General Communication's (GNCMA) CEO Ronald Duncan on Q2 2016 Results - Earnings Call Transcript

| About: General Communication, (GNCMA)

General Communication, Inc. (NASDAQ:GNCMA)

Q2 2016 Earnings Conference Call

August 3, 2016 2:00 PM ET

Executives

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

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

Gregory Chapados - Executive Vice President and Chief Operating Officer

Analysts

Ana Goshko - Bank of America

Barry Sine - Drexel Hamilton

Anthony Klarman - Deutsche Bank

James Brooks - Juneau Empire

Operator

Good day, and welcome to the GCI Second Quarter 2016 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference call over to Mr. Peter Pounds, GCI’s Chief Financial Officer. Please go ahead.

Peter Pounds

Thank you, Alison. And thank you all for joining us today. I’m Pete Pounds, the company’s Chief Financial Officer; Ron Duncan, our President and CEO is on the call today, as well as other members of the team. We will all be available to participate in the question-and-answer session that will follow my initial comments.

This conference call is being recorded and will be available for playback. 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 these factors can be found in GCI’s filings with the Securities and Exchange Commission.

First, an update on the state of Alaska economy. As we noted last month in the 8-K, the state’s failure to enact a workable long-term fiscal plan means that we will be reducing our 2017 capital expenditures by 20% to 25%, as compared to our 2016 budget of $210 million. This implies the capital budget of $158 million to $168 million in 2017. These capital expenditures are still significant and should our state’s failure to enact a fiscal plan further slow our economy, we may make further cuts.

Now for some general commentary. We are half way through the year now and our three major capital projects are on track. Our projects to complete a second fiber to the North Slope and to bring our terrestrial network are on track for 2017 completion. We are also making significant progress in our new billings system. Already this year we have shut down three legacy billing systems, which provide near term benefits to our customers and positions us well for our 2018 billings system conversion.

During the quarter, we combined our legacy managed broadband business with business services forming our new GCI business through, which is headed up by Senior Vice President, Martin Cary. Martin joined GCI in 1997 and has been instrumental in building our managed broadband business.

On the financial front, revenue of $234 million for the quarter was down $14 million on a year-over-year basis and up $3 million sequentially. The year-over-year declines were primarily due to reductions in wireless ARPU from handset financing and our new roaming and backhaul agreements. This was partially offset by growth in data.

Adjusted EBITDA in the quarter was $79 million, down $9 million or 10%, compared with the second quarter of last year, and up $1 million or 1% compared to the prior quarter. The decline from last year is from roaming and backhaul revenues due to our long term agreements, in addition to increased SG&A spending on our billings system conversions.

Turning to the wireless segments, the wireless segment posted revenues of $54 million for the quarter, representing a $14 million decline from the second quarter of 2015 and a $2 million gain from the first quarter of 2016. Again, the new roaming and backhaul agreements account for the majority of those changes. Adjusted EBITDA for the quarter was $40 million, down $5 million on a year-over-year basis and flat sequentially.

Turning to the wireline segment, the wireline segment achieved revenues of $180 million for the quarter; that’s flat both sequentially and on a year-over-year basis. Gains and data revenue were offset by declines in voice, video, and on a year-over-year basis wireless. Wire line adjusted EBITDA was $39 million in the quarter. This is down $4 million year-over-year and up $1 million sequentially.

The year-over-year decline is due to increased SG&A spending, including our billing system and changes in segment allocations. Turning now to specific customer groups within the wireline segment for more detail, first consumer. Consumer revenues of $84 million in the first quarter were down $5 million on a year-over-year basis and $1 million compared to the prior quarter. The year-over-year change was driven by declining wireless ARPU associated with the shift to equipment installment plan.

The sequential claims decline was due to the decline in video revenues for the quarter. Seasonality played a significant role in our subscriber numbers, wireless benefited with 2900 net additions. Video subscribers declined by 2200 and cable modem subscribers were down 800.

Now for GCI business, GCI business revenues of $96 million in the quarter were up $6 million year-over-year and 1 million sequentially. Continued growth in terrestrial based revenues were slightly offset by weakness in professional services revenue and rate compression in the data market.

Other matters of interest, capital expenditures, our capital expenditures for the quarter totaled 50 million and that brings our year to day total to $84 million. Stock buybacks, we bought back 500,000 shares during the quarter at a cost of $8 million. Future buybacks are contingent on a number of factors, including leverage, board approval, and other opportunities in the market.

Liquidity, we ended the quarter with $11 million in cash on the balance sheet and $113 million in availability on our line of credit. With total current maturities of $12 million, I’m satisfied with our liquidity. Additionally, after the quarter closed, we completed our previously noted tower transaction, which increased our liquidity meaningfully. Leverage remains within our comfort zone with net leverage of 4.32 times.

Guidance and economic prospects. There is no change in our guidance for the year, adjusted EBITDA between $295 million and $325 million, revenue of between $930 million and $980 million, and capital expenditures of approximately $210 million.

We will now be happy to answer your questions Alison.

Question-and-Answer Session

Operator

Thank you. We will now we will now begin the question and answer session. [Operator Instructions] And our first question will come from Ana Goshko of Bank of America. Please go ahead.

Ana Goshko

Hi. thanks very much. I have a few questions. First of all on the wireless subscriber front, particularly in consumer I understand that this was a seasonally strong quarter in prepaid, but if we take a step back and look at the year-over-year, prepaid customers are up 5%, postpaid is down by about 5%. So I want to understand what’s the current dynamics you’re facing competitively in terms of the prepaid growth, and the postpaid losses, and is it potentially a function of the economic situation and kind of the total addressable market in this state or is it more for competitive win and loss situation?

Peter Pounds

Ana there is I think three different things going on. Number one, we are seeing the state economy have an effect and so people are migrating down from postpaid to prepaid, so that’s definitely improving our prepaid position. Secondly, we have had an improvement to our prepaid product over the last year and we are seeing the benefits there.

And the third item is that we have been migrating the 87,000 customers that we acquired on February 2nd of 2015 from the legacy platform under our own platform and that it certainly exacerbated the situation with our postpaid customers as we moved those customers over to our remaining billing systems.

Ana Goshko

Okay. And then any comment just on the competitive environment with regard to Verizon or AT&T and kind of the offer there in the market or to the degree that Verizon has become more present and more aggressive?

Peter Pounds

Nothing really of note there, Ana.

Ana Goshko

Okay. And then the second question is just on the CapEx outlook for 2017. So, would your base case prior to the situation on the fiscal front in the state, was the base case to keep CapEx flat, and you’re now telling us that because of the fiscal situation, you’re really going to take a step back, is that the message that we should take from this?

Peter Pounds

I think the message is that without long-term stability on the state fiscal front, we are going to be reducing our CapEx. And that’s really what we felt comfortable releasing is that next year’s CapEx is going to be 20% to 25% below the current year.

And I did note that if we continue to have problems with the state’s fiscal situation, if there is not action to handle that, that gives us long-term stability that there is the likelihood of additional cuts in CapEx in out years.

Ana Goshko

Okay. And then in what areas are you – I don’t know if it’s cutting back, but the situation had been rosier on the economic front, where would you have deployed that that capital from what kind of projects or upgrades, et cetera?

Peter Pounds

Yes, I would say that we are reducing our CapEx when it comes to projects that we’re currently working on. For example, we will be able to complete our fiber in the North Slope next year, that’s going to have more investment this year than next year and in the TERRA project as well. We’re spending a lot of dollars this year that will allow us to drop off expenditures next year.

Ronald Duncan

So, there also want to be less growth CapEx we’re expecting the size of the market to compress rather than continue growing, depending on how bad the state economy gets in reaction to the fiscal situation, we’re going to see some loss of population over the next several years up here. We’re already seeing it with the compression in the oil industry. We’re going to compounded with the compression of investment spending by not just us by others in the economy.

So we won’t have a need for as much growth in the network. We won’t be doing as much densification. We won’t be building as much new bandwidth capacity, because we’re in the size of the market strength, you don’t need that and will be slowing down the deployment of the new products.

So there would be slower advances beyond the. gigabit speeds of a fewer locations to get upgraded the gigabit, there will be less network to expand. And we’re slowing down our infrastructure investments in the rest of the state. And as Pete said, they will slowdown more if the state can’t figure a path to some sort of long-term stability.

We’ll also be prioritizing our investments, so that they’re directed away from things that rely on the consumer economy and more into core assets, where know there’s a return from – these are government entities that are in place or our roaming partners so that sort of thing.

Ana Goshko

Okay, thanks. And then just one quick one finally. What are the planned use of proceeds for the tower sale proceeds, I understand that you had the fiber acquisition for $20 million, but that leaves about $70 million and especially with the CapEx outlook for next year being cut, it should put you in a pretty good cash position. Wanted to know how you plan to deploy that?

Peter Pounds

Yes. I think we disclosed at our year-end press release that we were basically allocating those funds for the North Slope fiber project and the TERRA ringing, so that’s kind the use of proceeds.

But absent that, we actually do have free cash flow this year. We’ve used some of that to buy back stock. And so, the reality is that, we did get a big infusion of cash, and to the extent that we had revolver borrowings, those basically are being and have been repaid. And we’re looking at redoing our senior credit facility and that may involve a change between now revolver and term loan A, which would potentially allow for further paydowns a little bit while retaining flexibility.

Ana Goshko

Okay. Thank you very much.

Peter Pounds

Thank you.

Operator

Our next question will come from Barry Sine of Drexel Hamilton. Please go ahead.

Barry Sine

Good afternoon. I wanted to continue on the theme of our capital spending. So when you talked about 2017, you tied back to the state fiscal situation. Does that imply that, if by some miracle legislature – legislators got together with Governor and we did see a long-term fiscal package that would satisfy you. Does that imply that you’d bring CapEx back up, or is it equally driven by the economic situation state?

Gregory Chapados

Well, I don’t know how bigger believer you are in miracles Barry. But at this point, I don’t think there is any chance that there is going to any vision towards fiscal stability and so following next year this time. The governor and the legislator have basically given up.

We do not believe there’s going to be a special session after the election. This will be addressed by the next legislator. It will be probably be an issue that’s even more contagious next year than it was this year, that means that it will be resolved, if it’s resolved at all only at the very end of the legislator session, which would pull it out to maybe this time next year.

And the options for resolving it absent, but doubling of oil prices are a lot more limited than they were this year. So nothing in state policy is going to change in 2017 investment horizon. We have some economic surprise happens and the state goes from a situation, where the economy is gradually declining to where it’s robustly growing again. And we feel confident in making investments would have a good return. In subsequent years, we would look at stepping back up capital. We’re all about making investments in places, where we can get a good return.

I think what you should assume happen this year is that, because of the state’s fiscal plan, the discount rate went up substantially, because there’s now a lot more risk involved in projecting what will happen, and it’s not what’s going to happen in the next 12 months, it’s what’s going to happen in the next 60 months is the failure to address the fiscal plan doesn’t lead to falling off the cliff. I think in the next 12 months, it leads to valuing around with a gradually compressing economy and falling off the cliff five years out in the future.

Barry Sine

And then talking about a longer-term outlook in terms of CapEx, the $210 million for this year, I had always kind of assumed that there was quite a few kind of one-time large projects in there, but that was a little bit above trend. Even with the reduction next year, as Pete has pointed out to me, you’re still above 15% of revenue.

Where should we think about CapEx as a percentage of revenue, long-term for GCI? Are there structural reasons, maybe the geography of Alaska, why you should normally have to spend more than – much more than 15% of revenue on CapEx, or is that 15%, which is pretty typical on a lower 48, is that a more normal run rate, when you finish some of these projects like TERRA?

Ronald Duncan

I think they’re all in terms of the growth opportunities. The TERRA project has been a tremendous project for us. It’s led to a lot of solid long-term growth. And there’s more opportunity in those regions. But there is now also more risk in those regions because of the potential stability of state government support that leads to substantial influences on the population out there. So that’s sort of incremental investment beyond what it takes to ring TERRA becomes a question, and 15% may or may not be a benchmark.

If we go two more years without any fiscal resolution from the state 15% maybe way too high, and we may strengthen in 25% this year could very well be 25% next year and 25% the following year, if the state’s economy is not headed for a solid future. And part of the problem is it’s very, very hard to predict at this point what’s going to happen.

You can pencil it out and say, well, jeez, states are going to look like Puerto Rico, that’s kind of an extreme case. Some things will happen, they will be exogenous events, but it’s just extremely difficult to foresee what it looks like over the next three or four years. And in that environment, responsible behavior says, you have to put less of your assets of claims and you can see in the future.

Barry Sine

And I wanted to zero win on a couple of our projects – there’s a couple of projects, I think that are important to your competitive situation and just get an update on those and just confirm that they won’t be impacted by the cut next year? The first one is lower 48 number portability, I believe that scheduled for completion sometime this year, and that shouldn’t be impacted. Could you comment on that project?

Peter Pounds

Yes, Barry, that’s not really a CapEx project.

Barry Sine

Okay. So and that is still on track for completion sometime end of this year?

Peter Pounds

Yes.

Barry Sine

And then the LTE rollout of the network, you had a question before about the competitive situation this state. I’m sure you’ve seen it Verizon’s Mall store in acreage have a big sign in the window. Alaska’s largest 4G LTE network, which I’m assuming you guys would take exception with, but you guys are also rolling out your LTE network. Any impact from the capital spending on the LTE rollout? And where will you get to in terms of LTE rollout this year with CapEx?

Gregory Chapados

Barry, this is Greg Chapados. We’ve met our initial goal going to 80% of Alaska POPs with LTE coverage. So I think we’re in a pretty good position competitively in terms of the coverage of other carriers in the state. And as you know, we are also covering a large part of rural Alaska with 3G. We are also going to be ultimately deploying LTE technology even in rural Alaska. So I think we’ve already accomplished a large part of our LTE goals. The goals are shifting to other things like the deployment of VoLTE and other technologies.

Ronald Duncan

That said the LTE is probably in the same category as cable modems densification that there’s less demand, because there are fewer overall users on the system, because the population is shrinking. The maintenance capital budget for all of those assets goes down, because you’re no longer serving a market that’s growing at 25% to 30% a year, you’re serving a market that’s growing more slowly, because there are fewer people, the demand increase stay there.

Barry Sine

And I noticed you did comment on the claims that I mentioned for Verizon, do you want to color on that?

Ronald Duncan

Not really. You were out there, you can figure it out.

Barry Sine

Okay, I did. All right. Thank you. Those are my questions. Thank you.

Gregory Chapados

Thanks, Barry.

Operator

[Operator Instructions] Our next question will come from Anthony Klarman of Deutsche Bank. Please go ahead.

Anthony Klarman

Hi, thanks. A follow on from the first question that was asked, I guess, on the guidance change on CapEx. We think of CapEx as a leading indicator of future growth and obviously, if there’s a shrinking population there would theoretically be a smaller growth opportunity.

I guess two questions off about, one does that change your moderate any of your views on what you might think about potential expansion outside of the state? I know you’ve at times flirted with potential asset purchases in the lower 48%, I wanted to see if that was a more realistic possibility in that scenario?

And then second, CapEx, you mentioned in terms of slowing the deployment, I guess, if top line growth slows as a result of CapEx and the opportunity slowing, have you thought about where you could pull OpEx leavers to kind of manage the free cash flow of the business to sort of where it is today?

Ronald Duncan

Well, taking those kind of in reverse order, yes, we are working right now to size the business to the expected economic situation, it doesn’t make any sense just to say, okay, we’re going to cut the CapEx and everything else stays the same. We’re going to adjust the way we operate to reflect the characteristics of the market, that doesn’t mean EBITDA growth stops, it probably slows top line growth.

But there are other ways to drive the EBITDA growth, and we will spend more time in energy focusing on changing the structure of the company to respond to the changing marketplace some of that you’ve seen already in the reorganization of the business. Services line, we’re responding aggressively to the changes in our managed services business as the oil company demand for those sorts of services goes away because the oil companies are substantially pulling back their footprint as well as their support industry.

So yes, we will be adjusting the size and focus of the company and while top line growth will probably slowdown. There are new products that the existing customers will continue to buy. So I don’t know that this materially changes are deal of the five year EBITDA.

With respect to the Lower 48, we are all about with opportunities will good return in spaces that we know. To-date, we haven’t found anything that we thought was particularly attractive, a lot of that has to do with asset pricing in the Lower 48. We’ve looked opportunities where we like the business.

But with the – exceedingly low cost of capital and the surplus of the e-funds slashing around there. Asset values typically are higher than we are willing to pay. So I wouldn’t expect to see anything dramatic in the near-term because we tend to be pretty disciplined and looking for a return on our investments.

Peter Pounds

I’ll add one thing that two regarding the capital and operating expenses. The capital that we will spend, I think the mix of that spending is going to focus increasingly on ways in which can reduce operating costs. So that’s another opportunity for us to build growth in using capital, even though it’s not necessarily expending the infrastructure across of space.

Anthony Klarman

Great, thank you very. Thanks Anthony.

Operator

Our next question will come from James Brooks of Juneau Empire. Please go ahead.

James Brooks

Hello, thank you. I’ve two quick questions here, what do you attribute the loss of subscribers to – and two, you all were fairly active in the legislature this year trying to convince them the pass a fiscal plan. Have you seen any pushback reaction as a result of that?

Ronald Duncan

So, lots of video subscribers I think is primarily an industry trends as people move more to – over the top consumption. I think we’re seeing only very limited effects from the gradual reduction in jobs and population, because I think we’ll book of that impact as hit the market that I suspect you’ll see some changes this fall. I don’t they’ll change our projections they’ve already been factored in.

I think you’ll see the initial impact of the population and the job changes this fall. Prior to say how rapidly that process and in term blow back form the campaign, I know that you there and you can read the block and there is also – it’s a nice name. I’ve been calling and company has been called.

I don’t think we’ve seen a maturity of effect on our subscriber base in terms of our participation in the effort to adopt the state fiscal plan that obviously it has been contentious in the blogosphere and those sorts of places. We were highly active participants, because we’ve always enjoyed investing in the state.

It’s been a good source of growth for us. So we were trying to preserve viable economy where we could continue to make those sorts of large scale investments that opportunity at the very least. This is the way for a year or two years now, and it increasingly difficult to see how we will get it back to sort of position we could have been ended, and we adopted a fiscal plan before we spent all the savings.

James Brooks

And then to follow-up on the first question, what do you attribute the decline in wireless customers to?

Ronald Duncan

That probably mostly the shift from by the billing systems, we’re still digesting the conversion from the ACS customers that we bought in the consolidation last January. We had to ship 100 somewhat customers from one billing platform to another many of those customers has to shift handsets, because they had legacy handsets that didn’t work on the future state net network and I think the bulk of the year-over-year wireless loss on the postpaid customers is attributable to expected losses in the conversion. We’re close to the end of the now and I suspect that place with stabilize and depending on the economy probably grow some.

James Brooks

And then one last follow-up by you had attributed the decline in video customers as the industry trend. But we also saw a decline in cable modem customers, didn’t we? What would you attribute that to?

Ronald Duncan

That’s possibly some competitive issues around the margin and it’s also somewhat seasonal. In the last six years, we’ve gained cable modem customers in three times in the second quarter. There are seasonally impact of people disconnects some of their service over the summary and go do better things up. So there are competitive issues that hasn’t flow when we anchorage market we’re seeing sort of a high tide of competitive pressure from HTS right now. I don’t think that’s terribly tied to the economy.

James Brooks

Thank you.

Ronald Duncan

Thank you.

Operator

[Operator Instructions] Ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back over to Mr. Peter Pounds for any closing remarks?

Peter Pounds

Thanks, Alison and thank you all for listen. We’ll look forward to sharing again here the first week of November.

Operator

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.

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