GLIBA Q4 2019 Earnings Call
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the GCI Liberty 2019 Q4 Earnings Call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded February 26. I would now like to turn the conference over to Courtnee Chun, Senior Portfolio Officer and Senior Vice President of Investor Relations. Please go ahead Courtnee.
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 filed with the SEC. These forward-looking statements speak only as of the date of this call and GCI Liberty and Liberty Broadband expressly disclaim 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 margins. 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 Liberty’s President and CEO, Greg Maffei.
Greg Maffei: Thank you, Courtnee, and good afternoon to all of you out there on the call. Today speaking on the call besides myself we'll have GCI Liberty’s Chief Accounting Officer, Brian Wendling; GCI's CFO, Pete Pounds. During the Q&A will be available to answer questions also related to Liberty Broadband. So starting first with GCI Liberty, as Ron noted in the release we had a solid operational quarter. There were pluses and minuses on the regulatory front but overall it was also being a benefit in the fourth quarter of $4 million as Brian will discuss further in a moment. With the full year despite a challenging business environment, there was stable consumer revenue as there were gains in data from sub growth in consumers moving up the stack with offset losses in video and voice. We also generated expense savings from operational efficiencies and a focus on the core Alaska business. GCI continues work on the anchorage 5G buildup which we expect will be completed later this year. Turning to LendingTree, which reported its Q4 results yesterday, they add over 3.6 million users to myLendingTree during 2019 bringing the total number of customers to 14.3 million. LendingTree continues to diversify its business effectively, Insurance is now the largest business and includes 37% pro forma versus Q4 of last year. The home and consumer segments also grew double-digits over the prior year.. Yesterday as I noted on the other earnings call and Tree issued 2020 guidance for another year of double-digit revenue and adjusted EBITDA growth. Turning over to Liberty Broadband, it was a great year for charter. They created over 1.1 million new customer relationships and net added over 1.4 million internet customers. They added over 900,000 mobile lines and plan to begin offering 5G inn Q1. For the full year, cable adjusted EBITDA grew 6.6% despite it being a non-political advertising year and cable free cash flow grew by over 100%. We expect the cable EBITDA growth will combine with declining capital intensity and a disciplined capital deployment strategy will continue to drive continued strong free cash flow particularly on a per share basis. Now we do expect cable CapEx intensity in 2020 to continue to decline from the 15% in 2019. So with that, let me turn over to Brian to further discuss the financials.
Brian Wendling: Thank you, Greg. At quarter end, GCI Liberty had consolidated cash and cash equivalents of $570 million, which includes $61 million of cash at GCI. The value of the public equity securities at GCI Liberty as of today’s close was $9.4 billion, which includes our $2.8 billion interest in Charter, $5.7 billion interest in Liberty Broadband and a $1 billion interest in LendingTree. At quarter end, GCI Liberty had total principal amount of debt of $3.2 billion, which includes a $1.3 billion margin loan outstanding against its Liberty Broadband shares, the Charter exchangeable debentures and $1.4 billion of debt, including finance leases and tower obligations at GCI. In the fourth quarter, GCI Liberty increased borrowings under the GCI Liberty margin loans by $400 million, proceeds were used to repay a portion of the GCI senior credit facility and for general corporate purposes. GCI's leverage at quarter end is defined at its credit agreement was 5.1 times compared to a maximum level leverage of 6.5 times. Note that the above amounts exclude the indemnification obligation and preferred stock which are separately identified in cash and debt table on the release. Our 10K is filed later, you will notice that GCI is running material weakness and its internal control over financial reporting. Material weakness was also from an aggregation of issues identified in IT general controls over access to various systems as well as issues in the design and operation of business process control. Our control issues percent we are working towards remediation and are implementing various activities to strengthen the control environment going forward including process redesign, enhanced training and personal development. We know that the issues were not an external breach and do not result in any material misstatements in our reported financial results. Before I hand it over to Pete, there are two significant rule and events that impacted GCI's results in the fourth quarter that I would like to walk through. First in December of 2019 GCI became aware of compliance issues on certain assets and expired RHD contracts. Because of these issues we have accrued a loss of approximately $17 million in SG&A in the fourth quarter. We continue to work with the SEC to resolve this issue and we confine much more disclosure around this in our 10-K. Separately on February 19 of 2020 the SEC issued an order which granted one of GCI's RHD customer's appeal to reverse a previous funding denial which had resulted in a loss of approximately $21 million that we recognized in the first quarter of 2019. This new SEC order led to the reversal in the fourth quarter of $21 million previously recognized loss. We will evaluate in the first quarter 2020 to determine what amount of revenue related to this contract for the last nine months of 2019 and going forward into 2020, we can recognize, GCI has continued to provide service for all periods and this will be taken into account in our analysis. At this point we would expect to recognize all or the majority of this revenue barring new information from the FCC. The role of reserve reversal together resulted in a net $4 million benefit that GCI has just delivered in the fourth quarter and a $17 million negative for the year. With that, I will turn it over to Pete to talk about GCI’s operating results in more detail.
Pete Pounds: Thank you, Brian. Revenue was down in the full-year 2019 as compared to 2018 primarily due to reductions in consumer video and voice as well as business wireless and video revenues. When comparing the fourth quarter results, 2019 Q4 revenue was down 1% primarily based on reduced business video revenue from a lack of political advertising revenue in a non-Election year. Adjusted OIBDA was down $10 million or 4% for the year. Excluding the RHC matters Brian noted would have increased $7 million or 3%. For the fourth quarter, we showed strong adjusted OIBDA year-over-year growth of $13 million or 21%. Adjusted OIBDA would have been up $9 million or 15% even without the benefit of the RHC matters Brian discussed. This adjusted OIBDA improvement is mostly due to our focus on cost efficiencies. Moving on to consumer, we're just starting to see signs of life in the Alaskan economy after a few years of flat cable modem subscribers, we finally had two great quarters in a row of sequential cable modem subscriber growth. In the fourth quarter, we grew 2,400 data subscribers and continued to move customers up the product stack which helps us reach a 5% and 6% growth rate in consumer data revenue on a quarterly and annual basis respectively. Consumer wireless revenue was up slightly due to increase handset sales. We continue to make our Anchorage five-band 5G upgrades which we expect to complete this summer. On the business side, revenue was down slightly in the fourth quarter and full-year with losses in wireless, voice and video offsetting good performance in business data. The decline in wireless was due to lower backhaul and roaming revenue. The video losses were due to non-election year advertising revenue declines. On the data side, revenue increased in the fourth quarter due to additional services provided to our healthcare and education customers and was flat for the full-year as the loss of revenue from the previously mentioned RHC customer offset these additional services. For the year, we invested approximately $133 million in capital expenditures. Expenditures were primarily for improvements to our wireless, fiber and coax networks. We expect to spend a similar amount in 2020. I'll now hand the call back over to Greg.
Greg Maffei: Thank you, Brian and thank you, Pete. We have scheduled our 2020 investor meeting for Thursday, November 19, in New York, so please mark your calendars. As always, we appreciate your continued interest in GCI Liberty and we look forward to chatting with you next quarter if not before and with that, operator, I'd like to open up for questions.
Operator: [Operator Instructions] Our first question comes from Michael Rollins, Citi.
Michael Rollins: Hi, thanks for taking the questions. I'm curious if you could discuss at the GCI level, what the most appropriate target leverage ratio should be for the company. And the capacity you'd have to either increase investments or repurchase stock or consider other uses for the capital?
Greg Maffei: Pete will take that. But why don't you talk about where we are in terms of leverage both and the constraints we currently have at the GCI level giving covenants? This is [indiscernible] our Treasurer.
Ron Duncan: So, GCI operates under both the credit agreement and some public bonds, with respect to the credit agreement, we are currently at 5.1 times total leverage ratio using that metric. On the bond covenants, we are approximately 5.5 times versus a six times covenant. Obviously, we've seen some fluctuations in it excuse me, seen some fluctuations in the leverage covenants due to the write-offs, and then the reversals, the RHC issues. And we are working, working towards reducing those covenants over I mean, the calculations over time. Please note that the RHC issues that were affected in first quarter 2019 will begin to anniversary off this quarter and first quarter, sorry. And that will improve these calculations going forward.
Greg Maffei: I think, thank you, Laura. And I think to note, what is the right level given the fluctuations potentially in our regulatory matters. We have been conservative against what this might be in probably at the levels and we try and build a little cushion of particularly various times we had incurrence issues. We're out of that now, but want to make sure that we don't have those issues. And the regulatory fluctuations have made that harder.
Michael Rollins: And just an operating question in Alaska, do you find that there's a greater sensitivity to natural resource pricing for example like the oil marketing, whether it's on the business side or the consumer side of the cable business, just curious how to think about some of those sensitivities over time.
Greg Maffei: Well, if I understand your question correctly, you're basically asking how much does the price of oil drive business activity in Alaska? And I think there are people on it for the GCI side who could certainly be more articulate, but the answer is quite a lot. Particularly with some lag on what projects get started, what things get build out, and what particularly in areas like the Northern Slope, what people do very much tied to where they think where oil has been, where oil will be. I don’t know, Pete or if Ron you want to comment further?
Ron Duncan: This is Ron. I'll just add that there's a substantial damper between current fluctuating oil prices and the climate and most oil revenue in Alaska comes to us by getting recycled by the state government. So low oil prices have an impact on state budget deficits that really aren't reflected immediately in the economy. And the companies that are investing on the North Slope are using a very long-term horizon. It's unlikely to be influenced by short-term perturbations in per barrel price of oil. Obviously that stays down where it is, that has a long-term impact. This is a three or six months cycle, we won’t see much results.
Michael Rollins: Thank you.
Operator: Next up, we'll hear from James Ratcliffe, Evercore ISI.
James Ratcliffe: Thanks for taking the question. Two, if I could. There's a comment in the release that there's an impairment loss of $167 million related to wireless licenses, and can you just talk about what drove that reassessment about long-term wireless revenue. And secondly, on the Liberty Broadband side, the new house proxies coming up next May, it looks though, like, if I'm doing the math, right, you should be pretty close to it’s not over 25% by then, anyway, at least with the GCI and Liberty’s help but if you could just any thoughts of how you plan to approach that, thanks.
Greg Maffei: Sure. James. I'll take the second question first and let, I think it's going to be Brian is going to answer on the wireless question. But on the Liberty Broadband question, I think you rightly note that both proxy will expire. I think there are several potential remedies to ensure that we don't have regulatory issues around the Investments Act of 1940. Potential remedies could first be extending the proxy. I don't know whether you have to still want us involved with it, my guess is they do, given that they have been largely holding their percentage constant and selling into the marketplace, having things that would cause us to be either sellers or less involved would probably not be a plus to them. And more importantly, I think, John Malone in particular, in the new house families had a partnership for 30 years, it's been very successful. And this is, this Charter investment has worked out well for both parties. So I suspect they might be willing to extend but we have not really talked about that. Secondly, as you rightly note, the Charter continues to buy back stock and could very well depending on the rate of their repurchases, we could very well end up over 25 on our own, when you combine the monies that we have in the products that come across from GCI Liberty to Liberty Broadband and lastly, there are things we could certainly do including buying more stock in Charter directly. We have tended to put our purchases and lean delivery broadband because it trades at a discount but we could things that you’ve seen us do for example as we did in Tree use a relatively call it purchase that is financed that would not cause us to how to match outlay of capital would give us some upside and would end some downside protection both and get us over the 25 hurdle. So while it's certainly something we pay attention to, I think we have a lot of way to solve any regulatory issues related that may rise. And then on the wireless impairment question as required by GAAP at the end of each year you're required to look at all of your various non-amortizing intangibles that was a standard process that we went through. We won't disclosure or going through too many of the details on the various variables that drive that valuation but there was increased uncertainty related to certain customers that flow through the valuation process.
Unidentified Analyst: Great. Thank you.
Operator: Our next question today will be from Zach Silver, B. Riley FBR.
Zach Silver: I know that there are a lot of moving pieces on the RHC both there are plus and minus you guys disclosed today, but wondering if you could sort of directionally give us a sense of how that may impact OEBITDA in 2020?
Greg Maffei: I think you would expect all outs being equal that we should be receiving positive impact to that. The contracts that were suspect, we took the $17 million to our reserve and there is a potential that we could end up with a larger reserve on that but I think we are comfortable we have the right reserve impact to circumstances we know. You’ve seen that we reversed the 21, there is more roughly $3 million a quarter that we were undertaking that is sitting on our balance sheet for three quarters. So there is $9 million more that is sitting there in suspense that the variables around that are what reimbursement rate we get from the SEC that we were to get the same reimbursement rate that we received on the 17 revenues. We would recognize all of that money. So on the margin today you would have the same that we are more likely than not to receive revenue rather than -- receive revenue off the balance sheet from those SEC issues rather than not incur new issues. I don’t know if anyone else Brian, Ron or Pete wants to add to my answer there.
Zach Silver: That's helpful and then more of a higher level on net, just given the T-Mobile spread decision recently, the horizontal merger would mark this year take on Greg or Ron whoever implications for M&A a large share of M&A in charter did this pressure in with this decision open the door for things that you may have not thought would have been possible before.
Greg Maffei: Brian do you want to add any comments or…
Brian Wendling: I think that was more targeted towards the charter levels like T-Mobile. The T-Mobile deal is clearly good for GCI by T-Mobile is largest the only partner and we get a lot of benefit from them. We will have access to additional sector when it comes to us through their merger with Sprint which will deploy and also we'll have a near term revenue effect to replace some of the running revenues that we weren’t getting from Sprint. So from a GCI perspective it's a big win.
Greg Maffei: Looking at the larger issues about what it might mean for Charter I think on the margin it was probably a slight negative, not enormous just because you have a stronger competitor but on the other hand it may have meant that slightly less competitive environment. This may be an opportunity for Charter, so you weigh all those two pieces hard to know for certain. What does it say about some other implications without planning to have complete impressions by any means. The fact of the stage will be back just probably a positive or imagining other large scale deals, the fact that people were very interested in seeing 5G rolled out and what that might mean about other combinations and the willingness to probably look potential determents in the deal or potential problems with the deal in pursuit of enabling 5G that might tend things that we could do otherwise. But I am not sure it's a massive impact one way or another. We'll see, there is a stronger T-Mo is a stronger T-Mo product, in fact the biggest issue.
Operator: Next up we'll hear from John Malone with Suntrust.
Unidentified Corporate Participant: Hey this is Mike [ph] from Suntrust. Most of my questions have been asked and answered, but I just wanted to ask you if I could get more color on the $400 million of additional margin loans? What's the if you could remind me of like what's the rate that you get on those margin loans and what I am just trying to figure out is whether it makes sense to pay down more debt with those types of loans, whether it's revolver or the [indiscernible]?
Unidentified CompanyRepresentative: Hi it's [indiscernible] again. The loans that we pay at Sprint rather puts money. Again we do use to partially repay back LLC facilities.
Greg Maffei: And the presence of this loan is in part to regulatory reasons.
Unidentified Corporate Participant: Understood. Thanks for the answer.
Operator: And our final question today comes from Matthew Harrigan with Buckingham.
Matthew Harrigan: Thank you for asking the same slightly and delicate question in the last quarter, but you still have to cope with the fairly hefty discounts on the RDAs and you can't get a letter from IRS anymore. Is there anything in loss given all the uncertainty they make it desirable to collapse the Russian ball structure this year particularly as [ph] now it's shown in a clearly better performance? All other imagine your products could even necessarily complete a regulatory review before if there is change in lawsuits and if there was a change in lawsuit?
Greg Maffei: That we clearly obviously have no plan or intent on that but we have certainly read that others have suggested it and some of the larger for that might be just reducing overhead, taking advantage of various discounts, consolidating some of our holdings in one spot. That would obviously be coming to some issues around tax, some issues around probably investment company. I do now believe and to what you are certainly suggesting that, I don’t believe or which way to be surprised that there would be significant STC or DOJ type issues. I think most of the issues would be largely around IRS and SEC to work for.
Greg Maffei: Thank you very much to everyone who was on the call. Thank you to our friends up in Anchorage for their comments. Thank you to everyone here in Colorado and as I said we look forward to speaking with you all again next quarter if not sooner.
Operator: Ladies and gentlemen, that does conclude today conference. Thank you all for your participation. You may now disconnect.