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General Communication, Inc. (NASDAQ:GNCMA)

Q4 2013 Results Earnings Conference Call

March 6, 2014 2:00 p.m. ET

Executives

Ronald Duncan - President, Chief Executive Officer and Co-Founder

Peter Pounds - Senior Vice President, Chief Financial Officer and Secretary

Tina Pidgeon - General Counsel and Senior Vice President, Governmental Affairs

Analysts

Barry Sine - Drexel Hamilton

Frank Louthan - Raymond James

Liam Burke - Janney

Operator

Welcome and thank you for standing by. At this time all participants will be in listen-only mode. After the presentation we will have a question-and-answer portion. (Operator Instructions) This call is being recorded. If you have any objections, you may disconnect. And now I am turning the meeting over to your host, Mr. Peter Pounds, Chief Financial Officer. Sir, you may begin.

Peter Pounds

Thank you for joining us today. I am Pete Pounds, the company’s Chief Financial Officer. Ron Duncan, our President and CEO is here with me along with the usual supporting cast. We will all be available to participate in the question and answer session which will follow my initial comments.

A copy of our detailed press release can be found on our website. This conference call is being recorded and will be available for playback for 72 hours beginning at 4 p.m. Eastern Time today. The playback number is (800) 839-2291 with an access code of 7461. In addition to the conference call, you may access the conference through the internet. To access the call via net conferencing, log on to our website at www.gci.com and follow the instructions. The webcast will be available for replay for the next two weeks.

Some of the statements made by GCI in this presentation are forward-looking in nature. Actual results may differ from those projected in forward-looking statements due to a number of factors. Additional information concerning such factors can be found in GCI's filings with the Securities and Exchange Commission.

Fourth quarter revenues totaled $218 million, up approximately $34 million over the fourth quarter of 2013. Revenues were flat on a sequential basis. Adjusted EBITDA increased $15 million or 28% compared to the prior year but was down $11 million on a sequential basis. The sequential decline is an expected seasonal drop reflecting lower levels of roaming and the increasing cost of acquisition in the wireless market.

Our EBITDA margin of 31% was up from 29% on a year-over-year basis but was down from 36% on a sequential basis. For the full year of 2013, revenues were $812 million, up $101 million or 14%. Adjusted EBITDA for the year was $267 million, up $40 million or 18%. Net income for the year was $9 million or $0.23 per share and represents a slight decline year-over-year. These results reflect the effects of the Alaska Wireless Network or AWN which closed during the third quarter of 2013. The fourth quarter was the first full quarter of operations for AWN.

Now turning to our segments. Wireless. While much integration work still needs to be done with AWN, we are off to a good start, both financially and operationally. AWN has been offering expanded LTE service in the Anchorage and Mat-Su markets. AWN recently rolled out LTE service in Juneau and expects to provide LTE service in the Fairbanks market by the end of the year. We are now providing TurboZone Wi-Fi access in over 1,100 venues with almost 1,700 access points around the state.

Wireless revenues of $62 million for the fourth quarter of 2013 decreased from the third quarter of 2013 revenues of $66 million. This reflects a full quarter of AWN operations but was offset by the seasonality of roaming. Wireless Adjusted EBITDA of $28 million decreased from the third quarter of 2013 Adjusted EBITDA of $37 million due to the seasonally lower roaming and the higher handset subsidies that we traditionally experience in the fourth quarter.

Now for the wireline segment. The wireline segment showed growth in a number of customer groups and continues to perform well. The wireline segment posted revenues totaling $156 million for the fourth quarter of 2013, which compares with $151 million for the same period in 2012, a 3% growth. Adjusted EBITDA for the fourth quarter of 2013 was $40 million, a slight decline from 2012 fourth quarter of $41 million, reflecting an increased allocation of operating expense to this segment.

I will now turn to the specific customer groups within the wireline segment. Consumer. Consumer revenues of $69 million for the fourth quarter of 2013 represented a slight increase over the same period in 2012. Increases in data offset decreases in voice and video revenues. Our operational metrics were favorable but for the expected declines in traditional voice and a decline of 800 wireless subscribers for the quarter. On the video front, the increased demand for TiVo has increased ARPU and reduced churn.

Additionally, we added 500 cable modem subscribers in the quarter. Our March to a Gigabit campaign has reinforced the speed message with new and existing cable modem customers. This has helped us to achieve an increase in cable modem ARPU from $70.81 to $74.42 on a sequential basis. Wireless was mixed with total subscribers declining by 800 for the quarter with the ARPU increasing by 1% sequentially and 6% on a year-over-year basis. As I will discuss later, we are planning on spending additional capital in 2014 to bring LTE to 80% of the population of Alaska by year-end, which we believe will significantly enhance our competitive position in wireless.

Business services. Business services revenues of $56 million for the fourth quarter of 2013 increased 4% over the same period in 2012. The fourth quarter reflected solid performance across all products in this customer group with cable advertising predictably strong throughout the holiday season. Overall, growth in the quarter was driven by video and voice. The voice revenue for the quarter did include the resolution of a billing dispute which resulted in a non-recurring increase of approximately $3 million in both revenue and EBITDA. Data revenue was relatively flat but for the decline in professional services revenue which is relatively low margin business.

Managed broadband. Managed broadband revenues for the fourth quarter of 2013 totaled $30 million, an increase of 6% over the fourth quarter of 2012. This positive performance is driven in part by the expansion of and increasing demand for the TERRA services in rural Alaska. It has been a pleasant surprise to see the growth in demand for TERRA from a variety of sectors. On November 5, GCI completed another phase of its terrestrial broadband network known as TERRA, with full service extending to Nome. GCI expects to complete the next phase to Kotzebue by the end of 2014.

Other items of interest. Denali Media. In the fourth quarter of 2013 we closed on the acquisition of one Anchorage broadcast station and two in Southeast Alaska. The CBS affiliate in Anchorage, KTVA, is now the first station in Alaska to have local HD news. Tribal Mobility Fund Phase 1. Las Friday, the FCC announced that GCI is eligible to receive $41.4 million from Phase 1 of the Tribal Mobility Fund option for first time delivery of 3G or 4G services. Upon approval of the final application, more than 37,000 Alaskan across dozens of communities are expected to benefit from the funded deployments. Funds issues under this award will be passed through to AWN as required by the FCC order approving the transaction.

The share repurchase program. During 2013, the company repurchased 1.8 million shares of GCI common stock at a total cost of $15.6 million. Depending on the company's performance, market conditions, its liquidity position and subject to board oversight, we will likely continue to opportunistically acquire shares in the open market.

Capital expenditures. For the year as a whole, we invested $181 million in capital expenditures. Off this, $16 million was funded by grants for a net of $165 million of cash CapEx. $28 million of the CapEx was attributable to the wireless segment and $137 million was attributed to the wireline segment.

Liquidity. We ended the fourth quarter with $45 million of cash on the balance sheet. In addition to our cash on hand, we have approximately $125 million in availability from our senior credit facility. With total current maturities of $9 million, we have more than adequate liquidity. With 2013 EBITDA of $267 million, our cash interest coverage is 3.8 times. Our leverage on gross debt is 4.2 times and 4.0 times on net debt. Our first significant principal repayments are not due until our senior credit facility matures in April of 2018.

Now for guidance and economic prospects. To summarize the results with reference to the previous guidance. We were projecting revenues in excess of $800 million, adjusted EBITDA of $265 million and capital expenditures less than $185 million. We were able to meet or exceed all three areas of guidance. Looking forward to 2014, we anticipate being able to improve on all measures by comparison with 2013. We believe that strong continued performance by all segments and customer groups will enable us to achieve consolidated revenues in the range of $910 million to $930 million. Adjusted EBITDA in the range of $285 million to $305 million.

For capital expenditure, our base investment program will be lower than 2013. It should be $140 million to $150 million, down from the $165 million net of grants in 2013. This does not include any real estate investment as we continue to review our leased property portfolio. Currently, however, we recognize the unique opportunity in the wireless market to solidify our competitive position and believe that an acceleration of our wireless build our warranted to bring full LTE service to 80% of Alaska. We estimate that this will accelerate approximately $30 million of planned expenditures from the outer years into 2014, bringing our total expected capital spend to about $170 million for the year.

In conclusion, we are pleased with this year's financial results but strategically we are even more pleased. The AWN transaction allows us to put in place the best statewide wireless network. The Denali Media transaction allows us to be the best provider of local video content in Alaska. The March to a Gigabit announcement was critical to cement GCI's commitment to deliver the best wired broadband experience to our customers in Alaska.

Finally, the continued expansion of our TERRA network brought us one step closer to ringing the network that is so important for our customers in Western Alaska. We have made some significant progress in 2013 and the company is well positioned as we enter 2014. We will now be happy to answer your questions. Al?

Question-and-Answer Session

Operator

(Operator Instructions) We have a question here coming from Mr. Barry Sine. Your line is now open.

Barry Sine - Drexel Hamilton

Good afternoon and congratulations on wrapping up a very busy year. Couple of questions for you. One, just kind of logistics question in terms of the financial release you put out last night. I notice you are giving a little less detail on some of the different product areas, expense and P&L wise, and now it's just lumping everything together in wireline. Is that a change just in disclosure or in the way you are thinking about managing the business?

Peter Pounds

Thanks, Barry. So about a year ago we had a change in how we thought about managing the business with the expectation of closing the AWN transaction. And so we changed our segment at that time and we have been focusing on how we do our disclosure here recently. And we just wanted to make sure that we were aligning all of our disclosure, whether that was in the Ks or Qs, or in the press release, to align with our two segments which are wireline and wireless. And so we have continued to provide some breakout on the revenue side but really below revenue, we are not providing information beyond the two segments there.

Barry Sine - Drexel Hamilton

So, for example, previously you would break out consumer business, managed broadband. Is that because you are thinking about those on a more holistic basis and managing them as a single business versus managing as separate businesses previously, or am I reading too much into that?

Peter Pounds

Yes, I would say that we really thought about that as two separate business, wireline and wireless, a year ago and we are kind of aligning our press release to provide that same level of detail.

Barry Sine - Drexel Hamilton

Okay. And then moving on. On the announcement on the government subsidies you got on wireless that came out this morning. Maybe you can give a little more visibility, what exactly are you building out there? Is that expected to be fixed wireless services or mobile, and just to confirm that goes into AWN, correct?

Tina Pidgeon

Barry, this is Tina Pidgeon. So just in terms of process. There is about a three week period we have before making final submission to the FCC, which then they have to review for final approval of the award. And during that intervening time, in the communities where we are a successful bidder, we will be determinating which will be delivering -- anticipating a 3G service versus a 4G service. And that decision under the FCC's program will also dictate whether we have two years for the 3G communities or 3 years for the 4G communities to complete the construction to each of those locations. So it is a mobile service offering and we will be making the technology elections over the next couple of weeks before we make our final FCC filing.

Barry Sine - Drexel Hamilton

And those funds do go into AWN and that becomes part of AWN?

Tina Pidgeon

That’s correct.

Barry Sine - Drexel Hamilton

Okay. And then -- so ACS is also eligible to use those networks and sell off of those networks once they're built?

Tina Pidgeon

That’s right.

Barry Sine - Drexel Hamilton

Okay. Also on wireless, in the section on guidance you talked about new opportunities that you saw as the reason for accelerating wireless CapEx. Company has identified unique opportunity in the wireless market. What exactly is that? Is that the late entry of Verizon that you are referring to or what are you are referring to there as the opportunity?

Peter Pounds

Well, I think it's an opportunity to capitalize on the spectrum that we have and capitalize on the speed message. Clearly on the wired data side, we have the speed message as we are marching towards a gigabit. We have recently announced that 200 megabits is our top speed now for cable modem service. And really in order to capitalize on the speed message for all the products, that means having LTE for the majority of the state of Alaska. And so while we were looking to get to LTE eventually throughout the urban areas of state, this accelerates that to keep that speed message out there. Also, I think you might have seen in the press release, that we have got roughly 17,000 Wi-Fi access points. We call it TurboZone and that helps us with the speed message as well.

Barry Sine - Drexel Hamilton

And getting to 80% of Alaska, I know the Anchorage Metro is what, about two thirds of the population. So what's the smallest city you get to at 80%?

Peter Pounds

You get to some pretty small cities throughout Southeast Alaska, Kenai Peninsula, Mat-Su, Fairbanks. So we are looking at basically everything that’s on the road systems.

Barry Sine - Drexel Hamilton

Okay. So that is quite a bit. My last question. I have asked in the last couple of conference calls for a little more visibility in terms of the Denali Media strategy, your whole TV strategy, what you are looking to do with that in terms of integrating it with the rest of the business and some other opportunities that you have there. Can you share a little bit more on what your ultimate strategy is with the television station acquisitions you have been doing?

Ronald Duncan

So they are kicking that one to me, Barry, this is Ron. I think you will see more of that this year. In fact you are seeing some more of it this week with the coverage of the Iditarod. The capabilities that we get through the Denali Media investment will enhance programming not only on the over the air stations but also both the quality and the amount of programming that’s available on the cable. So you should expect to see us carrying more local sporting events, more local other events that are not necessarily just sporting. We are substantially beefing up our video coverage of the Iditarod this week, we will be at the Arctic Man Games in a couple of weeks with coverage that will extend both on the broadcast stations and all the cable systems.

We are renewing and extending a number of our sports sponsorship events for teams within the state and we will use the resources and facilities at Denali Media to help us produce those for both broadcast and cable content. So it's a way to create more unique content which we hope will improve the stickiness of the cable product. And it's also a way to get better traction in ad business which should be a pretty vibrant business up here in this year given the number of highly contentious election issues that we have spread out over the next nine months.

Operator

Thank you. And our next question comes from Frank Louthan. Your line is now open, sir.

Frank Louthan - Raymond James

I apologize, I was having some trouble getting on earlier in the call. A couple of things. It looked like some of the rates on some the commercial side, the ARPU we were calculating, it seemed like it jumped up a little bit in the quarter. Is there something different you are doing there or maybe just moving some other revenue into that? And then on the rural expansion, that’s your opportunity. Is that really -- how does that work between your retail marketing in the JV? Which is that really being offered to as far as that build out is concerned?

Peter Pounds

So the ARPU was on consumer or commercial, Frank?

Frank Louthan - Raymond James

On the commercial side as we were calculating it.

Ronald Duncan

I will take a stab at the wireless question while Pete is looking at what you are referencing on the ARPU. Basically the way the FCC award will work assuming that the rest of the process completes as we expect, is that the grant funds will support both the construction and some components of the operation of the wireless networks in the communities where we were elected or selected for the funding. The funds, when they come in, will be turned over to AWN and AWN will build and operate the networks in those communities and essentially carryout the underlying commitments that were made in conjunction with the grant.

And then the AWN network will be available to both AWN retailers to sell to their customers. So there will be retail margin on that network for either retail provider if they elect to sell service in those communities. And AWN will have the wholesale margin on the AWN services that it provides to the retailers, supplemented in these cases by the grant funds which help to cover the substantially higher than normal costs of both constructing and operating in those communities.

Frank Louthan - Raymond James

Okay.

Peter Pounds

On ARPU issue, really the only ARPUs that we have listed are related to consumer. The only thing I can speculate on the business services side is, I did mention we had the $3 million billing dispute, which if you were running a calculation based on the number of minutes we had put through the network last quarter, that would have spiked an ARPU calculation there. Additionally, if you were doing it on business services video, we did have a strong advertising quarter for the fourth quarter, so if you were trying to do that. I would say, on the consumer side, really it's two things. It's TiVo is driving higher ARPU customers and reducing churn, and then the March to a Gigabit, albeit late in the quarter, was helpful in driving more customers to the higher bandwidth services that we offer.

Operator

(Operator Instructions) Our next question comes from Mr. Liam Burke. Your line is now open.

Liam Burke - Janney

On the cable modem front, last quarter you had a dip because a competitor -- your competitor in Alaska came out with a low priced basic, I'm assuming a DSL service, that sort of took your lower-end cable modem customers. This quarter, you added a few back and then you had attributed it to the gigabit or the higher-speed offering. Are you winning back customers or where are those subscribers coming from?

Peter Pounds

Liam, they are coming from all over the state. Obviously, with Anchorage being as big as it is in this state, we are not going to be gaining subs without gaining subs in Anchorage. I think that ultimately, we have got a much, much faster platform with the HFC plant that we have as compared to DSL and ultimately I think customers appreciate that.

Liam Burke - Janney

Okay. And on the accounts receivable front, you seem to have a spike towards the end of the year. Do you have a timing issue there or what drove that number up?

Peter Pounds

Yes, there was a timing issue, that was roughly $20 million, Liam. Typically we receive payments from the rural health customers in the fourth quarter of the year. Due to some of the storms and such that we were having on the East Coast this winter that actually got pushed into January this year. So that’s really about a $20 million bump right there.

Liam Burke - Janney

Great.

Ronald Duncan

Coming back just for second to the cable modem question. I mean the competitor was less visible in the fourth quarter. I don’t know that the lower-end product has that strong of legs. And I think that mostly we were benefitting from the spillover effect of the March to a Gigabit, because even though that added more customers at the high end, it increased the visibility of the cable modem product and stressed the quality and the speed of the whole line of cable modem products. And we added customers not just at the multi-hundred megabit speeds, but also at the lower speed and I think it's just the beneficial spillover effect from the good publicity surrounding the cable modem line.

Peter Pounds

Do you have any questions there Al?

Operator

Yes, sir. At this time we don’t have any questions on the queue.

Ronald Duncan

Okay. Well, thank you all for joining us. We will be back here in early May and we will look forward to talking with you then. Thank you very much.

Operator

Thank you. And that does conclude today's conference. Thank you for joining and you may now disconnect.

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