GLIBA Q4 2018 Earnings Call
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the GCI Liberty 2018 Q4 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded, today February 28. I would now like to turn the conference over to Courtnee Chun, Senior Vice President of Investor Relations. Please go ahead.
Courtnee Chun: Thank you. Before we begin, we'd like to remind everyone that this call includes certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, actual events or results could differ materially due to a number of risks and uncertainties including those mentioned in our most recent Forms 10-K and 10-Q filed with the SEC. These forward-looking statements speak only as of the date of this call, and GCI Liberty and Liberty Broadband expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein to reflect any change in GCI Liberty or Liberty Broadband's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. On today's call, we will discuss certain non-GAAP financial measures, including adjusted OIBDA and adjusted OIBDA margin. Information regarding the comparable GAAP metrics along with required definitions and reconciliations, including preliminary note in Schedules 1 and 2, can be found in the earnings press release issued today, which is available on our website. Now I'd like to turn the call over to Greg Maffei, Liberty's President and CEO.
Greg Maffei: Thank you, Courtnee, and to welcome to all of you joining us this afternoon. Today, speaking on the call besides myself, we'll have GCI Liberty CFO, Mark Carleton; GCI's CFO, Pete Pounds. Also during the Q&A, we will be available to answer questions about Liberty Broadband, if there are any. So starting at GCI Liberty, at the corporate level we continued share repurchases. The November 1 and January 31, we repurchased over $100 million worth of stock. We aim to take advantage of the double discount at GCI Liberty, the low and the low Charter price. That double discount is because look through with the discount GCI Liberty has Liberty Broadband and then turn Liberty Broadband has to Charter. To-date is you look at that double discount, we've effectively repurchased a Charter in average look through price of around $270 and that look through price today is up to $290 and obviously Charter itself is considerably higher. So we're excited about trying to take advantage of both, the growth in Charter and that double discount. Turning to GCI, 2018 was an undoubtedly a challenging year. We operating in a difficult business environment and a difficult regulatory environment. Nonetheless, GCI completed several critical business initiatives. We believe will set us up better for the future and we look forward to a more favorable business environment in 2019. You'll hear more about that from Pete Pounds shortly. Over Liberty Broadband, Charter finished the year strong and performed well in 2018. Charter's footprint is now upgraded to all digital and as access to the spectrum internet gig service. We saw strong residential growth across residential, commercial and advertising. We ended the year with our after our launch of mobile with 134,000 mobile lines and we expect to accelerate that dramatically in 2019. Charter repurchased $5 billion of its own shares in 2018 at an average price of $309. Notably CapEx is expect to decline to $7 billion in 2019, a dramatic decrease over what we spent over the last couple of years. Online with our thesis in the long-term Charter can have the most attractive and CapEx profiles in the industry. Charter remains and we're excited about the fact that it is a leverage free cash flow story with a potential for significant equity shrink. So with that, let me turn over to Mark Carleton to discuss the financials into more detail at the GCI Liberty level.
Mark Carleton: Thank you Greg. At quarter end GCI Liberty had consolidated cash of $491 million which includes $100 million of cash at GCI. The value of the public equity securities at GCI Liberty as of today's close was $6.7 billion, which includes over $1.8 billion interest in Charter, $3.8 billion interest in Liberty Broadband and $1 billion interest in Lending Tree. GCI Liberty has $900 million margin loan outstanding against its Liberty Broadband shares. At quarter end, GCI Liberty had a total principal amount of debt of $3 billion which includes the aforementioned margin loan. The Charter exchangeable debentures and $1.6 billion of debt including captain leases and tower obligations at GCI. GCI's leverage as defined in its credit agreement was 5.2 times compared to a maximum allowable leverage of 6.5 times. In December, GCI LLC refinanced its revolving senior credit facility and term loan A; this resulted in extended maturity at December 2023 and improved leverage covenants. As you see our 10-K gets filed later today. You'll notice that GCI is remitting two materials weaknesses in its internal control over financial reporting. The first issue relates to access and IT general controls and the second to manual and IT controls around the payroll process. We along with the GCI management certainly increase the level of scrutiny and focus on controls and processes since we acquired GCI last year. We have implemented remediation activities to correct both of these problems and will continue to focus on strengthening the controlled environment going forward. We note that the issues were not an external breach and did not result in any material misstatements in our reported financial results. And with that, I will turn it over to the Pete Pounds.
Pete Pounds: Thank you Mark. As Greg mentioned 2018 was a challenging year for GCI. The launch of our new billing system, stalled economy in the state and reductions in our Rural Health Care service revenues were significant challenge. However, the billing platforms have simplified our business is improving our customer experience. Additionally, we see continued signs with the economy in Alaska is turning around. Oil and tourism in particular are showing signs of life. We look forward to capitalizing on these developments in 2019. I'll start with an update on Rural Health Care. There are two appeals related to GCI that are currently pending. The first is in response to the October 10, letter that we received from the FCC whereby they notified us of their decision to reduce our funding for the year ended June 30, 2018 by $27.8 million. We appealed that decision on November 9, 2018. The second relates to an RHC customer of GCI's who was denied funding by the Universal Service Administrative Company or USAC for the same funding year. This letter was received by the customer on November 30, 2018 and they appeal to USAC on January 29, 2019. I don't have any updates on those appeals at this point. But more detail on the background of these matters can be found in our press release and 10-K. Operating results, all of the results I'm going to discuss here at pro forma unless otherwise noted. Revenues were down in the full year 2018 as compared to 2017 primarily due to the RHC rate reduction. But there were also declines in the time and materials business. When comparing the fourth quarter results 2018 revenue was up 1% over last year based on growth in consumer data. Adjusted OIBDA was down approximately 6% for the year due to the RHC rate reduction which impacted all four quarters of 2018, but only the last two quarters of 2017. Additionally, one-time charges including severance payments, capital write-offs and expenses related to the November 30, earthquake were incurred. On a positive note, our network showed excellent resiliency in the face of the earthquake and continued to operate, but for minor outages related to power outages in customer home and at some cell sites. On a quarterly basis, adjusted OIBDA was down 7% driven by the one-time charges I just noted. Consumer; in the midst of the recession our consumer group had a good year. While we were not able to grow our data subscriber significantly. We continue to see our subscribers migrate up to better value plans with higher ARPUs. Wireless revenues were flat excluding the free month we offered our subscribers during the billing conversion at August. Business had a challenging revenue year with the RHC rate reduction, time and materials declines and wireless roaming revenue declines. These were partially offset by revenue growth in video from political advertising. CapEx for the year we invested approximately $160 million in capital expenditures. The expenditures were primarily for warless network improvements, fiber and hybrid fiber coax improvements and the new billing system. We expect to spend approximately the same amount on capital expenditures in 2019. I'll now call the hand back over to Greg.
Courtnee Chun: Greg?
Mark Carleton: Greg, do we have you?
Greg Maffei: Yes, sorry I was muted. Thank you Mark and thank you Pete. We have set our Annual Investor meeting in New York for Thursday, November 21 and we hope to see many of you on the listening audience there that day. We do appreciate your continued interest in GCI Liberty. I would now like to open it up for questions. Operator, if you would please.
Operator: [Operator Instructions] We'll take our first question James Ratcliffe with Evercore. Please go ahead.
James Ratcliffe: Two if I could. One on, GCI and one on, Liberty Broadband. On the GCI front, could you get into little more in speaks one-time expenses that were in 4Q and with freeze in the release, it sounds like EBITDA would have been up year-on-year absent those. I just want to make sure I understand that correctly. And secondly regarding Liberty Broadband in Charter in particularly, Greg, can you talk about how you see the wireless business working with Charter going forward both in potentially as a wireless provider potentially as a source of network capacity to other warless providers. Thanks.
Greg Maffei: Sure. I can go first, while you guys make sure you have the answers to the questions about the comparability with look [ph]. On Liberty Broadband I think the way that Charter thinks about that business is first and foremost, it will help it drive that bundle with wireless will be an attractive pricing, vehicle which will help to drive Broadband share. We have a superior broadband network and given the MVNO relationship we have, we believe we can be a price taker in the mobile space as well and bundle that offering together and make a very attractive offering for consumers. In some circumstances somewhere down the road could be reversed MVNO perhaps but that's not really in front of us today. In front of us today is trying to take advantage of the contract we have in the strength of our fixed line network combined with the wireless and Wi-Fi capabilities we have to provide a very attractive consumer offering. I don't know if that's helpful on the Liberty Broadband mobile side, if there's any more you like.
James Ratcliffe: No, that's great. Thanks.
Greg Maffei: Comparability of Q4 for GCI.
Pete Pounds: Looking at year-over-year, we were down just a little over $4 million, taking a look at the one items. The biggest item really is the write-off of capital projects and that amounted to roughly $3 million in the fourth quarter. Severance and earthquake would have gotten you a little more than the difference so, we would have been up slightly on OIBDA but for those three items that I noted there. On the earthquake most of the damage that you'll see to the financials really come from a write-off of capital assets as oppose to operating expenses. Albeit there were some meaningful operating expenses in the fourth quarter there.
James Ratcliffe: I'm looking at this correctly, if it hadn't been for those and the RHC price cut, your EBITDA would have been up for close on 10% year-on-year.
Pete Pounds: The RHC is effect on a pro forma basis there, so when you look at the adjusted OIBDA in the fourth quarter of 2017 of $65.5 million, that really came in about $7 million higher before the RHC rate reduction. So call it 72.5 before RHC but before is included here, so I would look at it absent those three items. We would have been up a 1% or 2% on OIBDA.
James Ratcliffe: Great. Thank you.
Operator: We'll take our next question from Zack Silver with B. Riley. Please go ahead.
Zack Silver: First one with the one year anniversary of GCI Ventures merger coming up, it will be great to get an update on number one, if you can cover any opportunities for cost efficiencies between leveraging your relationship GCI has the Charter and then, number two if you have any updated thoughts on the potential to clean up sort of redundancy of having two public companies in GCI Liberty and Liberty Broadband.
Greg Maffei: I'll address those and I'd first say, we really are not addressing Charter efficiencies as much as GCI has its own programs both GCI 400 and some further cost reduction. It's really undertaking to optimize its business and Pete when I'm done you can certainly comment add to that, if you'd like. But I think the focus is not on cross sharing given the ownership structure the way it is with Charter. But instead at the moment looking at its own efficiencies. The deal is not quite year old, you're close got a couple more weeks and.
Zack Silver: Right.
Greg Maffei: And we of course would never consider anything. And we had no conversations or imagined yet that those might be eliminated and obviously before a year occurs, we wouldn't think about looking at that kind of combination.
Zack Silver: Got it.
Greg Maffei: Pete, do you want to add anything on the cost efficiencies?
Pete Pounds: No, Greg. Your comments right, that we're looking internally on cost efficiencies here. We'd obviously like a little bit of tailwinds on the economy and not so much headwinds on the regulatory front. But the focus is been internal at this point.
Zack Silver: Okay and then just one quick follow-up. This customer issue of not getting funding on this RHC customer. Can you size maybe their revenue in OIBDA impact based on what you know now or is that the right way to interpret that?
Pete Pounds: Yes, you can look in our 10-K, when it gets filed but it's roughly $13 million a year.
Zack Silver: Got it. Thank you very much.
Operator: Ando our last question comes from Mike Kerrane with SunTrust. Please go ahead.
Mike Kerrane: It's Mike Kerrane from SunTrust. Peter, I had a question for you about CapEx at GCI. I know that the level of CapEx you said in 2019 would be 160 and the same as 2018. I recall a few years ago, you guys purposely took that level down in response to the economy in Alaska and the budget deficits there. You said that the economy looks like it's doing a little bit, is that level of CapEx, the run rate that you see going forward. I know in the past it's been above 200 as the economy approves we model CapEx to go higher.
Pete Pounds: I guess I would say that we don't give forward-looking guidance at this point beyond the next year. I would note that, the point that came out if we were talking of CapEx at the level of $210 million on probably I would guess $880 million or so of revenues and so I think that's pretty clear that its' 23%, 24% of revenues that was an unsustainable rate for the long-term and I guess, there's really nothing that would indicate that there is so much fundamentally difference from GCI that on the long-term basis, we should deviate substantially from the industry.
Mike Kerrane: Great, that's helpful. Thanks.
Greg Maffei: Well, thank you very much operator and to the listening audience. I think that's all we have today. Appreciate your continued interest in GCI Liberty as we said and look forward to speaking with you on the next call, if not before. Thank you very much, this afternoon.
Operator: Once again that does conclude today's conference. Thank you for your participation. You may disconnect your phone lines.