Consumer revenue keeps dropping as GCI reports 1Q results

General Communication Inc. took in $228 million in its first quarter of 2017, but a decline of nearly $7 million in consumer revenue and a $46.5 million accounting writedown for income taxes led it to post a $55.2 million net loss for the period.

In the first quarter of 2017, GCI’s revenue from consumers fell to $107 million from $113.7 million in the same period for 2016. But those losses were somewhat offset by nearly $4 million in additional business revenue for the same time period.

Following national trends, a growth in data streaming — movies and television from Netflix, Hulu and other entertainment sources — are outpacing consumer demand for cable television. GCI saw a further loss of 4,500 cable subscribers between first quarter 2016 and the same period in 2017.

“Alaskans, just like our counterparts in the Lower 48, are getting more and more of their TV and film entertainment over the Internet instead of traditional pay-TV subscriptions,” said Kate Slyker, GCI chief marketing officer.

This shows up in the gain of $8 million in Internet data revenue that helped offset a $3 million loss in consumer wireless revenue and a $4 million loss in cable revenue. The loss of nearly $7 million between 2017 and 2016 in the consumer category was partially offset by a gain of $3.6 million in business revenue.

GCI has 4,000 fewer wireless lines in service after the first quarter of 2017 compared to a year ago and 6,500 fewer basic video subscribers. The number of HD/DVR boxes in service declined by 5,600.

Postpaid business and consumer wireless lines declined by 7,100 lines (5,500 consumer and 1,600 business), which was offset somewhat by a gain of 3,900 prepaid wireless lines.

An investment conference May 4 and a first-quarter 2017 financial report spell out other expenses that impacted GCI’s bottom line.

GCI President and CEO Ron Duncan said additional expenses in 2017’s first quarter came in part because the sales, general and administrative expense line items have increased.

The financial report shows a $3 million increase in labor and health insurance costs and a $2.4 million rise in professional and contract services.

There was also a $4.2 million jump in transaction costs related to GCI’s purchase by Colorado-based Liberty Interactive Corp.

In a deal announced April 4, GCI sold a controlling interest to Liberty Interactive Corp. for $1.12 billion. Currently, GCI is incurring expenses for advisory and legal fees as it completes transactions and filings with the Regulatory Commission of Alaska and the Department of Justice.

“A majority of these costs have already been incurred or will be incurred regardless of whether the transactions are completed. It’s difficult to estimate those costs accurately ahead of time,” the financial report states.

Liberty and GCI are unaffiliated companies that are currently operated independently of each other. Management at both GCI and Liberty may be required to “divert a disproportional amount of attention away from their respective day-to-day activities and operations. Yet the reorganization agreement imposes certain restrictive interim covenants on us,” according to the report.

The restrictions may prevent GCI from changing employee benefits, making certain acquisitions or pursing certain business opportunities or making certain changes to CGI capital stock.

Yet, during this transitional time, officials say GCI is committed to continuing service to Alaska customers and investing in Alaska infrastructure. The corporation’s vision is to become the leading technology and cloud services provider for “businesses and enterprise organizations throughout Alaska, the Pacific Northwest and beyond,” according to Leah Boltz, director of business marketing.

Like other telecoms nationally, GCI sees the upswing in business and consumer needs for data storage.

Most recently, the company acquired Northpoint Consulting, which provides network engineering and professional technology services to Fortune 500 companies throughout the Pacific Northwest.

GCI also foresees some growth in the rural Alaska customer base. By the end of 2017, GCI will deliver broadband internet service to 10 additional communities in the Norton Sound and Kotzebue region, bringing the total number of communities served on the TERRA network to 84.

Alaska’s ailing economy also has impacted GCI’s bottom line. Last year, GCI spent $1.1 million in the first quarter advocating for a fiscal solution as part of the Alaska’s Future coalition co-founded by Duncan.

The ultimately unsuccessful campaign, at least for 2016, encouraged legislators to approve a fiscal plan and for the public to support such a plan. GCI reduced its capital expenditures for 2017 by 20 percent due to lack of a fiscal plan either through restructuring earnings from the Alaska Permanent Fund or income taxes.

GCI recognized a $46 million tax bill in first quarter 2017, when the previous year’s taxes were just more than $1 million.

But “the taxes in the financial statements for the first quarter are an accounting anomaly and are not related to the taxes that we actually pay. They also do not impact our free cash flow or Pro Forma EBITDA (earnings before interest, taxes, depreciation and amortization), which is how we measure the performance of the business,” said Kyle Jones, senior manager of GCI Finance.

“Because of extensive investment, GCI has taken losses in the past that are resulting in a tax benefit this year.”

The $46.5 million income tax expense combined with an $8.6 million loss from its operations led to the posting of a loss of more than $55 million.

Alaska’s fiscal crisis is seriously impacting businesses, Duncan contended again on May 4 during his conference with investors.

Job losses in the economy haven’t yet shown up in a collapse of the real estate market, Duncan noted. Nor is it known yet how many job losses resulted in an outward migration from Alaska.

“But one thing is certain,” he said, “they are not taking their cable modems with them.”

According to the Alaska Department of Labor statistics, Alaska has seen outward migration of more than 20,000 people from 2012-16.

Now businesses are in hold mode, sitting on “a bit of a pause while we see what’s going on. We’ll see if they (the Legislature) come up with some solution that plugs the deficit hole. If they go home and do nothing again this year, the likelihood is that losses will accelerate,” Duncan told investors.

Because Alaska is dependent on the oil industry along with state government spending, prolonged periods of low oil prices will adversely impact the economy.

Duncan told investors at the May 4 meeting that despite losses, GCI is back in growth mode. Losses last year had to do with transitions. GCI was also “late with the launch of unlimited and was hit with a second round of national price reductions.”

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Naomi Klouda can be reached at Naomi.klouda@alaskajournal.com.

Updated: 
05/10/2017 - 12:50pm

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