ENGLEWOOD, Colo. –
GCI Liberty, Inc. (“GCI Liberty”) (Nasdaq: GLIBA, GLIBP) today reported third quarter 2019 results. Headlines include(1):
“We are starting to see the benefits of improvements in efficiencies and new products that we mentioned during the second quarter,” said GCI CEO, Ron Duncan. “We are making good progress on our 5G deployment and expect our Anchorage project, which covers an area approximately the size of Rhode Island, to be completed in 2020. Our customers are already starting to see significant benefits from that upgrade and we look forward to having one of the first 5G-NR compliant networks in the nation - certainly the northernmost.”
Discussion of Results
Unless otherwise noted, the following discussion compares financial information for the three months ended September 30, 2019 to pro forma financial information for the same period in 2018.
The pro forma financial information presented herein for the three months ended September 30, 2018 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. The pro forma results have also been adjusted for the FCC's Rural Health Care decision.
GCI
GCI receives support from various Universal Service Fund ("USF") programs: high cost, low income, rural health care, and schools and libraries, and also contributes into the USF. The USF Rural Health Care ("RHC") Program subsidizes the rates for services provided to rural health care providers. In November 2017, the Universal Service Administrative Co. ("USAC") requested further information to support GCI's rural rates charged to a number of its RHC Program customers for the year that runs July 1, 2017 through June 30, 2018 (the "2017 Funding Year"). On October 10, 2018, the Federal Communications Commission ("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. Pro forma financials for the third quarter of 2018 reflect this reduction. GCI filed an appeal to the FCC staff decision on November 9, 2018 and a supplemental appeal on January 29, 2019. GCI will continue to pursue this appeal and expects to reduce future RHC Program revenue by a similar rate until a final resolution is reached with the FCC.
Separately, on November 30, 2018, GCI received multiple notices from USAC denying requested funding from an RHC customer (the "Customer") for the 2017 Funding Year. In November 2017, USAC requested information from the Customer related to bidding process documentation for two separate service contracts they have with GCI. The Customer responded, but USAC denied the funding based on the determination that bids previously received were not submitted with the original funding request and/or that bidding information submitted was related to the wrong bidding year. The Customer filed an appeal with USAC on January 29, 2019 and made a supplemental filing on March 12, 2019.
On May 6, 2019, USAC denied the appeal. As a result of the denial, in the first quarter GCI recorded a reserve of $21 million and an associated bad debt expense representing the portion of revenue for the Customer that would have otherwise been subsidized by the RHC Program recognized from July 1, 2017 through March 31, 2019. GCI will not recognize RHC revenue to the extent services continue to be provided to the Customer, which has historically approximated $12 million per year, until an adequate level of clarity is reached on the matter and the applicable revenue recognition criteria are met. Thus, GCI did not recognize revenue for the services provided to the Customer for the three months ended September 30, 2019. The Customer appealed the decision on July 5, 2019, but resolution and timing of the appeal are unknown at this time.
The following table provides GCI’s operating metrics and pro forma financial results for the third quarter of 2018 and 2019.
(amounts in thousands, except operating metrics) |
|
|
3Q18 |
|
|
3Q19 |
|
% Change |
|||
GCI Consolidated Financial Metrics |
|
|
|
|
|
|
|
|
|||
Revenue |
|
|
|
|
|
|
|
|
|||
Consumer |
|
$ |
105,377 |
|
|
$ |
110,322 |
|
|
5 |
% |
Business |
|
|
110,259 |
|
|
|
110,706 |
|
|
— |
% |
Total Revenue |
|
$ |
215,636 |
|
|
$ |
221,028 |
|
|
3 |
% |
|
|
|
|
|
|
|
|
|
|||
Operating Income |
|
$ |
4,643 |
|
|
$ |
3,663 |
|
|
(21 |
)% |
Operating Income Margin (%) |
|
|
2.2 |
|
% |
|
1.7 |
% |
(50 |
)bps |
|
|
|
|
|
|
|
|
|
|
|||
Adjusted OIBDA(1) |
|
$ |
68,391 |
|
|
$ |
71,960 |
|
|
5 |
% |
Adjusted OIBDA Margin(1) (%) |
|
|
31.7 |
|
% |
|
32.6 |
% |
90 |
bps |
|
|
|
|
|
|
|
|
|
|
|||
GCI Consumer |
|
|
|
|
|
|
|
|
|||
Financial Metrics |
|
|
|
|
|
|
|
|
|||
Revenue |
|
|
|
|
|
|
|
|
|||
Wireless |
|
$ |
38,552 |
|
|
$ |
41,929 |
|
|
9 |
% |
Data |
|
|
39,652 |
|
|
|
42,920 |
|
|
8 |
% |
Video |
|
|
22,276 |
|
|
|
21,198 |
|
|
(5 |
)% |
Voice |
|
|
4,897 |
|
|
|
4,275 |
|
|
(13 |
)% |
Total Revenue |
|
$ |
105,377 |
|
|
$ |
110,322 |
|
|
5 |
% |
Operating Metrics |
|
|
|
|
|
|
|
|
|||
Wireless Lines in Service(2) |
|
|
197,800 |
|
|
|
188,400 |
|
|
(5 |
)% |
Data - Cable Modem Subscribers(3) |
|
|
125,300 |
|
|
|
124,600 |
|
|
(1 |
)% |
Video |
|
|
|
|
|
|
|
|
|||
Basic Subscribers(4) |
|
|
90,300 |
|
|
|
82,200 |
|
|
(9 |
)% |
Homes Passed |
|
|
253,400 |
|
|
|
253,400 |
|
|
— |
% |
Voice - Total Access Lines in Service(5) |
|
|
45,800 |
|
|
|
40,800 |
|
|
(11 |
)% |
|
|
|
|
|
|
|
|
|
|||
GCI Business |
|
|
|
|
|
|
|
|
|||
Financial Metrics |
|
|
|
|
|
|
|
|
|||
Revenue |
|
|
|
|
|
|
|
|
|||
Wireless |
|
$ |
24,392 |
|
|
$ |
24,393 |
|
|
— |
% |
Data |
|
|
69,592 |
|
|
|
70,813 |
|
|
2 |
% |
Video |
|
|
4,927 |
|
|
|
4,115 |
|
|
(16 |
)% |
Voice |
|
|
11,348 |
|
|
|
11,385 |
|
|
— |
% |
Total Revenue |
|
$ |
110,259 |
|
|
$ |
110,706 |
|
|
— |
% |
Operating Metrics |
|
|
|
|
|
|
|
|
|||
Wireless Lines in Service(2) |
|
|
22,000 |
|
|
|
21,100 |
|
|
(4 |
)% |
Data - Cable Modem Subscribers(3) |
|
|
9,200 |
|
|
|
9,000 |
|
|
(2 |
)% |
Voice - Total Access Lines in Service(5) |
|
|
36,600 |
|
|
|
34,800 |
|
|
(5 |
)% |
GCI revenue increased during the third quarter driven by an increase in Consumer revenue. Operating income decreased primarily due to higher depreciation and amortization expense. Adjusted OIBDA increased due to the growth in revenue and operational efficiencies, which reduced selling, general and administrative expenses.
GCI Consumer
Consumer revenue was up 5% due to increases in wireless and data revenue. Data revenue grew as subscribers continued to move to higher bandwidth products. Growth in wireless revenue was driven by the free month of service given in the third quarter of 2018 to certain customers due to the billing system conversion. 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. The wireless and data revenue increases were partially offset by declines in voice and video revenue.
GCI Business
Business revenue was flat in the quarter with growth in data offsetting declines in video. Data revenue increased primarily due to higher sales to health care customers. Video revenue declined due to lower political advertising revenue.
Capital Expenditures
Year to date, GCI has spent $97 million on capital expenditures, excluding capitalized interest and insurance payments received to cover the costs of the 2018 earthquake. Capital expenditure spending was related primarily to improvements to data and wireless networks. GCI's capital expenditures for 2019 are expected to be approximately $140 million.
Share Repurchases
GCI Liberty did not repurchase shares from August 1, 2019 through October 31, 2019. The total remaining repurchase authorization for GCI Liberty is approximately $494 million.
FOOTNOTES
GCI LIBERTY GAAP FINANCIAL METRICS |
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(amounts in thousands) |
|
|
3Q18(1) |
|
|
3Q19 |
||
Revenue |
|
|
|
|
|
|
||
GCI Holdings |
|
$ |
205,047 |
|
|
$ |
221,028 |
|
Corporate and other |
|
|
5,099 |
|
|
|
6,016 |
|
Total GCI Liberty Revenue |
|
$ |
210,146 |
|
|
$ |
227,044 |
|
|
|
|
|
|
|
|
||
Operating Income |
|
|
|
|
|
|
||
GCI Holdings |
|
$ |
(8,859
|