Introducing coverage of Altice USA by his firm with a “neutral” rating, MoffettNathanson analyst Craig Moffett said the company has driven down per-subscriber operating expenses not related to pay-TV programming by around 20%.
But in a rather Debbie Downer report to investors, Moffett described Altice's original goals of U.S. cable conquest as sinking off the pier.
For one, Altice’s high-margin goals for its $17.7 billion purchase of Cablevision last year face challenges. Not only does the European telecom face intense competitive pressure from OTT operators in its so-called “Optimum” region, having Verizon offer an $80-a-month 1-gig internet product caps how much the cable operator can raise its own prices on internet service.
“Verizon’s broadband offering steals the thunder from what would otherwise be Altice’s pressure-release valve,” Moffett said. “So yes, we expect Altice can raise margins. And yes, we expect that doing so will impair growth. There’s no such thing as a free lunch.”
Speaking more broadly, Moffett expressed doubts in regard to Altice originally more ambitious goal to take on Comcast.
“Longer term, we’re also left scratching our heads about where all this gets them,” Moffett added. “Sure, there are a few small M&A targets out there. But without Charger, and that appears to be a non-starter, there is no endgame that yields anything more than a sub-scale cost-cutter. That’s certainly not what they had in mind, originally.”
In the end, “Altice USA faces the same combination of headwinds and tailwinds as its larger peers, but even more so,” Moffett said. “They can be expected to have higher margins as they aggressively shed costs, but (modestly) slower growth as they grapple in a more competitive footprint. Their capital intensity will be higher than peers initially (as they build out fiber-to-the-home) but perhaps lower down the road.”
While Optimum is overpenetrated and faces steep competition, Altice USA’s other acquisition, Suddenlink, is underpenetrated and faces less competition. The result, Moffett contended, is a “pedestrian” situation.
“Altice rode into the U.S. market with an aura of differentness,” the analyst said. “They spoke disparagingly of U.S. models and suggested that they have a better way. Our analysis suggests they are actually less different than they seem.”