General Communication's (GNCMA) Management on Q4 2016 Results - Earnings Call Transcript

| About: General Communication, (GNCMA)

General Communication, Inc. (NASDAQ:GNCMA)

Q4 2016 Earnings Conference Call

March 2, 2017 2:00 PM ET

Executives

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

Greg Chapados – Executive Vice President and Chief Operating Officer

Analysts

Barry Sine – Drexel Hamilton

John Park – Needle Point

Mike Kerrane – SunTrust

Operator

Good day and welcome to the GCI Fourth Quarter 2016 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask question. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Peter Pounds, Chief Financial Officer. Please go ahead, sir.

Peter Pounds

Thank you, Denise, 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 many others on our management team. We will be available to participate in the question-and-answer session, which 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 such factors can be found in GCI’s filings in the Securities and Exchange Commission. First, some general commentary. We’ve had another busy quarter. First, we eliminated the fourth billing system of the year during the fourth quarter. We did end up taking a financial charge of approximately $2 million for the early termination of the contract. But it was a great accomplishment for the operating team.

This is a significant improvement for our customers and its elimination was greeted with enthusiasm internally, as well. Second, the introduction of our new cable modem plans which increased both speeds and usage was instrumental in reinvigorating growth in subscribers in spite of an economy which is in a recession. Third, during the fourth quarter we completed the acquisition of the fiber optic cable connecting Anchorage to Kenai and Kodiak during the fourth quarter. Finally, we began a new procurement initiative that we believe will be instrumental in growing our EBITDA margin.

Moving on to the financial side, our revenues for the quarter were $232 million, down $4 million from the prior quarter on seasonally lower roaming as well as lower handset revenues. Compared with the prior year, revenue was down $9 million as a result of our roaming and backhaul agreement. Our fourth quarter adjusted EBITDA was $68 million, which is down $10 million sequentially. The reduction in EBITDA was due to the roaming revenue declines, inventory write-off, the billing system write-off and the consistently higher fourth quarter healthcare costs.

On a year-over-year basis EBITDA was down $3 million, driven by an $8 million decline in roaming and backhaul. But for the roaming and backhaul changes EBITDA was up 7% on a year-over-year basis even with our fourth-quarter charges that I mentioned earlier.

Moving on to the Wireless segment, the Wireless segment posted revenues of $50 million for the quarter, representing a $2 million decline from the third quarter of 2016 and down $10 million from last year. This decline is primarily related to the lower roaming and backhaul revenue. Wireline segment, the Wireline segment revenues of $182 million from for the quarter were down $2 million from the third quarter and up $1 million from the fourth quarter of last year. Declining wireless subscribers and ARPU were offset by gains in data revenues.

Wireline adjusted EBITDA was $36 million in the quarter, which is up $4 million year-over-year and down $10 million sequentially. EBITDA benefited year-over-year from cost reductions associated with our professional services business and growth in data revenues. The sequentially EBITDA decline was due to SG&A charges, which I noted previously.

I will now turn to specific customer groups within the Wireline segment for more detail. First, Consumer. Consumer revenues of $84 million in the fourth quarter were down $6 million year-over-year and $4 million sequentially. Declining wireless subscribers from the migration of our acquired customers and declining ARPU associated with equipment installment plans pushed wireless revenues down. Video subscriber declines also impacted the year-over-year comparison. However, our cable modem subscribers were up 600 sequentially. We continue to improve our data offerings by rolling out the first product in our Better than Unlimited campaign. Our red data plan now includes the first terabyte of data at gigabit speed and endless data at speeds matching our competitors’ average speed.

In Wireless we were down 3,900 subscribers in the fourth quarter. These declines are due to the final transition of subscribers off of our decommissioned billing system as well as seasonal declines in pre-paid and Lifeline. GCI Business, our revenues in GCI Business were $98 million in the quarter, up $6 million year-over-year and $2 million sequentially. Data revenues led the growth. SG&A, SG&A in the quarter was $94 million. This is up $5 million year-over-year and sequentially. The increase resulted from the elimination of a billing system, the write-off of obsolete inventory and the typical year-end increase in healthcare costs.

Now moving to other matters of interest, first capital expenditures. Our capital expenditures for the quarter totaled $59 million, bringing our total for the year to $211 million. Stock buyback, once again we were active buying back 600,000 shares during the fourth quarter at a cost of $9 million. Our total repurchases for the year were 3.5 million shares at a cost of $55 million. Future buybacks are contingent on a number of factors including leverage, Board approval and other opportunities.

Liquidity, we ended the quarter with $19 million in cash on the balance sheet and $124 million in availability on our line of credit. With total current maturities of $13 million I’m satisfied with our liquidity. Net leverage after adding back the roaming adjustment is 4.6 times. Guidance and economic prospects, after adjusting for the $55 million headwind related to our roaming and backhaul contract and $8 million of costs related to our new billing system we grew EBITDA by $21 million in 2016. This was in spite of revenues which were up just $10 million after adjusting for the roaming and backhaul contracts.

With the current state of Alaska fiscal situation we are focusing on operating a more efficient organization to drive EBITDA growth in spite of what may be limited revenue growth. There are several important initiatives to that end. First, the new billing system in 2018. This will significantly simplify how we do business with our customers. The first step was the elimination of the old billing system. That was completed in 2016. The second step is to migrate customers off of old plans that will not be migrated to the new billing system and moving those customers to the latest plan. This is on track for completion this year.

The final step is the conversion next year. The second area is circuit cost reduction. We have a new group that is tasked with building out our network to areas that have expensive tales circuit. I am pleased with the significant progress this group has made and with the new revenue opportunities that it is providing. Finally, our new procurement initiative. We currently spend over $500 million per year in cost excluding employee cost and interest expense. We are working with procurement consultants and our vendors to make sure that we get appropriate pricing. With these and other changes we believe that we can grow our EBITDA margins meaningfully from the current 31% over the next several years.

Adjusted EBITDA guidance, we expect adjusted EBITDA to be between $300 million and $325 million in 2017. CapEx, capital expenditures are expected to be approximately $165 million in 2017. This is down significantly from our 2016 expenditures of $211 million. Leverage, we expect to maintain our leverage in the range of 4 to 4.5 times in 2017. Our leverage is calculated with an adjustment for the impact of our roaming and backhaul agreement which will be $20 million on top of our adjusted EBITDA in 2017.

We will now be happy to answer your questions. Denise, can you open up the line for questions?

Question-and-Answer Session

Operator

Certainly. We will now begin the question-and-answer session. [Operator Instructions] And your first question will come from Barry Sine of Drexel Hamilton. Please go ahead.

Barry Sine

Thank you, gentlemen. First question is on the competitive situation in the wireless industry. And, obviously, this is a nationwide trend. If I look at your website this morning it talks about 40% discount versus AT&T, but it looks like your 20 gig plan is actually more expensive than their now unlimited 22. So what are you doing in the marketplace to maintain GCI’s respective price competition with the price competitiveness with the other carriers?

Greg Chapados

Barry, it’s Greg Chapados. Obviously, there has been a lot of volatility in the wireless market over these past few weeks as people have changed their offering in response to Verizon’s embracing unlimited. And we are in the process, too, of getting prepared to launch a new set of wireless plans here in Alaska.

Barry Sine

Okay, that’s what I would expect. Pete, a question for you. You answered most of the questions that I would’ve had in your script, but one question on the savings from the billing systems, when did that start or when does that start?

Peter Pounds

That starts January 2017 here. We accrued any final payments that we are making in 2017 into 2016 since we are off of that billing platform. And so effectively the accrual ended in fourth quarter of 2016. And so I think it was a total of close to $7 million all in for 2016 between the actual payments in 2016 and what we moved forward in 2017.

Barry Sine

So if we take out the onetime charges, are we expecting a $5 million annual step down now in SG&A as a result of that?

Peter Pounds

The natural step down related to the billing systems would be $6 million to $7 million between 2016 and 2017, Barry.

Barry Sine

Great. Last question. On business services as you guys pointed out, very, very strong data revenue growth. I’m wondering if you could help me break that down a little bit more. Managed broadband presumably is still benefiting from all that you spent on Project TERRA. I’m assuming you are still seeing good growth there. That network probably is not fully penetrated, but then on the metro side you’ve, obviously, down a lot with cable modem and services. So I assume you are getting accelerated growth on the metro side. Could you talk about the competitive environment in both of those areas please?

Peter Pounds

Yes, I would just note that we continue to spend an awful lot of money on TERRA. And we are going to continue to spend that this year in 2017. As we look to ring the network one of the things that we are very, very concerned about is making sure that we’ve got the best reliability that we can have and by ringing that network we will have that. Yes, there are some new revenue opportunities that have been coming online as a result of the expenditures that we have been making there. But we are not going to parse out the financials there. Other than note you have pointed out there is some growth there and you have pointed out there is some growth on the other business data as well, and I would leave it at that.

Barry Sine

Okay, that’s great. Thank you very much.

Peter Pounds

All right. Thank you, Barry.

Operator

The next question will come from John Park of Needle Point. Please go ahead.

John Park

Hi guys, thanks for taking my question. Just wanted to understand why we saw such a steep sequential decline in EBITDA from Q3 to Q4. I understand the $2 million write-offs on the SG&A and $5 million sequential revenue decline, but anything else going on?

Peter Pounds

I would basically say you’ve got your roaming and backhaul. You have got your healthcare costs. You have got your billing system and you’ve got the inventory write-off and those four are in broad terms all $2.5 million issues.

John Park

Okay, got it.

Peter Pounds

And that’s your sequential decline.

John Park

Perfect. And then when we think about the 2017 as a whole, I know revenue guidance wasn’t given but directionally when we look at this year most, maybe all the revenue decline was from the roaming and backhaul and the rest of the business was flat to up 1%. So directionally should we expecting similar flattish revenue for 2017?

Peter Pounds

Yes, that would be my expectation. We are given the recession that the state of Alaska is in and we didn’t feel comfortable giving specific revenue guidance. But I would not expect it to be terribly far off of last year’s performance absent the roaming.

John Park

Got it. And then when we are trying to get to the EBITDA guidance, I know $5 million is coming from the billing system. There are going to be some circuit cost savings and procurement initiatives. In total how much cost savings can we have that would get us to a midpoint of our EBITDA guidance?

Peter Pounds

I guess I would take a look at what our EBITDA margins are and what the industry is, and I think that would leave you with an opportunity set that’s north of 5% EBITDA margin growth. I don’t think that all comes in during 2017 because that would give you EBITDA guidance even above where we are at right now. But over a period of several years we’ve got meaningful opportunities. And just note that we got where we are today because we have been aggressively growing the business. We have spent 20% to 22% of our revenues historically on CapEx and the focus was on building a great network just as quickly as we could.

Now as we are in a market that has fewer growth opportunities we are going back and we are looking at networks that don’t need to exist, old GSM networks, old CDMA networks that are no longer needed, we are looking at old billing systems that are no longer needed, going back and getting those efficiencies. And there are several points of EBITDA margin opportunity there. And noting the relative lack of revenue growth expectation going forward here into 2017, you should assume that most of the EBITDA growth in 2017 comes from trimming the cost, particularly cost that we are paying to our vendors.

John Park

Great thank you. One last one. How should we be thinking of leverage here based on EBITDA? It’s north of five times now, so it seems to be much higher than comparable companies. And given the macro challenges and some of the headwinds we are seeing, are you guys comfortable at least on EBITDA level operating at more than five times?

Peter Pounds

Yes, we think of leverage as net leverage as it’s contractually given in our senior credit facility, which means that we get to add back the differential between cash received and GAAP revenues in our roaming contracts. So looking at our EBITDA as we see it for covenant purposes, I would point you to the press release which is effectively the $288 million plus $30 million last year.

As our EBITDA this year if you just take the midpoint between $300 million and $325 million, that would give you $312 million. Add back the $20 million and you’d be at $332.5 million of EBITDA would be what we think of as 2017 EBITDA at this point. Then that would be your denominator in the leverage calc. And we are looking to get back into the 4 to 4.5 times under those parameters.

John Park

Great, thank you very much.

Peter Pounds

Thank you.

Operator

[Operator Instructions] The next question will come from Mike Kerrane of SunTrust. Please go ahead.

Mike Kerrane

Hey, I wanted to ask about the leverage question maybe in a little bit different way. You talked about the company being in a low growth mode right now and the stock price has seemed to do very well over the last six months. How do you guys think about the $55 million of buybacks you did in 2016? And going forward would you continue at that pace given the low growth expectations? Or is there some other way to think about the amount of capital that gets returned to shareholders versus debtholders?

Peter Pounds

I’d like to parse that out into two separate pieces there Michael. First of all, on the growth I’d make a distinction between revenue growth and EBITDA growth. We have always been very interested in growing both and certainly a recession in the state puts a limit on the opportunities on the revenue side. But as I mentioned earlier, we’ve got plenty of opportunities on the cost side to make sure that we continue to grow our EBITDA here.

As far as the buybacks, you know, the average price that we got into or that we bought back the stock in 2016 we are currently above those levels, which I guess makes you feel relatively good about the purchases that you made last year, certainly better than if the reverse were true. But we think of this on a long-term basis and we are not going to give specific guidance about stock buybacks other than the somewhat limiting factor of we like to be in the 4 to 4.5 times leverage.

Mike Kerrane

Okay, thanks, Peter.

Peter Pounds

All right, thank you.

Operator

[Operator Instructions] And I am showing no questions at this time. I would like to hand the conference back to Mr. Pounds for any closing remarks.

Peter Pounds

All right. Well, thank you, Denise, and thank you all for dialing in. We will look forward to talking with you here the first week of May. Thank you very much.

Operator

Thank you. Ladies and gentlemen, the conference has now concluded. Thank you for attending today’s presentation. You may now disconnect your lines.

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