVNO") agreements with Sprint and other roaming partners, including AT&T. Our mobile wireless service is subject to most of the same FCC and consumer protection regulations as typical, network-based wireless carriers (such as E911 services, local number portability, privacy protection, and constraints on billing and advertising practices). The FCC or other regulatory authorities may adopt new or different regulations that apply to our services or similarly situated providers, impose new taxes or fees, or modify the obligations of other network-based carriers to provide wholesale RAN access to providers like Altice USA.
Other Services
We may provide other services and features over our cable system, such as games and interactive advertising, that may be subject to a range of federal, state and local laws, such as privacy and consumer protection regulations. We also maintain various websites that provide information and content regarding our businesses. The operation of these websites is also subject to a similar range of regulations.
Privacy Regulations
Our cable, Internet, voice, wireless and advertising services are subject to various federal, state and local laws and regulations, as well as, in instances where we operate outside of the U.S., the laws and regulations of the countries and regions where we operate, regarding subscriber privacy, data security, data protection, and data use. Our provision of Internet services subjects us to the limitations on use and disclosure of user communications and records contained in the Electronic Communications Privacy Act of 1986. Broadband Internet access service is also subject to various privacy laws applicable to electronic communications. We are subject to various state regulations and enforcement oversight related to our policies and practices covering the collection, use, and disclosure of personal information. In 2018, California passed a comprehensive privacy act aimed at increasing disclosure requirements, privacy protections, and the rights of consumers to identify and delete stored private data, subject to some limited business exceptions. The California law became effective on January 1, 2020. We expect further scrutiny of privacy practices at all levels of government in the areas where we operate, and implementing systems to comply with new rules could impact our business opportunities and impose operating costs on the business.
Our i24 operation has employees and offices in the European Union ("EU") that are subject to the General Data Protection Regulation ("GDPR"). Further, our a4 advertising business conducts limited business with customers that advertise in the EU. As such, we have certain compliance obligations with EU and member state (and UK) laws and regulations, including compliance obligations under the GDPR, and bear potential enforcement risks and fines if we fail to comply, even as the application of those regulations to some of our operations are unclear or are unknown.
Environmental Regulations
Our business operations are subject to environmental laws and regulations, including regulations governing the use, storage, disposal of, and exposure to hazardous materials, the release of pollutants into the environment and the remediation of contamination. In part as a result of the increasing public awareness concerning the importance of environmental regulations, these regulations have become more stringent over time. Amended or new regulations could impact our operations and costs.
Employees and Labor Relations
Human Capital
As of December 31, 2020, we had approximately 8,900 employees. Approximately 600 of our employees were represented by unions as of such date. Approximately 97% of our employees are U.S based. Our employees perform work in a variety of environments, including customers’ homes or businesses, in the field, and onsite in retail stores, centers or offices. In fiscal year 2020, the COVID-19 pandemic had a significant impact on our workforce management approach. A majority of our workforce worked remotely for a significant part of the year, , and we instituted safety protocols and procedures for the essential employees who continued to work in customer locations and in the field.
Diversity and Inclusion
Together has no limits is our cultural anthem. Together represents inclusion and opportunity for all types of people throughout our company.
Our commitment to diversity and inclusion is rooted in providing our employees and our customers with the best experience possible. Our approach is informed by best practices in recruitment, retention, community and culture, which will help us build a company that is welcoming, respectful and with equal opportunities for all.
To support this vision, we created employee Affinity Groups that foster communities with shared interests and backgrounds. Through professional development sessions, networking events, panels and community events, our Affinity Groups are helping to create a greater sense of belonging, improve understanding of differences, and inform businesses practices and policies.
Compensation and Benefits
We are committed to providing a competitive total rewards program that assists us in attracting and retaining our talent. Our compensation program targets market competitive pay and provides an opportunity for our full time non-union employees to earn performance based incentive compensation. Our market competitive and inclusive benefits program includes healthcare benefits, life and disability insurance, 401(k) plan with company matching contributions, paid time off, and other voluntary benefit programs.
Available Information and Website
We make available free of charge, through our investor relations section at our website, http://www.alticeusa.com, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the U.S. Securities and Exchange Commission ("SEC"). Website references in this report are provided as a convenience and do not constitute, and should not be viewed as, incorporation by reference of the information contained on, or available through, the websites. Therefore, such information should not be considered part of this report.
Item 1A. Risk Factors
Summary of Risk Factors
Our business is subject to a number of risks that may impact our business and prospects. The following summary identifies certain risk factors that may prevent us from achieving our business objectives or may adversely affect our business, financial condition and results of operations. These and other risks are discussed in detail in the section that follows.
Risk Factors Relating to Our Business
•We operate in a highly competitive business environment.
•We face significant risks as a result of rapid changes in technology, consumer expectations and behavior.
•Programming and retransmission costs are increasing and disputes with programmers and the inability to retain or obtain popular programming can adversely affect our relationship with customers.
•We may not be able to successfully implement our growth strategy.
•Our business, financial condition and results of operations may be adversely affected by the COVID-19 pandemic.
•The financial markets are subject to volatility and disruptions, which may adversely affect our business.
•We are highly leveraged and have substantial indebtedness and may incur additional indebtedness.
•We have in past periods incurred substantial losses from continuing operations, and we may do so in the future.
•A lowering or withdrawal of the ratings assigned to our subsidiaries' debt securities and credit facilities by ratings agencies may increase our future borrowing costs and reduce our access to capital.
•Our subsidiaries' ability to meet obligations under their indebtedness may be restricted by limitations on our other subsidiaries' ability to send funds.
•We are subject to significant restrictive covenants under the agreements governing our indebtedness.
•We will need to raise significant amounts of funding over the next several years to fund capital expenditures, repay existing obligations and meet other obligations; we may also engage in extraordinary transactions that involve the incurrence of large amounts of indebtedness.
•Changes or uncertainty in respect of LIBOR may affect our sources of funding.
•We rely on network and information systems for our operations and a disruption or failure of, or defects in, those systems may disrupt our operations or damage our reputation with customers.
•If we experience a significant data security breach, our results of operations and reputation could suffer.
•The terms of existing or new collective bargaining agreements with our represented workforce can increase our expense and labor disruptions could adversely affect us.
•A significant amount of our book value consists of intangible assets that may not generate cash in the event of a voluntary or involuntary sale.
•We may engage in acquisitions, dispositions and other strategic transactions and the integration of such acquisitions, the sales of assets and other strategic transactions could materially adversely affect us.
•Significant unanticipated increases in the use of bandwidth-intensive Internet-based services could increase our costs.
•Our business depends on intellectual property rights and on not infringing on others' intellectual property rights.
•We may be liable for the material that content providers distribute over our networks.
•If we are unable to retain key employees, our ability to manage our business could be adversely affected.
•Impairment of Altice Europe's or Mr. Drahi's reputation could adversely affect current and future customers' perception of Altice USA.
•Macroeconomic developments may adversely affect our business.
•Online piracy could result in reduced revenues and increased expenditures.
•Our mobile wireless service will be subject to startup risk, competition, and risks associated with the price and availability of wholesale access to RAN.
Risk Factors Relating to Regulatory and Legislative Matters
•Our business is subject to extensive governmental legislation and regulation.
•Our cable system franchises are subject to non-renewal or termination.
•Our cable system franchises are non-exclusive.
•Local franchising authorities have the ability to impose additional regulatory constraints on our business.
•Further regulation of the cable industry could restrict our marketing options or impair our ability to raise rates.
•We may be materially adversely affected by regulatory changes related to pole attachments.
•Changes in channel carriage regulations could impose significant additional costs on us.
•Increasing regulation of our Internet-based products and services could adversely affect our ability to provide new products and services.
•Offering telephone services may subject us to additional regulatory burdens, causing us to incur additional costs.
•Our mobile service exposes us to regulatory risk.
•We may be materially adversely affected by regulatory, legal and economic changes relating to our physical plant.
Risk Factors Relating to Ownership of Our Class A Common Stock and Class B Common Stock
•An active, liquid trading market for our Class B common stock has not developed and we cannot assure you that an active, liquid trading market will develop in the future.
•Our stockholders' percentage ownership in us may be diluted by future issuances of capital stock.
•We have no current plans to pay cash dividends on our Class A common stock or Class B common stock for the foreseeable future.
•Future sales, or the perception of future sales, by us or our existing stockholders in the public market could cause the market price of our Class A common stock to decline.
•The tri-class structure of Altice USA common stock has the effect of concentrating voting control with Next Alt.
•Next Alt controls us and its interests may conflict with ours or our stockholders in the future.
•Anti-takeover provisions in our organizational documents could prevent a change of control transaction.
•Holders of a single class of Altice USA common stock may not have any remedies if an action by our directors has an adverse effect on only that class of Altice USA common stock.
•We are a "controlled company" within the meaning of the rules of the NYSE.
•If securities or industry analysts do not publish research or reports about our business, if they adversely change their recommendations regarding our Class A common stock, or if our operating results do not meet their expectations, the market price of our Class A common stock could decline.
•We are subject to securities class action litigation related to our 2017 initial public offering and we may be subject to additional securities class action litigation in the future.
•Our amended and restated bylaws provide that the Court of Chancery of the State of Delaware is the exclusive forum for substantially all disputes between us and our stockholders.
Risk Factors Relating to Our Business
We operate in a highly competitive business environment which could materially adversely affect our business, financial condition, results of operations and liquidity.
We operate in a highly competitive, consumer-driven industry and we compete against a variety of broadband, video and telephony providers and delivery systems, including broadband communications companies, wireless data and telephony providers, satellite-delivered video signals, Internet-delivered video content and broadcast television signals available to residential and business customers in our service areas. Some of our competitors include AT&T and its DirecTV subsidiary, CenturyLink, DISH, Frontier and Verizon. In addition, our video services compete with all other sources of leisure, news, information and entertainment, including movies, sporting or other live events, radio broadcasts, home-video services, console games, print media and the Internet.
In some instances, our competitors have fewer regulatory burdens, easier access to financing, greater resources, greater operating capabilities and efficiencies of scale, stronger brand-name recognition, longstanding relationships with regulatory authorities and customers, more customers, more flexibility to offer promotional packages at prices lower than ours and greater access to programming or other services. This competition creates pressure on our pricing and has adversely affected, and may continue to affect, our ability to add and retain customers, which in turn adversely affects our business, financial condition and results of operations. The effects of competition may also adversely affect our liquidity and ability to service our debt. For example, we face intense competition from Verizon, which has constructed FTTH network infrastructure that passes a significant number of households in our New York metropolitan service area. We estimate that Verizon is currently able to sell a fiber-based triple play, including broadband, video and telephony services, to at least half of the households in our New York metropolitan service area and may expand these and other service offerings to more customers in the future. The extent of Verizon's build-out and sales activity in our New York metropolitan service area is difficult to assess because it is based on visual inspections and other limited estimating techniques and therefore serves only as an approximation.
Our competitive risks are heightened by the rapid technological change inherent in our business, evolving consumer preferences and the need to acquire, develop and adopt new technology to differentiate our products and services from those of our competitors, and to meet consumer demand. We may need to anticipate far in advance which technology we should use for the development of new products and services or the enhancement of existing products and services. The failure to accurately anticipate such changes may adversely affect our ability to attract and retain customers, which in turn could adversely affect our business, financial condition and results of operations.
Consolidation and cooperation in our industry may allow our competitors to acquire service capabilities or offer products that are not available to us or offer similar products and services at prices lower than ours.
In addition, certain of our competitors own directly or are affiliated with companies that own programming content or have exclusive arrangements with content providers that may enable them to obtain lower programming costs or offer exclusive programming that may be attractive to prospective customers. For example, DirecTV has exclusive arrangements with the National Football League that give it access to programming we cannot offer. Further, in 2018 AT&T acquired Time Warner, which owns a number of cable networks, including TBS, CNN and HBO, as well as Warner Bros. Entertainment, which produces television, film and home-video content. AT&T's and DirecTV's access to Time Warner programming and studio assets provides AT&T and DirecTV the ability to offer competitive promotional packages that could negatively affect our ability to maintain or increase our existing customers and revenues. DBS operators such as DISH and DirecTV also have marketing arrangements with certain phone companies in which the DBS provider's video services are sold together with the phone company's broadband and mobile and traditional phone services.
Another source of competition for our video services is the delivery of video content over the Internet directly to customers, some of which is offered without charging a fee for access to the content. This competition comes from a number of different sources, including companies that deliver movies, television shows and other video programming, including extensive on demand, live content, serials, exclusive and original content, over broadband Internet connections to televisions, computers, tablets and mobile devices, such as Netflix, Hulu, Disney+, iTunes, Apple TV, YouTube, Amazon Prime, Sling TV, AT&T TV Now, Locast and others. It is possible that additional competitors will enter the market and begin providing video content over the Internet directly to customers. Increasingly, content owners, such as HBO, CBS, Disney and ESPN, are selling their programming directly to consumers over the Internet without requiring a video subscription. The availability of these services has and will continue to adversely affect customer demand for our video services, including premium and on-demand services. Further, due to consumer electronics innovations, consumers can watch such Internet-delivered content on television sets and mobile devices, such as smartphones and tablets. Internet access services are also offered by providers of wireless services, including traditional cellular phone carriers and others focused solely on wireless data services.
Our video services also face competition from broadcast television stations, entities that make digital video recorded movies and programs available for home rental or sale, satellite master antenna television ("SMATV") systems, which generally serve large MDUs under an agreement with the landlord and service providers and open video system operators. Private cable systems can offer improved reception of local television stations and many of the same satellite-delivered program services that are offered by cable systems. SMATV systems currently benefit from operating advantages not available to franchised cable systems, including fewer regulatory burdens. Cable television has also long competed with broadcast television, which consists of television signals that the viewer is able to receive without charge using an "off-air" antenna. The extent of such competition is dependent upon the quality and quantity of broadcast signals available through "off-air" reception, compared to the services provided by the local cable system. The use of radio spectrum now provides traditional broadcasters with the ability to deliver HD television pictures and multiple digital-quality program streams. There can be no assurance that existing, proposed or as yet undeveloped technologies will not become dominant in the future and render our video service offering less profitable or even obsolete.
Our broadband service faces competition from wired and wireless providers.Most broadband communications companies, which already have wired networks, an existing customer base and other operational functions in place (such as billing and service personnel), offer DSL, cable or FTTH/FTTP services. We believe these services compete with our broadband service and are often offered at prices comparable to or lower than our Internet services and, despite sometimes being offered at speeds lower than the speeds we offer, are capable of serving as substitutes for some consumers. In addition, to the extent that these providers’ networks are more ubiquitously deployed, such as traditional telephone networks, they may be in a better position to offer Internet services to businesses passed by their networks on a more economic or timely basis than we can, even if the services they offer are arguably inferior. They may also increasingly have the ability to combine video services, mobile services and telephone and Internet services offered to their customers, either directly or through co-marketing agreements with other service providers.
Mobile broadband providers may be able to provide services that substitute for our fixed and mobile broadband service.Current and future fixed and wireless Internet services, such as 4G, LTE and 5G (and variants) wireless broadband services and WiFi networks, and devices such as wireless data cards, tablets and smartphones, and mobile wireless routers that connect to such devices, may also compete with our broadband services both for in premises broadband service and mobile broadband. All major wireless carriers have started to offer unlimited data plans,
which could, in some cases, become a substitute for the fixed broadband services we provide. The FCC is likely to continue to make additional radio spectrum available for these wireless Internet access services, which in time could expand the quality and reach of these services.
Our telephony services, including the mobile wireless voice and data service that we launched in 2019, compete directly with established broadband communications companies and other carriers, including wireless providers, as increasing numbers of homes are replacing their traditional telephone service with wireless telephone service. We also compete against VoIP providers like Vonage, Skype, GoogleTalk, Facetime, WhatsApp and magicJack that do not own networks but can provide service to any person with a broadband connection, in some cases free of charge. Our telephony services also face competition from substitute services such as SMS, chat, Apple Messaging, WhatsApp and similar communications services.
In addition, we compete against ILECs, other CLECs and long-distance voice-service companies for large commercial and enterprise customers. While we compete with the ILECs, we also enter into interconnection agreements with ILECs so that our customers can make and receive calls to and from customers served by the ILECs and other telecommunications providers. Federal and state law and regulations require ILECs to enter into such agreements and provide facilities and services necessary for connection, at prices subject to regulation. The specific price, terms and conditions of each agreement, however, depend on the outcome of negotiations between us and each ILEC. Interconnection agreements are also subject to approval by the state regulatory commissions, which may arbitrate negotiation impasses. We have entered into interconnection agreements with Verizon for New York, New Jersey and portions of Connecticut, and with Frontier for portions of Connecticut, which have been approved by the respective state commissions. We have also entered into interconnection agreements with other ILECs in New York and New Jersey and in each of the other states where we offer VoIP and telecommunications services in the Suddenlink territories. These agreements, like all interconnection agreements, are for limited terms and upon expiration are subject to renegotiation, potential arbitration and approval under the laws in effect at that time.
Our advertising business faces competition from traditional and non-traditional media outlets, such as television and radio stations, traditional print media and the Internet, including Facebook, Google and others.
We face significant risks as a result of rapid changes in technology, consumer expectations and behavior.
The broadband communications industry has undergone significant technological development over time and these changes continue to affect our business, financial condition and results of operations. Such changes have had, and will continue to have, a profound impact on consumer expectations and behavior. Our video business faces technological change risks as a result of the continuing development of new and changing methods for delivery of programming content such as Internet-based delivery of movies, shows and other content which can be viewed on televisions, wireless devices and other developing mobile devices. Consumers' video consumption patterns are also evolving, for example, with more content being downloaded for time-shifted consumption. A proliferation of delivery systems for video content can adversely affect our ability to attract and retain customers and the demand for our services and it can also decrease advertising demand on our delivery systems. Our broadband business faces technological challenges from rapidly evolving wireless Internet solutions. Our telephony service offerings face technological developments in the proliferation of telephony delivery systems including those based on Internet and wireless delivery. If we do not develop or acquire and successfully implement new technologies, we will limit our ability to compete effectively for customers, content and advertising.
Many of our video customers take delivery of their services through our set-top box and combined home communications hub, the Altice One. Increasingly, customers are able to enjoy our content or other content through other devices, such as Roku, Apple TV, or "smart" TVs, which eliminates or reduces the need to use our devices. Our Altice One communications hub allows our customers to aggregate many services in a manner that is similar to some of these devices. Nonetheless, we cannot provide any assurance that we will realize, in full or in part, the anticipated benefits we expect from the introduction of our home communications hub, Altice One, or that it will be rolled out across our footprint in the timeframe we anticipate. In addition, we may be required to make material capital and other investments to anticipate and to keep up with technological change. These challenges could adversely affect our business, financial condition and results of operations.
In the fourth quarter of 2017, we entered into a multi-year strategic agreement with Sprint pursuant to which we currently utilize Sprint's network to provide mobile voice and data services to our customers throughout the nation, and our broadband network is currently being utilized to accelerate the densification of Sprint's network. We believe this additional product offering will enable us to deliver greater value and more benefits to our customers, by offering mobile voice and data services, in addition to our broadband, video and telephony services. Some of our competitors
already offer, or have announced plans to offer, their own "quad-play" offerings that bundle broadband, video, telephony and mobile voice and data services. If our customers do not view our quad-play offers as competitive with those offered by our competitors, we could experience increased customer churn. We cannot provide any assurance that we will realize, in full or in part, the anticipated benefits we expect from the introduction of our mobile voice and data services, or that they will be introduced to, or adopted by, customers to the extent or in the timeframe we anticipate. In addition, we may be required to make material capital and other investments to develop this business and to anticipate and keep up with technological change. These challenges could adversely affect our business, financial condition and results of operations.
Programming and retransmission costs are increasing and we may not have the ability to pass these increases on to our customers. Disputes with programmers and the inability to retain or obtain popular programming can adversely affect our relationship with customers and lead to customer losses, which could materially adversely affect our business, financial condition and results of operations.
Programming costs are one of our largest categories of expenses. In recent years, the cost of programming in the cable and satellite video industries has increased significantly and is expected to continue to increase, particularly with respect to costs for sports programming and broadcast networks. We may not be able to pass programming cost increases on to our customers due to the increasingly competitive environment. If we are unable to pass these increased programming costs on to our customers, our results of operations would be adversely affected. Moreover, programming costs are related directly to the number of customers to whom the programming is provided. Our smaller customer base relative to our competitors may limit our ability to negotiate lower per-customer programming costs, which could result in reduced operating margins relative to our competitors with a larger customer base.
The expiration dates of our various programming contracts are staggered, which results in the expiration of a portion of our programming contracts throughout each year. We attempt to control our programming costs and, therefore, the cost of our video services to our customers, by negotiating favorable terms for the renewal of our affiliation agreements with programmers. On certain occasions in the past, such negotiations have led to disputes with programmers that have resulted in temporary periods during which we did not carry or decided to stop carrying a particular broadcast network or programming service or services. For example, in 2017, we were unable to reach an agreement with Starz on acceptable economic terms, and effective January 1, 2018, all Starz services were removed from our lineups, and we launched alternative networks offered by other programmers under new long-term contracts. On February 13, 2018, we and Starz reached a new carriage agreement and we restored the Starz services previously offered by Optimum and Suddenlink. To the extent we are unable to reach agreement with certain programmers on terms we believe are reasonable, we may be forced to, or determine for strategic or business reasons to, remove certain programming channels from our line-up and may decide to replace such programming channels with other programming channels, which may not be available on acceptable terms or be as attractive to customers. Such disputes, or the removal or replacement of programming, may inconvenience some of our customers and can lead to customer dissatisfaction and, in certain cases, the loss of customers, which could have a material adverse effect on our business, financial condition, results of operations and liquidity. There can be no assurance that our existing programming contracts will be renewed on favorable or comparable terms, or at all, or that the rights we negotiate will be adequate for us to execute our business strategy.
We may also be subject to increasing financial and other demands by broadcast stations. Federal law allows commercial television broadcast stations to make an election between "must-carry" rights and an alternative "retransmission consent" regime. Local stations that elect "must-carry" are entitled to mandatory carriage on our systems, but at no fee. When a station opts for retransmission consent, cable operators negotiate for the right to carry the station's signal, which typically requires payment of a per-customer fee. Our retransmission agreements with stations expire from time to time. Upon expiration of these agreements, we may carry some stations under short-term arrangements while we attempt to negotiate new long-term retransmission agreements. In connection with any negotiation of new retransmission agreements, we may become subject to increased or additional costs, which we may not be able to pass on to our customers. To the extent that we cannot pass on such increased or additional costs to customers or offset such increased or additional costs through the sale of additional services, our business, financial condition, results of operations and liquidity could be materially adversely affected. In addition, in the event contract negotiations with stations are unsuccessful, we could be required, or determine for strategic or business reasons, to cease carrying such stations' signals, possibly for an indefinite period. Any loss of stations could make our video service less attractive to our customers, which could result in a loss of customers, which could have a material adverse effect on our business, financial condition, results of operations and liquidity. There can be no assurance that any expiring retransmission agreements will be renewed on favorable or comparable terms, or at all.
We may not be able to successfully implement our growth strategy.
Our future growth, profitability and results of operations depend upon our ability to successfully implement our business strategy, which, in turn, is dependent upon a number of factors, including our ability to continue to:
•simplify and optimize our organization;
•reinvest in infrastructure and content;
•invest in sales, marketing and innovation;
•enhance the customer experience;
•drive revenue and cash flow growth; and
•opportunistically grow through value-accretive acquisitions.
There can be no assurance that we can successfully achieve any or all of the above initiatives in the manner or time period that we expect. Furthermore, achieving these objectives will require investments which may result in short-term costs without generating any current revenues and therefore may be dilutive to our earnings. We cannot provide any assurance that we will realize, in full or in part, the anticipated benefits we expect our strategy will achieve. The failure to realize those benefits could have a material adverse effect on our business, financial condition and results of operations. In addition, if we are unable to continue improving our operational performance and customer experience we may face a decrease in new customers and an increase in customer churn, which could have a material adverse effect on our business, financial condition and results of operations. In particular, there can be no assurance that we will be able to successfully implement our plan to build a FTTH network within the anticipated timeline or at all or within the cost parameters we currently expect. Similarly, we may not be successful in deploying Altice One, or the mobile voice and data services we recently launched, on our current timeline or realize, in full or in part, the anticipated benefits we expect from the introduction thereof, and we may face technological, financial, legal, regulatory or other challenges in pursuing these or other initiatives.
Our business, financial condition and results of operations may be adversely affected by the recent COVID-19 pandemic
The coronavirus pandemic ("COVID-19"), and measures to prevent its spread, may have a material adverse impact on our business, financial condition and results of operations. The severity and timing of the impact will depend on a number of factors, including the level and rapidity of infection, duration of containment measures, changes in consumer spending patterns, measures imposed or taken by governmental authorities in response to the pandemic, macroeconomic conditions in our markets, and negative effects on the financial condition of our customers.
Under difficult economic conditions, including prolonged unemployment and employment furloughs, demand for our products and services could decline and some customers may be unable or unwilling to pay for our products and services. Additionally, in order to prioritize the demands of the business, we may delay certain capital investments, such as FTTH or in other new initiatives, products or services, which may adversely affect our business in the future. If these events occur and were to continue, our revenue may be reduced materially which could result in reduced operating margins and a reduction in cash flows.
Governmental and non-governmental initiatives to reduce the transmission of COVID-19, such as the imposition of restrictions on work and public gatherings and the promotion of social distancing, along with new government service, collection, pricing or rebate mandates, such as New Jersey’s recent executive order to maintain broadband service for non-paying customers, have impacted and could continue to impact our operations and financial results. Our suppliers and vendors also may be affected by such measures in their ability to provide products and services to us and these measures could also make it more difficult for us to serve our customers.
In addition, the impact that the COVID-19 pandemic will have on our business, financial condition and results of operations could exacerbate the other risks identified in this section.
The financial markets are subject to volatility and disruptions, which have in the past, and may in the future, adversely affect our business, including by affecting the cost of new capital and our ability to fund acquisitions or other strategic transactions.
From time to time the capital markets experience volatility and disruption. Volatility in the capital markets may be impacted by a number of factors. Some of the main factors which contributed to capital markets volatility in recent months included, for example, uncertainty between the United States and other countries with respect to trade policies, treaties, and tariffs, the outlook for interest rates, and continued uncertainty surrounding the effects of the
decision by the United Kingdom to exit the EU, which formally occurred on January 31, 2020. There can be no assurance that market conditions will not continue to be volatile or worsen in the future.
Historical market disruptions have typically been accompanied by a broader economic downturn, which has historically led to lower demand for our products, such as video services, as well as lower levels of television advertising, and increased incidence of customers' inability to pay for the services we provide. A recurrence of these conditions may further adversely impact our business, financial condition and results of operations.
We rely on the capital markets, particularly for offerings of debt securities and borrowings under syndicated facilities, to meet our financial commitments and liquidity needs if we are unable to generate sufficient cash from operations to fund such anticipated commitments and needs and to fund acquisitions or other strategic transactions. Disruptions or volatility in the capital markets could also adversely affect our ability to refinance on satisfactory terms, or at all, our scheduled debt maturities and could adversely affect our ability to draw on our revolving credit facilities.
Disruptions in the capital markets as well as the broader global financial market can also result in higher interest rates on any new debt securities we issue and increased costs under credit facilities which bear floating interest rates. Such disruptions could increase our interest expense, adversely affecting our business, financial position and results of operations.
Our access to funds under our revolving credit facilities is dependent on the ability of the financial institutions that are parties to those facilities to meet their funding commitments. Those financial institutions may not be able to meet their funding commitments if they experience shortages of capital and liquidity or if they experience excessive volumes of borrowing requests within a short period of time. Moreover, the obligations of the financial institutions under our revolving credit facilities are several and not joint and, as a result, a funding default by one or more institutions does not need to be made up by the others.
Longer term, volatility and disruptions in the capital markets and the broader global financial market as a result of uncertainty, changing or increased regulation of financial institutions, reduced alternatives or failures of significant financial institutions could adversely affect our access to the liquidity needed for our businesses. Such disruptions could require us to take measures to conserve cash or impede or delay potential acquisitions, strategic transactions and refinancing transactions until the markets stabilize or until alternative credit arrangements or other funding for our business needs can be arranged.
We are highly leveraged and have substantial indebtedness, which reduces our capability to withstand adverse developments or business conditions. If we incur additional indebtedness, such indebtedness could further exacerbate the risks associated with our substantial indebtedness.
Our subsidiaries have incurred substantial amounts of indebtedness in connection with acquisitions and to finance the Cequel Acquisition, the Cablevision Acquisition, our operations, upgrades to our cable plant and acquisitions of other cable systems, sources of programming and other businesses. We have also incurred substantial indebtedness in order to offer new or upgraded services to our current and potential customers. At December 31, 2020, the carrying value of our total aggregate indebtedness, including collateralized indebtedness, was approximately $26.7 billion. Because we are highly leveraged, our payments on our indebtedness are significant in relation to our revenues and cash flow, which exposes us to significant risk in the event of downturns in our businesses (whether through competitive pressures or otherwise), our industry or the economy generally, since our cash flows would decrease, but our required payments under our indebtedness would not. Any decrease in our revenues or an increase in operating costs (and corresponding reduction in our cash flows) would therefore adversely affect our ability to make interest or principal payments on our indebtedness as they come due.
Economic downturns may also impact our ability to comply with the covenants and restrictions in our indentures, credit facilities and other agreements governing our indebtedness and may impact our ability to pay or refinance our indebtedness as it comes due. If we do not repay or refinance our debt obligations when they become due and do not otherwise comply with the covenants and restrictions in our indentures, credit facilities and other agreements governing our indebtedness, we would be in default under those agreements and the underlying debt could be declared immediately due and payable. In addition, any default under any of our indentures, credit facilities or other agreements governing our indebtedness could lead to an acceleration of debt under any other debt instruments or agreements that contain cross-acceleration or cross-default provisions. If the indebtedness incurred under our indentures, credit facilities and other agreements governing our indebtedness were accelerated, we would not have sufficient cash to repay amounts due thereunder. To avoid a default, we could be required to defer capital expenditures, sell assets, seek strategic investments from third parties or otherwise reduce or eliminate discretionary uses of cash. However, if such measures were to become necessary, there can be no assurance that we would be able
to sell sufficient assets or raise strategic investment capital sufficient to meet our scheduled debt maturities as they come due. In addition, any significant reduction in necessary capital expenditures could adversely affect our ability to retain our existing customer base and obtain new customers, which would adversely affect our business, financial position and results of operations.
Our overall leverage and the terms of our financing arrangements could also:
•make it more difficult for us to satisfy obligations under our outstanding indebtedness;
•limit our ability to obtain additional debt or equity financing in the future, including for working capital, capital expenditures or acquisitions, and increase the costs of such financing;
•limit our ability to refinance our indebtedness on terms acceptable to us or at all;
•limit our ability to adapt to changing market conditions;
•restrict us from making strategic acquisitions or cause us to make non-strategic divestitures;
•require us to dedicate a significant portion of our cash flow from operations to paying the principal of and interest on our indebtedness, thereby limiting the availability of our cash flow to fund future capital expenditures, working capital, research and development, and other corporate purposes;
•increase our vulnerability to or limit our flexibility in planning for, or reacting to, changes in our business and the broadband communications industry generally as well as general economic conditions, including the risk of increased interest rates;
•place us at a competitive disadvantage compared with competitors that have a less significant debt burden; and
•adversely affect public perception of us and our brands.
In addition, a substantial portion of our indebtedness bears interest at variable rates. If market interest rates increase, our variable-rate debt will have higher debt service requirements, which could adversely affect our cash flows and financial condition. For more information, see "Item 7A. Quantitative and Qualitative Disclosures About Market Risk—Interest Rate Risk." Although we have historically entered into, and may in the future enter into, hedging arrangements to limit our exposure to an increase in interest rates or to other risks, such arrangements may not offer complete protection from these risks. In addition, the nature of these hedges could prevent us from realizing benefits we would have received had the hedge not been put in place, such as if interest rates fall.
The terms of our existing indebtedness restrict, but do not prohibit, us from incurring additional indebtedness. We may increase our consolidated indebtedness for various business reasons, which might include, among others, financing acquisitions or other strategic transactions, funding prepayment premiums, if any, on the debt we refinance, funding distributions to our shareholders or general corporate purposes. If we incur additional indebtedness, such indebtedness will be added to our current debt levels and the above-described risks we currently face could be magnified.
We have in past periods incurred substantial losses from continuing operations, and we may do so in the future, which may reduce our ability to raise needed capital.
We have in the past incurred substantial losses from continuing operations and we may do so in the future. Significant losses from continuing operations could limit our ability to raise any needed financing, or to do so on favorable terms, as such losses could be taken into account by potential investors, lenders and the organizations that issue investment ratings on our indebtedness.
A lowering or withdrawal of the ratings assigned to our subsidiaries' debt securities and credit facilities by ratings agencies may increase our future borrowing costs and reduce our access to capital.
Credit rating agencies continually revise their ratings for companies they follow. The condition of the financial and credit markets and prevailing interest rates have fluctuated in the past and are likely to fluctuate in the future. In addition, developments in our business and operations or the amount of indebtedness could lead to a ratings downgrade on our or our subsidiaries' indebtedness. The debt ratings for our subsidiaries' debt securities and credit facilities are currently below the "investment grade" category, which results in higher borrowing costs and more restrictive covenants in our indentures and credit facilities, as well as a reduced pool of potential investors of that debt as some investors will not purchase debt securities or become lenders under credit facilities that are not rated in an investment grade rating category. In addition, there can be no assurance that any rating assigned will remain for any given period of time or that a rating will not be lowered or withdrawn entirely by a rating agency, if in that rating agency's judgment, future circumstances relating to the basis of the rating, such as adverse changes, so warrant. Our
credit rating (including the credit rating assigned to our subsidiaries’ debt securities and credit facilities) has in the past been and may continue to be impacted by a number of factors, including the effects of the U.S. economy experiencing an uneven recovery following a protracted slowdown, factors affecting the broadband communications and video service industry, our operating performance and our financing activities. Any such fluctuation in the rating of us or our subsidiaries may impact our ability to access debt markets in the future or increase our cost of future debt which could have a material adverse effect on our business, financial condition and results of operations, which in return may adversely affect the market price of shares of our Class A common stock.
Our subsidiaries' ability to meet obligations under their indebtedness may be restricted by limitations on our other subsidiaries' ability to send funds.
Our primary debt obligations have been incurred by our subsidiaries, mainly CSC Holdings, LLC ("CSC Holdings"). A portion of the indebtedness incurred by CSC Holdings is not guaranteed by any of its subsidiaries. CSC Holdings is primarily a holding company whose ability to pay interest and principal on such indebtedness is wholly or partially dependent upon the operations of its subsidiaries and the distributions or other payments of cash, in the form of distributions, loans or advances, those other subsidiaries deliver to our indebted subsidiaries. Our subsidiaries are separate and distinct legal entities and, unless any such subsidiaries has guaranteed the underlying indebtedness, have no obligation, contingent or otherwise, to pay any amounts due on our indebted subsidiaries' indebtedness or to make any funds available to our indebted subsidiaries to do so. These subsidiaries may not generate enough cash to make such funds available to our indebted subsidiaries and in certain circumstances legal and contractual restrictions may also limit their ability to do so.
Also, our subsidiaries' creditors, including trade creditors, in the event of a liquidation or reorganization of any subsidiary, would be entitled to a claim on the assets of such subsidiaries, including any assets transferred to those subsidiaries, prior to any of our claims as a stockholder and those creditors are likely to be paid in full before any distribution is made to us. To the extent that we are a creditor of a subsidiary, our claims could be subordinated to any security interest in the assets of that subsidiary and/or any indebtedness of that subsidiary senior to that held by us.
We are subject to significant restrictive covenants under the agreements governing our indebtedness.
The indentures, credit facilities and agreements governing the indebtedness of our subsidiaries contain various negative covenants that restrict our subsidiaries' (and their respective subsidiaries') ability to, among other things:
•incur additional indebtedness and guarantee indebtedness;
•pay dividends or make other distributions, or repurchase or redeem capital stock;
•prepay, redeem or repurchase subordinated debt or equity;
•issue certain preferred stock;
•make loans and investments;
•sell assets;
•incur liens;
•enter into transactions with affiliates;
•create or permit any encumbrances or restrictions on the ability of their respective subsidiaries to pay dividends or make other distributions, make loans or advances or transfer assets, in each case to such subsidiary, or its other restricted subsidiaries; and
•consolidate, merge or sell all or substantially all of their assets.
We are also subject to certain affirmative covenants under our subsidiary's revolving credit facility, which, among other things, require our operating subsidiaries to maintain a specified financial ratio if there are any outstanding loans thereunder. Our ability to meet these financial ratios may be affected by events beyond our control and, as a result, there can be no assurance that we will be able to meet these ratios.
Violation of these covenants could result in a default that would permit the relevant creditors to require the immediate repayment of the borrowings thereunder, which could result in a default under other debt instruments and agreements that contain cross-default provisions and, in the case of our revolving credit facility, permit the relevant lenders to restrict the relevant borrower's ability to borrow undrawn funds under such revolving credit facility. A default under any of the agreements governing our indebtedness could materially adversely affect our financial condition and results of operations.
As a result, we may be:
•limited in how we conduct our business;
•unable to raise additional debt or equity financing to operate during general economic or business downturns; or
•unable to compete effectively or to take advantage of new business opportunities.
These restrictions could have a material adverse effect on our ability to grow in accordance with our strategy and on the value of our debt and equity securities.
We will need to raise significant amounts of funding over the next several years to fund capital expenditures, repay existing obligations and meet other obligations and the failure to do so successfully could adversely affect our business. We may also engage in extraordinary transactions that involve the incurrence of large amounts of indebtedness.
Our business is capital intensive. Operating and maintaining our cable systems requires significant amounts of cash payments to third parties. Capital expenditures were $1,074.0 million, $1,355.4 million and $1,153.6 million in 2020, 2019 and 2018, respectively, and primarily included payments for customer premise equipment, network infrastructure, support and other costs.
We are building a FTTH network, and we continue to upgrade our existing HFC network. During the fourth quarter of 2017, we introduced an entertainment and connectivity hub, Altice One, and we continue to expand the availability of this device across our footprint, as well as its functionality. Also in the fourth quarter of 2017, we entered into a multi-year strategic agreement pursuant to which we currently utilize Sprint's network to provide mobile voice and data services to our customers throughout the nation, and our broadband network is currently being utilized to accelerate the densification of Sprint's network. We may not be able to execute these initiatives within the anticipated timelines, or at all, and we may incur greater than anticipated costs and capital expenditures, fail to realize anticipated benefits, experience business disruptions or encounter other challenges to executing these initiatives which could have a material adverse effect on our business, financial condition and results of operations.
We expect these capital expenditures to continue to be significant as we further enhance our service offerings. We may have substantial future capital commitments in the form of long-term contracts that require substantial payments over a period of time. In the longer term, our ability to fund our operations, make planned capital expenditures, make scheduled payments on our indebtedness and repay our indebtedness depends on our future operating performance and cash flows and our ability to access the capital markets, which, in turn, are subject to prevailing economic conditions and to financial, business and other factors, some of which are beyond our control. Competition, market disruptions or deterioration in economic conditions could lead to lower demand for our products, as well as lower levels of advertising, and increased incidence of customers' inability to pay for the services we provide. These events would adversely impact our results of operations, cash flows and financial position. As such, we may not be able to generate sufficient cash internally to fund anticipated capital expenditures, make ongoing interest payments and repay our indebtedness at maturity. Accordingly, we may have to do one or more of the following:
•refinance existing obligations to extend maturities;
•raise additional capital, through bank loans, debt or equity issuances or a combination thereof;
•cancel or scale back current and future spending programs; or
•sell assets or interests in one or more of our businesses.
However, we may not be able to refinance existing obligations or raise any required additional capital on terms acceptable to us or at all. Borrowing costs related to future capital raising activities may be significantly higher than our current borrowing costs and we may not be able to raise additional capital on favorable terms, or at all, if financial markets experience volatility. If we are unable to pursue our current and future spending programs, we may be forced to cancel or scale back those programs. Our choice of which spending programs to cancel or reduce may be limited. Failure to successfully pursue our capital expenditure and other spending plans could materially and adversely affect our ability to compete effectively. It is possible that in the future we may also engage in extraordinary transactions and such transactions could result in the incurrence of substantial additional indebtedness.
Changes or uncertainty in respect of LIBOR may affect our sources of funding.
The interest rates applicable to some of our sources of funding are linked to LIBOR. Various interest rate benchmarks (including LIBOR) are the subject of recent regulatory guidance and proposals for reform. Some reforms
are already effective while others are still to be implemented, including the EU Benchmark Regulation (Regulation (EU) 2016/1011). In addition, the sustainability of LIBOR has been questioned by the United Kingdom’s Financial Conduct Authority (“FCA”) as a result of the absence of relevant active underlying markets and possible disincentives (including possibly as a result of regulatory reforms) for market participants to continue contributing to such benchmarks. On November 29, 2017, the Bank of England and the FCA announced that the Working Group on Sterling Risk-Free Rates (the "Working Group") would have an extended mandate to catalyze a broad transition to the Sterling Overnight Index Average rate (“SONIA”) across sterling bond, loan and derivatives markets so that SONIA is established as the primary sterling interest rate benchmark by the end of 2021. In January 2020, the Working Group published their priorities and milestones on the LIBOR transition, which includes taking steps to promote and enable widespread use of SONIA compounded in arrears, enabling a further shift of volumes from GBP LIBOR to SONIA in derivative markets and establishing a clear framework to manage transition of legacy LIBOR products. Further, the Bank of England and FCA published a press release in support of the objectives of the Working Group and announcing the next steps for LIBOR transition in 2020. These reforms and other pressures may cause such benchmarks to disappear entirely, to perform differently than in the past (as a result of a change in methodology or otherwise), create disincentives for market participants to continue to administer or participate in certain benchmarks or have other consequences which cannot be predicted. Based on the foregoing, investors should in particular be aware that:
•any of the reforms or pressures described above or any other changes to a relevant interest rate benchmark (including LIBOR) could affect the level of the published rate, including to cause it to be lower and/or more volatile than it would otherwise be; and
•if LIBOR is discontinued, then the rate of interest applicable to our sources of funding may be determined for a period by applicable fallback provisions, although such provisions, often being dependent in part upon the provision by reference banks of offered quotations for the LIBOR rate, may not operate as intended (depending on market circumstances and the availability of rates information at the relevant time) and may in certain circumstances result in the effective application of a fixed rate based on the rate which applied in the previous period when LIBOR was available.
More generally, any of the above matters or any other significant change to the setting or existence of LIBOR could affect our ability to meet our obligations under our sources of funding and/or could have a material adverse effect on the liquidity of, and the amount payable under, our sources of funding. Changes in the manner of administration of LIBOR could result in adjustments to the conditions applicable to our sources of funding or other consequences relevant to our sources of funding. No assurance can be provided that changes will not be made to LIBOR or any other relevant benchmark rate and/or that such benchmarks will continue to exist.
We rely on network and information systems for our operations and a disruption or failure of, or defects in, those systems may disrupt our operations, damage our reputation with customers and adversely affect our results of operations.
Network and information systems are essential to our ability to conduct our business and deliver our services to our customers. While we have in place multiple security systems designed to protect against intentional or unintentional disruption, failure, misappropriation or corruption of our network and information systems, there can be no assurance that our efforts to protect our network and information systems will prevent any of the problems identified above. A problem of this type might be caused by events such as computer hacking, computer viruses, worms and other destructive or disruptive software, "cyber-attacks," phishing attacks and other malicious activity, defects in the hardware and software comprising our network and information systems, as well as natural disasters, power outages, terrorist attacks and similar events. Such events could have an adverse impact on us and our customers, including degradation of service, service disruption, excessive call volume to call centers, theft and damage to our plant, equipment and data, costs associated with remediation, notification, and potential damages to third parties affected by such malicious activities. Operational or business delays may result from the disruption of network or information systems and the subsequent remediation activities. Moreover, these events may create negative publicity resulting in reputation or brand damage with customers and our results of operations could suffer.
We also use certain vendors to supply some of the hardware, software and support of our network, some of which have been customized or altered to fit our business needs. Certain of these vendors and suppliers may have leverage over us considering that there are limited suppliers of certain products and services, or that there is a long lead time and/or significant expense required to transition to another provider. In addition, some of these vendors and suppliers do not have a long operating history or may not be able to continue to supply the equipment and services we desire. Some of our hardware, software and operational support vendors and some of our service providers represent our sole
source of supply or have, either through contract or as a result of intellectual property rights, a position of some exclusivity. In addition, because of the pace at which technological innovations occur in our industry, we may not be able to obtain access to the latest technology on reasonable terms. Any delays or the termination or disruption in these relationships as a result of contractual disagreements, operational or financial failures on the part of our vendors and suppliers, or other adverse events that prevent such vendors and suppliers from providing the equipment or services we need, with the level of quality we require, in a timely manner and at reasonable prices, could result in significant costs to us and have a negative effect on our ability to provide services and rollout advanced services. Our ability to replace such vendors and suppliers may be limited and, as a result, our business, financial condition, results of operations and liquidity could be materially adversely affected.
If we experience a significant data security breach or fail to detect and appropriately respond to a significant data security breach, our results of operations and reputation could suffer.
The nature of our business involves the receipt and storage of information about our customers and employees. We have procedures in place to detect and respond to data security incidents. However, because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and may be difficult to detect for long periods of time, we may be unable to anticipate these techniques or implement adequate preventive measures. In addition, hardware, software or applications we develop or procure from third parties may contain defects in design or manufacture or other problems that could unexpectedly compromise information security. We are regularly the target of attempted cyber intrusions and we commit substantial resources to continuously monitor and further develop our network and infrastructure to detect, protect and address the risk of unauthorized access, misuse, computer viruses and other events. Unauthorized parties may also attempt to gain access to our systems or facilities and to our proprietary business information. Our security programs and measures do not prevent all intrusions. Cyber intrusions require a significant amount of time and money to assess and remedy, and our incident response efforts may not be effective in all cases. If our efforts to protect the security of information about our customers and employees are unsuccessful, a significant data security breach may result in costly government enforcement actions, private litigation and negative publicity resulting in reputation or brand damage with customers, and our financial condition and results of operations could suffer. For example, in November 2019, a phishing attack against employee email accounts resulted in the exposure of certain employees' email credentials and, as a result, the exposure of information in those accounts including personal information of current and former employees as well as some customers. We took measures to secure against these attacks and responded by notifying affected persons, relevant state and federal agencies and law enforcement agencies. While the November 2019 attack appears to be contained both from an exposure and cost perspective, we have learned of at least one putative class action having been filed on February 13, 2020, and this and similar attacks could impose costs, liability and reputational harm that could adversely affect our operations and financial results. While we maintain insurance for cyber incidents, due to policy terms, limits and exclusions, it may not apply in all cases, and may not be adequate to cover all liabilities.
A portion of our workforce is represented by labor unions under established collective bargaining agreements or negotiating for a first contract. The terms of existing or new collective bargaining agreements can increase our expenses. Labor disruptions could adversely affect our business, financial condition and results of operations.
As of December 31, 2020, approximately 600 of the Company’s employees were represented by either the Communications Workers of America ("CWA") or the International Brotherhood of Electrical Workers ("IBEW"). The Company has existing collective bargaining agreements with the CWA and IBEW that cover approximately 600 employees in New York and New Jersey and expire at various times beginning February 12, 2023 through April 25, 2024.
The collective bargaining agreements with the CWA and IBEW covering these groups of employees or any other agreements with other unions may increase the Company’s expenses or affect our ability to implement operational changes. Increased unionization of our workforce and any labor disputes we experience could create disruption or have an adverse effect on our business, financial condition and results of operations.
A significant amount of our book value consists of intangible assets that may not generate cash in the event of a voluntary or involuntary sale.
At December 31, 2020, we reported approximately $33.4 billion of consolidated total assets, of which approximately $24.0 billion were intangible.Intangible assets primarily included franchises from city and county governments to operate cable systems, goodwill, customer relationships and trade names. While we believe the carrying values of our intangible assets are recoverable, we may not receive any cash in the event of a voluntary or involuntary sale of these intangible assets, particularly if we were not continuing as an operating business. We urge our stockholders to read
carefully the notes to our consolidated financial statements contained herein, which provide more detailed information about these intangible assets.
We may engage in acquisitions, dispositions and other strategic transactions and the integration of such acquisitions, the sales of assets and other strategic transactions could materially adversely affect our business, financial condition and results of operations.
Our business has grown significantly as a result of acquisitions, which entail numerous risks including:
•distraction of our management team in identifying potential acquisition targets, conducting due diligence and negotiating acquisition agreements;
•difficulties in integrating the operations, personnel, products, technologies and systems of acquired businesses;
•difficulties in enhancing our customer support resources to adequately service our existing customers and the customers of acquired businesses;
•the potential loss of key employees or customers of the acquired businesses;
•unanticipated liabilities or contingencies of acquired businesses;
•unbudgeted costs which we may incur in connection with pursuing potential acquisitions which are not consummated;
•failure to achieve projected cost savings or cash flow from acquired businesses, which are based on projections that are inherently uncertain;
•fluctuations in our operating results caused by incurring considerable expenses to acquire and integrate businesses before receiving the anticipated revenues expected to result from the acquisitions; and
•difficulties in obtaining regulatory approvals required to consummate acquisitions, or costs associated with obtaining such approvals in the form of additional expenses or ongoing conditions on the operation of the business.
We also participate in competitive bidding processes, some of which may involve significant cable systems. We also may sell all or portions of the businesses we own, including cable systems or business units. If we engage in acquisitions, dispositions or other strategic transactions in the future, we may incur additional debt, contingent liabilities and amortization expenses, which could materially adversely affect our business, financial condition and results of operations. We could also issue substantial additional equity which could dilute existing stockholders.
If our acquisitions do not result in the anticipated operating efficiencies, are not effectively integrated, or result in costs which exceed our expectations, or if our dispositions fail to generate adequate consideration, result in contingent liabilities, adversely affect our ability to generate revenue or are disruptive to our other businesses, our business, financial condition and results of operations could be materially adversely affected.
Significant unanticipated increases in the use of bandwidth-intensive Internet-based services could increase our costs.
The rising popularity of bandwidth-intensive Internet-based services poses risks for our broadband and wireless services. Examples of such services include peer-to-peer file sharing services, gaming services and the delivery of video via streaming technology and by download. If heavy usage of bandwidth-intensive broadband and wireless services grows beyond our current expectations or capacity, we may need to incur more expenses than currently anticipated to expand the bandwidth capacity of our systems or our customers could have a suboptimal experience when using our broadband or wireless services, which could adversely affect our business, reputation, financial condition and results of operations. In order to provide quality services at attractive prices, we need the continued flexibility to develop and refine business models that respond to changing consumer uses and demands and to manage bandwidth usage efficiently. Our ability to undertake such actions could be restricted by regulatory and legislative efforts to impose so-called "net neutrality" requirements on broadband communication providers like us that provide broadband services. For more information, see "Regulation—Broadband."
Our business depends on intellectual property rights and on not infringing on the intellectual property rights of others.
We rely on our patents, copyrights, trademarks and trade secrets, as well as licenses and other agreements with our vendors and other parties, to use our technologies, conduct our operations and sell our products and services. Our
intellectual property rights may be challenged and invalidated by third parties and may not be strong enough to provide meaningful commercial competitive advantage. Third parties have in the past, and may in the future, assert claims or initiate litigation related to exclusive patent, copyright, trademark and other intellectual property rights to technologies and related standards that are relevant to us. These assertions have increased over time as a result of our growth and the general increase in the pace of patent claims assertions, particularly in the United States. Because of the existence of a large number of patents in the networking field, the secrecy of some pending patents and the rapid rate of issuance of new patents, we believe it is not possible to determine in advance whether a product or any of its components infringes or will infringe on the patent rights of others. Asserted claims and/or initiated litigation can include claims against us or our manufacturers, suppliers or customers, alleging infringement of their proprietary rights with respect to our existing or future products and/or services or components of those products and/or services.
Regardless of the merit of these claims, they can be time-consuming, result in costly litigation and diversion of technical and management personnel, or require us to modify our business, develop a non-infringing technology, be enjoined from use of certain intellectual property, use alternate technology or enter into license and royalty agreements. There can be no assurance that licenses will be available on acceptable terms and conditions, if at all, or that our indemnification by our suppliers will be adequate to cover our costs if a claim were brought directly against us or our customers. Furthermore, because of the potential for high court awards that are not necessarily predictable, it is not unusual to find even arguably unmeritorious claims settled for significant amounts. If any infringement or other intellectual property claim made against us by any third-party is successful, if we are required to indemnify a customer with respect to a claim against the customer, or if we fail to modify our business, develop non-infringing technology, use alternate technology or license the proprietary rights on commercially reasonable terms and conditions, our business, financial condition and results of operations could be materially adversely affected.
We may be liable for the material that content providers distribute over our networks.
The law in most cases limits the liability of private network operators for information carried on, stored on or disseminated through their networks. However, these limitations on liability are subject to certain exceptions and the contours of those exceptions are not fully settled. Among other things, the limitation of copyright liability for network operators with respect to materials transmitted over their networks is conditioned upon the network operators’ terminating the accounts of repeat infringers in certain circumstances, and the law is unsettled as to the circumstances in which such termination is required to maintain the operator’s limitation of liability. As such, we could be exposed to legal claims relating to content disseminated on our networks and/or asserting that we are not eligible for statutory limitations on liability for network operators with respect to such content. Claims could involve matters such as defamation, invasion of privacy or copyright infringement. If we need to take costly measures to reduce our exposure to these risks or are required to defend ourselves against such claims, our business, reputation, financial condition and results of operations could be materially adversely affected.
If we are unable to retain key employees, our ability to manage our business could be adversely affected.
Our operational results have depended, and our future results will depend, upon the retention and continued performance of our management team. The competitive environment for management talent in the broadband communications industry could adversely impact our ability to retain and hire new key employees for management positions. The loss of the services of key members of management and the inability or delay in hiring new key employees could adversely affect our ability to manage our business and our future operational and financial results.
Impairment of Altice Europe's or Mr. Drahi's reputation could adversely affect current and future customers' perception of Altice USA.
Our ability to attract and retain customers depends, in part, upon the external perceptions of Altice USA, which in turn may be affected by Altice Europe's and Mr. Drahi's reputation and the quality of Altice Europe's products and its corporate and management integrity. The broadband communications and video services industry is by its nature more prone to reputational risks than other industries. This has been compounded in recent years by the free flow of unverified information on the Internet and on social media. Impairment of, including any loss of goodwill or reputational advantages, Altice Europe's or Mr. Drahi's reputation in markets in which we do not operate could adversely affect current and future customers', regulators', investors' and others' perception of Altice USA.
Macroeconomic developments may adversely affect our business.
Our performance is subject to global economic conditions and the related impact on consumer spending levels. Continued uncertainty about global economic conditions poses a risk as consumers and businesses may postpone spending in response to tighter credit, unemployment, negative financial news, and/or declines in income or asset
values, which could have a material negative effect on demand for our products and services. As our business depends on consumer discretionary spending, our results of operations are sensitive to changes in macroeconomic conditions. Our customers may have less money for discretionary purchases as a result of job losses, foreclosures, bankruptcies, increased fuel and energy costs, higher interest rates, higher taxes, reduced access to credit, and lower home values. These and other economic factors could adversely affect demand for our products, which in turn could adversely affect our financial condition and results of operations.
Online piracy of entertainment and media content could result in reduced revenues and increased expenditures which could materially harm our business, financial condition and results of operations.
Online entertainment and media content piracy is extensive in many parts of the world and is made easier by technological advances. This trend facilitates the creation, transmission and sharing of high quality unauthorized copies of entertainment and media content. The proliferation of unauthorized copies of this content will likely continue, and if it does, could have an adverse effect on our business, financial condition and results of operations because these products could reduce the demand for and revenue we receive from our products. Additionally, in order to contain this problem, we may have to implement elaborate and costly security and antipiracy measures, which could result in significant expenses and losses of revenue. There can be no assurance that even the highest levels of security and anti-piracy measures will prevent piracy.
Our mobile wireless service will be subject to startup risk, competition, and risks associated with the price and availability of wholesale access to RAN.
In 2019, we launched a mobile wireless voice and data service. We are offering this service using wholesale RAN agreements we have entered into with Sprint and other RAN providers, as well as with our existing WiFi hotspot infrastructure in subscriber homes and at outdoor WiFi hotspots. We believe that our approach to the mobile wireless service offering, including the construction and operation of our own “mobile core” and the ability to bundle and promote the product to our existing customer base, will give us advantages over resellers and incumbent network-based operators alike. We nevertheless face competition from well-established incumbents like Verizon, T-Mobile, Sprint and AT&T. These incumbents have scale advantages over Altice USA and own their spectrum and RAN, affording them significant control over the quality and reach of their own wireless networks, the service quality, speed of improvement and investment, cost, and the handling of subscriber congestion, which our service cannot replicate because it relies in part on incumbent networks that we do not fully control.
Our mobile wireless strategy depends on the availability of wholesale RAN access from one or more network-based providers with whom we are likely to compete. Our mobile service is vulnerable to constraints on the availability of wholesale access or increases in price from the incumbents. We are also dependent on our ability to extend our agreement with Sprint or another wholesale RAN access provider after the initial term of our agreement with Sprint expires.
Consolidation among wholesale RAN access providers could impair our ability to sustain our mobile service. In 2018, Sprint and T-Mobile announced an intent to merge. The merger was approved by the U.S. Justice Department in July 2019, the FCC in November 2019 (which conditioned its approval on fulfillment of certain commitments, including certain conditions intended to benefit the Company) and a federal court in the Southern District of New York in February 2020. According to a joint press release issued by Sprint and T-Mobile on February 11, 2020, although the business combination remains subject to certain closing conditions, including possible additional court proceedings, the companies are taking final steps to complete the merger. While the reduction of competition among mobile wireless network-based providers likely will negatively impact the price and availability of wholesale RAN access to the Company generally, certain of the conditions imposed upon the merger parties by the U.S. Justice Department and the FCC have the potential to ameliorate those effects and to enhance the coverage, quality and cost structure for our mobile services while those conditions are in effect. We rely on the merger parties and the U.S. Justice Department's and FCC’s oversight of those conditions for enforcement. If we fail to obtain timely or fully the benefit of the conditions, or if enforcement is inadequate, the price, reach, quality and competitiveness of our mobile offering likely will be adversely affected.
Risk Factors Relating to Regulatory and Legislative Matters
Our business is subject to extensive governmental legislation and regulation, which could adversely affect our business, increase our operational and administrative expenses and limit our revenues.
Regulation of the cable, telephone, mobile, and broadband industries imposes operational and administrative expenses and limits their revenues. The Company operates in all of these industries and is therefore subject to, among other things:
•rules governing the provisioning and marketing of cable equipment and compatibility with new digital technologies;
•rules governing the manner in which we advertise, market or price our products and services in the marketplace, and how we position those products and services against competing products and services;
•rules and regulations relating to data protection and customer and employee privacy;
•rules establishing limited rate regulation of video service;
•rules governing the copyright royalties that must be paid for retransmitting broadcast signals;
•rules governing when a cable system must carry a particular broadcast station and when it must first obtain retransmission consent to carry a broadcast station;
•rules governing the provision of channel capacity to unaffiliated commercial leased access programmers;
•rules limiting the ability to enter into exclusive agreements with MDUs and control inside wiring;
•rules for cable franchise renewals and transfers;
•other requirements covering a variety of operational areas such as equal employment opportunity, emergency alert systems, disability access, technical standards and customer service and consumer protection requirements;
•rules, regulations and regulatory policies relating to the provision of broadband service, including "net neutrality" requirements;
•rules, regulations and regulatory policies relating to the provision of telephony services; and
•rules, regulations and regulatory policies relating to licensed mobile network operators, wholesale access to mobile networks by resellers or MVNOs, and regulation of the prices, terms, or service provided by mobile operators.
Many aspects of these regulations are currently the subject of judicial proceedings and administrative or legislative proposals. There are also efforts to amend or expand the federal, state and local regulation of some of our cable systems, which may compound the regulatory risks we already face, and proposals that might make it easier for our employees to unionize. The Permanent Internet Tax Freedom Act prohibits many taxes on Internet access service, but certain states and localities are considering new taxes and fees on our provision of cable, broadband, and telecommunications taxes that could increase operating expenses. Certain states are also considering adopting energy efficiency regulations governing the operation of equipment that we use, which could constrain innovation. Congress periodically considers whether to rewrite the entire Communications Act to account for changes in the communications marketplace or to adopt more focused changes. Congress has in the past considered, and continues to consider, additional regulations on cable providers and ISPs to address specific consumer or customer issues. In response to recent data breaches and increasing concerns regarding the protection of consumers' personal information, Congress, states, and regulatory agencies are considering the adoption of new privacy and data security laws and regulations that could result in additional privacy, as well as network and information security, requirements for our business. These new laws, as well as existing legal and regulatory obligations, could require significant expenditures.
Additionally, there have been statements by federal government officials indicating that some laws and regulations applicable to our industry may be repealed or modified in a way that could be favorable to us and our competitors. There can be no assurance that any such repeal or modification will be beneficial to us or will not be more beneficial to our current and future competitors.
Our cable system franchises are subject to non-renewal or termination. The failure to renew a franchise in one or more key markets could adversely affect our business.
Our cable systems generally operate pursuant to franchises, permits and similar authorizations issued by a state or local governmental authority controlling the public rights-of-way. Some franchises establish comprehensive facilities and service requirements, as well as specific customer service standards and monetary penalties for non-compliance. In many cases, franchises are terminable if the franchisee fails to comply with significant provisions set forth in the franchise agreement governing system operations. Franchises are generally granted for fixed terms and must be periodically renewed. Franchising authorities may resist granting a renewal if either past performance or the prospective operating proposal is considered inadequate. Franchise authorities often demand concessions or other commitments as a condition to renewal. In some instances, local franchises have not been renewed at expiration, and we have operated and are operating under either temporary operating agreements or without a franchise while negotiating renewal terms with the local franchising authorities.
As of December 31, 2020, two of our largest franchises, the Town of Hempstead, New York, comprising an aggregate of approximately 76,000 video customers, and the New York City franchise, comprising of approximately 431,000 video customers were expired. We are currently lawfully operating in both these franchise areas under temporary authority recognized by the State of New York. Lightpath holds a franchise from New York City that expired on December 20, 2008 and the renewal process is pending. We believe New York City is treating the expiration date of this franchise as extended until a formal determination on renewal is made, but there can be no assurance that we will be successful in renewing this franchise on anticipated terms or at all. We expect to renew or continue to operate under all or substantially all of our franchises.
The traditional cable franchising regime has undergone significant change as a result of various federal and state actions. Some state franchising laws do not allow incumbent operators like us to immediately opt into favorable statewide franchising as quickly as new entrants, and often require us to retain certain franchise obligations that are more burdensome than those applied to new entrants.
There can be no assurance that we will be able to comply with all significant provisions of our franchise agreements and certain of our franchisors have from time to time alleged that we have not complied with these agreements. Additionally, although historically we have renewed our franchises without incurring significant costs, there can be no assurance that we will be able to renew, or to renew on terms as favorable, our franchises in the future. A termination of or a sustained failure to renew a franchise in one or more key markets could adversely affect our business in the affected geographic area.
Our cable system franchises are non-exclusive. Accordingly, local and state franchising authorities can grant additional franchises and create competition in market areas where none existed previously, resulting in overbuilds, which could adversely affect our results of operations.
Cable systems are operated under non-exclusive franchises historically granted by local authorities. More than one cable system may legally be built in the same area, which is referred to as an overbuild. It is possible that a franchising authority might grant a second franchise to another cable operator and that such franchise might contain terms and conditions more favorable than those afforded to us. Although entry into the cable industry involves significant cost barriers and risks, well-financed businesses from outside the cable industry, such as online service providers, or public utilities that already possess fiber optic and other transmission lines in the areas they serve, may over time become competitors. In addition, there are a few cities that have constructed their own cable systems, in a manner similar to city-provided utility services, and private cable companies not affiliated with established local exchange carriers have also demonstrated an interest in constructing overbuilds. We believe that for any potential competitor to be successful, such competitor's overbuild would need to be able to serve the homes and businesses in the overbuilt area with equal or better service quality, on a more cost-effective basis than we can.
In some cases, local government entities and municipal utilities may legally compete with us without securing a local franchise or on more favorable franchise terms. In recent years, federal legislative and regulatory proposals have sought to facilitate the ability of municipalities to construct and deploy broadband facilities that could compete with our cable systems. In addition, certain telephone companies have sought or are seeking authority to operate in communities without first obtaining a local franchise. As a result, competing operators may build systems in areas in which we hold franchises. The FCC has adopted rules that streamline entry for new competitors (including those affiliated with telephone companies) and reduce franchising burdens for these new entrants. The FCC subsequently extended more modest relief to incumbent cable operators like the Company, but a recent federal court decision curtailed a portion of this relief that relates to the cap on in-kind payments to franchising authorities. At the same
time, a substantial number of states have adopted franchising laws designed to streamline entry for new competitors, and they often provide advantages for these new entrants that are not immediately available to existing operators.
We believe the markets we serve are not significantly overbuilt. However, the FCC and some state regulatory commissions direct certain subsidies to entities deploying broadband to areas deemed to be "unserved" or "underserved." Many other organizations have applied for and received these funds, including broadband services competitors and new entrants into such services. We have generally opposed such subsidies when directed to areas that we serve and have deployed broadband capable networks. Despite those efforts, we could be placed at a competitive disadvantage if recipients use these funds to subsidize services that compete with our broadband services.
Local franchising authorities have the ability to impose additional regulatory constraints on our business, which could reduce our revenues or increase our expenses.
In addition to the franchise agreement, local franchising authorities in some jurisdictions have adopted cable regulatory ordinances that further regulate the operation of cable systems. This additional regulation increases the cost of operating our business. For example, some local franchising authorities impose minimum customer service standards on our operations. There are no assurances that the local franchising authorities will not impose new and more restrictive requirements.
Further regulation of the cable industry could restrict our marketing options or impair our ability to raise rates to cover our increasing costs.
The cable industry has operated under a federal rate regulation regime for more than three decades. Currently, rate regulation by franchising authorities is strictly limited to the basic service tier and associated equipment and installation activities. A franchising authority that wishes to regulate basic cable service offered by a particular cable system must certify and demonstrate that the cable system is not subject to "effective competition" as defined by federal law. Our franchise authorities have not certified to exercise this limited rate regulation authority. If any of our local franchising authorities obtain certification to regulate rates, they would have the power to reduce rates and order refunds on the rates charged for basic service and equipment, which could reduce our revenues. The FCC and Congress also continue to be concerned that cable rate increases are exceeding inflation. It is possible that either the FCC or Congress will adopt more extensive rate regulation for our video services or regulate our other services, such as broadband and telephony services, which could impede our ability to raise rates, or require rate reductions. To the extent we are unable to raise our rates in response to increasing costs, or are required to reduce our rates, our business, financial condition, results of operations and liquidity will be materially adversely affected. There has been legislative and regulatory interest in requiring cable operators to offer historically bundled programming services on an à la carte basis. It is possible that new marketing restrictions could be adopted in the future. These restrictions could affect how we provide, and limit, customer equipment used in connection with our services and how we provide access to video programming beyond conventional cable delivery. A number of state and local regulatory authorities have imposed or seek to impose price- or price-related regulation that we believe is inconsistent with FCC direction, and these efforts, if successful, will diminish the benefits of deregulation and hamper our ability to compete with our largely unregulated competitors. We have brought a challenge in federal court against one such attempt to regulate our pricing by the New Jersey Board of Public Utilities, and in January 2020 we won a preliminary injunction in federal court in the District of New Jersey enjoining that agency from enforcing its regulation.
There also continues to be interest at the FCC and in Congress in proposals that would allow customers to receive cable service without having to rent a set-top box from their cable operator. These proposals could, if adopted, adversely affect our relationship with our customers and programmers and our operations. It is also possible that regulations will be adopted affecting the negotiations between MVPDs (like us) and programmers. While these regulations might provide us with additional rights and protections in our programming negotiations, they might also limit our flexibility in ways that adversely affect our operations.
We may be materially adversely affected by regulatory changes related to pole attachments.
Pole attachments are cable wires that are attached to utility poles. Cable system pole attachments to utility poles historically have been regulated at the federal or state level, generally resulting in favorable pole attachment rates and rights for attachments used to provide cable service. Any changes in the current pole attachment approach could result in a substantial increase in our pole attachment costs.
Changes in channel carriage regulations could impose significant additional costs on us.
Cable operators also face significant regulation affecting the carriage of broadcast and other programming channels. We can be required to devote substantial capacity to the carriage of programming that we might not otherwise carry
voluntarily, including certain local broadcast signals; local public, educational and governmental access programming; and unaffiliated, commercial leased access programming (channel capacity designated for use by programmers unaffiliated with the cable operator). Regulatory changes in this area could disrupt existing programming commitments, interfere with our preferred use of limited channel capacity and limit our ability to offer services that would maximize our revenue potential. It is possible that other legal restraints will be adopted limiting our discretion over programming decisions.
Increasing regulation of our Internet-based products and services could adversely affect our ability to provide new products and services.
On February 26, 2015, the FCC adopted a new "net neutrality" or Open Internet order (the "2015 Order") that: (1) reclassified broadband Internet access service from an information service to a Title II common carrier service, (2) applied certain existing Title II provisions and associated regulations; (3) forbore from applying a range of other existing Title II provisions and associated regulations, but to varying degrees indicated that this forbearance may be only temporary and (4) issued new rules expanding disclosure requirements and prohibiting blocking, throttling, paid prioritization and unreasonable interference with the ability of end users and edge providers to reach each other. The 2015 Order also subjected broadband providers' Internet traffic exchange rates and practices to potential FCC oversight and created a mechanism for third parties to file complaints regarding these matters. The 2015 Order could have had a material adverse impact on our business by limiting our ability to efficiently manage our cable systems and respond to operational and competitive challenges. In December 2017, the FCC adopted an order (the "2017 Order") that in large part reverses the 2015 Order and reestablishes the “information service” classification for broadband services. The 2017 Order was affirmed in part on appeal in October 2019 insofar as it classified broadband Internet access services as information services subject to lesser federal regulation. However, the 2017 Order was also vacated in part on appeal insofar as it preempted states from subjecting broadband Internet access services to any requirements more stringent than the federal requirements. As a result, the precise extent to which state rules may impose such requirements on broadband Internet access service providers is not fully settled. Additionally, Congress and some states are considering legislation that may codify "net neutrality" rules, which could include prohibitions on blocking, throttling and prioritizing Internet traffic. A number of states, including California, have adopted legislation and/or executive orders that apply “net neutrality” rules to ISPs. The California legislation is currently being challenged in court. Additionally, the FCC is expected to revisit the appropriate regulatory classification of broadband in 2021.
Offering telephone services may subject us to additional regulatory burdens, causing us to incur additional costs.
We offer telephone services over our broadband network and continue to develop and deploy interconnected VoIP services. The FCC has ruled that competitive telephone companies that support VoIP services, such as those that we offer to our customers, are entitled to interconnect with incumbent providers of traditional telecommunications services, which ensures that our VoIP services can operate in the market. However, the scope of these interconnection rights is being reviewed in a current FCC proceeding, which may affect our ability to compete in the provision of telephony services or result in additional costs. It remains unclear precisely to what extent federal and state regulators will subject VoIP services to traditional telephone service regulation. Expanding our offering of these services may require us to obtain certain authorizations, including federal and state licenses. We may not be able to obtain such authorizations in a timely manner, or conditions could be imposed upon such licenses or authorizations that may not be favorable to us. The FCC has already extended certain traditional telecommunications requirements, such as E911 capabilities, USF contribution, CALEA, measures to protect Customer Proprietary Network Information, customer privacy, disability access, number porting, battery back-up, network outage reporting, rural call completion reporting and other regulatory requirements to many VoIP providers such as us. If additional telecommunications regulations are applied to our VoIP service, it could cause us to incur additional costs and may otherwise materially adversely impact our operations. In 2011, the FCC released an order significantly changing the rules governing intercarrier compensation for the origination and termination of telephone traffic between interconnected carriers. These rules have resulted in a substantial decrease in interstate compensation payments over a multi-year period. The FCC is currently considering additional reforms that could further reduce interstate compensation payments. Further, although the FCC recently declined to impose additional regulatory burdens on certain point to point transport ("special access") services provided by cable companies, that FCC decision has been appealed by multiple parties. If those appeals are successfully, there could be additional regulatory burdens and additional costs placed on these services.
Our mobile service exposes us to regulatory risk.
In September 2019, we launched Altice Mobile, our mobile service using our own core infrastructure and our iMVNO agreements with Sprint (now T-Mobile USA, Inc.) and other roaming partners, including AT&T. Our iMVNO service is subject to many of the same FCC regulations as traditional mobile service as well as some state and local regulations. The FCC or other regulatory authorities may adopt new or different regulations for iMVNOs or mobile carriers, or impose new fees, that could adversely affect our service or the business opportunity generally.
We may be materially adversely affected by regulatory, legal and economic changes relating to our physical plant.
Our systems depend on physical facilities, including transmission equipment and miles of fiber and coaxial cable. Significant portions of those physical facilities occupy public rights-of-way and are subject to local ordinances and governmental regulations. Other portions occupy private property under express or implied easements, and many miles of the cable are attached to utility poles governed by pole attachment agreements. No assurances can be given that we will be able to maintain and use our facilities in their current locations and at their current costs. Changes in governmental regulations or changes in these relationships could have a material adverse effect on our business and our results of operations.
Risk Factors Relating to Ownership of Our Class A Common Stock and Class B Common Stock
An active, liquid trading market for our Class B common stock has not developed and we cannot assure you that an active, liquid trading market will develop in the future. Holders of shares of our Class B common stock may need to convert them into shares of our Class A common stock to realize their full potential value, which over time could further concentrate voting power with remaining holders of our Class B common stock.
Our Class B common stock is not listed on the New York Stock Exchange ("NYSE") or any other stock exchange and we do not currently intend to list our Class B common stock on the NYSE or any other stock exchange. There is currently no active, liquid trading market for the Class B common stock and we cannot assure you that an active trading market will develop or be sustained at any time in the future. If an active market is not developed or sustained, the price and liquidity of the Class B common stock may be adversely affected. Because the Class B common stock is unlisted, holders of shares of Class B common stock may need to convert them into shares of our Class A common stock, which is listed on the NYSE, in order to realize their full potential value. Sellers of a significant number of shares of Class B common stock may be more likely to convert them into shares of Class A common stock and sell them on the NYSE. This could over time reduce the number of shares of Class B common stock outstanding and potentially further concentrate voting power with remaining holders of Class B common stock.
Our stockholders' percentage ownership in us may be diluted by future issuances of capital stock, which could reduce their influence over matters on which stockholders vote.
Pursuant to our amended and restated certificate of incorporation, our Board of Directors has the authority, without action or vote of our stockholders, to issue all or any part of our authorized but unissued shares of Class A common stock, including shares issuable upon the exercise of options, Class B common stock, Class C common stock or shares of our authorized but unissued preferred stock. We may issue such capital stock to meet a number of our business needs, including funding any potential acquisitions or other strategic transactions. Future issuances of Class A common stock, Class B common stock or voting preferred stock could reduce our stockholders' influence over matters on which our stockholders vote and, in the case of issuances of preferred stock, would likely result in their interest in us being subject to the prior rights of holders of that preferred stock.
Because we have no current plans to pay cash dividends on our Class A common stock or Class B common stock for the foreseeable future, our stockholders may not receive any return on investment unless they sell their Class A common stock or Class B common stock.
We intend to retain future earnings, if any, for future operations, expansion and debt repayment and have no current plans to pay any cash dividends for the foreseeable future. The declaration, amount and payment of any future dividends on shares of Class A common stock and shares of Class B common stock will be at the sole discretion of our Board of Directors. Our Board of Directors may take into account general and economic conditions, our financial condition and results of operations, our available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax and regulatory restrictions and implications on the payment of dividends by us to our stockholders or by our subsidiaries to us and such other factors as our Board of Directors may deem relevant. In addition, our ability to pay dividends is limited by covenants contained in the agreements governing our existing indebtedness and may be limited by covenants contained in any future indebtedness we or our subsidiaries incur. As a result, our stockholders may not receive any return on an investment in our Class A common stock or Class B common stock unless our stockholders sell our Class A common stock or Class B common stock.
Future sales, or the perception of future sales, by us or our existing stockholders in the public market could cause the market price of our Class A common stock to decline.
The sale of substantial amounts of shares of our Class A common stock (including shares of Class A common stock issuable upon conversion of shares of our Class B common stock), or the perception that such sales could occur, could cause the prevailing market price of shares of our Class A common stock to decline. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.
As of December 31, 2020, we had a total of 290.6 million shares of Class A common stock outstanding and 185.9 million shares of Class B common stock outstanding.
Any shares held by our affiliates, as that term is defined under Rule 144 ("Rule 144") of the Securities Act of 1933, as amended (the "Securities Act"), including Next Alt and its affiliates, may be sold only in compliance with certain limitations.
Pursuant to a stockholders and registration rights agreement between the Company and Next Alt, Altice Europe, BC Partners LLP ("BCP") and entities affiliated with the Canada Pension Plan Investment Board ("CPPIB" and together with BCP, the "Sponsors"), the other parties thereto have the right, subject to certain conditions, to require us to register the sale of their shares of our Class A common stock, or shares of Class A common stock issuable upon conversion of shares of our Class B common stock, under the Securities Act. By exercising their registration rights and selling a large number of shares, our existing owners could cause the prevailing market price of our Class A common stock to decline. Registration of any of these outstanding shares of capital stock would result in such shares becoming freely tradable without compliance with Rule 144 upon effectiveness of the registration statement, except for shares received by individuals who are our affiliates.
If these stockholders exercise their registration rights and sell shares of common stock, or if the market perceives that they intend to sell such shares, the market price of our Class A common stock could drop significantly. These factors could also make it more difficult for us to raise additional funds through future offerings of our Class A common stock or Class B common stock or other securities. In the future, we may also issue our securities in connection with investments or acquisitions. The number of shares of our Class A common stock, Class B common stock or Class C common stock issued in connection with an investment or acquisition could constitute a material portion of then-outstanding shares of our Class A common stock and Class B common stock. Any issuance of additional securities in connection with investments or acquisitions may result in additional dilution to our stockholders.
In addition, if Next Alt’s lenders foreclose on the shares of Class A and Class B common stock it has pledged in connection with certain transactions, such lenders may have the right to acquire and sell such shares, which could cause the market price of our Class A common stock to drop significantly.
The tri-class structure of Altice USA common stock has the effect of concentrating voting control with Next Alt. This will limit or preclude our stockholders' ability to influence corporate matters, including the election of directors, amendments of our organizational documents and any merger, consolidation, sale of all or substantially all of our assets or other major corporate transaction requiring stockholder approval. Shares of Class B common stock will not automatically convert to shares of Class A common stock upon transfer to a third-party.
Each share of Class B common stock is entitled to twenty-five votes per share and each share of Class A common stock is entitled to one vote per share. If we issue any shares of Class C common stock, they will be non-voting.
Because of the twenty-five-to-one voting ratio between our Class B common stock and Class A common stock, a majority of the combined voting power of our capital stock is controlled by Next Alt. This allows Next Alt to control all matters submitted to our stockholders for approval until such date as Next Alt ceases to own, or to have the right to vote, shares of our capital stock representing a majority of the outstanding votes. This concentrated control will limit or preclude our stockholders' ability to influence corporate matters for the foreseeable future, including the election of directors, amendments of our organizational documents and any merger, consolidation, sale of all or substantially all of our assets or other major corporate transaction requiring stockholder approval. The disparate voting rights of Altice USA common stock may also prevent or discourage unsolicited acquisition proposals or offers for our capital stock that our stockholders may feel are in their best interest as one of our stockholders.
Shares of our Class B common stock are convertible into shares of our Class A common stock at the option of the holder at any time. Our amended and restated certificate of incorporation does not provide for the automatic conversion of shares of Class B common stock upon transfer under any circumstances. The holders of Class B common stock thus will be free to transfer them without converting them into shares of Class A common stock.
Next Alt controls us and its interests may conflict with ours or our stockholders in the future.
As of February 6, 2020, Next Alt and other entities controlled by Patrick Drahi own or have the right to vote approximately 44% of our issued and outstanding Class A and Class B common stock, which represents approximately 92% of the voting power of our outstanding capital stock, in each case inclusive of voting agreements that Next Alt has entered into with certain current and former officers and directors of Altice USA and Altice Europe and its consolidated subsidiaries with respect to all shares of Altice USA common stock they own. So long as Next Alt continues to control a majority of the voting power of our capital stock, Next Alt and, through his control of Next Alt, Mr. Drahi, will be able to significantly influence the composition of our Board of Directors and thereby influence our policies and operations, including the appointment of management, future issuances of Altice USA common stock or other securities, the payment of dividends, if any, on Altice USA common stock, the incurrence or modification of debt by us, amendments to our amended and restated certificate of incorporation and amended and restated bylaws and the entering into extraordinary transactions, and their interests may not in all cases be aligned with our stockholders' interests. In addition, Next Alt may have an interest in pursuing acquisitions, divestitures and other transactions that, in its judgment, could enhance its investment or improve its financial condition, even though such transactions might involve risks to our stockholders. For example, Next Alt could cause us to make acquisitions that increase our indebtedness or cause us to sell revenue-generating assets.
In addition, Next Alt is able to determine the outcome of all matters requiring stockholder approval and is able to cause or prevent a change of control of the Company or a change in the composition of our Board of Directors and could preclude any unsolicited acquisition of the Company. The concentration of ownership could deprive our stockholders of an opportunity to receive a premium for their shares of our Class A common stock or Class B common stock as part of a sale of the Company and ultimately might affect the market price of our Class A common stock.
If conflicts arise between us and Next Alt, these conflicts could be resolved in a manner that is unfavorable to us and as a result, our business, financial condition and results of operations could be materially adversely affected. In addition, if Next Alt ceases to control us, our business, financial condition and results of operations could be adversely affected.
Anti-takeover provisions in our organizational documents could delay or prevent a change of control transaction.
Certain provisions of our amended and restated certificate of incorporation and amended and restated bylaws may have an anti-takeover effect and may delay, defer or prevent a merger, acquisition, tender offer, takeover attempt or other change of control transaction that a stockholder might consider in its best interest, including those attempts that might result in a premium over the market price for the shares held by our stockholders.
These provisions provide for, among other things:
•a tri-class common stock structure, as a result of which Next Alt generally will be able to control the outcome of all matters requiring stockholder approval, including the election of directors and significant corporate transactions, such as a merger or other sale of our company or its assets;
•the ability of our Board of Directors to, without further action by our stockholders, fix the rights, preferences, privileges and restrictions of up to an aggregate of 100,000,000 shares of preferred stock in one or more series and authorize their issuance; and
•the ability of stockholders holding a majority of the voting power of our capital stock to call a special meeting of stockholders.
These anti-takeover provisions could make it more difficult for a third-party to acquire us, even if the third-party's offer may be considered beneficial by many of our stockholders. As a result, our stockholders may be limited in their ability to obtain a premium for their shares of our Class A common stock. In addition, so long as Next Alt controls a majority of our combined voting power it will be able to prevent a change of control of the Company.
Holders of a single class of Altice USA common stock may not have any remedies if an action by our directors has an adverse effect on only that class of Altice USA common stock.
Under Delaware law, the board of directors has a duty to act with due care and in the best interests of all of our stockholders, including the holders of all classes of Altice USA common stock. Principles of Delaware law established in cases involving differing treatment of multiple classes of stock provide that a board of directors owes an equal duty to all common stockholders regardless of class and does not have separate or additional duties to any group of stockholders. As a result, in some circumstances, our Board of Directors may be required to make a decision
that could be viewed as adverse to the holders of one class of Altice USA common stock. Under the principles of Delaware law and the business judgment rule, holders may not be able to successfully challenge decisions that they believe have a disparate impact upon the holders of one class of our stock if our Board of Directors is disinterested and independent with respect to the action taken, is adequately informed with respect to the action taken and acts in good faith and in the honest belief that the board is acting in the best interest of all of our stockholders.
We are a "controlled company" within the meaning of the rules of the NYSE. As a result, we qualify for, and rely on, exemptions from certain corporate governance requirements that would otherwise provide protection to stockholders of other companies.
Next Alt controls a majority of the voting power of our capital stock. As a result, we are a "controlled company" within the meaning of the corporate governance standards of the NYSE. Under these rules, a company of which more than 50% of the voting power is held by an individual, group or another company is a "controlled company" and may elect not to comply with certain corporate governance requirements, including:
•the requirement that a majority of our Board of Directors consists of "independent directors" as defined under the rules of the NYSE; and
•the requirement that we have a governance and nominating committee.
Consistent with these exemptions, we will continue not to have a majority of independent directors on our Board of Directors or a nominating and governance committee. Accordingly, our stockholders will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the NYSE.
If securities or industry analysts do not publish research or reports about our business, if they adversely change their recommendations regarding our Class A common stock, or if our operating results do not meet their expectations, the market price of our Class A common stock could decline.
The trading market for our Class A common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. We do not have any control over these analysts. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. Moreover, if one or more of the analysts who cover our company downgrades our Class A common stock, or if our operating results do not meet their expectations, the market price of our Class A common stock could decline.
We are subject to securities class action litigation related to our 2017 initial public offering and we may be subject to additional securities class action litigation in the future.
We are subject to securities class action litigation related to our 2017 initial public offering (“IPO Litigation”) and we may be subject to additional securities class action litigation in the future.In the past, securities class action litigation has often been instituted against companies whose securities have experienced periods of volatility in market price. Securities litigation brought against us following volatility in the price of our Class A common stock, regardless of the merit or ultimate results of such litigation, could result in substantial costs, which would hurt our financial condition and results of operations and divert management's attention and resources from our business. While we believe the IPO Litigation is without merit, there can be no assurance that the outcome will not materially and adversely affect our financial condition and results of operations.
Our amended and restated bylaws provide that the Court of Chancery of the State of Delaware is the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders' ability to obtain a favorable judicial forum for disputes with us or our directors, officers or other stockholders.
Our amended and restated bylaws provide that the Court of Chancery of the State of Delaware (or, if the Court of Chancery does not have jurisdiction, another state or federal court located in the State of Delaware) is the exclusive forum for: (i) any derivative action or proceeding brought in our name or on our behalf; (ii) any action asserting a breach of fiduciary duty; (iii) any action asserting a claim against us arising under the General Corporation Law of the State of Delaware ("DGCL"); (iv) any action regarding our amended and restated certificate of incorporation or our amended and restated bylaws; or (v) any action asserting a claim against us that is governed by the internal affairs doctrine. Our amended and restated bylaws permit our Board of Directors to approve the selection of an alternative forum. Unless waived, this exclusive forum provision may limit a stockholder's ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other stockholders, which may discourage such lawsuits against us and our directors, officers and other stockholders. Alternatively, if a court were to
find this provision in our amended and restated bylaws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our business, financial condition and results of operations.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our headquarters are located in Long Island City, New York, where we currently lease office space pursuant to a lease agreement which will expire in 2032. We also own a building located in Bethpage, New York, where we maintain administrative offices. In addition, we own or lease real estate throughout our operating areas where certain of our call centers, corporate facilities, business offices, earth stations, transponders, microwave towers, warehouses, headend equipment, hub sites, access studios, and microwave receiving antennae are located.
Our principal physical assets consist of cable operating plant and equipment, including signal receiving, encoding and decoding devices, headend facilities, fiber optic transport networks, coaxial and distribution systems and equipment at or near customers' homes or places of business for each of the systems. The signal receiving apparatus typically includes a tower, antenna, ancillary electronic equipment and earth stations for reception of satellite signals. Headend facilities are located near the receiving devices. Our distribution system consists primarily of coaxial and fiber optic cables and related electronic equipment. Customer premise equipment consists of set-top devices, cable modems, Internet routers, wireless devices and media terminal adapters for telephone. Our cable plant and related equipment generally are attached to utility poles under pole rental agreements with local public utilities; although in some areas the distribution cable is buried in underground ducts or directly in trenches. The physical components of the cable systems require maintenance and periodic upgrading to improve system performance and capacity. In addition, we operate a network operations center that monitors our network 24 hours a day, seven days a week, helping to ensure a high quality of service and reliability for both our residential and commercial customers. We own most of our service vehicles.
We believe our properties, both owned and leased, are in good condition and are suitable and adequate for our operations.
Item 3. Legal Proceedings
Refer to Note 1517 to our consolidated financial statements included in this Annual Report on Form 10-K for a discussion of our legal proceedings. Item 4. Mine Safety Disclosures
Not applicable.
PART II
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Item 5. | Market for the Registrants' Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Altice USA Class A common stock is tradedlisted for trading on the New York Stock Exchange ("NYSE")NYSE under the symbol "ATUS".
Price Range of Altice USA, Inc. Class A Common Stock
The following tables set forth for the periods indicated the intra-day high and low sales prices per share of the"ATUS." Altice USA Class AB common stock as reportedis not listed for trading on the NYSE:
|
| | | | | | | |
| High | | Low |
Year Ended December 31, 2017: | | | |
Second Quarter (June 22 (date of IPO) through June 30) | $ | 35.29 |
| | $ | 31.52 |
|
Third Quarter | 34.86 |
| | 26.11 |
|
Fourth Quarter | 28.45 |
| | 17.80 |
|
any stock exchange.As of February 16, 2018,5, 2021, there were 7four holders of record of Altice USA Class A common stock and 2two holders of record of ATUS Class B common stock.
Stockholder Dividends and Distributions
The Company may pay dividends on its capital stock only from net profits and surplus as determined under Delaware law. If dividends are paid on the Altice USA common stock, holders of the Altice USA Class A common stock and Altice USA Class B common stock are entitled to receive dividends, and other distributions in cash, stock or property, equally on a per share basis, except that, subject to certain exceptions, stock dividends with respect to Altice USA Class A common stock may be paid only with shares of Altice USA Class A common stock and stock dividends with respect to Altice USA Class B common stock may be paid only with shares of Altice USA Class B common stock.
The Company's indentures restrict the amount of dividends and distributions in respect of any equity interest that can be made.
In the second quarter of 2017, prior to the Company's IPO, the Company declared and paid cash distributions aggregating $839,700 to stockholders. In 2016, the Company declared cash distributions of $445,176, of which $365,559 were paid in 2016 and $79,617 were paid in the first quarter of 2017.
Equity Compensation Plan Information
The Equity Compensation Plan information under which the Company's equity securities are authorized for issuance required under Item 5 is hereby incorporated by reference from the Company's definitive proxy statement for its Annual Meeting of Stockholders or, if such definitive proxy statement is not filed with the Securities and Exchange Commission prior to 120 days after the close of its fiscal year, an amendment to this Annual Report on Form 10-K filed under cover of Form 10-K/A.
Unregistered Sales of Equity Securities and Use of Proceeds
(c) Purchases of Equity Securities by the Issuer
Set forth below is information related to transactions under the Company's share repurchase program for the quarter ended December 31, 2020.
| | | | | | | | | | | | | | | | | | | | | | | |
| (a) Total Number of Shares (or Units) Purchased | | (b) Average Price Paid per Share (or Unit) | | (c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs (1)(2) | | (d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs (1) |
| | | | | | | |
October 1- October 31 | 6,201,273 | | | $ | 27.32 | | | 180,824,027 | | | $ | 2,813,640,302 | |
November 1- November 30 | 16,476,539 | | | 29.77 | | | 197,300,566 | | | 4,323,179,352 | |
December 1 - December 31 | 64,613,479 | | | 36.01 | | | 261,914,045 | | | 1,996,230,356 | |
|
| |
(a) | Sales of Unregistered Securities |
We had no unregistered sales of equity securities during the period covered by this report.
(1)On June 22, 2017, we completed our IPO,8, 2018, the Company's Board of Directors authorized the repurchase of up to $2.0 billion of Altice USA Class A common stock. On July 30, 2019, the Board of Directors authorized a new incremental three-year share repurchase program of $5.0 billion, to take effect following the completion of the June 2018 repurchase program. Under these repurchase programs, shares of Altice USA Class A common stock may be purchased from time to time in which we sold 12,068,966the open market and may include trading plans entered into with one or more brokerage firms in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934. The programs do not have an expiration date and may be suspended at any time at the discretion of the Board of Directors. In November 2020, the Company's Board of Directors authorized the repurchase of up to an additional $2.0 billion of Altice USA Class A common stock pursuant to the Tender Offer discussed below.
(2)This column reflects the cumulative number of shares acquired pursuant to the repurchase program at the end of the respective period.
On November 23, 2020, the Company commenced a modified "Dutch auction" tender offer (the "Tender Offer") to purchase up to $2.5 billion in value of shares of its Class A Common Stock, and selling stockholders sold 51,874,063at a price not greater than $36.00 per share nor less than $32.25 per share. The Tender Offer expired on December 21, 2020. On December 21, 2020, the Company accepted for purchase 64,613,479 shares ofits Class A Common Stock, at a price of $30.00$36.00 per share. Additionally, on June 22, 2017, the selling stockholders sold 7,781,110 shares of Class A Common Stock at ashare, plus related fees, for an aggregate purchase price of $30.00 per share pursuant$2.3 billion. The aggregate purchase price of these shares (including the fees relating to the exercise of an overallotment option granted to the underwritersTender Offer), is reflected in connection with the offering. The offer and sale of all of the shares of our Class A Common Stock were registered under the Securities Act, pursuant to a Registration Statement on Form S-1 (Registration No. 333-217240), which was declared effective by the SEC on June 21, 2017.
The managing underwriters of our IPO, which has now been completed, were J.P. Morgan, Morgan Stanley, Citigroup and Goldman Sachs & Co. The aggregate offering price for shares soldstockholders' equity (deficiency) in the offering was approximately $2,151.7 million (including shares sold pursuant to the exerciseconsolidated balance sheet as of the overallotment option). We did not receive any proceeds from the sale of shares by the selling stockholders. We received approximately $349.1 million in net proceeds from the offering, after deducting underwriter discounts and commissions of approximately $11.9 million and other offering expenses of approximately $1.1 million.December 31, 2020.
There has been no material change in the use of proceeds from our IPO as described in Altice USA's prospectus report on Form S-1/A, filed on June 12, 2016. On July 10, 2017, the Company used approximately $350.1 million of the proceeds to fund the redemption of $315.8 million principal amount of 2025 senior notes issued by CSC Holdings and the related call premium of approximately $34.3 million. Prior to the redemption of the notes and the payment of the premium and interest, we invested the net proceeds in money market funds.
Altice USA Stock Performance Graph
The chart below compares the performance of our Class A common stock with the performance of the S&P 500 Index and a Peer Group Index by measuring the changes in our Class A common stock prices from June 22, 2017 through December 31, 2017.2020. As required by the SEC, the values shown assume the reinvestment of all dividends. Because no published index of comparable media companies currently reports values on a dividends-reinvested basis, the Company has created a Peer Group Index for purposes of this graph in accordance with the requirements of the SEC. The Peer Group Index is made up of companies that deliver broadband, video and telephony services as a significant element of their business, although not all of the companies included in the Peer Group Index participate in all of the lines of business in which we are engaged and some of the companies included in the Peer Group Index also engage in lines of business in which we do not participate. Additionally, the market capitalizations of many of the companies included in the Peer Group are quite different from ours. The common stocks of the following companies have been included in the Peer Group Index: AT&T, CenturyLink, Charter, Comcast, Frontier, DISH, Network, Sprint (through April 2020), T-Mobile, US, Inc., Verizon, and Windstream Holdings, Inc. (through March 2019). The chart assumes $100 was invested on June 22, 2017 in each of the Company's Class A common stock, the S&P 500 Index and in a Peer Group Index and reflects reinvestment of dividends on a quarterly basis and market capitalization weighting.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 22, 2017 | | Dec 31, 2017 | | Dec. 31, 2018 | | Dec. 31, 2019 | | Dec. 31, 2020 |
ALTICE USA CLASS A | $ | 100.00 | | | $ | 64.90 | | | $ | 56.30 | | | $ | 93.17 | | | $ | 129.06 | |
S&P 500 INDEX | $ | 100.00 | | | $ | 109.82 | | | $ | 102.97 | | | $ | 132.71 | | | $ | 154.29 | |
PEER GROUP INDEX | $ | 100.00 | | | $ | 104.17 | | | $ | 94.78 | | | $ | 124.33 | | | $ | 135.44 | |
Item 6. Selected Historical Financial Data
|
| | | | | | | |
| June 22, | | June 30, | | September 30, | | December 31, |
| 2017 | | 2017 | | 2017 | | 2017 |
ALTICE USA CLASS A | $100.00 | | $98.75 | | $83.49 | | $64.90 |
S&P 500 INDEX | $100.00 | | $99.54 | | $103.49 | | $109.82 |
PEER GROUP INDEX | $100.00 | | $99.44 | | $89.84 | | $84.04 |
SELECTED HISTORICAL FINANCIAL DATAAltice USA
The summary consolidated historical balance sheets and operating data of Altice USA as of December 31, 20172020 and 20162019 and for the years ended December 31, 20172020, 2019, 2018 and 20162017 presented below have been derived from the audited consolidated financial statements of Altice USA included elsewhere herein. The operating data of Altice USA for the year ended December 31, 2016 include the operating results of Cequel for the year ended December 31, 2016 and the operating results of Cablevision for the period from the date of acquisition, June 21, 2016, through December 31, 2016.
The summary consolidated historical balance sheet and operating data of Cablevision has been presented for the periods priorbelow also give effect to the Cablevision Acquisition as Cablevision is deemed to beATS acquisition since its formation, the predecessor entity. The summary consolidated historical operating datai24 acquisition from April 1, 2018, the Cheddar acquisition from June 1, 2019 and the acquisition of Cablevision presented below have been derivedcertain cable assets in New Jersey from the audited consolidated financial statements of Cablevision.July 2020.
The selected historical results presented below are not necessarily indicative of the results to be expected for any future period. This information should be read in conjunction with the audited consolidated financial statements of Altice USA and the notes thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations of Altice USA.Operations.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Altice USA | | Cablevision (a) |
| Years ended December 31, | | January 1, 2016 to June 20, 2016 |
| 2020 | | 2019 | | 2018 | | 2017 | | 2016 | |
| | | | | | | | | | | (unaudited) |
| (in thousands) | | |
Revenue | $ | 9,894,642 | | | $ | 9,760,859 | | | $ | 9,566,608 | | | $ | 9,306,950 | | | $ | 6,017,212 | | | $ | 3,137,604 | |
Operating expenses | 7,779,353 | | | 7,937,048 | | | 7,884,229 | | | 8,465,942 | | | 5,554,403 | | | 2,658,667 | |
Operating income | 2,115,289 | | | 1,823,811 | | | 1,682,379 | | | 841,008 | | | 462,809 | | | 478,937 | |
Other income (expense): | | | | | | | | | | | |
Interest expense, net | (1,350,341) | | | (1,530,850) | | | (1,545,426) | | | (1,601,211) | | | (1,442,730) | | | (285,508) | |
Gain (loss) on investments and sale of affiliate interests, net | 320,061 | | | 473,406 | | | (250,877) | | | 237,354 | | | 142,102 | | | 129,990 | |
Gain (loss) on derivative contracts, net | (178,264) | | | (282,713) | | | 218,848 | | | (236,330) | | | (53,696) | | | (36,283) | |
Gain (loss) on interest rate swap contracts | (78,606) | | | (53,902) | | | (61,697) | | | 5,482 | | | (72,961) | | | — | |
Loss on extinguishment of debt and write-off of deferred financing costs | (250,489) | | | (243,806) | | | (48,804) | | | (600,240) | | | (127,649) | | | — | |
Other income (expense), net | 5,577 | | | 1,183 | | | (12,484) | | | (13,651) | | | 980 | | | 1,224 | |
Income (loss) before income taxes | 583,227 | | | 187,129 | | | (18,061) | | | (1,367,588) | | | (1,091,145) | | | 288,360 | |
Income tax benefit (expense) (b) | (139,748) | | | (47,190) | | | 38,655 | | | 2,862,352 | | | 259,666 | | | (124,848) | |
Net income (loss) | 443,479 | | | 139,939 | | | 20,594 | | | 1,494,764 | | | (831,479) | | | 163,512 | |
Net loss (income) attributable to noncontrolling interests | (7,296) | | | (1,003) | | | (1,761) | | | (1,587) | | | (551) | | | 236 | |
Net income (loss) attributable to Altice USA / Cablevision stockholders | $ | 436,183 | | | $ | 138,936 | | | $ | 18,833 | | | $ | 1,493,177 | | | $ | (832,030) | | | $ | 163,748 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
INCOME (LOSS) PER SHARE: | | | | | | | | | | | | |
Basic income (loss) per share | | $ | 0.75 | | | $ | 0.21 | | | $ | 0.03 | | | $ | 2.15 | | | $ | (1.28) | | | $ | 0.60 | |
Basic weighted average common shares (in thousands) | | 581,057 | | | 660,384 | | | 730,088 | | | 696,055 | | | 649,525 | | | 272,035 | |
| | | | | | | | | | | | |
Diluted income (loss) per share | | $ | 0.75 | | | $ | 0.21 | | | $ | 0.03 | | | $ | 2.15 | | | $ | (1.28) | | | $ | 0.58 | |
Diluted weighted average common shares (in thousands) | | 583,689 | | | 662,541 | | | 730,088 | | | 696,055 | | | 649,525 | | | 280,199 | |
Cash dividends declared per common share (c) | | $ | — | | | $ | — | | | $ | 2.035 | | | $ | 1.29 | | | $ | 0.69 | | | $ | — | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Altice USA | | Cablevision (a) |
| | | January 1, 2016 to June 20, 2016 | | |
| Years ended December 31, | | Years Ended December 31, |
| 2017 | | 2016 | | | 2015 | | 2014 | | 2013 |
| | | (dollars in thousands) |
Revenue | $ | 9,326,570 |
| | $ | 6,017,212 |
| | $ | 3,137,604 |
| | $ | 6,545,545 |
| | $ | 6,508,557 |
| | $ | 6,287,383 |
|
Operating expenses | 8,461,186 |
| | 5,557,546 |
| | 2,662,298 |
| | 5,697,074 |
| | 5,587,299 |
| | 5,588,159 |
|
Operating income | 865,384 |
| | 459,666 |
| | 475,306 |
| | 848,471 |
| | 921,258 |
| | 699,224 |
|
Other income (expense): | | | |
| | | | |
| | |
| | |
|
Interest expense, net | (1,601,211 | ) | | (1,442,730 | ) | | (285,508 | ) | | (584,839 | ) | | (575,580 | ) | | (600,637 | ) |
Gain (loss) on investments, net | 237,354 |
| | 141,896 |
| | 129,990 |
| | (30,208 | ) | | 129,659 |
| | 313,167 |
|
Gain (loss) on derivative contracts, net | (236,330 | ) | | (53,696 | ) | | (36,283 | ) | | 104,927 |
| | (45,055 | ) | | (198,688 | ) |
Gain (loss) on interest rate swap contracts, net | 5,482 |
| | (72,961 | ) | | — |
| | — |
| | — |
| | — |
|
Loss on extinguishment of debt and write-off of deferred financing costs | (600,240 | ) | | (127,649 | ) | | — |
| | (1,735 | ) | | (10,120 | ) | | (22,542 | ) |
Other income (expense), net | (1,788 | ) | | 4,329 |
| | 4,855 |
| | 6,045 |
| | 4,988 |
| | 2,436 |
|
Income (loss) from continuing operations before income taxes | (1,331,349 | ) | | (1,091,145 | ) | | 288,360 |
| | 342,661 |
| | 425,150 |
| | 192,960 |
|
Income tax benefit (expense) (b) | 2,852,967 |
| | 259,666 |
| | (124,848 | ) | | (154,872 | ) | | (115,768 | ) | | (65,635 | ) |
Income (loss) from continuing operations, net of income taxes | 1,521,618 |
| | (831,479 | ) | | 163,512 |
| | 187,789 |
| | 309,382 |
| | 127,325 |
|
Income (loss) from discontinued operations, net of income taxes (c) | — |
| | — |
| | — |
| | (12,541 | ) | | 2,822 |
| | 338,316 |
|
Net income (loss) | 1,521,618 |
| | (831,479 | ) | | 163,512 |
| | 175,248 |
| | 312,204 |
| | 465,641 |
|
Net loss (income) attributable to noncontrolling interests | (1,587 | ) | | (551 | ) | | 236 |
| | 201 |
| | (765 | ) | | 20 |
|
Net income (loss) attributable to Altice USA / Cablevision stockholders | $ | 1,520,031 |
| | $ | (832,030 | ) | | $ | 163,748 |
| | $ | 175,449 |
| | $ | 311,439 |
| | $ | 465,661 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
INCOME (LOSS) PER SHARE: | | | | | | | | | | | |
Basic income (loss) per share attributable to Altice USA / Cablevision stockholders: | | | | | | | | | | | |
Income (loss) from continuing operations, net of income taxes | $ | 2.18 |
| | $ | (1.28 | ) | | $ | 0.60 |
| | $ | 0.70 |
| | $ | 1.17 |
| | $ | 0.49 |
|
Income (loss) from discontinued operations, net of income taxes (c) | $ | — |
| | $ | — |
| | $ | — |
| | $ | (0.05 | ) | | $ | 0.01 |
| | $ | 1.30 |
|
Net income (loss) | $ | 2.18 |
| | $ | (1.28 | ) | | $ | 0.60 |
| | $ | 0.65 |
| | $ | 1.18 |
| | $ | 1.79 |
|
Basic weighted average common shares (in thousands) | 696,055 |
| | 649,525 |
| | 272,035 |
| | 269,388 |
| | 264,623 |
| | 260,763 |
|
Diluted income (loss) per share attributable to Altice USA / Cablevision stockholders: | | | | | | | | | | | |
Income (loss) from continuing operations, net of income taxes | $ | 2.18 |
| | $ | (1.28 | ) | | $ | 0.58 |
| | $ | 0.68 |
| | $ | 1.14 |
| | $ | 0.48 |
|
Income (loss) from discontinued operations, net of income taxes (c) | $ | — |
| | $ | — |
| | $ | — |
| | $ | (0.05 | ) | | $ | 0.01 |
| | $ | 1.27 |
|
Net income (loss) | $ | 2.18 |
| | $ | (1.28 | ) | | $ | 0.58 |
| | $ | 0.63 |
| | $ | 1.15 |
| | $ | 1.75 |
|
Diluted weighted average common shares (in thousands) | 696,055 |
| | 649,525 |
| | 280,199 |
| | 276,339 |
| | 270,703 |
| | 265,935 |
|
Cash dividends declared per common share (d) | $ | 1.29 |
| | $ | 0.69 |
| | $ | — |
| | $ | 0.45 |
| | $ | 0.60 |
| | $ | 0.60 |
|
Amounts attributable to Altice USA / Cablevision stockholders: | | | | | | | | | | | |
Income (loss) from continuing operations, net of income taxes | $ | 1,520,031 |
| | $ | (832,030 | ) | | $ | 163,748 |
| | $ | 187,990 |
| | $ | 308,617 |
| | $ | 127,345 |
|
Income (loss) from discontinued operations, net of income taxes (c) | — |
| | — |
| | — |
| | (12,541 | ) | | 2,822 |
| | 338,316 |
|
Net income (loss) | $ | 1,520,031 |
| | $ | (832,030 | ) | | $ | 163,748 |
| | $ | 175,449 |
| | $ | 311,439 |
| | $ | 465,661 |
|
| |
(a) | Represents the operating results of Cablevision for the period prior to the Cablevision Acquisition (Predecessor periods). |
| |
(b) | Pursuant to the enactment of the Tax Reform on December 22, 2017, the Company recorded a noncash deferred tax benefit of $2,337,900 to remeasure the net deferred tax liability to adjust for the reduction in the corporate income tax rate from 35% to 21% which is effective on January 1, 2018. |
(a)Represents the operating results of Cablevision for the period prior to the Cablevision Acquisition (Predecessor period).
47(b)Pursuant to the enactment of the Tax Reform on December 22, 2017, the Company recorded a non-cash deferred tax benefit of $2,332,677 in 2017 to remeasure the net deferred tax liability to adjust for the reduction in the corporate income tax rate from 35% to 21% which was effective on January 1, 2018. In 2018, the Company recorded a non-cash deferred tax benefit of $52,915 based on a remeasurement of the Company's net deferred tax liability.
(c)The 2017 and 2016 amounts represent distributions declared prior to the Company's IPO of $839,700 and $445,176, respectively, divided by the number of shares of common stock outstanding adjusted to reflect the retroactive impact of the organizational transactions that occurred prior to the IPO.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance Sheet Data: | | | | | | | | | |
| Altice USA |
| December 31, |
| 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
| (dollars in thousands) |
Total assets | $ | 33,376,660 | | | $ | 34,108,122 | | | $ | 33,613,808 | | | $ | 34,812,082 | | | $ | 36,498,578 | |
| | | | | | | | | |
Notes payable to affiliates and related parties | — | | | — | | | — | | | — | | | 1,750,000 | |
Credit facility debt | 8,288,000 | | | 7,148,287 | | | 5,915,559 | | | 4,643,523 | | | 3,444,790 | |
Collateralized indebtedness | 1,617,506 | | | 1,585,088 | | | 1,406,182 | | | 1,349,474 | | | 1,286,069 | |
Senior guaranteed notes, senior secured notes and senior notes and debentures | 16,482,398 | | | 15,476,496 | | | 15,359,561 | | | 15,860,432 | | | 17,507,325 | |
Notes payable and other obligations | 174,801 | | | 140,994 | | | 106,108 | | | 65,902 | | | 13,726 | |
Finance lease obligations | 159,637 | | | 69,420 | | | 25,190 | | | 21,980 | | | 28,155 | |
Total debt | 26,722,342 | | | 24,420,285 | | | 22,812,600 | | | 21,941,311 | | | 24,030,065 | |
Redeemable equity | 25,763 | | | 108,551 | | | 130,007 | | | 231,290 | | | 68,147 | |
Stockholders' equity (deficiency) | (1,141,030) | | | 2,269,964 | | | 3,670,941 | | | 5,503,214 | | | 2,042,221 | |
Noncontrolling interests | (62,109) | | | 9,298 | | | 9,295 | | | 1,539 | | | 287 | |
Total equity (deficiency) | (1,203,139) | | | 2,279,262 | | | 3,680,236 | | | 5,504,753 | | | 2,042,508 | |
| |
(c) | Loss from discontinued operations for 2015 primarily reflects an expense related to the decision in a case relating to Rainbow Media Holdings LLC, a business whose operations were previously discontinued. Income from discontinued operations for 2014 resulted primarily from the settlement of a contingency related to Montana property taxes related to Bresnan Cable. Income from discontinued operations for 2013 primarily relates to (i) the operating results and related gain on the sale of Bresnan Cable of $259,692, (ii) the operating results and related loss on the sale of Clearview Cinemas of $(25,012), and (iii) the proceeds and costs related to the settlement of litigation with DISH Network, LLC of $103,636. |
| |
(d) | Represent distributions declared prior to the Company's IPO of $839,700 and $445,176 in 2017 and 2016, respectively, divided by the number of shares of common stock outstanding adjusted to reflect the retroactive impact of the organizational transactions, discussed in Note 1, that occurred prior to the IPO. |
|
| | | | | | | | | | | | | | | | | | | |
Balance Sheet Data: | | | | | | | | | |
| Altice USA | | Cablevision Systems Corporation |
| December 31, |
| 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| | | (dollars in thousands) |
Total assets (a) | $ | 34,775,225 |
| | $ | 36,474,249 |
| | $ | 6,800,174 |
| | $ | 6,682,021 |
| | $ | 6,500,967 |
|
Notes payable to affiliates and related parties | — |
| | 1,750,000 |
| | — |
| | — |
| | — |
|
Credit facility debt (a) | 4,643,523 |
| | 3,444,790 |
| | 2,514,454 |
| | 2,769,153 |
| | 3,745,625 |
|
Collateralized indebtedness | 1,349,474 |
| | 1,286,069 |
| | 1,191,324 |
| | 986,183 |
| | 817,950 |
|
Senior guaranteed notes | 2,291,185 |
| | 2,289,494 |
| | — |
| | — |
| | — |
|
Senior notes and debentures (a) | 13,569,247 |
| | 15,217,831 |
| | 5,801,011 |
| | 5,784,213 |
| | 5,068,926 |
|
Notes payable | 65,902 |
| | 13,726 |
| | 14,544 |
| | 23,911 |
| | 5,334 |
|
Capital leases and other obligations | 21,980 |
| | 28,155 |
| | 45,966 |
| | 46,412 |
| | 31,290 |
|
Total debt (a) | 21,941,311 |
| | 24,030,065 |
| | 9,567,299 |
| | 9,609,872 |
| | 9,669,125 |
|
Redeemable equity | 231,290 |
| | 68,147 |
| | — |
| | 8,676 |
| | 9,294 |
|
Stockholders' equity (deficiency) | 5,494,301 |
| | 2,029,555 |
| | (4,911,316 | ) | | (5,041,469 | ) | | (5,284,330 | ) |
Noncontrolling interest | 1,539 |
| | 287 |
| | (268 | ) | | 779 |
| | 786 |
|
Total equity (deficiency) | 5,495,840 |
| | 2,029,842 |
| | (4,911,584 | ) | | (5,040,690 | ) | | (5,283,544 | ) |
| |
(a) | Amounts for years ended December 31, 2015, 2014 and 2013 have been restated to reflect the adoption of Accounting Standards Update (“ASU”) No. 2015-03, Simplifying the Presentation of Debt Issuance Costs.
|
The following table sets forth certain customer metrics by segmentfor the Company (unaudited):
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| December 31, | | |
| 2020 (f)(g) | | 2019 (f) | | 2018 | | | | | | | | | | |
| (in thousands, except per customer amounts) |
Homes passed (a) | 9,034.1 | | | 8,818.6 | | | 8,699.6 | | | | | | | | | | | |
Total customers relationships (b)(c) | 5,024.6 | | | 4,916.3 | | | 4,899.5 | | | | | | | | | | | |
Residential | 4,648.4 | | | 4,533.3 | | | 4,518.1 | | | | | | | | | | | |
SMB | 376.1 | | | 383.1 | | | 381.4 | | | | | | | | | | | |
Residential customers: | | | | | | | | | | | | | | | |
Broadband | 4,359.2 | | | 4,187.3 | | | 4,115.4 | | | | | | | | | | | |
Video | 2,961.0 | | | 3,179.2 | | | 3,286.1 | | | | | | | | | | | |
Telephony | 2,214.0 | | | 2,398.8 | | | 2,530.1 | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Penetration of homes passed (d) | 55.6 | % | | 55.7 | % | | 56.3 | % | | | | | | | | | | |
ARPU (e)(h) | $ | 140.09 | | | $ | 142.65 | | | $ | 143.22 | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Cablevision | | Cequel |
| December 31, | | December 31, |
| 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 |
| (in thousands, except per customer amounts) |
Homes passed (a) | 5,164 |
| | 5,116 |
| | 5,076 |
| | 3,457 |
| | 3,407 |
| | 3,352 |
|
Total customers relationships (b)(c) | 3,156 |
| | 3,141 |
| | 3,115 |
| | 1,750 |
| | 1,751 |
| | 1,712 |
|
Residential | 2,893 |
| | 2,879 |
| | 2,858 |
| | 1,642 |
| | 1,649 |
| | 1,618 |
|
SMB | 263 |
| | 262 |
| | 258 |
| | 109 |
| | 102 |
| | 94 |
|
Residential customers: | | | | | | | | | | | |
Pay TV | 2,363 |
| | 2,428 |
| | 2,487 |
| | 1,042 |
| | 1,107 |
| | 1,154 |
|
Broadband | 2,670 |
| | 2,619 |
| | 2,562 |
| | 1,376 |
| | 1,344 |
| | 1,276 |
|
Telephony | 1,965 |
| | 1,962 |
| | 2,007 |
| | 592 |
| | 597 |
| | 581 |
|
Residential triple product customers penetration (d) | 64.2 | % | | 64.8 | % | | 67.6 | % | | 25.7 | % | | 25.5 | % | | 25.4 | % |
Penetration of homes passed (e): | 61.1 | % | | 61.4 | % | | 61.4 | % | | 50.6 | % | | 51.4 | % | | 51.1 | % |
ARPU (f) | $ | 155.82 |
| | $ | 154.49 |
| | $ | 150.61 |
| | $ | 112.57 |
| | $ | 109.30 |
| | $ | 104.04 |
|
(a)Represents the estimated number of single residence homes, apartments and condominium units passed by the broadband network in areas serviceable without further extending the transmission lines. In addition, it includes commercial establishments that have connected to our broadband network. Broadband services were not available to approximately 30 thousand homes passed and telephony services were not available to approximately 500 thousand homes passed.
(b)Represents number of households/businesses that receive at least one of the Company's fixed-line services.
(c)Customers represent each customer account (set up and segregated by customer name and address), weighted equally and counted as one customer, regardless of size, revenue generated, or number of boxes, units, or outlets. Free accounts are included in the customer counts along with all active accounts, but they are limited to a prescribed group. Most of these accounts are also not entirely free, as they typically generate revenue through pay-per-view or other pay services and certain equipment fees. Free status is not granted to regular customers as a promotion. In counting bulk residential customers, such as an apartment building, we count each subscribing family unit within the building as one customer, but do not count the master account for the entire building as a customer. We count a bulk commercial customer, such as a hotel, as one customer, and do not count individual room units at that hotel.
(d)Represents the number of total customer relationships divided by homes passed.
(e)Calculated by dividing the average monthly revenue for the respective quarter (fourth quarter for annual periods) derived from the sale of broadband, video and telephony services to residential customers for the quarter by the average number of total residential customers for the same period.
(f)Customer metrics do not include Altice Mobile customers.
(g)Pursuant to the Keep Americans Connected pledge ("Pledge") that the Company made in response to the COVID-19 pandemic and pursuant to the New Jersey Executive Order No. 126 ("NJ Order") enacted in April 2020, the Company did not disconnect certain internet and voice services to customers for non-payment. Customer metrics include the retention of certain of these previously non-paying customers who had current account balances as of December 31, 2020 due to the Company forgiving their past due balances or placing them on a payment plan. Customer metrics as of December 31, 2020 also include approximately 10 thousand customer relationships impacted by storms in Louisiana that have not been disconnected for non-payment (see table below).
| | | | | | | | | | | | | | | | | | |
(a)Total customer relationships | Represents the estimated number of single residence homes, apartments and condominium units passed by the cable distribution network in areas serviceable without further extending the transmission lines. In addition, it includes commercial establishments that have connected to our cable distribution network. For Cequel, broadband services were not available to approximately 100 homes passed and telephony services were not available to approximately 500 homes passed. 10.3 |
| | | | | | | | | | | | | | |
(b)Residential | Represents number of households/businesses that receive at least one of the Company's services. 9.2 |
| | | | | | | | | | | | | | |
(c)SMB | Customers represent each customer account (set up and segregated by customer name and address), weighted equally and counted as one customer, regardless of size, revenue generated, or number of boxes, units, or outlets. In calculating the number of customers, we count all customers other than inactive/disconnected customers. Free accounts are included in the customer counts along with all active accounts, but they are limited to a prescribed group. Most of these accounts are also not entirely free, as they typically generate revenue through pay-per-view or other pay services. Free status is not granted to regular customers as a promotion. In counting bulk residential customers, such as an apartment building, we count each subscribing family unit within the building as one customer, but do not count the master account for the entire building as a customer. We count a bulk commercial customer, such as a hotel, as one customer, and do not count individual room units at that hotel.1.1 |
| | | | | | | | | | | | | | |
(d)Residential customers: | Represents the number of customers that subscribe to three of our services divided by total residential customer relationships. |
| | | | | | | | | | | | | |
(e)Broadband | Represents the number of total customer relationships divided by homes passed. 8.7 |
| | | | | | | | | | | | | | |
(f)Video | Calculated by dividing the average monthly revenue for the respective quarter (fourth quarter for annual periods) presented derived from the sale of broadband, pay television and telephony services to residential customers for the respective quarter by the average number of total residential customers for the same period. 4.8 | | | | | | | | | | | | | | | |
Telephony | 2.0 | | | | | | | | | | | | | | | |
(h) ARPU for the December 31, 2020 period reflects a reduction of $1.26 due to credits that we currently anticipate will be issued to video customers as a result of credits the Company expects to receive from certain sports programming networks whereby the minimum number of events were not delivered pursuant to the contractual agreements with the networks and related franchise fees.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
This Form 10-K contains statements that constitute forward-looking information within the meaning of the Private Securities Litigation Reform Act of 1995.1995, Section 27A of the Securities Act and Section 21E of the Securities Act of 1934, as amended. In this Form 10-K there are statements concerning our future operating results and future financial performance. Words such as "expects", "anticipates", "believes", "estimates", "may", "will", "should", "could", "potential", "continue", "intends", "plans" and similar words and terms used in the discussion of future operating results, future financial performance and future events identify forward-looking statements. Investors are cautioned that such forward-looking statements are not guarantees of future performance, results or events and involve risks and uncertainties and that actual results or developments may differ materially from the forward-looking statements as a result of various factors.
We operate in a highly competitive, consumer and technology driven and rapidly changing business that is affected by government regulation and economic, strategic, technological, political and social conditions. Various factors could adversely affect our operations, business or financial results in the future and cause our actual results to differ materially from those contained in the forward‑lookingforward-looking statements. In addition, important factors that could cause our actual results to differ materially from those in our forward‑lookingforward-looking statements include:
•competition for broadband, pay televisionvideo and telephony customers from existing competitors (such as broadband communications companies, DBSdirect broadcast satellite ("DBS") providers, wireless data and telephony providers, and Internet‑basedInternet-based providers) and new competitors entering our footprint;
•changes in consumer preferences, laws and regulations or technology that may cause us to change our operational strategies;
•increased difficulty negotiating programming agreements on favorable terms, if at all, resulting in increased costs to us and/or the loss of popular programming;
•increasing programming costs and delivery expenses related to our products and services;
•our ability to achieve anticipated customer and revenue growth, to successfully introduce new products and services and to implement our growth strategy;
•our ability to complete our capital investment plans on time and on budget, including our plan to build a FTTHfiber-to-the-home ("FTTH") network, and deploy Altice One, our new home communications hub;
•our ability to develop and deploy mobile voice and data services pursuantand our ability to the agreement we entered into with Sprint in the fourth quarter of 2017;attract customers to these services;
•the effects of economic conditions or other factors which may negatively affect our customers’ demand for our current and future products and services;
•the effects of industry conditions;
•demand for digital and linear advertising on our cable systems;products and services;
•our substantial indebtedness and debt service obligations;
•adverse changes in the credit market;
•changes as a result of any tax reforms that may affect our business;
•financial community and rating agency perceptions of our business, operations, financial condition and the industries in which we operate;
•the restrictions contained in our financing agreements;
•our ability to generate sufficient cash flow to meet our debt service obligations;
•fluctuations in interest rates which may cause our interest expense to vary from quarter to quarter;
•technical failures, equipment defects, physical or electronic break‑insbreak-ins to our services, computer viruses and similar problems;
•the disruption or failure of our network, information systems or technologies as a result of computer hacking, computer viruses, “cyber‑attacks,”"cyber-attacks," misappropriation of data, outages, natural disasters, and other material events;
•the impact from the coronavirus ("COVID-19") pandemic;
•our ability to obtain necessary hardware, software, communications equipment and services and other items from our vendors at reasonable costs;
•our ability to effectively integrate acquisitions and to maximize expected operating efficiencies from our acquisitions or as a result of the transactions, if any;
•significant unanticipated increases in the use of bandwidth‑intensive Internet‑basedbandwidth-intensive Internet-based services;
•the outcome of litigation, government investigations and other proceedings; and
our ability to successfully operate our business following the completion of our separation from Altice N.V., and
•other risks and uncertainties inherent in our cable and other broadband communications businesses and our other businesses, including those listed under the caption “Risk Factors”"Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained herein.
We disclaimThese factors are not necessarily all of the important factors that could cause our actual results to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors could cause our actual results to differ materially from those expressed in any of our forward-looking statements.
Given these uncertainties, you are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements are made only as of the date of this Annual Report. Except to the extent required by law, we do not undertake, and specifically decline any obligation, to update or revise theany forward-looking statements contained herein, exceptor to publicly announce the results of any revisions to any of such statements to reflect future events or developments. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless expressed as otherwise requiredsuch, and should only be viewed as historical data.
You should read this Annual Report with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect. We qualify all forward-looking statements by applicable federal securities laws.these cautionary statements.
Certain numerical figures included in this annual reportAnnual Report have been subject to rounding adjustments. Accordingly, such numerical figures shown as totals in various tables may not be arithmetic aggregations of the figures that precede them.
Overview
All dollar amounts, except per customer and per share data, included in the following discussion, are presented in thousands.
Our Business
We principally provide broadband communications and video services in the United States and market our services primarily under two brands: Optimum, in the New York metropolitan area, and Suddenlink, principally in markets in the south-central United States. We deliver broadband, pay television,video, telephony, services, Wi‑Fi hotspot access, proprietary content and advertisingmobile services to approximately 4.9more than five million residential and business customers. Our footprint extends across 21 states through a fiber‑richfiber-rich hybrid-fiber coaxial ("HFC") broadband network and a fiber-to-the-home ("FTTH") network with approximately 8.6more than nine million homes passed as of December 31, 2017. We have two reportable segments: Cablevision2020. Additionally, we offer news programming and Cequel. Cablevision provides broadband, pay televisioncontent, and telephony servicesadvertising services. The Company launched Altice Mobile, our full service mobile offering, to residential and business customersconsumers across our footprint in and around the New York metropolitan area. Cequel provides broadband, pay television and telephony services to residential and business customers in the south‑central United States, with the majority of its customers located in the ten states of Texas, West Virginia, Louisiana, Arkansas, North Carolina, Oklahoma, Arizona, California, Missouri and Ohio.September 2019.
Key Factors Impacting Operating Results and Financial Condition
Our future performance is dependent, to a large extent, on the impact of direct competition, general economic conditions (including capital and credit market conditions), our ability to manage our businesses effectively, and our relative strength and leverage in the marketplace, both with suppliers and customers. For more information, see “Risk Factors”"Risk Factors" and “Business-Competition”"Business-Competition" included herein.
In March 2020, the United States declared a national emergency concerning the outbreak of the coronavirus ("COVID-19"). There have also been extraordinary and wide-ranging actions taken by federal, state and local governmental authorities to contain and combat the outbreak and spread of the virus. We have continued to provide our telecommunications services to our customers during this pandemic. We expect that our future results may be impacted, including if residential or business customers discontinue their service or are unable to pay for our products and services, or if advertising revenue declines. Additionally, in order to prioritize the demands of the business, we may continue to delay certain capital investments. Due to the uncertainty surrounding the magnitude and duration of business and economic impacts relating to COVID-19, including the effort to contain and combat the spread of the virus, and business impacts of government actions, we currently cannot reasonably estimate the ultimate impact of
COVID-19 on our business. See "Risk Factors - Our business, financial condition and results of operations may be adversely affected by the recent COVID-19 pandemic."
We derive revenue principally through monthly charges to residential customers of our pay television, broadband, video, and telephony services. We also derive revenue from equipment rental, DVR, VOD, pay‑per‑view,pay-per-view, installation and home shopping commissions. Our residential pay television, broadband, video, and telephony services accounted for approximately 45%37%, 27%37%, and 9%5%, respectively, of our consolidated revenue for the year ended December 31, 2017.2020. We also derive revenue from the sale of a wide and growing variety of products and services to both large enterprise and SMB customers, including broadband, telephony, networking and pay televisionvideo services. For the year ended December 31, 2017, 14%2020, 15% of our consolidated revenue was derived from these business services. In addition, we derive revenues from the sale of advertising time available on the programming carried on our cable television systems, digital advertising and data analytics, and affiliation fees for news programming, which accounted for approximately 4%5% of our consolidated revenue for the year ended December 31, 2017.2020. Our mobile and other revenue for the year ended December 31, 20172020 accounted for less than 1% of our consolidated revenue.
Revenue increases are derived fromis impacted by rate increases, increaseschanges in the number of customers to our services, including additional services sold to our existing customers, programming package upgradeschanges by our pay televisionvideo customers, speed tier upgradeschanges by our broadband customers, and acquisitions and construction of cable systems that result in the addition of new customers.
Our ability to increase the number of customers to our services is significantly related to our penetration rates.
We operate in a highly competitive consumer‑drivenconsumer-driven industry and we compete against a variety of broadband, pay televisionvideo and telephony providers and delivery systems, including broadband communications companies, wireless data and telephony providers, satellite‑deliveredsatellite-delivered video signals, Internet‑deliveredInternet-delivered video content and broadcast television signals available to residential and business customers in our service areas. Our competitors include AT&T and its DirecTV subsidiary, CenturyLink, DISH, Network, Frontier and Verizon. Consumers’Verizon. Consumers' selection of an alternate source of service, whether due to economic constraints, technological advances or preference, negatively impacts the demand for our services. For more information on our competitive landscape, see “Risk Factors”"Risk Factors" and “Business-Competition”"Business-Competition" included herein.
Our programming costs, which are the most significant component of our operating expenses, have increased and are expected to continue to increase primarily as a result of contractual rate increases and new channel launches.increases. See “-Results"Results of Operations”Operations" below for more information regarding our key factors impacting our revenues and operating expenses.
Historically, we have made substantial investments in our network and the development of new and innovative products and other service offerings for our customers as a way of differentiating ourselves from our competitors and we may continue to do so in the future. We have commenced a five‑year plan to build aOur FTTH network build, which willwould enable us to deliver more than 10 Gbps broadband speeds to meet the growing data needs of residential and business customers, is underway. In addition, we launched Altice Mobile to consumers across our entire Optimum footprint and part of our Suddenlink footprint.in September 2019. We may incur greater than anticipated capital expenditures in connection with this initiative,these initiatives, fail to realize anticipated benefits, experience delays and business disruptions or encounter other challenges to executing itthem as planned. See “-Liquidity"Liquidity and Capital Resources-Capital Expenditures”Expenditures" for additional information regarding our capital expenditures.
Certain Transactions
The following transactions occurred during the periods covered by this Management's Discussion and Analysis of Financial Condition and Results of Operations:
On June 21, 2016, Altice USA acquired Cablevision for a total purchase price of approximately $9,958,323. The Altice USA operating results includeIn December 2020, the operating results of Cablevision from the date of acquisition.
In July 2016, weCompany completed the sale of a 75%49.99% interest in Newsdayits Lightpath fiber enterprise business (the "Lightpath Transaction") based on an implied enterprise value of $3.2 billion. The Company retained a 50.01% interest in the Lightpath business and maintained control of Cablevision Lightpath LLC, and retained the remaining 25% ownership interest. Effective July 7, 2016,entity holding the interest in the Lightpath business. Accordingly, the Company continues to consolidate the operating results of Newsday are no longer consolidated with our resultsthe Lightpath business.
On July 14, 2020, the Company completed its acquisition of certain cable assets in New Jersey and our 25% interest in the operating results of Newsdaythe acquired business were consolidated as of the acquisition date.
In June 2019, the Company completed the acquisition of Cheddar Inc., a digital-first news company and the operating results of Cheddar were consolidated as of June 1, 2019.
As discussed in Note 1 of the Company's consolidated financial statements, the Company completed the ATS Acquisition in January 2018. ATS was previously owned by Altice Europe and a member of ATS's former management through a holding company. As the acquisition is recorded ona combination of businesses under common control, the equity basis.Company combined the results of operations and related assets and liabilities of ATS for all periods since the formation of ATS.
In April 2018, Altice Europe transferred its ownership of i24NEWS, a 24/7 international news and current affairs channels, to the Company for minimal consideration. As the acquisition was a combination of businesses under common control, the Company combined the results of operations and related assets and liabilities of i24NEWS as of April 1, 2018. Operating results for periods prior to April 1, 2018 have not been revised to reflect the combination of i24NEWS as the impact was deemed immaterial. In April 2018, the Company redeemed a 24% interest in Newsday.
Non-GAAP Financial Measures
We define Adjusted EBITDA, which is a non-GAAP financial measure, as net income (loss) excluding income taxes, income (loss) from discontinued operations, 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, 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 two 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.
Results of Operations - Altice USA
| | | Altice USA | | Altice USA |
| Years Ended December 31, | | Years Ended December 31, |
| 2017 | | 2016 | | 2020 | | 2019 | | 2018 | |
Revenue: | | | | Revenue: | | | | | | |
Residential: | | | | Residential: | | |
Pay TV | $ | 4,214,745 |
| | $ | 2,759,216 |
| |
Broadband | 2,563,772 |
| | 1,617,029 |
| Broadband | $ | 3,689,159 | | | $ | 3,222,605 | | | $ | 2,887,455 | | |
Video | | Video | 3,670,859 | | | 3,997,873 | | | 4,156,428 | | |
Telephony | 823,981 |
| | 529,973 |
| Telephony | 468,777 | | | 598,694 | | | 652,895 | | |
Business services and wholesale | 1,298,817 |
| | 819,541 |
| Business services and wholesale | 1,454,532 | | | 1,428,532 | | | 1,362,758 | | |
Advertising | 391,866 |
| | 252,049 |
| |
News and advertising | | News and advertising | 519,205 | | | 475,904 | | | 487,264 | | |
Mobile | | Mobile | 78,127 | | | 21,264 | | | — | | |
Other | 33,389 |
| | 39,404 |
| Other | 13,983 | | | 15,987 | | | 19,808 | | |
Total revenue | 9,326,570 |
| | 6,017,212 |
| Total revenue | 9,894,642 | | | 9,760,859 | | | 9,566,608 | | |
Operating expenses: | | | | Operating expenses: | | | | | | |
Programming and other direct costs | 3,035,655 |
| | 1,911,230 |
| Programming and other direct costs | 3,340,442 | | | 3,300,528 | | | 3,173,076 | | |
Other operating expenses | 2,342,655 |
| | 1,705,615 |
| Other operating expenses | 2,264,473 | | | 2,300,398 | | | 2,290,266 | | |
Restructuring and other expense | 152,401 |
| | 240,395 |
| Restructuring and other expense | 91,073 | | | 72,978 | | | 38,548 | | |
Depreciation and amortization (including impairments) | 2,930,475 |
| | 1,700,306 |
| Depreciation and amortization (including impairments) | 2,083,365 | | | 2,263,144 | | | 2,382,339 | | |
Operating income | 865,384 |
| | 459,666 |
| Operating income | 2,115,289 | | | 1,823,811 | | | 1,682,379 | | |
Other income (expense): | | | | Other income (expense): | | |
Interest expense, net | (1,601,211 | ) | | (1,442,730 | ) | Interest expense, net | (1,350,341) | | | (1,530,850) | | | (1,545,426) | | |
Gain on investments, net | 237,354 |
| | 141,896 |
| |
Loss on derivative contracts, net | (236,330 | ) | | (53,696 | ) | |
Gain (loss) on interest rate swap contracts | 5,482 |
| | (72,961 | ) | |
Gain (loss) on investments and sale of affiliate interests, net | | Gain (loss) on investments and sale of affiliate interests, net | 320,061 | | | 473,406 | | | (250,877) | | |
Gain (loss) on derivative contracts, net | | Gain (loss) on derivative contracts, net | (178,264) | | | (282,713) | | | 218,848 | | |
Loss on interest rate swap contracts | | Loss on interest rate swap contracts | (78,606) | | | (53,902) | | | (61,697) | | |
Loss on extinguishment of debt and write-off of deferred financing costs | (600,240 | ) | | (127,649 | ) | Loss on extinguishment of debt and write-off of deferred financing costs | (250,489) | | | (243,806) | | | (48,804) | | |
Other income (loss), net | (1,788 | ) | | 4,329 |
| |
Loss from continuing operations before income taxes | (1,331,349 | ) | | (1,091,145 | ) | |
Income tax benefit | 2,852,967 |
| | 259,666 |
| |
Net income (loss) | 1,521,618 |
| | (831,479 | ) | |
Other income (expense), net | | Other income (expense), net | 5,577 | | | 1,183 | | | (12,484) | | |
Income (loss) before income taxes | | Income (loss) before income taxes | 583,227 | | | 187,129 | | | (18,061) | | |
Income tax benefit (expense) | | Income tax benefit (expense) | (139,748) | | | (47,190) | | | 38,655 | | |
Net income | | Net income | 443,479 | | | 139,939 | | | 20,594 | | |
Net income attributable to noncontrolling interests | (1,587 | ) | | (551 | ) | Net income attributable to noncontrolling interests | (7,296) | | | (1,003) | | | (1,761) | | |
Net income (loss) attributable to Altice USA stockholders | $ | 1,520,031 |
| | $ | (832,030 | ) | |
Net income attributable to Altice USA, Inc. stockholders | | Net income attributable to Altice USA, Inc. stockholders | $ | 436,183 | | | $ | 138,936 | | | $ | 18,833 | | |
The following is a reconciliation of net income (loss) to Adjusted EBITDA:EBITDA and Operating Free Cash Flow:
| | | | | | | | | | | | | | | | | | | |
| Altice USA |
| Years Ended December 31, |
| 2020 | | 2019 | | 2018 | | |
Net income | $ | 443,479 | | | $ | 139,939 | | | $ | 20,594 | | | |
Income tax expense (benefit) | 139,748 | | | 47,190 | | | (38,655) | | | |
Other expense (income), net | (5,577) | | | (1,183) | | | 12,484 | | | |
Loss on interest rate swap contracts | 78,606 | | | 53,902 | | | 61,697 | | | |
Loss (gain) on derivative contracts, net | 178,264 | | | 282,713 | | | (218,848) | | | |
Loss (gain) on investments and sales of affiliate interests, net | (320,061) | | | (473,406) | | | 250,877 | | | |
Loss on extinguishment of debt and write-off of deferred financing costs | 250,489 | | | 243,806 | | | 48,804 | | | |
Interest expense, net | 1,350,341 | | | 1,530,850 | | | 1,545,426 | | | |
Depreciation and amortization | 2,083,365 | | | 2,263,144 | | | 2,382,339 | | | |
Restructuring and other expense | 91,073 | | | 72,978 | | | 38,548 | | | |
Share-based compensation | 125,087 | | | 105,538 | | | 59,812 | | | |
Adjusted EBITDA | 4,414,814 | | | 4,265,471 | | | 4,163,078 | | | |
Capital Expenditures (cash) | 1,073,955 | | | 1,355,350 | | | 1,153,589 | | | |
Operating Free Cash Flow | $ | 3,340,859 | | | $ | 2,910,121 | | | $ | 3,009,489 | | | |
The following is a reconciliation of net cash flow from operating activities to Free Cash Flow:
|
| | | | | | | |
| Altice USA |
| Year Ended December 31, |
| 2017 | | 2016 |
Net income (loss) | $ | 1,521,618 |
| | $ | (831,479 | ) |
Income tax benefit | (2,852,967 | ) | | (259,666 | ) |
Other expense (income), net (a) | 1,788 |
| | (4,329 | ) |
Loss (gain) on interest rate swap contracts | (5,482 | ) | | 72,961 |
|
Loss on derivative contracts, net (b) | 236,330 |
| | 53,696 |
|
Gain on investments, net | (237,354 | ) | | (141,896 | ) |
Loss on extinguishment of debt and write-off of deferred financing costs | 600,240 |
| | 127,649 |
|
Interest expense, net | 1,601,211 |
| | 1,442,730 |
|
Depreciation and amortization | 2,930,475 |
| | 1,700,306 |
|
Restructuring and other expense | 152,401 |
| | 240,395 |
|
Share-based compensation | 57,430 |
| | 14,368 |
|
Adjusted EBITDA | $ | 4,005,690 |
| | $ | 2,414,735 |
|
| | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2020 | | 2019 | | 2018 | | |
| | | | | | | |
Net cash flows from operating activities | $ | 2,980,164 | | | $ | 2,554,169 | | | $ | 2,508,317 | | | |
Capital Expenditures (cash) | 1,073,955 | | | 1,355,350 | | | 1,153,589 | | | |
Free Cash Flow | $ | 1,906,209 | | | $ | 1,198,819 | | | $ | 1,354,728 | | | |
| |
(a) | Includes primarily dividends received on Comcast common stock owned by the Company. |
| |
(b) | Consists of unrealized and realized losses (gains) due to the change in the fair value of derivative contracts. |
The following table sets forth certain customer metrics by segmentfor the Company (unaudited):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, | | Increase (Decrease) 2020 | | December 31, 2018 | | Increase (Decrease) 2019 |
| 2020 (f)(g) | | 2019 (f) | | | |
| | | | | | | | | |
Homes passed (a) | 9,034.1 | | | 8,818.6 | | | 215.5 | | | 8,699.6 | | | 119.0 | |
Total customer relationships (b)(c) | 5,024.6 | | | 4,916.3 | | | 108.3 | | | 4,899.5 | | | 16.8 | |
Residential | 4,648.4 | | | 4,533.3 | | | 115.1 | | | 4,518.1 | | | 15.2 | |
SMB | 376.1 | | | 383.1 | | | (7.0) | | | 381.4 | | | 1.7 | |
Residential customers: | | | | | | | | | |
Broadband | 4,359.2 | | | 4,187.3 | | | 171.9 | | | 4,115.4 | | | 71.9 | |
Video | 2,961.0 | | | 3,179.2 | | | (218.2) | | | 3,286.1 | | | (106.9) | |
Telephony | 2,214.0 | | | 2,398.8 | | | (184.8) | | | 2,530.1 | | | (131.3) | |
Penetration of homes passed (d) | 55.6 | % | | 55.7 | % | | | | 56.3 | % | | |
ARPU(e)(h) | $ | 140.09 | | | $ | 142.65 | | | | | $ | 143.22 | | | |
|
| | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2017 | | As of December 31, 2016 | | Increase |
| Cablevision | Cequel | Total | | Cablevision | Cequel | Total | | (Decrease) |
| (in thousands, except per customer amounts) |
Homes passed (a) | 5,164 |
| 3,457 |
| 8,621 |
| | 5,116 |
| 3,407 |
| 8,524 |
| | 97 |
|
Total customer relationships (b)(c) | 3,156 |
| 1,750 |
| 4,906 |
| | 3,141 |
| 1,751 |
| 4,892 |
| | 14 |
|
Residential | 2,893 |
| 1,642 |
| 4,535 |
| | 2,879 |
| 1,649 |
| 4,528 |
| | 7 |
|
SMB | 263 |
| 109 |
| 371 |
| | 262 |
| 102 |
| 364 |
| | 7 |
|
Residential customers: |
|
| | | | | | | |
Pay TV | 2,363 |
| 1,042 |
| 3,406 |
| | 2,428 |
| 1,107 |
| 3,535 |
| | (129 | ) |
Broadband | 2,670 |
| 1,376 |
| 4,046 |
| | 2,619 |
| 1,344 |
| 3,963 |
| | 83 |
|
Telephony | 1,965 |
| 592 |
| 2,557 |
| | 1,962 |
| 597 |
| 2,559 |
| | (2 | ) |
Residential triple product customer penetration (d): | 64.2 | % | 25.7 | % | 50.2 | % | | 64.8 | % | 25.5 | % | 50.5 | % | |
|
|
Penetration of homes passed (e): | 61.1 | % | 50.6 | % | 56.9 | % | | 61.4 | % | 51.4 | % | 57.4 | % | |
|
|
ARPU(f) | $ | 155.82 |
| $ | 112.57 |
| $ | 140.15 |
| | $ | 154.49 |
| $ | 109.30 |
| $ | 138.07 |
| |
|
|
(a)Represents the estimated number of single residence homes, apartments and condominium units passed by the broadband network in areas serviceable without further extending the transmission lines. In addition, it includes commercial establishments that have connected to our broadband network. Broadband services were not available to approximately 30 thousand homes passed and telephony services were not available to approximately 500 thousand homes passed.
| |
(a) | Represents the estimated number of single residence homes, apartments and condominium units passed by the cable distribution network in areas serviceable without further extending the transmission lines. In addition, it includes commercial establishments that have connected to our cable distribution network. For Cequel, broadband services were not available to approximately 100 homes passed and telephony services were not available to approximately 500 homes passed.
|
| |
(b) | Represents number of households/businesses that receive at least one of the Company's services.
|
| |
(c) | Customers represent each customer account (set up and segregated by customer name and address), weighted equally and counted as one customer, regardless of size, revenue generated, or number of boxes, units, or outlets. In calculating the number of customers, we count all customers other than inactive/disconnected customers. Free accounts are included in the customer counts along with all active accounts, but they are limited to a prescribed group. Most of these accounts are also not entirely free, as they typically generate revenue through pay-per-view or other pay services and certain equipment fees. Free status is not granted to regular customers as a promotion. In counting bulk residential customers, such as an |
(b)Represents number of households/businesses that receive at least one of the Company's fixed-line services.
(c)Customers represent each customer account (set up and segregated by customer name and address), weighted equally and counted as one customer, regardless of size, revenue generated, or number of boxes, units, or outlets. Free accounts
are included in the customer counts along with all active accounts, but they are limited to a prescribed group. Most of these accounts are also not entirely free, as they typically generate revenue through pay-per-view or other pay services and certain equipment fees. Free status is not granted to regular customers as a promotion. In counting bulk residential customers, such as an apartment building, we count each subscribing family unit within the building as one customer, but do not count the master account for the entire building as a customer. We count a bulk commercial customer, such as a hotel, as one customer, and do not count individual room units at that hotel.
(d)Represents the number of total customer relationships divided by homes passed.
(e)Calculated by dividing the average monthly revenue for the respective quarter (fourth quarter for annual periods) derived from the sale of broadband, video and telephony services to residential customers for the quarter by the average number of total residential customers for the same period.
(f)Customer metrics do not include Altice Mobile customers.
(g)Pursuant to the Keep Americans Connected pledge ("Pledge") that the Company made in response to the COVID-19 pandemic and pursuant to the New Jersey Executive Order No. 126 ("NJ Order") enacted in April 2020, the Company did not disconnect certain internet and voice services to customers for non-payment. Customer metrics include the retention of certain of these previously non-paying customers who had current account balances as of December 31, 2020 due to the Company forgiving their past due balances or placing them on a payment plan. Customer metrics as of December 31, 2020 also include approximately 10 thousand customer relationships impacted by storms in Louisiana that have not been disconnected for non-payment (see table below).
| | | | | | | | | | | | | | | | | | | |
(d)Total customer relationships | Represents the number of customers that subscribe to three of our services divided by total residential customer relationships. 10.3 |
| | | | | | | | | | | | | | |
(e)Residential | Represents the number of total customer relationships divided by homes passed. 9.2 |
| | | | | | | | | | | | | | |
(f)SMB | Calculated by dividing the average monthly revenue for the respective quarter (fourth quarter for annual periods) derived from the sale of broadband, pay television and telephony services to residential customers for the respective quarter by the average number of total residential customers for the same period. 1.1 | | | | | | | | | | | | | | | |
Residential customers: | | | | | | | | | | | | | | | |
Broadband | 8.7 | | | | | | | | | | | | | | | |
Video | 4.8 | | | | | | | | | | | | | | | |
Telephony | 2.0 | | | | | | | | | | | | | | | |
(h) ARPU for the December 31, 2020 period reflects a reduction of $1.26 due to credits that we currently anticipate will be issued to video customers as a result of credits the Company expects to receive from certain sports programming networks whereby the minimum number of events were not delivered pursuant to the contractual agreements with the networks and related franchise fees.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Segment Results | | January 1, 2016 to June 20, 2016 |
| December 31, 2017 | | December 31, 2016 | |
| Cablevision | | Cequel | | Eliminations | | Total | | Cablevision | | Cequel | | Total | | Cablevision |
Revenue: | | | | | | | | | | | | | | | |
Residential: | | | | | | | | | | | | | | | |
Pay TV | $ | 3,113,238 |
| | $ | 1,101,507 |
| | $ | — |
| | $ | 4,214,745 |
| | $ | 1,638,691 |
| | $ | 1,120,525 |
| | $ | 2,759,216 |
| | $ | 1,468,006 |
|
Broadband | 1,603,015 |
| | 960,757 |
| | — |
| | 2,563,772 |
| | 782,615 |
| | 834,414 |
| | 1,617,029 |
| | 673,010 |
|
Telephony | 693,478 |
| | 130,503 |
| | — |
| | 823,981 |
| | 376,034 |
| | 153,939 |
| | 529,973 |
| | 342,142 |
|
Business services and wholesale | 923,161 |
| | 375,656 |
| | — |
| | 1,298,817 |
| | 468,632 |
| | 350,909 |
| | 819,541 |
| | 411,102 |
|
Advertising | 321,149 |
| | 73,509 |
| | (2,792 | ) | | 391,866 |
| | 163,678 |
| | 88,371 |
| | 252,049 |
| | 125,419 |
|
Other | 10,747 |
| | 22,642 |
| | — |
| | 33,389 |
| | 14,402 |
| | 25,002 |
| | 39,404 |
| | 117,925 |
|
Total revenue | 6,664,788 |
| | 2,664,574 |
| | (2,792 | ) | | 9,326,570 |
| | 3,444,052 |
| | 2,573,160 |
| | 6,017,212 |
| | 3,137,604 |
|
Operating expenses: | | | | | | | | | | | | | | | |
Programming and other direct costs | 2,280,062 |
| | 758,190 |
| | (2,597 | ) | | 3,035,655 |
| | 1,164,925 |
| | 746,305 |
| | 1,911,230 |
| | 1,088,555 |
|
Other operating expenses | 1,675,665 |
| | 667,185 |
| | (195 | ) | | 2,342,655 |
| | 1,028,447 |
| | 677,168 |
| | 1,705,615 |
| | 1,136,970 |
|
Restructuring and other expense | 112,384 |
| | 40,017 |
| | — |
| | 152,401 |
| | 212,150 |
| | 28,245 |
| | 240,395 |
| | 22,223 |
|
Depreciation and amortization | 2,251,614 |
| | 678,861 |
| | — |
| | 2,930,475 |
| | 963,665 |
| | 736,641 |
| | 1,700,306 |
| | 414,550 |
|
Operating income | $ | 345,063 |
| | $ | 520,321 |
| | $ | — |
| | $ | 865,384 |
| | $ | 74,865 |
| | $ | 384,801 |
| | $ | 459,666 |
| | $ | 475,306 |
|
Altice USA - Comparison of Results for the Year Ended December 31, 20172020 compared to the Year Ended December 31, 2016
Pay Television Revenue
Pay television revenue2019 and for the years endedYear Ended December 31, 2017 and 2016 was $4,214,745 and $2,759,216, respectively, of which $3,113,238 and $1,638,691 was derived from the Cablevision segment and $1,101,507 and $1,120,525 relates to our Cequel segment, respectively. Pay television is derived principally through monthly charges to residential customers of our pay television services. Revenue increases are derived primarily from rate increases, increases in the number of customers, including additional services sold to our existing customers, and programming package upgrades.
Pay television revenue for our Cablevision segment increased $1,474,547 for the year ended December 31, 20172019 compared to the year endedYear Ended December 31, 2016. The increase is primarily due to the consolidation of the Cablevision results as of June 21, 2016, the date of the Cablevision Acquisition. Our 2016 results do not include pay television revenue2018
of $1,468,006 recognized by Cablevision for the period January 1, 2016 through June 20, 2016. Pay television revenue was also impacted by rate increases for certain video services implemented in the fourth quarter of 2016 and 2017, an increase in late fees and an increase in pay-per-view revenue. Partially offsetting these increases was a decrease in revenue as compared to the prior year due to a decline in pay television customers.
Pay television revenue for our Cequel segment decreased $19,018 (2%) for the year ended December 31, 2017 compared to the year ended December 31, 2016. The decrease was due primarily to a decline in the number of pay television customers and a decrease in premium video services revenue, partially offset by certain rate increases, and an increase in late fees.
We believe our pay television customer declines noted in the table above are largely attributable to competition, particularly from Verizon in our Cablevision footprint and DBS providers in our Cequel footprint, as well as competition from companies that deliver video content over the Internet directly to customers. These factors are expected to continue to impact our ability to maintain or increase our existing customers and revenue in the future.
Broadband Revenue
Broadband revenue for the years ended December 31, 20172020, 2019 and 20162018 was $2,563,772$3,689,159, $3,222,605, and $1,617,029, respectively,$2,887,455, respectively. Broadband revenue is derived principally through monthly charges to residential subscribers of which $1,603,015our broadband services. Revenue is impacted by rate increases, changes in the number of customers, including additional services sold to our existing subscribers, and $782,615changes in speed tiers. Additionally, revenue is impacted by changes in the standalone selling price of each performance obligation within our promotional bundled offers.
Broadband revenue increased $466,554 (14%) for the year ended December 31, 2020 compared to the year ended December 31, 2019. The increase was derived from our Cablevision segmentdue primarily to higher average recurring broadband revenue per broadband customer, primarily driven by certain rate increases and $960,757service level changes, and $834,414an increase in broadband customers, partially offset by customer credits issued for service outages following certain storms.
Broadband revenue increased $335,150 (12%) for the year ended December 31, 2019 compared to the year ended December 31, 2018. The increase was derived from our Cequel segment. Broadbanddue primarily to higher average recurring broadband revenue per broadband customer, primarily driven by certain rate increases and service level changes, and an increase in broadband customers.
Video Revenue
Video revenue for the years ended December 31, 2020, 2019 and 2018 was $3,670,859, $3,997,873 and $4,156,428, respectively. Video revenue is derived principally through monthly charges to residential customers of our broadbandvideo services. Revenue increases are derived primarily fromis impacted by rate increases, increaseschanges in the number of customers, including additional services sold to our existing customers, and speed tier upgrades.changes in programming packages. Additionally, revenue is impacted by changes in the standalone selling price of each performance obligation within our promotional bundled offers.
Video revenue for our Cablevision segment increased $820,400decreased $327,014 (8%) for the year ended December 31, 20172020 compared to the year ended December 31, 2016. The increase is primarily due to the consolidation of the Cablevision results as of June 21, 2016, the date of the Cablevision Acquisition. Our 2016 results do not include broadband2019. Video revenue of $673,010 recognized by Cablevision for the period January 1, 2016 through June 20, 2016. Broadband revenue also increased $147,390year ended December 31, 2020 includes estimated credits of approximately $94,300 that we currently anticipate will be issued to customers as a result of higher average recurring broadband$90,100 of credits the Company expects to receive from certain sports programming networks whereby the minimum number of events were not delivered pursuant to the contractual agreements with the networks and related franchise fees. These credits did not impact Adjusted EBITDA for the periods. The remaining decrease was due primarily to a decline in video customers, as well as customer credits issued for service outages following certain storms.
Video revenue per broadband customer (driven by rate increases, the impact of service level changes, and an increase in late fees) and an increase in broadband customers.
Broadband revenue for our Cequel segment increased $126,343 (15%decreased $158,555 (4%) for the year ended December 31, 20172019 compared to the same period in the prior year.year ended December 31, 2018. The increasedecrease was due primarily to highera decline in video customers and lower average recurring broadband revenue per broadband customer (driven by rate increases, the impact of service level changes, and an increase in late fees) and an increase in broadband customers.video customer.
Telephony Revenue
Telephony revenue for the years ended December 31, 20172020, 2019 and 20162018 was $823,981$468,777, $598,694 and $529,973 of which $693,478 and $376,034 was derived from the Cablevision segment and $130,503 and $153,939 was derived from our Cequel segment.$652,895, respectively. Telephony revenue is derived principally through monthly charges to residential customers offor our telephony services. Revenue increases are derived primarily from rate increases, increasesis impacted by changes in rates for services, changes in the number of customers, and additional services sold to our existing customers. Additionally, revenue is impacted by changes in the standalone selling price of each performance obligation within our promotional bundled offers.
Telephony revenue for our Cablevision segment increased $317,444decreased $129,917 (22%) for the year ended December 31, 20172020 compared to the year ended December 31, 2016.2019. The increase is primarilydecrease was due to the consolidation of the Cablevision results as of June 21, 2016, the date of the Cablevision Acquisition. Our 2016 results do not include telephony revenue of $342,142 recognized by Cablevision for the period January 1, 2016 through June 20, 2016. Offsetting this increase was a net decrease of $24,698 due primarily to lower average revenue per telephony customer and a decline in international calling.telephony customers, as well as customer credits issued for service outages following certain storms.
Telephony revenue for our Cequel segment decreased $23,436 (15%$54,201 (8%) for the year ended December 31, 20172019 compared to the year ended December 31, 2016.2018. The decrease was due primarily to lower average revenue per telephony customer and a decline in telephony customers.
Business Services and Wholesale Revenue
Business services and wholesale revenue for the years ended December 31, 20172020, 2019 and 20162018 was $1,298,817$1,454,532, $1,428,532, and $819,541, respectively of which $923,161 and $468,632 was derived from the Cablevision segment and $375,656 and $350,909 was derived from our Cequel segment.$1,362,758, respectively. Business services and wholesale revenue is derived primarily from the sale of fiber based telecommunications services to the business market, and the sale of broadband, pay televisionvideo and telephony services to SMB customers.
Business services and wholesale revenue for our Cablevision segment increased $454,529$26,000 (2%) for the year ended December 31, 20172020 compared to the year ended December 31, 2016.2019. The increase is primarily due to the consolidation of the Cablevision results as of June 21, 2016, the date of the Cablevision Acquisition. Our 2016 results do not include revenue of $411,102 recognized by Cablevision for the period January 1, 2016 through June 20, 2016. Business services revenue also increased $43,427was primarily due to higher average recurring telephony and broadband revenue per SMB customer, primarily driven by certain rate increases and service level changes and an increase in
Ethernet revenue resulting from a larger numberrelated to an indefeasible right of services installed,use contract recorded in the second quarter of 2020, partially offset by reduced traditional voicea decrease in SMB customers, customer credits issued for service outages following certain storms and data servicescustomer credits of approximately $2,900 that we currently anticipate will be issued to SMB customers as a result of credits the Company expects to receive from certain sports programming networks whereby the minimum number of events were not delivered pursuant to the contractual agreements with the networks and related franchise fees. These credits did not impact Adjusted EBITDA for commercial customers.the periods.
Business services and wholesale revenue for our Cequel segment increased $24,747 (7%$65,774 (5%) for the year ended December 31, 2017 as2019 compared to the year ended December 31, 2016.2018. The increase was primarily due to higher commercial ratesaverage recurring broadband revenue per SMB customer, primarily driven by certain rate increases and customers for broadband services,service level changes, an increase in certain pay television ratesrevenue from the backhaul of carrier data and increasesan increase in commercial carrier services.installation revenue.
News and Advertising Revenue
AdvertisingNews and advertising revenue for the years ended December 31, 20172020, 2019 and 2016, net of inter-segment revenue,2018, was $391,866$519,205, $475,904, and $252,049, respectively, of which $321,149$487,264, respectively. News and $163,678 was derived from our Cablevision segment and $73,509 and $88,371 was derived from our Cequel segment. Advertisingadvertising revenue is primarily derived from the sale of (i) advertising timeinventory available on the programming carried on our cable television systems.systems, (ii) advertising on over the top ("OTT") platforms, (iii) digital advertising, and (iv) data analytics. News and advertising revenue also includes affiliation fees for news programming.
AdvertisingNews and advertising revenue for our Cablevision segment increased $157,471$43,301 (9%) for the year ended December 31, 20172020 compared to the year ended December 31, 2016.2019. The increase iswas primarily due to the consolidation of the Cablevision results as of June 21, 2016, the date of the Cablevision Acquisition. Our 2016 results do not includehigher political revenue and affiliate fees.
News and advertising revenue of $125,419 recognized by Cablevision for the period January 1, 2016 through June 20, 2016. The remaining increase in advertising revenue of $32,052 was due primarily to an increase in digital advertising revenue and an increase in data and analytics revenue, partially offset by a decrease in political advertising.
Advertising revenue for our Cequel segment decreased $14,862 (17%$11,360 (2%) for the year ended December 31, 2017 as2019 compared to the year ended December 31, 2016.2018. The decrease iswas primarily due to declineslower political revenue, partially offset by an increase in political, auto, retail,digital advertising, and restaurant advertising.strong national sales.
Mobile Revenue
Mobile revenue for the year ended December 31, 2020 and 2019 was $78,127 and $21,264, respectively, and relates to sales of devices and mobile services that were launched to consumers in September 2019. As of December 31, 2020, we had approximately 169 thousand mobile lines.
Other Revenue
Other revenue for the years ended December 31, 20172020, 2019 and 20162018 was $33,389$13,983, $15,987, and $39,404, respectively, of which $10,747 and $14,402 was derived from our Cablevision segment and $22,642 and $25,002 was derived from our Cequel segment.$19,808, respectively. Other revenue includes revenue from other miscellaneous revenue streams.
Programming and Other Direct Costs
Programming and other direct costs net of intersegment eliminations, for the years ended December 31, 20172020, 2019 and 20162018 amounted to $3,035,655$3,340,442, $3,300,528 and $1,911,230, respectively, of which $2,280,062 and $1,164,925 relate to our Cablevision segment and $758,190 and $746,305 relate to our Cequel segment.$3,173,076, respectively. Programming and other direct costs include cable programming costs, which are costs paid to programmers (net of amortization of any incentives received from programmers for carriage) for cable content (including costs of VOD and pay‑per‑view)pay-per-view) and are generally paid on a per‑customerper-customer basis. These costs typically rise due to increases in contractual rates and new channel launches and are also impacted by changes in the number of customers receiving certain programming services. These costs also include interconnection, call completion, circuit and transport fees paid to other telecommunication companies for the transport and termination of voice and data services, which typically vary based on rate changes and the level of usage by our customers. These costs also include franchise fees which are payable to the state governments and local municipalities where we operate and are primarily based on a percentage of certain categories of revenue derived from the provision of pay televisionvideo service over our cable systems, which vary by state and municipality. These costs change in relation to changes in such categories of revenues or rate changes. Additionally, these costs include the costs of mobile devices sold to our customers and direct costs of providing mobile services.
The increase of $1,115,137 related to our Cablevision segment$39,914 (1%) for the year ended December 31, 2017,2020, as compared to the prior year iswas primarily due to the consolidation of the Cablevision results as of June 21, 2016, the date of the Cablevision Acquisition. Our 2016 results do not include $1,088,555 of programming and other direct costs recognized by Cablevision for the period January 1, 2016 through June 20, 2016. The remaining increase of $26,582 is attributable to the following:
|
| | | |
Cablevision segment: | |
Increase in programming costs due primarily to contractual rate increases and an increase in pay-per-view costs primarily from an event in August 2017, partially offset by lower pay television customers and lower video-on-demand costs | $ | 61,623 |
|
Increase in costs of digital media advertising spots for resale | 23,601 |
|
Decrease in costs primarily related to the sale of Newsday in July 2016 | (33,888 | ) |
Decrease in call completion and transport costs primarily due to lower level of activity | (17,881 | ) |
Decrease in cost of sales (which includes the bulk sale of handset inventory of $5,445 during the first quarter of 2016) | (9,945 | ) |
Other net increases | 3,072 |
|
| $ | 26,582 |
|
| | | | | |
Increase in call completion and transfer costs primarily related to our mobile business ($30,240) | $ | 33,126 | |
Costs of mobile devices | 24,359 | |
Increase primarily relating to costs of digital media and linear advertising spots for resale | 17,160 | |
Decrease in programming costs which includes estimated credits expected to be received (see discussion below) and a decrease in costs due to lower video customers, partially offset by an increase in costs due to net contractual rate increases | (21,511) | |
Decrease in costs due to certain tax refunds | (11,033) | |
Other net decreases | (2,187) | |
| $ | 39,914 | |
The increase of $11,885 related to our Cequel segment$127,452 (4%) for the year ended December 31, 2017,2019, as compared to the prior year period isDecember 31, 2018 was primarily attributable to the following:
| | | | | |
Increase in programming costs due primarily to contractual rate increases, partially offset by lower video customers and lower video-on-demand and pay-per-view costs | $ | 102,071 | |
Costs of mobile devices | 22,379 | |
Increase in costs of digital media and linear advertising spots for resale | 9,488 | |
Decrease in call completion and transfer costs primarily due to lower level of activity related to our telephony service, partially offset by an increase in costs related to our mobile service of $3,890 | (9,975) | |
Other net increases | 3,489 | |
| $ | 127,452 | |
|
| | | |
Cequel segment: | |
Increase in programming costs due primarily to contractual rate increases and an increase in pay-per-view costs primarily from an event in August 2017, partially offset by lower pay television customers and lower video-on-demand costs | $ | 20,141 |
|
Decrease in franchise costs due to lower pay television customers | (5,159 | ) |
Decrease in media cost of sales | (1,634 | ) |
Net decrease in call completion and interconnection costs due to lower level of activity | (1,803 | ) |
Other net increases | 340 |
|
| $ | 11,885 |
|
Programming costs
Programming costs aggregated $2,533,244$2,701,145, $2,722,656, and $1,567,688$2,620,585 for the years ended December 31, 20172020, 2019 and 2016,2018, respectively. The 2016 amount does not include programmingProgramming costs of $883,792 recognized by Cablevision for the period January 1, 2016 through June 20, 2016.year ended December 31, 2020 include estimated credits of approximately $93,000 that the Company expects to receive from certain sports programming networks whereby the minimum number of events were not delivered pursuant to the contractual agreements with the networks. These credits did not impact Adjusted EBITDA for the periods as we reduced video revenue for a corresponding amount as it is currently anticipated that these credits will be issued to customers. Our programming costs in 20182021 will continue to be impacted by changes in programming rates, which we expect to increase, by high single digits, and by changes in the number of pay televisionvideo customers.
Other Operating Expenses
Other operating expenses for the years ended December 31, 20172020, 2019 and 20162018 amounted to $2,342,655$2,264,473, $2,300,398, and $1,705,615, respectively, of which $1,675,665 and $1,028,447 relate to our Cablevision segment and $667,185 and $677,168 relate to our Cequel segment.$2,290,266, respectively. Other operating expenses include staff costs and employee benefits including salaries of company employees and related taxes, benefits and other employee related expenses.expenses, as well as third-party labor costs. Other operating expenses also include network management and field service costs, which represent costs associated with the maintenance of our broadband network, including costs of certain customer connections and other costs associated with providing and maintaining services to our customers.
Customer installation and network repair and maintenance costs may fluctuate as a result of changes in the level of activities and the utilization of contractors as compared to employees. Also, customer installation costs fluctuate as the portion of our expenses that we are able to capitalize changes. Costs associated with the initial deployment of new customer premise equipment necessary to provide broadband, pay televisionvideo and telephony services are capitalized (asset-based). In circumstances whereThe redeployment of customer premise equipment tracking is not available, the Company estimates the amount of capitalized installation costs based on whether or not the business or residence had been previously connected to the network, (premise-based). Network repair and maintenance and utility costs also fluctuateexpensed as capitalizable network upgrade and enhancement activity changes.
In connection with the execution of an agreement with ATS in the second quarter of 2017 (see Note 14 of our consolidated financial statements), the Cablevision segment's operating results reflect a reduction in employee related expenses due to certain employees becoming employed by ATS and an increase in contractor costs for services provided by ATS. See further details in the table below. A substantial portion of the Cequel segment technical workforce became employees of ATS in December 2017.
In January 2018, the Company acquired 70% of the equity interests in ATS and the Company expects to become the owner of 100% of the equity interests in ATS prior to the Distribution (see Note 1 of our consolidated financial statements).incurred.
Other operating expenses also include costs related to the operation and maintenance of our call center facilities that handle customer inquiries and billing and collection activities and sales and marketing costs, which include advertising production and placement costs associated with acquiring and retaining customers. These costs vary period to period and certain of these costs, such as sales and marketing, may increase with intense competition. Additionally, other operating expenses include various other administrative costs, including legal fees, and product development costs.
The decrease in other operating expenses of $35,925, net of an increase of $647,218 related$35,318 relating to our Cablevision segmentmobile service, for the year ended December 31, 2017, net of inter-segment eliminations,2020 as compared to the prior year is primarily due to the consolidation of the Cablevision results as of June 21, 2016, the date of the Cablevision Acquisition. Our 2016 results do not include $1,136,970 of other operating expenses recognized by Cablevision for the period January 1, 2016 through June 20, 2016. The remaining decrease of $489,752 iswas attributable to the following:
|
| | | |
Cablevision segment: | |
Decrease primarily in employee related costs related to the elimination of certain positions (including the impact of the decline in headcount resulting from the ATS agreement), and lower net benefits, partially offset by merit increases | $ | (457,528 | ) |
Decrease in costs primarily related to the sale of Newsday in July 2016 | (95,262 | ) |
Decrease primarily related to maintenance agreements for equipment, as well as lower repairs and maintenance costs relating to our operations | (69,053 | ) |
Decrease in rent and insurance (including the impact of the ATS agreement) | (24,138 | ) |
Increase in contractor costs due primarily to the execution of the ATS agreement | 114,519 |
|
Increase in sales and marketing costs | 18,033 |
|
Increase in bad debt expense | 10,325 |
|
Increase in fees for certain executive services provided by our parent entity (twelve months in 2017 compared to approximately six months in 2016) | 9,444 |
|
Other net increases | 3,908 |
|
| $ | (489,752 | ) |
| | | | | |
Net decrease in labor costs and benefits (offset by an increase in costs related to Cheddar of $10,548, which was acquired in June 2019), partially offset by a decrease in capitalizable activity | $ | (43,837) | |
Decrease in bad debt expense | (25,555) | |
Decrease in sales and marketing costs (including third-party commissions) | (15,862) | |
Increase in share-based compensation | 19,550 | |
Increase in rent and property taxes | 13,506 | |
Increase in legal costs | 9,008 | |
Other net increases (including a decrease of $5,598 due to a favorable resolution of a tax matter) | 7,265 | |
| $ | (35,925) | |
The decreaseincrease in other operating expenses of $9,983 related$10,132, including an increase of $32,458 relating to our Cequel segmentmobile service, for the year ended December 31, 2017, net of inter-segment eliminations,2019 as compared to the prior year period iswas attributable to the following:
| | | | | |
Increase in share-based compensation, including charges related to modifications of awards | $ | 45,725 | |
Increase in bad debt | 20,095 | |
Net decrease in labor costs and benefits (partially offset by an increase in costs related to i24NEWS of $6,425 and an increase of $14,720 related to Cheddar) and an increase in capitalizable activity | (33,431) | |
Decrease in management fee relating to certain executive, administrative and managerial services provided to the Company from Altice Europe prior to separation in June 2018 | (13,250) | |
Net decrease in marketing costs | (7,457) | |
Other net decreases (partially offset by an increase in costs of $2,380 relating to Cheddar and $3,027 related to i24NEWS) | (1,550) | |
| $ | 10,132 | |
|
| | | |
Cequel segment: | |
Decrease primarily in salaries and benefits related to the elimination of certain positions in connection with the initiatives to simplify the Company's organizational structure, partially offset by a decrease in capitalizable activity | $ | (56,381 | ) |
Decrease in insurance costs | (6,255 | ) |
Decrease in contract labor costs | (2,171 | ) |
Increase in consulting and professional fees | 22,023 |
|
Increase in share-based compensation and long-term incentive plan awards expense | 18,754 |
|
Increase in sales and marketing costs | 8,426 |
|
Increase in worker's compensation expenses | 2,082 |
|
Net increase in property, general and sales and use taxes | 1,539 |
|
Other net increases | 2,000 |
|
| $ | (9,983 | ) |
Restructuring and Other Expense
Restructuring and other expense for the year ended December 31, 2017 of $152,401 ($112,384 for our Cablevision segment and $40,017 for our Cequel segment)2020 amounted to $91,073, as compared to $240,395$72,978 for the year ended December 31, 2016 ($212,1502019 and $38,548 for our Cablevision segment and $28,245 for our Cequel segment).the year ended December 31, 2018. These amounts primarily relaterelated to severance and other employee related costs resulting from headcount reductions, facility realignment costs and impairments of certain ROU assets, related to initiatives which commenced in 2016 and 2019 that are intended to simplify the Company's organizational structure. The expense for the year ended December 31, 2020 also included $47,631 related to contractual payments for terminated employees and $4,068 related to the facility realignment costs. We currently anticipate thatmay incur additional restructuring expenses will be recognizedin the future as we continue to analyze our organizational structure.
Depreciation and Amortization
Depreciation and amortization for the years ended December 31, 20172020, 2019 and 20162018 amounted to $2,930,475$2,083,365, $2,263,144 and $1,700,306, respectively, of which $2,251,614 and $963,665 relates to our Cablevision segment and $678,861 and $736,641 relates to our Cequel segment.
The increase in depreciation and amortization related to our Cablevision segment of $1,287,949 is primarily due to the consolidation of the Cablevision results as of June 21, 2016, the date of the Cablevision Acquisition. Our 2016 results do not include $414,550 of depreciation and amortization recognized by Cablevision for the period January 1, 2016 through June 20, 2016. The remaining increase of $873,399 is primarily attributable to the acceleration of amortization of its trade name intangible assets in connection with the announcement, on May 23, 2017, of the adoption of a global brand to replace the Optimum brand in the future, as well as depreciation on new asset additions. In December 2017, the Company made a decision to postpone the adoption of a global brand that would have replaced the Optimum brand, increasing the useful life of the Optimum trade name intangible asset to 5 years, which will reduce the future annual amortization expense related to the Optimum trade name.
$2,382,339, respectively.
The decrease in depreciation and amortization of $179,779 (8%) for the year ended December 31, 2020 as compared to the prior year is due to certain fixed assets and intangible assets becoming fully depreciated or amortized, partially offset by the acceleration of amortization expense related to our Cequel segmentcertain customer relationship intangible assets and an increase in depreciation as a result of $57,780 (8%asset additions.
The decrease in depreciation and amortization of $119,195 (5%) for the year ended December 31, 2019 as compared to the prior year is due primarily to lower amortization expense for certain fixed assets and intangible assets that are beingbecoming fully depreciated or amortized, using an accelerated method, partially offset by an increase resulting from revisions made to the fair valuein depreciation as a result of assets acquired resulting from the finalization in the fourth quarter of 2016 of the purchase price allocation in connection with the Cequel Acquisition.asset additions.
Adjusted EBITDABroadband Revenue
Adjusted EBITDA amounted to $4,005,690 and $2,414,735Broadband revenue for the years ended December 31, 20172020, 2019 and 2016,2018 was $3,689,159, $3,222,605, and $2,887,455, respectively. Broadband revenue is derived principally through monthly charges to residential subscribers of which $2,751,121 and $1,259,844 relatesour broadband services. Revenue is impacted by rate increases, changes in the number of customers, including additional services sold to our Cablevision segmentexisting subscribers, and $1,254,569 and $1,154,891 relates tochanges in speed tiers. Additionally, revenue is impacted by changes in the standalone selling price of each performance obligation within our Cequel segment.promotional bundled offers.
Adjusted EBITDA is a non-GAAP measure that is defined as net loss excluding income taxes, loss from discontinued operations, 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, interest expense (including cash interest expense), interest income, depreciation and amortization (including impairments), share-based compensation expense, restructuring expense or credits and transaction expenses. See reconciliation of net loss to adjusted EBITDA above.
The increase in adjusted EBITDABroadband revenue increased $466,554 (14%) for the year ended December 31, 2017 as compare2020 compared to the prior year ended December 31, 2019. The increase was due primarily to higher average recurring broadband revenue per broadband customer, primarily driven by certain rate increases and service level changes, and an increase in broadband customers, partially offset by customer credits issued for service outages following certain storms.
Broadband revenue increased $335,150 (12%) for the year ended December 31, 2019 compared to the consolidation of the Cablevision results as of June 21, 2016, the date of the Cablevision Acquisitionyear ended December 31, 2018. The increase was due primarily to higher average recurring broadband revenue per broadband customer, primarily driven by certain rate increases and the increasesservice level changes, and an increase in revenue and decreases in operating expenses (excluding depreciation and amortization, restructuring and other expense and share‑based compensation), as discussed above.broadband customers.
Interest Expense, netVideo Revenue
Interest expense, net was $1,601,211 and $1,442,730,Video revenue for the years ended December 31, 20172020, 2019 and 2016, respectively,2018 was $3,670,859, $3,997,873 and includes interest on debt issued$4,156,428, respectively. Video revenue is derived principally through monthly charges to financeresidential customers of our video services. Revenue is impacted by rate increases, changes in the Cablevision Acquisitionnumber of customers, including additional services sold to our existing customers, and Cequel Acquisition, as well as interest on debt assumedchanges in connection with these acquisitions. The increaseprogramming packages. Additionally, revenue is impacted by changes in the standalone selling price of $158,481each performance obligation within our promotional bundled offers.
Video revenue decreased $327,014 (8%) for the year ended December 31, 20172020 compared to the year ended December 31, 2019. Video revenue for the year ended December 31, 2020 includes estimated credits of approximately $94,300 that we currently anticipate will be issued to customers as a result of $90,100 of credits the Company expects to receive from certain sports programming networks whereby the minimum number of events were not delivered pursuant to the contractual agreements with the networks and related franchise fees. These credits did not impact Adjusted EBITDA for the periods. The remaining decrease was due primarily to a decline in video customers, as well as customer credits issued for service outages following certain storms.
Video revenue decreased $158,555 (4%) for the year ended December 31, 2019 compared to the year ended December 31, 2018. The decrease was due primarily to a decline in video customers and lower average revenue per video customer.
Telephony Revenue
Telephony revenue for the years ended December 31, 2020, 2019 and 2018 was $468,777, $598,694 and $652,895, respectively. Telephony revenue is derived principally through monthly charges to residential customers for our telephony services. Revenue is impacted by changes in rates for services, changes in the number of customers, and additional services sold to our existing customers. Additionally, revenue is impacted by changes in the standalone selling price of each performance obligation within our promotional bundled offers.
Telephony revenue decreased $129,917 (22%) for the year ended December 31, 2020 compared to the year ended December 31, 2019. The decrease was due to lower average revenue per telephony customer and a decline in telephony customers, as well as customer credits issued for service outages following certain storms.
Telephony revenue decreased $54,201 (8%) for the year ended December 31, 2019 compared to the year ended December 31, 2018. The decrease was due to lower average revenue per telephony customer and a decline in telephony customers.
Business Services and Wholesale Revenue
Business services and wholesale revenue for the years ended December 31, 2020, 2019 and 2018 was $1,454,532, $1,428,532, and $1,362,758, respectively. Business services and wholesale revenue is derived primarily from the sale of fiber based telecommunications services to the business market, and the sale of broadband, video and telephony services to SMB customers.
Business services and wholesale revenue increased $26,000 (2%) for the year ended December 31, 2020 compared to the year ended December 31, 2019. The increase was primarily due to higher average recurring broadband revenue per SMB customer, primarily driven by certain rate increases and service level changes and an increase in revenue related to an indefeasible right of use contract recorded in the second quarter of 2020, partially offset by a decrease in SMB customers, customer credits issued for service outages following certain storms and customer credits of approximately $2,900 that we currently anticipate will be issued to SMB customers as a result of credits the Company expects to receive from certain sports programming networks whereby the minimum number of events were not delivered pursuant to the contractual agreements with the networks and related franchise fees. These credits did not impact Adjusted EBITDA for the periods.
Business services and wholesale revenue increased $65,774 (5%) for the year ended December 31, 2019 compared to the year ended December 31, 2018. The increase was primarily due to higher average recurring broadband revenue per SMB customer, primarily driven by certain rate increases and service level changes, an increase in revenue from the backhaul of carrier data and an increase in installation revenue.
News and Advertising Revenue
News and advertising revenue for the years ended December 31, 2020, 2019 and 2018, was $519,205, $475,904, and $487,264, respectively. News and advertising revenue is primarily derived from the sale of (i) advertising inventory available on the programming carried on our cable television systems, (ii) advertising on over the top ("OTT") platforms, (iii) digital advertising, and (iv) data analytics. News and advertising revenue also includes affiliation fees for news programming.
News and advertising revenue increased $43,301 (9%) for the year ended December 31, 2020 compared to the year ended December 31, 2019. The increase was primarily due to higher political revenue and affiliate fees.
News and advertising revenue decreased $11,360 (2%) for the year ended December 31, 2019 compared to the year ended December 31, 2018. The decrease was primarily due to lower political revenue, partially offset by an increase in digital advertising, and strong national sales.
Mobile Revenue
Mobile revenue for the year ended December 31, 2020 and 2019 was $78,127 and $21,264, respectively, and relates to sales of devices and mobile services that were launched to consumers in September 2019. As of December 31, 2020, we had approximately 169 thousand mobile lines.
Other Revenue
Other revenue for the years ended December 31, 2020, 2019 and 2018 was $13,983, $15,987, and $19,808, respectively. Other revenue includes revenue from other miscellaneous revenue streams.
Programming and Other Direct Costs
Programming and other direct costs for the years ended December 31, 2020, 2019 and 2018 amounted to $3,340,442, $3,300,528 and $3,173,076, respectively. Programming and other direct costs include cable programming costs, which are costs paid to programmers (net of amortization of any incentives received from programmers for carriage) for cable content (including costs of VOD and pay-per-view) and are generally paid on a per-customer basis. These costs typically rise due to increases in contractual rates and new channel launches and are also impacted by changes in the number of customers receiving certain programming services. These costs also include interconnection, call completion, circuit and transport fees paid to other telecommunication companies for the transport and termination of voice and data services, which typically vary based on rate changes and the level of usage by our customers. These costs also include franchise fees which are payable to the state governments and local municipalities where we operate and are primarily based on a percentage of certain categories of revenue derived from the provision of video service over our cable systems, which vary by state and municipality. These costs change in relation to changes in such categories of revenues or rate changes. Additionally, these costs include the costs of mobile devices sold to our customers and direct costs of providing mobile services.
The increase of $39,914 (1%) for the year ended December 31, 2020, as compared to the prior year was primarily attributable to the following:
| | | | | |
Increase in call completion and transfer costs primarily related to our mobile business ($30,240) | $ | 33,126 | |
Costs of mobile devices | 24,359 | |
Increase primarily relating to costs of digital media and linear advertising spots for resale | 17,160 | |
Decrease in programming costs which includes estimated credits expected to be received (see discussion below) and a decrease in costs due to lower video customers, partially offset by an increase in costs due to net contractual rate increases | (21,511) | |
Decrease in costs due to certain tax refunds | (11,033) | |
Other net decreases | (2,187) | |
| $ | 39,914 | |
The increase of $127,452 (4%) for the year ended December 31, 2019, as compared to December 31, 2018 was primarily attributable to the following:
| | | | | |
Increase in programming costs due primarily to contractual rate increases, partially offset by lower video customers and lower video-on-demand and pay-per-view costs | $ | 102,071 | |
Costs of mobile devices | 22,379 | |
Increase in costs of digital media and linear advertising spots for resale | 9,488 | |
Decrease in call completion and transfer costs primarily due to lower level of activity related to our telephony service, partially offset by an increase in costs related to our mobile service of $3,890 | (9,975) | |
Other net increases | 3,489 | |
| $ | 127,452 | |
Programming costs
Programming costs aggregated $2,701,145, $2,722,656, and $2,620,585 for the years ended December 31, 2020, 2019 and 2018, respectively. Programming costs for the year ended December 31, 2020 include estimated credits of approximately $93,000 that the Company expects to receive from certain sports programming networks whereby the minimum number of events were not delivered pursuant to the contractual agreements with the networks. These credits did not impact Adjusted EBITDA for the periods as we reduced video revenue for a corresponding amount as it is currently anticipated that these credits will be issued to customers. Our programming costs in 2021 will continue to be impacted by changes in programming rates, which we expect to increase, and by changes in the number of video customers.
Other Operating Expenses
Other operating expenses for the years ended December 31, 2020, 2019 and 2018 amounted to $2,264,473, $2,300,398, and $2,290,266, respectively. Other operating expenses include staff costs and employee benefits including salaries of company employees and related taxes, benefits and other employee related expenses, as well as third-party labor costs. Other operating expenses also include network management and field service costs, which represent costs associated with the maintenance of our broadband network, including costs of certain customer connections and other costs associated with providing and maintaining services to our customers.
Customer installation and network repair and maintenance costs may fluctuate as a result of changes in the level of activities and the utilization of contractors as compared to employees. Also, customer installation costs fluctuate as the portion of our expenses that we are able to capitalize changes. Costs associated with the initial deployment of new customer premise equipment necessary to provide broadband, video and telephony services are capitalized (asset-based). The redeployment of customer premise equipment is expensed as incurred.
Other operating expenses also include costs related to the operation and maintenance of our call center facilities that handle customer inquiries and billing and collection activities and sales and marketing costs, which include advertising production and placement costs associated with acquiring and retaining customers. These costs vary period to period and certain of these costs, such as sales and marketing, may increase with intense competition. Additionally, other operating expenses include various other administrative costs, including legal fees, and product development costs.
The decrease in other operating expenses of $35,925, net of an increase of $35,318 relating to our mobile service, for the year ended December 31, 2020 as compared to the prior year was attributable to the following:
| | | | | |
Net decrease in labor costs and benefits (offset by an increase in costs related to Cheddar of $10,548, which was acquired in June 2019), partially offset by a decrease in capitalizable activity | $ | (43,837) | |
Decrease in bad debt expense | (25,555) | |
Decrease in sales and marketing costs (including third-party commissions) | (15,862) | |
Increase in share-based compensation | 19,550 | |
Increase in rent and property taxes | 13,506 | |
Increase in legal costs | 9,008 | |
Other net increases (including a decrease of $5,598 due to a favorable resolution of a tax matter) | 7,265 | |
| $ | (35,925) | |
The increase in other operating expenses of $10,132, including an increase of $32,458 relating to our mobile service, for the year ended December 31, 2019 as compared to the prior year was attributable to the following:
| | | | | |
Increase in share-based compensation, including charges related to modifications of awards | $ | 45,725 | |
Increase in bad debt | 20,095 | |
Net decrease in labor costs and benefits (partially offset by an increase in costs related to i24NEWS of $6,425 and an increase of $14,720 related to Cheddar) and an increase in capitalizable activity | (33,431) | |
Decrease in management fee relating to certain executive, administrative and managerial services provided to the Company from Altice Europe prior to separation in June 2018 | (13,250) | |
Net decrease in marketing costs | (7,457) | |
Other net decreases (partially offset by an increase in costs of $2,380 relating to Cheddar and $3,027 related to i24NEWS) | (1,550) | |
| $ | 10,132 | |
Restructuring and Other Expense
Restructuring and other expense for the year ended December 31, 2020 amounted to $91,073, as compared to $72,978 for the year ended December 31, 2019 and $38,548 for the year ended December 31, 2018. These amounts primarily related to severance and other employee related costs resulting from headcount reductions, facility realignment costs and impairments of certain ROU assets, related to initiatives which commenced in 2016 and 2019 that are intended to simplify the Company's organizational structure. The expense for the year ended December 31, 2020 also included $47,631 related to contractual payments for terminated employees and $4,068 related to the facility realignment costs. We may incur additional restructuring expenses in the future as we continue to analyze our organizational structure.
Depreciation and Amortization
Depreciation and amortization for the years ended December 31, 2020, 2019 and 2018 amounted to $2,083,365, $2,263,144 and $2,382,339, respectively.
The decrease in depreciation and amortization of $179,779 (8%) for the year ended December 31, 2020 as compared to the prior year is attributabledue to the following:
|
| | | |
Increase due to changes in average debt balances and interest rates on our indebtedness and collateralized debt | $ | 142,236 |
|
Lower interest income | 11,890 |
|
Other net increases, primarily amortization of deferred financing costs and original issue discounts | 4,355 |
|
| $ | 158,481 |
|
See "Liquiditycertain fixed assets and Capital Resources" discussion below for a detail of our borrower groups.
Gain on Investments, net
Gain on investments, net for the years ended December 31, 2017 and 2016, of $237,354 and $141,896 consists primarily of the increase in the fair value of Comcast common stock owned by the Company for the periods. For 2016, the gain is for the period June 21, 2016 through December 31, 2016. The effects of these gains areintangible assets becoming fully depreciated or amortized, partially offset by the losses on theacceleration of amortization expense related equity derivative contracts, net described below.to certain customer relationship intangible assets and an increase in depreciation as a result of asset additions.
Loss on Derivative Contracts, net
Loss on derivative contracts, netThe decrease in depreciation and amortization of $119,195 (5%) for the year ended December 31, 2017 amounted to $236,3302019 as compared to $53,696 for the prior year ended December 31, 2016, and includes realized and unrealized lossesis due to the change in fair value of equity derivative contracts relating to the Comcast common stock owned by the Company. For 2016, the loss is for the period June 21, 2016 through December 31, 2016. The effects of these losses are offset by gains on investment securities pledged as collateral, which are included in gain on investments, net discussed above. The loss for the year ended December 31, 2017 also includes the realized loss on the settlement of certain put-call options of $97,410.
Gain (loss) on interest rate swap contracts
Gain (loss) on interest rate swap contracts was $5,482 and $(72,961) for the years ended December 31, 2017 and 2016. These amounts represent the increase or decrease in fair value of the fixed to floating interest rate swaps entered into by our Cequel segment in September 2016. The objective of these swaps is to adjust the proportion of total debt that is subject to fixed and variable interest rates. These swap contracts are not designated as hedges for accounting purposes.
Loss on extinguishment of debt and write-off of deferred financing costs
Loss on extinguishment of debt and write-off of deferred financing costs amounted to $600,240 and $127,649 for the year ended December 31, 2017 and 2016, respectively. The 2017 amount includes the premium of $513,723 related to the notes payable to affiliates and related parties that were converted into shares of the Company’s common stock, $18,976 related to the Cablevision Extension Amendment and the redemption of senior notes, $28,684 related to the Cequel Extension
Amendment and the redemption of senior notes and $38,858 related to premiums paid upon the early repayment of certain senior notes outstanding.
Loss on extinguishment of debt amounted to $127,649 for the year ended December 31, 2016 and includes primarily the write-off of unamortized deferred financing costs and the unamortized discount relating to the prepayment of $1,290,500 outstanding under the term credit facility at Cablevision.
Income Tax Benefit
The Company recorded income tax benefit of $2,852,967 for the year ended December 31, 2017. Pursuant to the enactment of Tax Reform on December 22, 2017, the Company recorded a noncash deferred tax benefit of $2,337,900 to remeasure the net deferred tax liability to adjust for the reduction in the corporate federal income tax rate from 35% to 21% which is effective on January 1, 2018. Nondeductible share-based compensation expense for the year ended December 31, 2017 reduced income tax benefit by $22,938.
The Company recorded income tax benefit of $259,666 for the year ended December 31, 2016. Nondeductible share-based compensation expense for the year ended December 31, 2016 reduced income tax benefit by $5,747.
On June 9, 2016 the common stock of Cequel was contributed to the Company. On June 21, 2016, the Company completed its acquisition of Cablevision. Accordingly, Cequel and Cablevision joined the federal consolidated and certain state combined income tax returns of the Company. As a result, the applicate tax rate used to measure deferred tax assets and liabilities increased, resulting in a non-cash deferred income tax charge of $153,660 in the second quarter of 2016. In addition, there was no state income tax benefit on the pre-merger accrued interest at Neptune Finco Corp. ("Finco"), an indirect wholly-owned subsidiary of Altice N.V. formed to complete the financing for the Cablevision Acquisition and the merger with CSC Holdings, resulting in additional deferred tax expense of $18,542 for the year ended December 31, 2016.
Results of Operations - Cablevision Systems Corporation
|
| | | | | | | | | | | |
| Cablevision Systems Corporation |
| Successor | | Predecessor |
| June 21, 2016 to December 31, 2016 | January 1, 2016 to June 20, 2016 | | Year Ended December 31, 2015 |
Revenue (a): | | | | | |
Residential: | | | | | |
Pay TV | $ | 1,638,691 |
| | $ | 1,468,006 |
| | $ | 3,142,991 |
|
Broadband | 782,615 |
| | 673,010 |
| | 1,303,918 |
|
Telephony | 376,034 |
| | 342,142 |
| | 748,181 |
|
Business services and wholesale | 468,632 |
| | 411,102 |
| | 834,154 |
|
Advertising | 163,678 |
| | 125,419 |
| | 263,839 |
|
Other | 14,402 |
| | 117,925 |
| | 252,462 |
|
Total revenue | 3,444,052 |
| | 3,137,604 |
| | 6,545,545 |
|
Operating expenses: | | | | | |
Programming and other direct costs | 1,164,925 |
| | 1,088,555 |
| | 2,269,290 |
|
Other operating expenses | 1,028,447 |
| | 1,136,970 |
| | 2,546,319 |
|
Restructuring and other expense | 212,150 |
| | 22,223 |
| | 16,213 |
|
Depreciation and amortization (including impairments) | 963,665 |
| | 414,550 |
| | 865,252 |
|
Operating income | 74,865 |
| | 475,306 |
| | 848,471 |
|
Other income (expense): | | | | | |
Interest expense, net | (606,347 | ) | | (285,508 | ) | | (584,839 | ) |
Gain (loss) on investments, net | 141,896 |
| | 129,990 |
| | (30,208 | ) |
Gain (loss) on equity derivative contracts, net | (53,696 | ) | | (36,283 | ) | | 104,927 |
|
Loss on extinguishment of debt and write-off of deferred financing costs | (102,894 | ) | | — |
| | (1,735 | ) |
Other income (expense), net | 4,329 |
| | 4,855 |
| | 6,045 |
|
Income (loss) from continuing operations before income taxes | (541,847 | ) | | 288,360 |
| | 342,661 |
|
Income tax benefit (expense) | 213,065 |
| | (124,848 | ) | | (154,872 | ) |
Income (loss) from continuing operations, net of income taxes | (328,782 | ) | | 163,512 |
| | 187,789 |
|
Income (loss) from discontinued operations, net of income taxes | — |
| | — |
| | (12,541 | ) |
Net income (loss) | (328,782 | ) | | 163,512 |
| | 175,248 |
|
Net loss (income) attributable to noncontrolling interests | (551 | ) | | 236 |
| | 201 |
|
Net income (loss) attributable to Cablevision stockholder(s) | $ | (329,333 | ) | | $ | 163,748 |
| | $ | 175,449 |
|
___________________ | |
(a) | Certain reclassifications have been made to previously reported amounts by product to reflect the current presentation. |
| |
(a) | Includes primarily dividends received on Comcast common stock owned by the Company. |
| |
(b) | Consists of unrealized and realized losses (gains) due to the change in fair value of equity derivative contracts relating to the Comcast common stock owned by the Company. |
|
| | | | | | | | | | | |
The following is a reconciliation of net income (loss) to Adjusted EBITDA: |
| Cablevision |
| Successor | | Predecessor |
| June 21, 2016 to December 31, 2016 | January 1, 2016 to June 20, 2016 | | Year Ended December 31, 2015 |
Net income (loss) | $ | (328,782 | ) | | $ | 163,512 |
| | $ | 175,248 |
|
(Income) loss from discontinued operations, net of income taxes | — |
| | — |
| | 12,541 |
|
Income tax (benefit) expense | (213,065 | ) | | 124,848 |
| | 154,872 |
|
Other income (a) | (4,329 | ) | | (4,855 | ) | | (6,045 | ) |
Loss on extinguishment of debt and write-off of deferred financing costs | 102,894 |
| | — |
| | 1,735 |
|
Loss (gain) on equity derivative contracts, net (b) | 53,696 |
| | 36,283 |
| | (104,927 | ) |
Loss (gain) on investments, net | (141,896 | ) | | (129,990 | ) | | 30,208 |
|
Interest expense, net | 606,347 |
| | 285,508 |
| | 584,839 |
|
Depreciation and amortization (including impairments) | 963,665 |
| | 414,550 |
| | 865,252 |
|
Restructuring and other expenses | 212,150 |
| | 22,223 |
| | 16,213 |
|
Share-based compensation | 9,164 |
| | 25,231 |
| | 65,286 |
|
Adjusted EBITDA | $ | 1,259,844 |
| | $ | 937,310 |
| | $ | 1,795,222 |
|
|
| | | | | | | | | | |
| Cablevision Systems Corporation |
| Years Ended December 31, | | Net Increase (Decrease) |
| 2016 | | 2015 | | 2016 |
| (in thousands, except per customer amounts) |
Homes passed (a) | 5,116 |
| | 5,076 |
| | 40 |
|
Total customers relationships (b) | 3,141 |
| | 3,115 |
| | 26 |
|
Residential | 2,879 |
| | 2,858 |
| | 21 |
|
SMB | 262 |
| | 258 |
| | 4 |
|
Residential customers (c): | | | | | |
Pay TV | 2,428 |
| | 2,487 |
| | (59 | ) |
Broadband | 2,619 |
| | 2,562 |
| | 57 |
|
Telephony | 1,962 |
| | 2,007 |
| | (45 | ) |
Residential triple product customer penetration (d): | 64.8 | % | | 67.6 | % | |
|
|
Penetration of homes passed (e): | 61.4 | % | | 61.4 | % | |
|
|
ARPU (f) | $ | 154.49 |
| | $ | 150.61 |
| |
|
|
____________________ | |
(a) | Represents the estimated number of single residence homes, apartments and condominium units passed by the cable distribution network in areas serviceable without further extending the transmission lines. In addition, it includes commercial establishments that have connected to our cable distribution network. |
| |
(b) | Represents number of households/businesses that receive at least one of the Company’s services. |
| |
(c) | Customers represent each customer account (set up and segregated by customer name and address), weighted equally and counted as one customer, regardless of size, revenue generated, or number of boxes, units, or outlets. In calculating the number of customers, we count all customers other than inactive/disconnected customers. Free accounts are included in the customer counts along with all active accounts, but they are limited to a prescribed group. Most of these accounts are also not entirely free, as they typically generate revenue through pay-per-view or other pay services and certain equipment fees. Free status is not granted to regular customers as a promotion. In counting bulk residential customers, such as an apartment building, we count each subscribing family unit within the building as one customer, but do not count the master account for the entire building as |
a customer. We count a bulk commercial customer, such as a hotel, as one customer, and do not count individual room units at that hotel.
| |
(d) | Represents the number of customers that subscribe to three of our services divided by total residential customer relationships. |
| |
(e) | Represents the number of total customer relationships divided by homes passed. |
| |
(f) | Calculated by dividing the average monthly revenue for the respective quarter (fourth quarter for annual periods) presented derived from the sale of broadband, pay television and telephony services to residential customers for the respective quarter by the average number of total residential customers for the same period. |
Cablevision - Comparison of Results for the Periods June 21, 2016 through December 31, 2016 and January 1, 2016 through June 20, 2016 to Results for the Year Ended December 31, 2015
Pay Television Revenue
Pay television revenue amounted to $1,638,691 and $1,468,006 for the period June 21, 2016 through December 31, 2016 and January 1, 2016 through June 20, 2016, respectively, compared to$3,142,991 for the year ended December 31, 2015. Pay television revenue for the Successor and Predecessor periods in 2016 was impacted by a decline in pay television customers, a decrease due to a pay-per-view boxing event that took place in 2015,intangible assets becoming fully depreciated or amortized, partially offset by increases in revenue due primarily to rate increases for certain pay television services implemented during the first quarter of 2016 and an increase in fees charged to restore suspended services.
We believe our pay television customer declines noted in the table above are largely attributable to intense competition, particularly from Verizon,depreciation as well as competition from companies that deliver video content over the Internet directly to customers. Also, the declines are attributable to our disciplined pricing and credit policies. These factors are expected to continue to impact our ability to maintain or increase our existing customers and revenue in the future.a result of asset additions.
Broadband Revenue
Broadband revenue amounted to $782,615 and $673,010 for the period June 21, 2016 throughyears ended December 31, 20162020, 2019 and January 1, 20162018 was $3,689,159, $3,222,605, and $2,887,455, respectively. Broadband revenue is derived principally through June 20, 2016, respectively, comparedmonthly charges to $1,303,918residential subscribers of our broadband services. Revenue is impacted by rate increases, changes in the number of customers, including additional services sold to our existing subscribers, and changes in speed tiers. Additionally, revenue is impacted by changes in the standalone selling price of each performance obligation within our promotional bundled offers.
Broadband revenue increased $466,554 (14%) for the year ended December 31, 2015. Broadband2020 compared to the year ended December 31, 2019. The increase was due primarily to higher average recurring broadband revenue for the Successor and Predecessor periods in 2016 was impactedper broadband customer, primarily driven by certain rate increases for certain broadband services implemented during the first quarter of 2016,and service level changes, and an increase in broadband customers, and an increase in fees charged to restore suspended services.partially offset by customer credits issued for service outages following certain storms.
Telephony Revenue
TelephonyBroadband revenue amounted to $376,034 and $342,142 for the period June 21, 2016 through December 31, 2016 and January 1, 2016 through June 20, 2016, respectively, compared to $748,181increased $335,150 (12%) for the year ended December 31, 2015. Telephony2019 compared to the year ended December 31, 2018. The increase was due primarily to higher average recurring broadband revenue per broadband customer, primarily driven by certain rate increases and service level changes, and an increase in broadband customers.
Video Revenue
Video revenue for the Successoryears ended December 31, 2020, 2019 and Predecessor periods in 20162018 was $3,670,859, $3,997,873 and $4,156,428, respectively. Video revenue is derived principally through monthly charges to residential customers of our video services. Revenue is impacted by a declinerate increases, changes in telephonythe number of customers, including additional services sold to our existing customers, and a declinechanges in international calling.programming packages. Additionally, revenue is impacted by changes in the standalone selling price of each performance obligation within our promotional bundled offers.
Business Services Revenue54
Business services and wholesale
Video revenue amounted to $468,632 and $411,102 for the period June 21, 2016 through December 31, 2016 and January 1, 2016 through June 20, 2016, respectively, compared to $834,154decreased $327,014 (8%) for the year ended December 31, 2015. 2020 compared to the year ended December 31, 2019. Video revenue for the year ended December 31, 2020 includes estimated credits of approximately $94,300 that we currently anticipate will be issued to customers as a result of $90,100 of credits the Company expects to receive from certain sports programming networks whereby the minimum number of events were not delivered pursuant to the contractual agreements with the networks and related franchise fees. These credits did not impact Adjusted EBITDA for the periods. The remaining decrease was due primarily to a decline in video customers, as well as customer credits issued for service outages following certain storms.
Video revenue decreased $158,555 (4%) for the year ended December 31, 2019 compared to the year ended December 31, 2018. The decrease was due primarily to a decline in video customers and lower average revenue per video customer.
Telephony Revenue
Telephony revenue for the years ended December 31, 2020, 2019 and 2018 was $468,777, $598,694 and $652,895, respectively. Telephony revenue is derived principally through monthly charges to residential customers for our telephony services. Revenue is impacted by changes in rates for services, changes in the number of customers, and additional services sold to our existing customers. Additionally, revenue is impacted by changes in the standalone selling price of each performance obligation within our promotional bundled offers.
Telephony revenue decreased $129,917 (22%) for the year ended December 31, 2020 compared to the year ended December 31, 2019. The decrease was due to lower average revenue per telephony customer and a decline in telephony customers, as well as customer credits issued for service outages following certain storms.
Telephony revenue decreased $54,201 (8%) for the year ended December 31, 2019 compared to the year ended December 31, 2018. The decrease was due to lower average revenue per telephony customer and a decline in telephony customers.
Business Services and Wholesale Revenue
Business services and wholesale revenue for the Successor and Predecessor periods in 2016 was impacted by rate increases for certain broadband services implemented during the first quarter of 2016, an increase in broadband customers and an increase in Ethernet revenue from an increase in services installed, partially offset by reduced traditional voice and data services.
Advertising Revenue
Advertising revenue amounted to $163,678 and $125,419 for the period June 21, 2016 throughyears ended December 31, 20162020, 2019 and January 1, 2016 through June 20, 2016, respectively, compared2018 was $1,454,532, $1,428,532, and $1,362,758, respectively. Business services and wholesale revenue is derived primarily from the sale of fiber based telecommunications services to $263,839the business market, and the sale of broadband, video and telephony services to SMB customers.
Business services and wholesale revenue increased $26,000 (2%) for the year ended December 31, 2015. Advertising2020 compared to the year ended December 31, 2019. The increase was primarily due to higher average recurring broadband revenue for the Successorper SMB customer, primarily driven by certain rate increases and Predecessor periods in 2016 was impacted byservice level changes and an increase in advertising salesrevenue related to an indefeasible right of use contract recorded in the second quarter of 2020, partially offset by a decrease in SMB customers, customer credits issued for service outages following certain storms and customer credits of approximately $2,900 that we currently anticipate will be issued to SMB customers as a result of credits the Company expects to receive from certain sports programming networks whereby the minimum number of events were not delivered pursuant to the political sector.
Other Revenue
Other revenue amounted to $14,402contractual agreements with the networks and $117,925related franchise fees. These credits did not impact Adjusted EBITDA for the period June 21, 2016 through December 31, 2016periods.
Business services and
January 1, 2016 through June 20, 2016, respectively, compared to $252,462 wholesale revenue increased $65,774 (5%) for the year ended December 31, 2015. 2019 compared to the year ended December 31, 2018. The increase was primarily due to higher average recurring broadband revenue per SMB customer, primarily driven by certain rate increases and service level changes, an increase in revenue from the backhaul of carrier data and an increase in installation revenue.
News and Advertising Revenue
News and advertising revenue for the years ended December 31, 2020, 2019 and 2018, was $519,205, $475,904, and $487,264, respectively. News and advertising revenue is primarily derived from the sale of (i) advertising inventory available on the programming carried on our cable television systems, (ii) advertising on over the top ("OTT") platforms, (iii) digital advertising, and (iv) data analytics. News and advertising revenue also includes affiliation fees for news programming.
News and advertising revenue increased $43,301 (9%) for the year ended December 31, 2020 compared to the year ended December 31, 2019. The increase was primarily due to higher political revenue and affiliate fees.
News and advertising revenue decreased $11,360 (2%) for the year ended December 31, 2019 compared to the year ended December 31, 2018. The decrease was primarily due to lower political revenue, partially offset by an increase in digital advertising, and strong national sales.
Mobile Revenue
Mobile revenue for the year ended December 31, 2020 and 2019 was $78,127 and $21,264, respectively, and relates to sales of devices and mobile services that were launched to consumers in September 2019. As of December 31, 2020, we had approximately 169 thousand mobile lines.
Other Revenue
Other revenue for the Successoryears ended December 31, 2020, 2019 and Predecessor periods in 20162018 was $13,983, $15,987, and $19,808, respectively. Other revenue includes revenue recognized by Newsday through July 7, 2016, affiliation fees paid by cable operators for carriage of our News 12 Networks andfrom other miscellaneous revenue sources. On July 7, 2016, the Company sold a 75% interest in Newsday and as a result no longer consolidates its operating results. As of July 7, 2016, the Company’s 25% interest in the operating results of Newsday is recorded on the equity basis.streams.
Programming and Other Direct Costs
Programming and other direct costs for the years ended December 31, 2020, 2019 and 2018 amounted to $3,340,442, $3,300,528 and $3,173,076, respectively. Programming and other direct costs include cable programming costs, which are costs paid to programmers (net of amortization of any incentives received from programmers for carriage) for cable content (including costs of VOD and pay-per-view) and are generally paid on a per-customer basis.
These costs typically rise due to increases in contractual rates and new channel launches and are also impacted by changes in the number of customers receiving certain programming services. These costs also include interconnection, call completion, circuit and transport fees paid to other telecommunication companies for the transport and termination of voice and data services, which typically vary based on rate changes and the level of usage by our customers. These costs also include franchise fees which are payable to the state governments and local municipalities where we operate and are primarily based on a percentage of certain categories of revenue derived from the provision of pay televisionvideo service over our cable systems, which vary by state and municipality. These costs change in relation to changes in such categories of revenues or rate changes. TheseAdditionally, these costs also included content, production and distributioninclude the costs of the Newsday business.
Programmingmobile devices sold to our customers and other direct costs amounted to $1,164,925 and $1,088,555 for the period June 21, 2016 through December 31, 2016 and January 1, 2016 through June 20, 2016, respectively, compared to $2,269,290of providing mobile services.
The increase of $39,914 (1%) for the year ended December 31, 2015. Programming and other direct costs for the Successor and Predecessor periods in 2016 were impacted by an increase in programming costs due primarily to contractual rate increases, partially offset by lower video customers. These costs were also impacted by the lower costs related to Newsday (due2020, as compared to the saleprior year was primarily attributable to the following:
| | | | | |
Increase in call completion and transfer costs primarily related to our mobile business ($30,240) | $ | 33,126 | |
Costs of mobile devices | 24,359 | |
Increase primarily relating to costs of digital media and linear advertising spots for resale | 17,160 | |
Decrease in programming costs which includes estimated credits expected to be received (see discussion below) and a decrease in costs due to lower video customers, partially offset by an increase in costs due to net contractual rate increases | (21,511) | |
Decrease in costs due to certain tax refunds | (11,033) | |
Other net decreases | (2,187) | |
| $ | 39,914 | |
The increase of our 75% interest in Newsday in July 2016), lower call completion and transport costs primarily due to lower level of activity, lower cost of sales related to wireless handset inventory and higher franchise and other fees due primarily to increases in rates in certain areas, partially offset by lower pay television customers.
Programming costs aggregated $978,120 and $883,792 for the period June 21, 2016 through December 31, 2016 and January 1, 2016 through June 20, 2016, respectively, compared to $1,796,021$127,452 (4%) for the year ended December 31, 2015.2019, as compared to December 31, 2018 was primarily attributable to the following:
| | | | | |
Increase in programming costs due primarily to contractual rate increases, partially offset by lower video customers and lower video-on-demand and pay-per-view costs | $ | 102,071 | |
Costs of mobile devices | 22,379 | |
Increase in costs of digital media and linear advertising spots for resale | 9,488 | |
Decrease in call completion and transfer costs primarily due to lower level of activity related to our telephony service, partially offset by an increase in costs related to our mobile service of $3,890 | (9,975) | |
Other net increases | 3,489 | |
| $ | 127,452 | |
Programming costs
Programming costs aggregated $2,701,145, $2,722,656, and $2,620,585 for the years ended December 31, 2020, 2019 and 2018, respectively. Programming costs for the year ended December 31, 2020 include estimated credits of approximately $93,000 that the Company expects to receive from certain sports programming networks whereby the minimum number of events were not delivered pursuant to the contractual agreements with the networks. These credits did not impact Adjusted EBITDA for the periods as we reduced video revenue for a corresponding amount as it is currently anticipated that these credits will be issued to customers. Our programming costs increased 4% for the 2016 periods due primarilyin 2021 will continue to an increasebe impacted by changes in contractual programming rates, which we expect to increase, and a pay-per-view boxing eventby changes in 2015, partially offset by a decrease in telephonythe number of video customers.
Other Operating Expenses
Other operating expenses for the years ended December 31, 2020, 2019 and 2018 amounted to $2,264,473, $2,300,398, and $2,290,266, respectively. Other operating expenses include staff costs and employee benefits including salaries of company employees and related taxes, benefits and other employee-related expenses.employee related expenses, as well as third-party labor costs. Other operating expenses also include network management and field service costs, which represent costs associated with the maintenance of our broadband network, including costs of certain customer connections and other costs associated with providing and maintaining services to our customers which are impacted by general cost increases for contractors, insurance and other various expenses.customers.
Customer installation and network repair and maintenance costs may fluctuate as a result of changes in the level of activities and the utilization of contractors as compared to employees. Also, customer installation costs fluctuate as the portion of our expenses that we are able to capitalize changes. Network repairCosts associated with the initial deployment of new customer premise equipment necessary to provide broadband, video and maintenance and utility costs also fluctuatetelephony services are capitalized (asset-based). The redeployment of customer premise equipment is expensed as capitalizable network upgrade and enhancement activity changes.incurred.
Other operating expenses also include costs related to the operation and maintenance of our call center facilities that handle customer inquiries and billing and collection activities and sales and marketing costs, which include advertising production and placement costs associated with acquiring and retaining customers. These costs vary period to period and certain of these costs, such as sales and marketing, may increase with intense competition. Additionally, other operating expenses include various other administrative costs, including legal fees, and product development costs.
OtherThe decrease in other operating expenses amountedof $35,925, net of an increase of $35,318 relating to $1,028,447 and $1,136,970 for the period June 21, 2016 through December 31, 2016 and January 1, 2016 through June 20, 2016, respectively, compared to $2,546,319our mobile service, for the year ended December 31, 2015. 2020 as compared to the prior year was attributable to the following:
| | | | | |
Net decrease in labor costs and benefits (offset by an increase in costs related to Cheddar of $10,548, which was acquired in June 2019), partially offset by a decrease in capitalizable activity | $ | (43,837) | |
Decrease in bad debt expense | (25,555) | |
Decrease in sales and marketing costs (including third-party commissions) | (15,862) | |
Increase in share-based compensation | 19,550 | |
Increase in rent and property taxes | 13,506 | |
Increase in legal costs | 9,008 | |
Other net increases (including a decrease of $5,598 due to a favorable resolution of a tax matter) | 7,265 | |
| $ | (35,925) | |
The increase in other operating expenses of $10,132, including an increase of $32,458 relating to our mobile service, for the Successor and Predecessor periods in 2016 were impacted by a decrease in employee-related costs relatedyear ended December 31, 2019 as compared to the elimination of certain positions, lower benefits and an increase in capitalizable activity, partially offset by merit increases. These costs were also impacted by the lower costs related to Newsday (dueprior year was attributable to the sale of our 75% interest in Newsday in July 2016), a decrease in share based compensation, a decrease in long-term incentive plan awards, lower legal costs, lower sales and marketing costs, lower repair and maintenance expenses, lower contractor costs, a settlement of a class action legal matter in 2015, partially offset by an increase in the management fee to Altice N.V.following:
| | | | | |
Increase in share-based compensation, including charges related to modifications of awards | $ | 45,725 | |
Increase in bad debt | 20,095 | |
Net decrease in labor costs and benefits (partially offset by an increase in costs related to i24NEWS of $6,425 and an increase of $14,720 related to Cheddar) and an increase in capitalizable activity | (33,431) | |
Decrease in management fee relating to certain executive, administrative and managerial services provided to the Company from Altice Europe prior to separation in June 2018 | (13,250) | |
Net decrease in marketing costs | (7,457) | |
Other net decreases (partially offset by an increase in costs of $2,380 relating to Cheddar and $3,027 related to i24NEWS) | (1,550) | |
| $ | 10,132 | |
Restructuring and Other Expense
Restructuring and other expense amounted to $212,150 and $22,223 for the period June 21, 2016 through December 31, 2016 and January 1, 2016 through June 20, 2016, respectively, compared to $16,213 for the year ended December 31, 2015. Restructuring and other expense2020 amounted to $91,073, as compared to $72,978 for the Successor 2016 period isyear ended December 31, 2019 and $38,548 for the year ended December 31, 2018. These amounts primarily related to severance and other employee related costs resulting from headcount reductions, facility realignment costs and impairments of certain ROU assets, related to initiatives which commenced in the Successor period2016 and 2019 that are intended to simplify the Company’sCompany's organizational structure.
The restructuring and other expense for the Predecessor 2016 period is primarilyyear ended December 31, 2020 also included $47,631 related to transaction costs of $19,924 incurred in connection with the Cablevision Acquisitioncontractual payments for terminated employees and adjustments$4,068 related to priorthe facility realignment costs. We may incur additional restructuring plans of $2,299. Restructuring and other expense for 2015 includes transaction costs incurredexpenses in connection with the Cablevision Acquisition of $17,862, net of adjustments relatedfuture as we continue to prior restructuring plans of $1,649.analyze our organizational structure.
Depreciation and Amortization
Depreciation and amortization (including impairments)for the years ended December 31, 2020, 2019 and 2018 amounted to $963,665$2,083,365, $2,263,144 and $414,550 for the period June 21, 2016 through December 31, 2016$2,382,339, respectively.
The decrease in depreciation and January 1, 2016 through June 20, 2016, respectively, compared to $865,252amortization of $179,779 (8%) for the year ended December 31, 2015. Depreciation2020 as compared to the prior year is due to certain fixed assets and intangible assets becoming fully depreciated or amortized, partially offset by the acceleration of amortization expense related to certain customer relationship intangible assets and an increase in depreciation as a result of asset additions.
The decrease in depreciation and amortization of $119,195 (5%) for the Successor period in 2016 was impactedyear ended December 31, 2019 as compared to the prior year is due to certain fixed assets and intangible assets becoming fully depreciated or amortized, partially offset by an increase in related to the step-up in the carrying valuedepreciation as a result of property, plant and equipment and amortizable intangible assets recorded in connection with the Cablevision Acquisition on June 21, 2016, partially offset by certain assets being retired or becoming fully depreciated.asset additions.
Adjusted EBITDA
Adjusted EBITDA amounted to $1,259,844$4,414,814, $4,265,471, and $937,310$4,163,078 for the periods June 21, 2016 throughyears ended December 31, 20162020, 2019 and January 1, 2016 through June 20, 2016, respectively, compared2018, respectively.
Adjusted EBITDA is a non-GAAP measure that is defined as net income (loss) excluding income taxes, 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, interest expense, interest income, depreciation and amortization (including impairments), share-based compensation expense or benefit, restructuring expense or credits and transaction expenses. See reconciliation of net income (loss) to $1,795,222adjusted EBITDA above.
The increases in adjusted EBITDA for the year ended December 31, 2015. Adjusted EBITDA for2020 as compared to the 2016 periodsprior year was impacted by an increasedue to the increases in revenue and a decrease in operating expenses for 2020 (excluding depreciation and amortization, restructuring and other expense and share-based compensation), as discussed above.
The increases in adjusted EBITDA for the year ended December 31, 2019 as compared to the prior year was due to the increases in revenue, partially offset by an increase in operating expenses (excluding depreciation and amortization, restructuring and other expense and share-based compensation), as discussed above.
Operating Free Cash Flow
Operating free cash flow was $3,340,859, $2,910,121 and $3,009,489 for the years ended December 31, 2020, 2019 and 2018, respectively. The increase in operating free cash flow for 2020 as compared to 2019 is due to a decrease in cash capital expenditures and an increase in adjusted EBITDA. The decrease in operating free cash flow in 2019 as compared to 2018 was due to an increase in cash capital expenditures, partially offset by an increase in adjusted EBITDA.
Free Cash Flow
Free cash flow was $1,906,209, $1,198,819 and $1,354,728 for the years ended December 31, 2020, 2019 and 2018, respectively. The increase in free cash flow in 2020 as compared to 2019 is primarily due to an increase in cash from operating activities and a decrease in cash capital expenditures. The decrease in free cash flow in 2019 as compared to 2018 is primarily due to an increase in cash capital expenditures.
Interest Expense, netexpense
Interest expense, amounted to $606,347net was $1,350,341, $1,530,850, and $285,508$1,545,426 for the period June 21, 2016 throughyears ended December 31, 20162020, 2019 and January 1, 2016 through June 20, 2016, respectively, compared to $584,8392018, respectively. The decrease of $180,509 for the year ended December 31, 2015. Interest expense2020 as compared to the year ended December 31, 2019 and the decrease of $14,576 for the Successor 2016 period includes additional interest relatedyear ended December 31, 2019 as compared to the debt incurredyear
ended December 31, 2018 were attributable to finance the Cablevision Acquisition.following:
| | | | | | | | | | | | | |
| 2020 | | 2019 | | |
Decrease due to changes in average debt balances and interest rates on our indebtedness and collateralized debt | $ | (173,121) | | | $ | (44,492) | | | |
Lower interest income | 3,515 | | | 5,147 | | | |
Other net increases (decreases) due to amortization of deferred financing costs, premiums and original issue discounts | (10,903) | | | 24,769 | | | |
| $ | (180,509) | | | $ | (14,576) | | | |
Gain (Loss) on Investments and Sale of Affiliate Interests, net
Gain (loss) on investments, net amounted to $141,896 and $129,990 for the period June 21, 2016 through December 31, 2016 and January 1, 2016 through June 20, 2016, respectively, and $(30,208) for the yearyears ended December 31, 20152020, 2019 and reflect2018, of $320,061, $473,406 and $(250,877) consists primarily of the increase or decrease(decrease) in the fair value of the Comcast common stock owned by the Company. The effects of these gains (losses) are partially offset by the (losses)losses and gains on the related equity derivative contracts, net described below.
Gain (Loss) on Equity Derivative Contracts, net
Gain (loss) on equity derivative contracts, net amounted to $(53,696)$(178,264), $(282,713) and $(36,283)$218,848 for the periods June 21, 2016 through December 31, 2016 and January 1, 2016 through June 20, 2016, respectively, and $104,927 for the yearyears ended December 31, 2015.
Gain (loss) on equity derivative contracts, net consists of2020, 2019 and 2018, respectively, and includes realized and unrealized and realized gains (losses)or losses due to the change in fair value of the Company’s equity derivative contracts relating to the Comcast common stock owned by the Company. The effects of these gains (losses) are offset by the (losses) gainslosses (gains) on investment securities pledged as collateral, which are included in gain (loss) on investments and sale of affiliate interest, net discussed above.
Loss on Interest Rate Swap Contracts
Loss on interest rate swap contracts amounted to $78,606, $53,902 and $61,697 for the years ended December 31, 2020, 2019 and 2018, respectively. These amounts represent the decrease in the fair value of interest rate swap contracts. These swap contracts are not designated as hedges for accounting purposes.
Loss on Extinguishment of Debt and Write-off of Deferred Financing Costs
Loss on extinguishment of debt and write-off of deferred financing costs amounted to $102,894$250,489, $243,806 and $48,804 for the period June 21, 2016 throughyears ended December 31, 20162020, 2019 and $1,7352018, respectively.
The following table provides a summary of the loss on extinguishment of debt and the write-off of deferred financing costs recorded by the Company upon the redemption of senior guaranteed, senior secured and senior notes and the refinancing of credit facilities:
| | | | | | | | | | | | | | | | | |
| Years ended December 31, |
| 2020 | | 2019 | | 2018 |
CSC Holdings 5.375% Senior Guaranteed Notes due 2023 | $ | 26,721 | | | $ | — | | | $ | — | |
CSC Holdings 7.75% Senior Notes due 2025 | 35,375 | | | — | | | — | |
CSC Holdings 10.875% Senior Notes due 2025 | 136,249 | | | — | | | — | |
CSC Holdings 6.625% Senior Guaranteed Notes due 2025 | 52,144 | | | — | | | — | |
Cablevision 8.000% Senior Notes due 2020 | — | | | 15,176 | | | — | |
Cablevision 5.125% Senior Notes due 2021 | — | | | 500 | | | — | |
CSC Holdings 5.125% Senior Notes due 2021 | — | | | 65,151 | | | — | |
CSC Holdings 10.125% Senior Notes due 2023 | — | | | 154,666 | | | — | |
Refinancing and subsequent amendment to CSC Holdings credit facility | — | | | 8,313 | | | — | |
Cablevision 7.75% Senior Notes due 2018 | — | | | — | | | 4,706 | |
Cequel 6.375% Senior Notes due 2020 | — | | | — | | | 36,910 | |
Cequel senior and senior secured notes pursuant to an exchange offer | — | | | — | | | (545) | |
Cequel Term Loan Facility | — | | | — | | | 7,733 | |
| $ | 250,489 | | | $ | 243,806 | | | $ | 48,804 | |
Other Income (Expense), Net
Other income (expense), net amounted to $5,577, $1,183, and $(12,484), for the years ended December 31, 2020, 2019 and 2018, respectively. These amounts include the non-service cost components of the Company's pension expense of $1,012, $8,274 and $9,529, net of dividends received on Comcast common stock owned by the Company. The 2018 amounts also include the equity in the net losses of Newsday through April 2018 and i24NEWS through March 31, 2018.
Income Tax Benefit (Expense)
The Company recorded income tax expense of $139,748 for the year ended December 31, 2015. 2020, resulting in an effective tax rate of 24% which is higher than the U.S. federal statutory tax rate of 21%.The Successor 2016 amount includes the write-off of unamortized deferred financing costs and the unamortized discount related to the prepayment of $1,290,500 outstanding under the CSC Holdings, a wholly-owned subsidiary of Cablevision, term credit facility. The 2015 amount includes the write-off of unamortized deferred financing costs and the unamortized discount related to the $200,000 repayment of CSC Holdings term B loan facility.
Income Tax Expense
Income tax benefit (expense) amounted to $213,065 for the periods from June 21, 2016 through December 31, 2016
and $(124,848) for the period from January 1, 2016 through June 20, 2016. In the Successor period, excluding the impact of the nondeductible share-based compensation of $3,208,primary difference between the effective tax rate would have been 40%. Inand the Predecessor period,statutory tax rate is due to nondeductible officer’s and share-based compensation expense, state income taxes, net of the federal benefit, a revaluation of state deferred taxes primarily due to certain acquisition-related costs were determinedchanges to be nondeductible,the state tax rates used to measure the Company’s deferred tax liabilities, a tax benefit associated with claiming additional current year and prior year research and development tax credits, and certain other non-deductible expenses. Due to the taxable gain resulting from the Lightpath Transaction discussed in additional deferredNote 1 to the consolidated financial statements, the Company recognized the benefit of fully utilizing its federal NOLs, capital loss carryover, research and development tax credits, and general business credits in 2020.
The Company recorded income tax expense of $9,392. Absent this item, the effective tax rate would have been 40%.
Income tax expense of $154,872$47,190 for the year ended December 31, 2015, reflected2019, resulting in an effective tax rate of 45%25% which was higher than the U.S. federal statutory tax rate of 21%. In April 2015, corporate incomeThe primary difference between the effective tax changes were enacted for both New York Staterate and the Citystatutory tax rate was due to nondeductible share-based compensation expense, a revaluation of New York. Thosestate deferred taxes primarily due to certain changes included a provision whereby investment income will be subject to higher taxes. Accordingly, in the second quarter of 2015, Cablevision recordedstate tax rates used to measure the Company’s deferred tax expense of $16,334 to remeasure the deferred tax liability for the investment in Comcast common stockliabilities and associated derivative securities. Also in 2015, Cablevisioncertain other non-deductible expenses.
The Company recorded income tax benefit of $2,630 related to research credits. Absent these items, the effective tax rate$38,655 for the year ended December 31, 2015 would have been 41%.
Loss From Discontinued Operations
Loss from discontinued operations2018. During 2018, the Company determined that it met the definition of a Qualified Technology Company for New York State tax purposes and thereby was eligible for the year ended December 31, 2015 amounted to $12,541,reduced tax rate. Additionally, during 2018, the state of New Jersey enacted significant tax law changes imposing a 2.5% surtax for tax years beginning January 1, 2018 and mandating combined return filing requirements for unitary corporations for tax years beginning January 1, 2019. Accordingly, the Company recorded a net deferred tax benefit of income taxes, and primarily reflects an expense related$52,915 based on a remeasurement of the net deferred tax liability.
CSC HOLDINGS, LLC
The consolidated statements of operations of CSC Holdings are essentially identical to the settlementconsolidated statements of operations of Altice USA, except for the following:
| | | | | | | | | | | | | | | | | | | | | |
| CSC Holdings | | | | |
| Years ended December 31, | | |
| 2020 | | 2019 | | 2018 | | | | |
| (in thousands) | | |
Net income attributable to Altice USA stockholders | $ | 436,183 | | | $ | 138,936 | | | $ | 18,833 | | | | | |
Less: items included in Altice USA's consolidated statements of operations: | | | | | | | | | |
Income tax expense (benefit) | 12,905 | | | (24,053) | | | (96,218) | | | | | |
Interest expense relating to Cablevision senior notes | — | | | 81,257 | | | 303,106 | | | | | |
Loss on investments and sale of affiliate interests, net | (546) | | | — | | | (10,659) | | | | | |
Interest income related to cash held by Cablevision and Altice USA | — | | | — | | | 2,372 | | | | | |
Other expense (income) | — | | | (2) | | | 210 | | | | | |
Loss on extinguishment of debt and write-off of deferred financing costs | — | | | 15,676 | | | 40,921 | | | | | |
Net income attributable to CSC Holdings' sole member | $ | 448,542 | | | $ | 211,814 | | | $ | 258,565 | | | | | |
| | | | | | | | | |
Refer to Altice USA's Management's Discussion and Analysis of Financial Condition and Results of Operations herein.
The following is a legal matter relatingreconciliation of CSC Holdings' net income to Rainbow Media Holdings LLC,Adjusted EBITDA and Operating Free Cash Flow:
| | | | | | | | | | | | | | | | | |
| CSC Holdings |
| Years ended December 31, |
| 2020 | | 2019 | | 2018 |
Net income | $ | 455,838 | | | $ | 212,817 | | | $ | 260,326 | |
Income tax expense | 126,843 | | | 71,243 | | | 57,563 | |
Other expense (income), net | (5,577) | | | (1,181) | | | 12,274 | |
Loss on interest rate swap contracts, net | 78,606 | | | 53,902 | | | 61,697 | |
Loss (gain) on derivative contracts, net | 178,264 | | | 282,713 | | | (218,848) | |
Gain on investments and sales of affiliate interests, net | (319,515) | | | (473,406) | | | 261,536 | |
Loss on extinguishment of debt and write-off of deferred financing costs | 250,489 | | | 228,130 | | | 7,883 | |
Interest expense, net | 1,350,341 | | | 1,449,593 | | | 1,239,948 | |
Depreciation and amortization | 2,083,365 | | | 2,263,144 | | | 2,382,339 | |
Restructuring and other expense | 91,073 | | | 72,978 | | | 38,548 | |
Share-based compensation | 125,087 | | | 105,538 | | | 59,812 | |
Adjusted EBITDA | 4,414,814 | | | 4,265,471 | | | 4,163,078 | |
Capital expenditures (cash) | 1,073,955 | | | 1,355,350 | | | 1,153,589 | |
Operating Free Cash Flow | $ | 3,340,859 | | | $ | 2,910,121 | | | $ | 3,009,489 | |
The following is a business whose operations were previously discontinued.reconciliation of net cash flow from operating activities to Free Cash Flow:
| | | | | | | | | | | | | | | | | |
| CSC Holdings |
| Years ended December 31, |
| 2020 | | 2019 | | 2018 |
Net cash flows from operating activities | $ | 2,980,422 | | | $ | 2,623,742 | | | $ | 2,766,075 | |
Capital expenditures (cash) | 1,073,955 | | | 1,355,350 | | | 1,153,589 | |
Free Cash Flow | $ | 1,906,467 | | | $ | 1,268,392 | | | $ | 1,612,486 | |
LIQUIDITY AND CAPITAL RESOURCES
Altice USA has no operations independent of its subsidiaries, Cablevision and Cequel.subsidiaries. Funding for our subsidiaries has generally been provided by cash flow from their respective operations, cash on hand and borrowings under theirthe revolving credit facilitiesfacility and the proceeds from the issuance of securities and borrowings under syndicated term loans in the capital markets. Our decision as to the use of cash generated from operating activities, cash on hand, borrowings under the revolving credit facilitiesfacility or accessing the capital markets has been based upon an ongoing review of the funding needs of the business, the optimal allocation of cash resources, the timing of cash flow generation and the cost of borrowing under the revolving credit facilities,facility, debt securities and syndicated term loans. We manage our business totarget a long-term netyear-end leverage ratio target of 4.5x to 5.0x.5.0x for our CSC Holdings debt silo. We calculate our consolidated net leverage ratio as net debt to L2QA EBITDA (Adjusted EBITDA for the two most recent consecutive fiscal quarters multiplied by 2.0).
We expect to utilize free cash flow and availability under the CSC Holdings revolving credit facilities,facility, as well as future refinancing transactions, to further extend the maturities of, or reduce the principal on, our debt obligations. The timing and terms of any refinancing transactions will be subject to, among other factors, market conditions. Additionally, we may, from time to time, depending on market conditions and other factors, use cash on hand and the proceeds from other borrowings to repay the outstanding debt securities through open market purchases, privately negotiated purchases, tender offers, or redemptions.
We believe existing cash balances, operating cash flows and availability under ourthe CSC Holdings revolving credit facilitiesfacility will provide adequate funds to support our current operating plan, make planned capital expenditures and fulfill our debt service requirements for the next twelve months. However, our ability to fund our operations, make planned capital expenditures, make scheduled payments on our indebtedness and repay our indebtedness depends on our future operating performance and cash flows and our ability to access the capital markets, which, in turn, are subject to prevailing economic conditions and to financial, business and other factors, some of which are beyond our control. Our collateralized debt maturing in the next 12 months will be settled with proceeds from monetization contracts entered into pursuant to the Synthetic Monetization Closeout discussed below. However, competition,Competition, market disruptions or a deterioration in economic conditions could lead to lower demand for our products, as well as lower levels of advertising, and increased incidence of customers' inability to pay for the
services we provide. These events would adversely impact our results of operations, cash flows and financial position. Although we currently believe that amounts available under the CSC Holdings revolving credit facilitiesfacility will be available when, and if, needed, we can provide no assurance that access to such funds will not be impacted by adverse conditions in the financial markets or other conditions. The obligations of the financial institutions under the revolving credit facilitiesfacility are several and not joint and, as a result, a funding default by one or more institutions does not need to be made up by the others.
In the longer term, we domay not expect to be able to generate sufficient cash from operations to fund anticipated capital expenditures, meet all existing future contractual payment obligations and repay our debt at maturity. As a result, we willcould be dependent upon our continued access to the capital and credit markets to issue additional debt or equity or refinance existing debt obligations. We will needintend to raise significant amounts of funding over the next several years to fund capital expenditures, repay existing obligations and meet other obligations, and the failure to do so successfully could adversely affect our business. If we are unable to do so, we will need totake other actions including deferring capital expenditures, selling assets, seeking strategic investments from third parties or reducing or eliminating stock repurchases and discretionary uses of cash.
Initial Public OfferingLightpath Transaction
In June 2017,December 2020, the Company completed its IPO of 71,724,139 shares of its Class A common stock (12,068,966 shares sold by the Company and 59,655,173 shares sold by existing stockholders) at a price to the public of $30.00 per share, including the underwriters full exercise of their option to purchase 7,781,110 shares to cover overallotments. The Company’s Class A common stock began trading on June 22, 2017, on the New York Stock Exchange under the symbol “ATUS”.
In connection with the sale of a 49.99% interest in its Class A common stock, theLightpath fiber enterprise business (the "Lightpath Transaction") based on an implied enterprise value of $3,200,000. The Company received total gross cash proceeds of approximately $362,069, before deducting$2,355,000 ($890,000 from the underwritingsale and $1,465,000 from the related financing activity, excluding the discount on the term loan of $3,000). The excess of the cash received from the sale, net of related expenses, over the book value of the interest sold of $741,471, net of taxes of $228,489, was recorded in stockholders' equity (deficiency) by Altice USA. The Company retained a 50.01% interest in the Lightpath business and expenses directlymaintained control of Cablevision Lightpath LLC, the entity holding the interest in the Lightpath business. Accordingly, the Company will continue to consolidate the operating results of the Lightpath business.
Cablevision Lightpath LLC was financed independently outside of the CSC Holdings restricted group. Cablevision Lightpath LLC issued $450,000 in aggregate principal amount of senior secured notes and $415,000 in aggregate principal amount of senior notes. Also, Cablevision Lightpath LLC entered into a credit agreement which provides a term loan in an aggregate principal amount of $600,000 and revolving loan commitments in an aggregate principal amount of $100,000. As of December 31, 2020, there were no borrowings outstanding under the Lightpath Revolving Credit Facility. Net proceeds from this transaction were used to fund the Tender Offer discussed below. See Note 11 and discussion below for additional information regarding the debt financing related to the issuance of the securities of $12,998. The Company did not receive any proceeds from the sale of shares by the selling stockholders. In July 2017, the Company used approximately $350,120 of the proceeds to fund the redemption of $315,779 principal amount of 10.875%senior notes that mature in 2025 issued by CSC Holdings, an indirect wholly-owned subsidiary of the Company, and the related call premium of approximately $34,341.Lightpath Transaction.
Debt Outstanding
The following tables summarizetable summarizes the carrying value of our outstanding debt, net of unamortized deferred financing costs, discounts and premiums (excluding accrued interest),as of December 31, 2020, as well as interest expense.expense for the year ended December 31, 2020.
| | | | | | | | | | | | | | | | | | | | | | | |
| CSC Holdings Restricted Group | | Lightpath | | Other Unrestricted Entities | | Altice USA/CSC Holdings |
Debt outstanding: | | | | | | | |
Credit facility debt | $ | 7,705,192 | | | $ | 582,808 | | | $ | — | | | $ | 8,288,000 | |
Senior guaranteed notes | 7,626,309 | | | — | | | — | | | 7,626,309 | |
Senior secured notes | — | | | 440,487 | | | — | | | 440,487 | |
Senior notes | 8,009,426 | | | 406,176 | | | — | | | 8,415,602 | |
Subtotal | 23,340,927 | | | 1,429,471 | | | — | | | 24,770,398 | |
Finance lease obligations | 159,637 | | | — | | | — | | | 159,637 | |
Notes payable and supply chain financing | 174,801 | | | — | | | — | | | 174,801 | |
Subtotal | 23,675,365 | | | 1,429,471 | | | — | | | 25,104,836 | |
Collateralized indebtedness relating to stock monetizations (a) | — | | | — | | | 1,617,506 | | | 1,617,506 | |
Total debt | $ | 23,675,365 | | | $ | 1,429,471 | | | 1,617,506 | | | $ | 26,722,342 | |
Interest expense: | | | | | | | |
Credit facility debt, senior notes, finance leases, notes payable and supply chain financing (b) | $ | 1,265,585 | | | $ | 13,772 | | | $ | — | | | $ | 1,279,357 | |
Collateralized indebtedness relating to stock monetizations (a) | — | | | — | | | 73,178 | | | 73,178 | |
Total interest expense | $ | 1,265,585 | | | $ | 13,772 | | | $ | 73,178 | | | $ | 1,352,535 | |
|
| | | | | | | | | | | | | | | | | | | |
| As of December 31, 2017 |
| Cablevision | | Cequel | | Altice USA | | Eliminations | | Total |
Debt outstanding: | | | | | | | | | |
Credit facility debt | $ | 3,393,306 |
| | $ | 1,250,217 |
| | $ | — |
| | $ | — |
| | $ | 4,643,523 |
|
Senior guaranteed notes | 2,291,185 |
| | — |
| | — |
| | — |
| | 2,291,185 |
|
Senior secured notes | — |
| | 2,570,506 |
| | — |
| | — |
| | 2,570,506 |
|
Senior notes and debentures | 8,228,004 |
| | 2,770,737 |
| | — |
| | — |
| | 10,998,741 |
|
Subtotal | 13,912,495 |
| | 6,591,460 |
| | — |
| | — |
| | 20,503,955 |
|
Capital lease obligations | 20,333 |
| | 1,647 |
| | — |
| | — |
| | 21,980 |
|
Notes payable (includes $21,091 related to collateralized debt) | 56,956 |
| | 8,946 |
| | — |
| | — |
| | 65,902 |
|
Subtotal | 13,989,784 |
| | 6,602,053 |
| | — |
| | — |
| | 20,591,837 |
|
Collateralized indebtedness relating to stock monetizations (a) | 1,349,474 |
| | — |
| | — |
| | — |
| | 1,349,474 |
|
Total debt | $ | 15,339,258 |
| | $ | 6,602,053 |
| | $ | — |
| | $ | — |
| | $ | 21,941,311 |
|
Interest expense: | | | | | | | | | |
Credit facility debt, senior notes, capital leases and notes payable | $ | 1,031,736 |
| | $ | 410,480 |
| | $ | 6,502 |
| | $ | (6,496 | ) | | $ | 1,442,222 |
|
Notes payable to affiliates and related parties | — |
| | — |
| | 90,405 |
| | — |
| | 90,405 |
|
Collateralized indebtedness and notes payable relating to stock monetizations (a) | 70,505 |
| | — |
| | — |
| | — |
| | 70,505 |
|
Total interest expense | $ | 1,102,241 |
| | $ | 410,480 |
| | $ | 96,907 |
| | $ | (6,496 | ) | | $ | 1,603,132 |
|
| |
(a) | This indebtedness is collateralized by shares of Comcast common stock. We intend to settle this debt by (i) delivering shares of Comcast common stock and the related equity contracts, (ii) delivering cash from the net proceeds on new monetization contracts, or (iii) delivering cash from the proceeds of monetization contracts entered into pursuant to the Synthetic Monetization Closeout discussed below. |
(a)This indebtedness is collateralized by shares of Comcast common stock. We intend to settle this debt by (i) delivering shares of Comcast common stock and the related equity contracts, or (ii) delivering cash from the net proceeds from new monetization contracts.
(b)Lightpath interest expense excludes interest on intercompany debt that was eliminated in consolidation.
The following table provides details of our outstanding credit facility debt, net of unamortized discounts and deferred financing costs as of December 31, 2017:2020:
| | | | | | | | | | | | | | | | | | | | | | | |
| Maturity Date | | Interest Rate | | Principal | | Carrying Value |
CSC Holdings | | | | | | | |
Revolving Credit Facility (a) | (b) | | 2.48% | | $ | 625,000 | | | $ | 616,027 | |
Term Loan B | July 17, 2025 | | 2.41% | | 2,895,000 | | | 2,884,065 | |
Incremental Term Loan B-3 | January 15, 2026 | | 2.41% | | 1,252,688 | | | 1,248,293 | |
Incremental Term Loan B-5 | April 15, 2027 | | 2.66% | | 2,977,500 | | | 2,956,807 | |
| | | | | 7,750,188 | | | 7,705,192 | |
Lightpath | | | | | | | |
Revolving Credit Facility (c) | November 30, 2025 | | —% | | — | | | — | |
Term Loan | November 30, 2027 | | 3.75% | | 600,000 | | | 582,808 | |
| | | | | $ | 8,350,188 | | | $ | 8,288,000 | |
|
| | | | | | | | | | | |
| Maturity Date | | Interest Rate | | Principal | | Carrying Value (a) |
Cablevision: | | | | | | | |
CSC Holdings Revolving Credit Facility (b) | $20,000 on October 9, 2020, remaining balance on November 30, 2021 | | 4.75% | | $ | 450,000 |
| | $ | 425,488 |
|
CSC Holdings Term Loan Facility | July 17, 2025 | | 3.74% | | 2,985,000 |
| | 2,967,818 |
|
Cequel: | | | | | | | |
Revolving Credit Facility (c) | November 30, 2021 | | — | | — |
| | — |
|
Term Loan Facility | July 28, 2025 | | 3.82% | | 1,258,675 |
| | 1,250,217 |
|
| | | | | $ | 4,693,675 |
| | $ | 4,643,523 |
|
| |
(a) | Carrying amounts are net of unamortized discounts and deferred financing costs. |
| |
(b) | At December 31, 2017, $115,973 of the revolving credit facility was restricted for certain letters of credit issued on behalf of the Company and $1,734,027 of the facility was undrawn and available, subject to covenant limitations. |
| |
(c) | At December 31, 2017, $13,500 of the revolving credit facility was restricted for certain letters of credit issued on behalf of the Company and $336,500 of the facility was undrawn and available, subject to covenant limitations. |
(a)At December 31, 2020, $137,920 of the revolving credit facility was restricted for certain letters of credit issued on behalf of the Company and $1,712,080 of the facility was undrawn and available, subject to covenant limitations. (b)The revolving credit facility of an aggregate principal amount of $2,275,000 matures in January 2024 and is priced at LIBOR plus 2.25%. The remaining revolving credit facility of an aggregate principal amount of $200,000 matures in November 2021 and is priced at LIBOR plus 3.25%.
(c)There were no borrowings outstanding under the Lightpath Revolving Credit Facility which provides for commitments in an aggregate principal amount of $100,000.
Payment Obligations Related to Debt
As of December 31, 2017,2020, total amounts payable by us in connection with our outstanding obligations, including related interest, as well as capital lease obligations, notes payable and supply chain financing, and the value deliverable at maturity under monetization contracts, but excluding finance lease obligations (see Note 9 to our consolidated financial statements) are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| CSC Holdings Restricted Group | | Lightpath | | Other Unrestricted Entities (a) | | Altice USA/ CSC Holdings |
2021 | $ | 2,303,195 | | | $ | 64,934 | | | $ | 33,886 | | | $ | 2,402,015 | |
2022 | 1,776,105 | | | 68,973 | | | 33,886 | | | 1,878,964 | |
2023 | 1,088,832 | | | 69,358 | | | 1,776,378 | | | 2,934,568 | |
2024 | 2,425,818 | | | 68,884 | | | — | | | 2,494,702 | |
2025 | 3,736,486 | | | 68,596 | | | — | | | 3,805,082 | |
Thereafter | 19,870,578 | | | 1,572,171 | | | — | | | 21,442,749 | |
Total | $ | 31,201,014 | | | $ | 1,912,916 | | | $ | 1,844,150 | | | $ | 34,958,080 | |
|
| | | | | | | | | | | |
| Cablevision (a) | | Cequel | | Total |
| | | | | |
2018 | $ | 2,600,461 |
| | $ | 386,068 |
| | $ | 2,986,529 |
|
2019 | 1,443,852 |
| | 387,356 |
| | 1,831,208 |
|
2020 | 1,387,607 |
| | 1,431,215 |
| | 2,818,822 |
|
2021 | 3,719,148 |
| | 1,563,658 |
| | 5,282,806 |
|
2022 | 1,368,770 |
| | 249,104 |
| | 1,617,874 |
|
Thereafter | 10,851,356 |
| | 5,026,217 |
| | 15,877,573 |
|
Total | $ | 21,371,194 |
| | $ | 9,043,618 |
| | $ | 30,414,812 |
|
| |
(a) | Includes $1,575,136 related(a)Relates to the Company's collateralized indebtedness (including related interest). This indebtedness is collateralized by shares of Comcast common stock. We intend to settle this debt by (i) delivering shares of Comcast common stock and the related equity contracts, (ii) delivering cash from the net proceeds on new monetization contracts, or (iii) delivering cash from the proceeds of monetization contracts entered into pursuant to the Synthetic Monetization Closeout discussed below. |
The amounts in the table above do not includeCompany's collateralized indebtedness and related interest. This indebtedness is collateralized by shares of Comcast common stock. We intend to settle this debt by (i) delivering shares of Comcast common stock and the effects ofrelated equity contracts or (ii) delivering cash from the debt transactions discussed in Note 20.net proceeds on new monetization contracts.
CSC Holdings Restricted Group
For financing purposes, the Company is structured as a restricted group (the "Restricted Group") and an unrestricted group, which includes certain designated subsidiaries and investments (the "Unrestricted Group"). The Restricted Group is comprised of CSC Holdings and thosesubstantially all of its wholly-owned operating subsidiaries. These subsidiaries which conduct our broadband, pay television and telephony services operations, as well as Lightpath, which provides Ethernet-based data, Internet, voice and video transport and managed services to the business market, comprise the "Restricted Group" as they are subject to the covenants and restrictions of the credit facility and indentures governing the notes and debentures issued by CSC Holdings. In addition, the Restricted Group is also subjectCablevision Lightpath LLC became an unrestricted subsidiary prior to the covenantsissuance of its senior notes and senior secured notes in September 2020. See discussion below regarding the Lightpath debt issued by Cablevision.financing.
Sources of cash for the Restricted Group include primarily cash flow from the operations of the businesses in the Restricted Group, borrowings under its credit facility and issuance of securities in the capital markets, contributions
from its parent, and, from time to time, distributions or loans from its subsidiaries. The Restricted Group's principal uses of cash include: capital spending, in particular, the capital requirements associated with the upgrade of its digital broadband, pay televisionvideo and telephony services, including costs to build aour FTTH network and enhancements to its service offerings such as Wi-Fi;network; debt service, includingservice; distributions made to Cablevisionits parent to service interest expense and principal repayments on its debt securities;fund share repurchases; other corporate expenses and changes in working capital; and investments that it may fund from time to time.
CablevisionCSC Holdings Credit FacilitiesFacility
OnIn October 9, 2015, Finco,a wholly-owned subsidiary of Altice USA, which merged with and into CSC Holdings on June 21, 2016, entered into a senior secured credit facility, which currently provides U.S. dollar term loans currently in an aggregate principal amount of $3,000,000 ($2,985,0002,895,000 outstanding at December 31, 2017)2020) (the “CVC"CSC Term Loan Facility”Facility", and the term loans extended under the CVCCSC Term Loan Facility, the “CVC"CSC Term Loans”Loans") and U.S. dollar revolving loan commitments in an aggregate principal amount of $2,300,000$2,475,000 ($625,000 outstanding at December 31, 2020) (the “CVC"CSC Revolving Credit Facility”Facility" and, together with the CVCCSC Term Loan Facility, the “CVC"CSC Credit Facilities”Facilities"), which are governed by a credit facilities agreement entered into by, inter alios,, CSC Holdings certain lenders party thereto and JPMorgan Chase Bank, N.A. as administrative agent and security agent (as amended, restated, supplemented or otherwise modified on June 20, 2016, June 21, 2016, July 21, 2016, September 9, 2016, December 9, 2016, and March 15, 2017, January 12, 2018, October 15, 2018, January 24, 2019, February 7, 2019, May 14, 2019, and October 3, 2019, respectively, and as further amended, restated, supplemented or otherwise modified from time to time, the “CVC"CSC Credit Facilities Agreement”Agreement").
During the year ended December 31, 2017, CSC Holdings borrowed $1,350,000 under its revolving credit facility ($500,000 was used to make cash distributions to its stockholders) and made voluntary repayments aggregating $1,075,256 with cash on hand.
In January 2018, CSC Holdings borrowed $150,000 under its revolving credit facility and entered into a new $1,500,000 incremental term loan facility (the "Incremental Term Loan"Loan B-2") under its existing CVC Credit Facilities Agreement.credit facilities agreement. The Incremental Term Loan B-2 was priced at 99.50%99.5% and willwas due to mature on January 25, 2026. The Incremental Term Loan isB-2 was comprised of eurodollar borrowings or alternate base rate borrowings, and bearsbore interest at a rate per annum equal to the adjusted LIBOLIBOR or the alternate base rate, as applicable, plus the applicable margin, where the applicable margin was (i) with respect to any alternate base
rate loan, 1.50% per annum and (ii) with respect to any eurodollar loan, 2.50% per annum. The Incremental Term Loan B-2 was repaid in full in October 2019 with proceeds from the Incremental Term Loan B-5 discussed below.
In October 2018, CSC Holdings entered into a $1,275,000 ($1,252,688 outstanding at December 31, 2020) incremental term loan facility (the “Incremental Term Loan B-3”) under its existing credit facilities agreement. The proceeds from the Incremental Term Loan B-3 were used to repay the entire principal amount of loans under Cequel’s then existing Term Loan Facility and certain transaction costs. The Incremental Term Loan B-3 is comprised of eurodollar borrowings or alternative base rate borrowings, and will bear interest at a rate per annum equal to the Adjusted LIBOR or the alternate base rate, as applicable, plus the applicable margin, where the applicable margin is (i) with respect to any alternate base rate loan, 1.25% per annum and (ii) with respect to any eurodollar loan, 2.25% per annum. The Company is required to make scheduled quarterly payments equal to 0.25% (or $3,188) of the principal amount of the Incremental Term Loan B-3, beginning with the fiscal quarter ended June 30, 2019, with the remaining balance scheduled to be paid on January 15, 2026.
In February 2019, CSC Holdings entered into a $1,000,000 incremental term loan facility ("Incremental Term Loan B-4") under its existing credit facilities agreement. The proceeds from the Incremental Term Loan B-4 were used to redeem $894,700 in aggregate principal amount of CSC Holdings’ 10.125% senior notes due 2023, representing the entire aggregate principal amount outstanding, and paying related fees, costs and expenses. The Incremental Term Loan B-4 was due to mature on April 15, 2027 and was issued with an original issue discount of 1.0%. The Incremental Term Loan B-4 bore interest at a rate per annum equal to the adjusted LIBOR or the alternate base rate, as applicable, plus the applicable margin, where the applicable margin was (i) with respect to any alternate base rate loan, 2.00% per annum and (ii) with respect to any eurodollar loan, 3.0%. The Incremental Term Loan B-4 was repaid in full in October 2019 with proceeds from the Incremental Term Loan B-5 discussed below.
In October 2019, CSC Holdings entered into a $3,000,000 ($2,977,500 outstanding at December 31, 2020), incremental term loan facility ("Incremental Term Loan B-5") under its existing credit facilities agreement, out of which $500,000 was available on a delayed draw basis. The Incremental Term Loan B-5 matures on April 15, 2027 and was issued at par. The Incremental Term Loan B-5 may be comprised of eurodollar borrowings or alternative base rate borrowings, and will bear interest at a rate per annum equal to the Adjusted LIBOR or the alternate base rate, as applicable, plus the applicable margin, where the applicable margin is (i) with respect to any alternate base rate loan, 1.50% per annum and (ii) with respect to any eurodollar loan, 2.50% per annum. See discussion below regarding useThe Company is required to make scheduled quarterly payments equal to 0.25% (or $7,500) of proceeds fromthe principal amount of the Incremental Term Loan.Loan B-5, beginning with the fiscal quarter ended June 30, 2020.
The initial proceeds of the Incremental Term Loan B-5 were used to repay approximately $2,500,000 of the outstanding term loans (Incremental Term Loan B-2 and Incremental Term Loan B-4) under the credit agreement, and the proceeds of the delayed draw tranche of the Incremental Term Loan B-5 were used to distribute $500,000 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.
During the year ended December 31, 2020, CSC Holdings borrowed $2,075,000 under its revolving credit facility and repaid $1,450,000 of amounts outstanding under the revolving credit facility.
The Company was in compliance with all of its financial covenants under the CVCCSC Credit Facilities Agreement as of December 31, 2017.2020.
See Note 911 to our consolidated financial statements for further information regarding the CVCCSC Credit Facilities Agreement.
Cequel Credit FacilitiesSenior Guaranteed Notes and Senior Notes
OnIn June 12, 2015, Altice US Finance I Corporation, a wholly-owned subsidiary of Cequel, entered into a senior secured credit facility which currently provides U.S. dollar term loans2020, CSC Holdings issued $1,100,000 in an aggregate principal amount of $1,265,000 ($1,258,675 outstandingsenior guaranteed notes that bear interest at a rate of 4.125% and mature on December 31, 2017) (the “Cequel Term Loan Facility”1, 2030, and the term loans extended under the Cequel Term Loan Facility, the “Cequel Term Loans”) and U.S. dollar revolving loan commitments$625,000 in an aggregate principal amount of $350,000 which are governed bysenior notes that bear interest at a credit facilities agreement entered into by, inter alios, Altice US Finance I Corporation, certain lenders party theretorate of 4.625% and JPMorgan Chase Bank, N.A. as administrative agentmature on December 1, 2030. The net proceeds from the sale of the these notes was used in July 2020 to early redeem the $1,095,825 aggregate principal amount of CSC Holdings' 5.375% senior notes due July 15, 2023, the $617,881 and security agent (as amended, restated, supplemented or otherwise modifiedthe $1,740 aggregate principal amount of CSC Holdings' 7.750% senior notes due July 15, 2025, plus pay accrued interest and the associated premiums related to the early redemption of these notes. In connection with the early redemptions, the Company recognized a loss on October 25, 2016, December 9, 2016the extinguishment of debt aggregating $62,096, reflecting the early redemption premiums and Marchthe write-off of outstanding deferred financing costs on these notes.
In August 2020, CSC Holdings issued $1,000,000 in aggregate principal amount of new senior guaranteed notes that bear interest at a rate of 3.375% and mature on February 15, 2017,2031 and as further amended, restated, supplemented or modified from time to time, the “Cequel Credit Facilities Agreement”).
The Company wasan additional $1,700,000 in compliance with allaggregate principal amount of its financial covenants under4.625% senior notes that mature on December 1, 2030 at a price of 103.25% of the Cequel Credit Facilities Agreement asaggregate principal amount. The net proceeds from the sale of December 31, 2017.the notes was used to early redeem the $1,684,221 aggregate principal amount of CSC Holdings' 10.875% senior notes due October 15, 2025, the $1,000,000 aggregate principal amount of CSC Holdings' 6.625% senior guaranteed notes due October 15, 2025, plus pay accrued interest and the associated premiums related to the early redemption of these notes. In connection with the early redemptions, the Company recognized a loss on the extinguishment of debt aggregating $188,393, reflecting the early redemption premiums and the write-off of outstanding deferred financing costs on these notes.
See Note 9 to11 of our consolidated financial statements for further information regarding the Cequel Credit Facilities Agreement.
Senior Notes
Cablevision Notes
On September 23, 2009, Cablevision issued $900,000 aggregate principal amount of its 8 5/8% Senior Notes due 2017 and 8 5/8% Series B Senior Notes due 2017 (together, the "Cablevision 2017 Senior Notes"). In April 2017, Cablevision redeemed $500,000 aggregate principal amount of its Cablevision 2017 Senior Notes with certaindetails of the proceeds of the term loans incurred under the CVC Credit Facilities Agreement,Company’s outstanding senior guaranteed notes and in September 2017, Cablevision repaid the remaining $400,000 from borrowings under its revolving credit facility.
On April 15, 2010, Cablevision issued $750,000 aggregate principal amount of its 7 3/4% Senior Notes due 2018 and $500,000 aggregate principal amount of its 8% Senior Notes due 2020. On September 27, 2012, Cablevision issued $750,000 aggregate principal amount of its 5 7/8% Senior Notes due 2022 ($649,024 outstanding at December 31, 2017).senior notes.
As of December 31, 2017, Cablevision2020, the Company was in compliance with all of its financial covenants under the indentures under which the Cablevision Notesour senior guaranteed notes and senior notes were issued.
CSC Holdings Notes
CSC Holdings Senior Guaranteed NotesLightpath Debt Financing
On October 9, 2015, FincoSeptember 29, 2020, in connection with the Lightpath Transaction, Cablevision Lightpath LLC ("Lightpath") issued $1,000,000$450,000 in aggregate principal amount of its 6 5/8% Senior Guaranteed Notes due 2025 (the "CSC 2025 Senior Guaranteed Notes"). CSC Holdings assumed the obligations as issuersenior secured notes that bear interest at a rate of the CSC 2025 Senior Guaranteed Notes upon the merger of Finco3.875% and CSC Holdingsmature on June 21, 2016. On September 23, 2016, CSC Holdings issued $1,310,00015, 2027 and $415,000 in aggregate principal amount of its 5 1/2% Senior Guaranteed Notes due 2027.senior notes that bear interest at a rate of 5.625% and mature on September 15, 2028. Prior to the issuance of these notes, Lightpath became an unrestricted subsidiary under the terms of CSC Holdings' debt.
In January 2018, CSC Holdings issued $1,000,000addition, on September 29, 2020, Lightpath entered into a credit agreement between, inter alios, certain lenders party thereto and Goldman Sachs Bank USA, as administrative agent, and Deutsche Bank Trust Company Americas, as collateral agent, (the "Lightpath Credit Agreement") which provides for, among other things, (i) a term loan in an aggregate principal amount of 5 3/8% senior guaranteed notes due February 1, 2028$600,000 (the "2028 Guaranteed Notes"“Lightpath Term Loan Facility”). The 2028 Guaranteed Notes are senior unsecured obligations and rank pari passu in right at a price of payment with all99.5% of the existingaggregate principal amount, which was drawn on November 30, 2020, and future senior indebtedness, including the existing senior notes and the Credit Facilities and rank senior(ii) revolving loan commitments in right of payment to all of existing and future subordinated indebtedness. The proceeds from the 2028 Guaranteed Notes, together with proceeds from the Incremental Term Loan, borrowings under CSC Holdings' revolving credit facility and cash on hand, were used in February 2018 to repay certain senior notes ($300,000an aggregate principal amount of CSC Holdings' senior notes due in February 2018 and $750,000$100,000 (the “Lightpath Revolving Credit Facility"). As of December 31, 2020, there were no borrowings outstanding under the Lightpath Revolving Credit Facility. The Company is required to make scheduled quarterly payments equal to 0.25% (or $1,500) of the principal amount of Cablevision senior notes due in April 2018) and will be used to fund a dividend of $1,500,000the Lightpath Term Loan Facility, beginning with the fiscal quarter ended March 31, 2021.
The loans made pursuant to the Company's stockholders immediately priorLightpath Credit Agreement are comprised of eurodollar borrowings or alternative base rate borrowings, and bear interest at a rate per annum equal to the adjusted LIBOR rate or the alternate base rate, as applicable, plus the applicable margin, where the applicable margin is (i) with respect to any alternate base rate loan, 2.25% per annum and in connection(ii) with respect to any eurodollar loan, 3.25% per annum. The maturity date of the Distribution.(i) Lightpath Term Loan Facility is November 30, 2027 and (ii) Lightpath Revolving Credit Facility is November 30, 2025.
As of December 31, 2017, CSC Holdings2020, Lightpath was in compliance with all of its financial covenants under its credit agreement and the indentures under which the CSC HoldingsLightpath senior guaranteedsecured notes were issued.
CSC Holdings Senior Notes
On February 6, 1998, CSC Holdings issued $300,000 aggregate principal amount of its 7 7/8% Senior Debentures which matured and were repaid on February 15, 2018. On July 21, 1998, CSC Holdings issued $500,000 aggregate principal amount of its 7 5/8% Senior Debentures due 2018. On February 12, 2009, CSC Holdings issued $526,000 aggregate principal amount of its 8 5/8% Senior Notes due 2019 and 8 5/8% Series B Senior Notes due 2019. On November 15, 2011, CSC Holdings issued $1,000,000 aggregate principal amount of its 6 3/4% Senior Notes due 2021 and 6 3/4% Series B Senior Notes due 2021. On May 23, 2014, CSC Holdings issued $750,000 aggregate principal amount of its 5 1/4% Senior Notes due 2024 and 5 1/4% Series B Senior Notes due 2024.
On October 9, 2015, Finco issued $1,800,000 aggregate principal amount of its 10 1/8% Senior Notes due 2023 (the "CSC 2023 Senior Notes") and $2,000,000 10 7/8% Senior Notes due 2025 (the "CSC 2025 Senior Notes). CSC Holdings assumed the obligations as issuer of the CSC 2023 Senior Notes and the CSC 2025 Senior Notes upon the merger of Finco and CSC Holdings on June 21, 2016. In July 2017, the Company used approximately $350,120 of the proceeds from the Company's IPO discussed above to fund the redemption of $315,779 principal amount of the CSC 2025 Senior Notes and the related call premium of approximately $34,341. See Note 9 of our consolidated financial statements for further details.
As of December 31, 2017, CSC Holdings was in compliance with all of its financial covenants under the indentures under which the CSC Holdings senior notes were issued.
Interest Rate Swap Contracts
In March 2020, the Company terminated two swap agreements whereby the Company was paying a floating rate of interest and receiving a fixed rate of interest on an aggregate notional value of $1,500,000. These contracts were due to mature in May 2026. In connection with the early termination, the Company received cash of $74,835 which has been recorded in gain (loss) on interest swap contracts in our consolidated statement of operations and presented in operating activities in our consolidated statement of cash flows.
In addition, in March 2020, the Company executed amendments to two interest swap contracts that reduced the fixed rate of interest that the Company was paying on an aggregate notional value of $1,000,000 and extended the maturity date of the contracts to January 15, 2025 from January 15, 2022. The difference in the fair value of the amended contracts and the original contracts on the date of the transaction of $5,689 (an increase in the liability) is being amortized to loss on derivative contracts over the remaining term of the contracts.
During the year ended December 31,2020, the Company entered into new interest rate swap contracts on an aggregate notional value of $3,850,000.
Cequel Notes
Cequel Senior Secured Notes
On June 12, 2015, Altice US Finance I Corporation issued $1,100,000 aggregate principal amount of its 5 3/8% Senior Secured Notes due 2023. On April 26, 2016, Altice US Finance I Corporation issued $1,500,000 aggregate principal amount of its 5 1/2% Senior Secured Notes due 2026.
As of December 31, 2017, Cequel was in compliance with all of its financial covenants under the indentures under which the Cequel senior secured notes were issued.
Cequel Senior Notes
On October 25, 2012, Cequel Capital Corporation and Cequel Communications Holdings I, LLC (collectively, the "Cequel Senior Notes Co-Issuers") issued $500,000 aggregate principal amount of their 6 3/8% Senior Notes due 2020 (the "Cequel 2020 Senior Notes"). On December 28, 2012, the Cequel Senior Notes Issuers issued an additional $1,000,000 aggregate principal amount of their Cequel 2020 Senior Notes. In April 2017, the Company redeemed $450,000 of the Cequel 2020 Senior Notes from proceeds of the Cequel Term Loan pursuant to the March 15, 2017 amendment.
On May 16, 2013, the Cequel Senior Notes Co-Issuers issued $750,000 aggregate principal amount of their 5 1/8% Senior Notes due 2021. On September 9, 2014, the Cequel Senior Notes Co-Issuers issued $500,000 aggregate principal amount of their 5 1/8% Senior Notes due 2021.
On June 12, 2015, Altice US Finance II Corporation issued $300,000 aggregate principal amount of its 7 3/4% Senior Notes due 2025 (the "Cequel 2025 Senior Notes"). Following the Cequel Acquisition, Altice US Finance II Corporation was merged into Cequel and the Cequel 2025 Senior Notes became the obligation of the Cequel Senior Notes Co-Issuers.
Also on June 12, 2015, Altice US Finance S.A., an indirect subsidiary of Altice, issued $320,000 principal amount of 7 3/4% Senior Notes due 2025 (the "Cequel Holdco Notes"), the proceeds from which were placed in escrow, to finance a portion of the purchase price for the Cequel Acquisition. The Cequel Holdco Notes were automatically exchanged into an equal aggregate principal amount of Cequel 2025 Senior Notes during the second quarter of 2016.
As of December 31, 2017, Cequel was in compliance with all of its financial covenants under the indentures under which the Cequel senior notes were issued.
Capital Expenditures
The following table presents the Company's capital expenditures: | | | Year Ended December 31, | | | | | | | | | | | | | | | | |
| 2017 | | 2016 | | Years Ended December 31, |
| Cablevision | | Cequel | | Total | | Cablevision | | Cequel | | Total | | 2020 | | 2019 | | 2018 | |
Customer premise equipment | $ | 187,765 |
| | $ | 119,702 |
| | $ | 307,467 |
| | $ | 77,536 |
| | $ | 154,718 |
| | $ | 232,254 |
| Customer premise equipment | $ | 177,049 | | | $ | 309,413 | | | $ | 369,236�� | | |
Network infrastructure | 263,080 |
| | 90,548 |
| | 353,628 |
| | 91,952 |
| | 76,926 |
| | 168,878 |
| Network infrastructure | 573,842 | | | 619,525 | | | 395,074 | | |
Support and other | 156,716 |
| | 31,643 |
| | 188,359 |
| | 83,153 |
| | 45,336 |
| | 128,489 |
| Support and other | 204,212 | | | 259,997 | | | 226,409 | | |
Business services | 103,871 |
| | 38,039 |
| | 141,910 |
| | 45,716 |
| | 50,204 |
| | 95,920 |
| Business services | 118,852 | | | 166,415 | | | 162,870 | | |
Capital purchases (cash basis) | $ | 711,432 |
| | $ | 279,932 |
| | $ | 991,364 |
| | $ | 298,357 |
| | $ | 327,184 |
| | $ | 625,541 |
| Capital purchases (cash basis) | 1,073,955 | | | 1,355,350 | | | 1,153,589 | | |
Capital purchases (including accrued not paid) (a) | $ | 724,130 |
| | $ | 320,175 |
| | $ | 1,044,305 |
| | $ | 348,852 |
| | $ | 351,827 |
| | $ | 700,679 |
| |
Right-of-use assets acquired in exchange for finance lease obligations | | Right-of-use assets acquired in exchange for finance lease obligations | 133,300 | | | 54,532 | | | 13,548 | | |
Notes payable issued to vendor for the purchase of equipment and other assets | | Notes payable issued to vendor for the purchase of equipment and other assets | 106,925 | | | 16,224 | | | 95,394 | | |
Change in accrued and unpaid purchases and other | | Change in accrued and unpaid purchases and other | 31,304 | | | (28,129) | | | 42,573 | | |
Capital purchases (accrual basis) | | Capital purchases (accrual basis) | $ | 1,345,484 | | | $ | 1,397,977 | | | $ | 1,305,104 | | |
Customer premise equipment includes expenditures for set-top boxes, cable modems, routers and other equipment that is placed in a customer's home, as well as equipment installation costs.costs for placing assets into service. Network infrastructure includes: (i) scalable infrastructure, such as headend equipment, (ii) line extensions, such as FTTH and fiber/coaxial cable, amplifiers, electronic equipment, make-ready and design engineering, and (iii) upgrade and rebuild, including costs to modify or replace
The table above does not include obligations for payments required to be made under multi-year franchise agreements based on a percentage of revenues generated from pay televisionvideo services per year. For the years ended December 31,
Interest rate risk is primarily a result of exposures to changes in the level, slope and curvature of the yield curve, the volatility of interest rates and credit spreads. Our exposure to interest rate risk results from changes in short-term interest rates. Interest rate risk exists primarily with respect to our credit facility debt, which bears interest at variable rates. The carrying value of our outstanding credit facility debt at December 31, 2017 amounted to $4,643,523.
To manage interest rate risk, we have from time to time entered into interest rate swap contracts to adjust the proportion of total debt that is subject to variable and fixed interest rates. Such contracts effectively fix the borrowing rates on floating rate debt to provide an economic hedge against the risk of rising rates and/or effectively convert fixed rate borrowings to variable rates to permit the Company to realize lower interest expense in a declining interest rate environment. We monitor the financial institutions that are counterparties to our interest rate swap contracts and we only enter into interest rate swap contracts with financial institutions that are rated investment grade. All such contracts are carried at their fair market values on our consolidated balance sheet,sheets, with changes in fair value reflected in the consolidated statementstatements of operations.
See discussion above for further details of our credit facility debt and See "Item 7A. Quantitative and Qualitative Disclosures About Market Risk" below for a discussion regarding the fair value of our debt.
We have entered into derivative contracts to hedge our equity price risk and monetize the value of our shares of common stock of Comcast. These contracts, at maturity, are expected to offset declines in the fair value of these securities below the hedge price per share while allowing us to retain upside appreciation from the hedge price per share to the relevant cap price. If any one of these contracts is terminated prior to its scheduled maturity date due to the occurrence of an event specified in the contract, we would be obligated to repay the fair value of the collateralized indebtedness less the sum of the fair values of the underlying stock and equity collar, calculated at the termination date. As of December 31, 20172020 we did not have an early termination shortfall relating to any of these contracts. The underlying stock and the equity collars are carried at fair value in our consolidated balance sheets and the collateralized indebtedness is carried at its principal value, net of discounts and the unamortized fair value adjustment for contracts that existed at the date of the Cablevision Acquisition. See "Item 7A. Quantitative and Qualitative Disclosures About Market Risk" for information on how we participate in changes in the market price of the stocks underlying these derivative contracts.
All of our monetization transactions are obligations of our wholly-owned subsidiaries that are not part of the Restricted Group; however, CSC Holdings provides guarantees of the subsidiaries' ongoing contract payment expense obligations and potential payments that could be due as a result of an early termination event (as defined in the agreements). The guarantee exposure approximates the net sum of the fair value of the collateralized indebtedness less the sum of the fair values of the underlying stock and the equity collar. All of our equity derivative contracts are carried at their current fair value in our consolidated balance sheets with changes in value reflected in our consolidated statements of operations, and all of the counterparties to such transactions currently carry investment grade credit ratings.
In preparing its financial statements, the Company is required to make certain estimates, judgments and assumptions that it believes are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented.