Positive Developments Amid Steep Declines for General Communication

By Markets Fool.com

Image source:Ian D. Keating, via Flickr.

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Alaskan telecommunications company General Communication (NASDAQ: GNCMA) reported its third-quarter results after the market closed on Nov. 2. Changes in backhaul and roaming agreements led to significant year-over-year declines in revenue, adjusted EBITDA, and net income. However, the company pointed to strong growth in data revenue, high cost reform developments, and cost savings due to billing system consolidation as major positives during the quarter. Here's what investors need to know about General Communication's third-quarter report.

General Communication: The raw numbers

Metric

Q3 2016

Q3 2015

Growth (YOY)

Revenue

$236.7 million

$258.6 million

(8.5%)

Adjusted EBITDA

$78.2 million

$96.5 million

(19%)

Net income

$7.9 million

$17.6 million

(55%)

Data source: General Communication Q3 earnings report. YOY = year over year.

What happened with General Communication this quarter?

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Revenue, EBITDA, and net income slumped during the third quarter, although management believes that year-over-year comparisons are less relevant due to recent changes in roaming and backhaul agreements.

  • Wireless revenue dropped 35% year over year to $52 million. Roaming and backhaul changes were the main drivers of the decline, but lower wireless average revenue per user was also a contributing factor.
  • The wireless segment produced adjusted EBITDA of $32 million, down 44% year over year.
  • Wireline revenue rose 3% year over year to $184 million, with weakness in voice and video counteracted by growth in consumer and business data.
  • Within the wireline segment, consumer revenue was flat year over year, while business revenue rose 7%.
  • The wireline segment produced adjusted EBITDA of $46 million, up 18% year over year, driven by data revenue growth and cost reductions.
  • General Communication is close to eliminating its fourth billing system of the year, and expects this move to reduce costs by $5 million annually.

General Communication left its 2016 revenue guidance unchanged, but provided an update on its adjusted EBITDA guidance.

  • Revenue for 2016 is still expected to be between $930 million and $980 million.
  • Adjusted EBITDA is now expected in the range of $280 million to $295 million, excluding a $30 million adjustment related to roaming agreements that the company previously included. Prior guidance called for adjusted EBITDA between $295 million and $325 million inclusive of this adjustment, so the new range represents a guidance boost on a comparable basis.

What management had to say

Despite the significant year-over-year declines, management described the quarter in glowing terms:

Operationally, this was one of our best quarters ever, and it showed up in our EBITDA growth of $7 million sequentially. We saw growth of data revenue, reductions in Cost of Goods Sold, significant risk reduction from the high cost reform, and our Senior Credit Facility refinance is imminent. Finally, we are close to eliminating our fourth billing system of the year which significantly simplifies our business and will lead to reductions of over $5 million per year in cost paid to those billing system providers.

General Communication also detailed positive developments related to high cost reform:

On August 31st, the FCC released an Order adopting the Alaska Plan for high cost universal service funding, which is a huge step toward keeping existing and bringing new advanced broadband communications to rural Alaska. This Order largely completes the reform of the federal universal service high cost support in the State, providing the certainty and stability necessary to continue deployment of new telecommunications infrastructure in rural Alaska. We are pleased with this outcome.

Looking forward

Net income tumbled during the third quarter in part due to costs associated with the ongoing billing system conversion. The company has already eliminated three wireless billing systems, and it plans to eliminate a fourth this year. Once complete, significant cost savings are expected.

Overall, the quarter was difficult to judge given the muddled year-over-year comparisons due to the roaming and backhaul changes. The boost in adjusted EBITDA guidance was a positive, and the high cost reform update provides the company with the certainty it needs to deploy new infrastructure.

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Timothy Green has no position in any stocks mentioned. The Motley Fool recommends General Communication. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.