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GCI Liberty Reports Third Quarter 2018 Financial ResultsGCI Liberty, Inc. ("GCI Liberty") (Nasdaq: GLIBA, GLIBP) today reported third quarter 2018 results. Headlines include(1):
"While we were disappointed with the Rural Health Care decision, GCI solidly executed, completing the migration to a new billing system and also increasing data revenue," said Greg Maffei, GCI Liberty President and CEO. "We initiated share repurchases this quarter with purchases of over $50 million over the last three months." Discussion of Results Unless otherwise noted, the following discussion compares financial information for the three months ended September 30, 2018 to the same period in 2017. Although GCI's results are only included in GCI Liberty's results beginning March 9, 2018, we believe discussion of the standalone results of GCI for all periods presented promotes a better understanding of the overall results of the business. The pro forma financial information presented herein was prepared assuming the acquisition took place on January 1, 2017. The pro forma financial information is presented for illustrative purposes only and does not represent what the results of operations of GCI would have been had the acquisition occurred at that time. GCI's pro forma operating results include acquisition accounting adjustments primarily related to revenue, depreciation, amortization, stock compensation and the exclusion of transaction related costs. Additionally, the pro forma results include adjustments to the third quarter of 2017 for the impact of the new revenue recognition standard (ASC 606) to assist in the comparability of 2017 and 2018. The pro forma results for the quarters ending September 30, 2017, March 31, 2018, June 30, 2018 and September 30, 2018 have also been adjusted for the FCC's Rural Health Care decision, as described below (see Schedule 3). GCI receives support from various Universal Service Fund ("USF") programs: high cost, low income, rural health care, and schools and libraries. The USF Rural Health Care Program ("RHC Program") subsidizes the rates for services provided to rural health care providers. On March 15, 2018, the Universal Service Administrative Co. ("USAC") announced that the funding request for the year that runs July 1, 2017 through June 30, 2018 (the "2017 Funding Year") exceeded the federal funding for the RHC Program. On June 25, 2018, the FCC issued an order resulting in an increase of the annual RHC Program funding cap from $400 million to $571 million and applied it to the 2017 Funding Year. As a result, aggregate funding is available to pay in full any approved funding for the 2017 Funding Year. The FCC also determined that it would annually adjust the RHC Program funding cap for inflation and carry-forward unused funds from past funding years for use in future funding years. Separately, in November 2017, USAC requested further information to support GCI's rural rates charged to a number of its RHC Program customers for the 2017 Funding Year. On October 10, 2018, the FCC staff notified GCI of their decision to reduce RHC support payments to GCI for the 2017 Funding Year by $27.8 million, an approximate 26% reduction, and to apply the same cost methodology to subsequent funding years. As a result, in the third quarter of 2018 GCI reduced its receivables balance recorded at the time of the GCI acquisition on March 9, 2018 by $19.1 million (inclusive of the approximate $6 million reduction recorded earlier in 2018) and reduced its revenue recognized from March 9, 2018 to the end of the 2017 Funding Year by approximately $8.6 million. Updated pro forma financials are presented in Schedule 3 of this press release. GCI will continue to pursue an appeal to the FCC staff decision and expects to reduce future RHC Program revenue by a similar rate until a final resolution is reached with the FCC. Thus, pro forma GCI revenue for the third quarter of 2018 also reflects a reduction in RHC Program revenue of approximately $7 million. GCI "On October 10th, the Wireline Competition Bureau of the FCC issued a letter setting alternative rates for services that GCI provided to rural health care providers, resulting in a reduction in anticipated Rural Health Care Program funding. We disagree with the decision and are deeply disappointed with the FCC staff determination to impose considerable reductions to our competitively bid rates for these deregulated services. We will pursue all available remedies to ensure the predictable, transparent administration of the program necessary for any provider to invest in broadband services to rural communities," said GCI CEO, Ron Duncan. "If this decision stands, we may be left with no choice but to narrow our focus in rural areas to meeting our maintenance obligations and the requirements of federal programs. We do not intend to abandon our rural customers, but the FCC decision forces us to pivot our future business investments to urban areas where the rules are more reliable. This unwise decision ultimately will have a serious adverse impact on all telecommunications users in rural Alaska and the Alaska economy." The following table provides GCI's operating metrics and pro forma financial results for the third quarter of 2017 and 2018.
GCI revenue declined in the third quarter, primarily driven by declines in GCI Consumer revenue due to the implementation of GCI's new billing system. During the transition to the new system, GCI moved all monthly recurring fees from bill in arrears to bill in advance. To ease the transition for existing customers, GCI chose to forgive one month of service fees for those customers who would have otherwise received an invoice for two months of service. This resulted in a revenue reduction of approximately $4 million. GCI operating income and adjusted OIBDA(3) declined due to the decrease in revenue. GCI Consumer GCI Consumer revenue declined in the third quarter, primarily due to the aforementioned change from billing in arrears to billing in advance as a result of the conversion to the new billing system, partially offset by an increase in data revenue. Data revenue grew as subscribers continued to move to higher bandwidth products. GCI Business GCI Business revenue declined due to lower wireless and voice revenue, primarily driven by a reduction in roaming traffic. The declines were partially offset by higher data and video revenue due to increases in professional services revenue and political advertising revenue. Capital Expenditures Year to date, GCI has spent $114 million on capital expenditures, excluding capitalized interest. Capital expenditure spending was related to wireless network improvements, fiber and Hybrid Fiber Coax improvements and GCI's new billing system. GCI's capital expenditures for 2018 are expected to be approximately $170 million. Share Repurchases From August 1, 2018 through October 31, 2018, GCI Liberty repurchased approximately 1.0 million Series A GCI Liberty shares (Nasdaq: GLIBA) at an average cost per share of $48.09 for total cash consideration of $50 million. The total remaining repurchase authorization for GCI Liberty is approximately $600 million. FOOTNOTES
NOTES The following financial information with respect to GCI Liberty's investments in equity securities and equity affiliates is intended to supplement GCI Liberty's consolidated statements of operations which are included in its Form 10-Q for the three months ended June 30, 2018 and September 30, 2018. Fair Value of Public Holdings
Cash and Debt The following presentation is provided to separately identify cash and liquid investments and debt information.
GCI Liberty cash decreased by $78 million in the third quarter due to share repurchases and other investing activities. This decrease was partially offset by an $11 million increase in cash at GCI due to borrowings on the senior credit facility, which were partially offset by capital expenditures. GCI Liberty debt increased by $48 million due to the aforementioned increased borrowings at GCI. Pursuant to an indemnification agreement, GCI Liberty will compensate Qurate Retail for any payments made in excess of the adjusted principal amount of the LI LLC Charter exchangeable debentures to any holder that exercises its exchange right on or before the put/call date of October 5, 2023. This indemnity is supported by a negative pledge in favor of Qurate Retail on the reference shares of Class A common stock of Charter held at GCI Liberty that underlie the LI LLC Charter exchangeable debentures. The indemnification obligation on GCI Liberty's balance sheet is valued based on the estimated exchange feature in the LI LLC Charter exchangeable debentures. As of September 30, 2018, a holder of the LI LLC Charter exchangeable debentures does not have the ability to exchange, and accordingly, the indemnification obligation has been classified as a long-term liability. There is $332 million principal amount of the LI LLC Charter exchangeable debentures outstanding as of September 30, 2018. Important Notice: GCI Liberty (Nasdaq: GLIBA, GLIBP) President and CEO, Greg Maffei, will discuss GCI Liberty's earnings release on a conference call which will begin at 5:00 p.m. (E.S.T.) on November 8, 2018. The call can be accessed by dialing (800) 239-9838 or (323) 794-2551, passcode 6164776, at least 10 minutes prior to the start time. The call will also be broadcast live across the Internet and archived on our website. To access the webcast go to http://ir.gciliberty.com/events-and-presentations/upcoming-events. Links to this press release and replays of the call will also be available on GCI Liberty's website. This press release includes certain forward-looking statements under the Private Securities Litigation Reform Act of 1995, including statements about business strategies, market potential, future financial prospects, capital expenditures, matters relating to the Universal Service Administrative Company and Rural Health Care program, statements about the indemnification by GCI Liberty, the continuation of our stock repurchase program and other matters that are not historical facts. These forward-looking statements involve many risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements, including, without limitation, possible changes in market acceptance of new products or services, competitive issues, regulatory matters affecting our businesses, continued access to capital on terms acceptable to GCI Liberty, changes in law and government regulations that may impact the derivative instruments that hedge certain of our financial risks, the availability of investment opportunities and market conditions conducive to stock repurchases. These forward-looking statements speak only as of the date of this press release, and GCI Liberty 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's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. Please refer to the publicly filed documents of GCI Liberty, including the most recent Forms 10-K and Forms 10-Q, for additional information about GCI Liberty and about the risks and uncertainties related to GCI Liberty's business which may affect the statements made in this press release. NON-GAAP FINANCIAL MEASURES This press release includes a presentation of adjusted OIBDA, which is a non-GAAP financial measure, for GCI Liberty (and certain of its subsidiaries) and GCI Holdings together with a reconciliation to that entity or such businesses' operating income, as determined under GAAP. GCI Liberty defines adjusted OIBDA as revenue less cost of sales, operating expenses, and selling, general and administrative expenses, excluding all stock based compensation, and excludes from that definition depreciation and amortization, separately reported litigation settlements and restructuring and impairment charges that are included in the measurement of operating income pursuant to GAAP. Further, this press release includes adjusted OIBDA margin which is also a non-GAAP financial measure. GCI Liberty defines adjusted OIBDA margin as adjusted OIBDA divided by revenue. GCI Liberty believes adjusted OIBDA is an important indicator of the operational strength and performance of its businesses, including each business' ability to service debt and fund capital expenditures. In addition, this measure allows management to view operating results and perform analytical comparisons and benchmarking between businesses and identify strategies to improve performance. Because adjusted OIBDA is used as a measure of operating performance, GCI Liberty views operating income as the most directly comparable GAAP measure. Adjusted OIBDA is not meant to replace or supersede operating income or any other GAAP measure, but rather to supplement such GAAP measures in order to present investors with the same information that GCI Liberty's management considers in assessing the results of operations and performance of its assets. Please see the attached schedules for applicable reconciliations. SCHEDULE 1 The following table provides a reconciliation of GCI's pro forma adjusted OIBDA to its pro forma operating income for the three months ended September 30, 2017 and September 30, 2018, respectively. The pro forma financial information presented below was prepared assuming the acquisition took place on January 1, 2017. The pro forma financial information is presented for illustrative purposes only and does not represent what the results of operations of GCI would have been had the acquisition occurred at that time. GCI's pro forma operating results include acquisition accounting adjustments primarily related to revenue, depreciation, amortization, stock compensation and the exclusion of transaction related costs. Additionally, the pro forma results include adjustments to the third quarter of 2017 for the impact of the new revenue recognition standard (ASC 606) to assist in the comparability of 2017 and 2018. The pro forma results have also been adjusted for the FCC's Rural Health Care decision. GCI HOLDINGS PRO FORMA ADJUSTED OIBDA RECONCILIATION
SCHEDULE 2 The following table provides a reconciliation of adjusted OIBDA for GCI Liberty to operating income (loss) calculated in accordance with GAAP for the three months ended September 30, 2017 and September 30, 2018, respectively. GCI LIBERTY ADJUSTED OIBDA RECONCILIATION
SCHEDULE 3 The following table provides updated pro forma results for GCI Holdings for the three months ended March 31, 2018 and June 30, 2018. The results have been updated from previous reported results due to the reduction in the RHC support payments as a result of the FCC rural rate decision and other acquisition accounting adjustments. GCI HOLDINGS RESTATED PRO FORMA RESULTS
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