GCI Liberty, Inc.

Ladies and gentlemen, thank you for standing by. Welcome to the DCI Liberty 2020 Q3 Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, please put star 1 on your telephone. As a reminder, this conference is being recorded November 9th. I would like to now turn the conference over to Courtney Chun, Chief Portfolio Officer. Please go ahead.

Thank you. Good morning. Before we begin, we'd like to remind everyone that this fall 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 and 10-Q filed with the FCC. These forward-looking statements speak only of the date of this call and GCI Liberty Broadband and Liberty Trip Advisor 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, Liberty Broadband, or Liberty Trip Advisor'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 for GCI Liberty, including adjusted OIDA and adjusted OIDA margins. Information regarding the comparable GAAP metrics, along with required definitions and reconciliations, including preliminary note and Schedules 1 and 2, can be found in the earnings press release issued today, which is available on the GCI Liberty website. Please remember to register for our virtual Liberty Investor Meetings. On Thursday, November 19, we will cover Liberty Media and Liberty TripAdvisor. And Friday, November 20, we'll include Curate, GCI Liberty, and Liberty Broadcast from 11 a.m. to 2 p.m. Eastern on both days. After the presentations on both days, John Malone and Greg Muffet, along with presenting CEOs, will host a Q&A session. Please pre-submit questions by Friday, November 13, to InvestorDay at LibertyMedia.com. You can find a link to register and all of these details on our home pages. Now I'd like to turn the call over to Greg Muffet, our President and CEO. Thank you.

Thank you, Courtney, and good morning to all. Today, speaking on the call, we will also have GCI Liberty's Chief Accounting and Principal Officer, Brian Wendling, and GCI CFO, Pete Pounds. Also during Q&A, we will be available to answer questions related to Liberty Broadband and Liberty Trip Advisor. First, I'd like to give a few updates on the proposed combination between GCI Liberty and Liberty Broadband. The HSR waiting period expired on October 9th. The FCC approved the transaction on October 23rd, which will become final on December 2nd if there are any applicable challenges. We are still waiting on regulatory commission of Alaska approval. We filed our application with them on September 16th and are looking to expedite that as quickly as we can. The proxy for the transaction went effective on October 30th, and our special meeting for the shareholder vote is scheduled for December 15th. The proxy does mention two lawsuits which were filed against GCI Liberty. One has been dismissed and the second is proceeding with expedited discovery. We do not expect the proceedings to delay the closing of the transaction. With the date set for the vote and based on regulatory recourse we've already received, we now expect the deal to close no later than the first quarter of Q1 2021. Now on to the third quarter results. starting with GCI Liberty. GCI had another great quarter. Revenue was up 11%, operating income was up 24 million, and adjusted EBITDA was up 27%. Pete Pounds will discuss those results in a little more detail in a moment. The 5G upgrade in Anchorage is complete, and third-party tests have shown that it's now twice as fast, the network is twice as fast as our competition. The company is in a very solid liquidity position with $105 million of cash and $271 million of undrawn capacity under its senior credit facility as of the end of the third quarter. Turning over to Liberty Broadband briefly, we did repurchase 3.4 million shares of Liberty Broadband stock for $488 million at an average price of $142. We consider these repurchases very attractive. If you look at the look-through price of the underlying charter, it involves a price of $4.86. This was a 23% discount to yesterday's close at $6.34, and given how the market is moving, I suspect it's a bigger discount yet. Charter had another fantastic quarter with outstanding financial results. Consolidated EBITDA grew over 13%. They generated $1.8 billion of free cash flow, up nearly 40%. They added 537,000 residential and small business Internet customers versus 386,000 last year. Over the past 12 months, Charter has added 2.3 million Internet customers. Growth in mobile lines has continued to accelerate as well, and they added 87,000 more in this quarter than the same period last year. Impressively and against Most of the industry, they added another 670,000 video subs. Year to date, we are up in video subs. During the quarter, Charter repurchased 6.1 million shares for $3.6 billion at an average price of $592 per share. Charter has shown an amazing ability to operate well under the circumstances, and it's really a testament to the hard work of the team and the investments they've made in various parts of the businesses over the last few years, which will allow them to operate quite effectively remotely. LendingTree hosted their earnings call this morning, and make sure you check out the replay. Lastly, TripAdvisor will host its earnings call tomorrow morning. Please tune into that for an update on their results as well. And with that, I'll turn it over to Brian to discuss the GCI Liberty financials. Thanks, Greg. At quarter end, GCI Liberty had consolidated cash and cash equivalent to $553 million, which includes $105 million in cash held at the GCI OpCo level. The value of the public equity securities that GCI Liberty ended yesterday's close was $10.9 billion, which includes our $3.4 billion interest in charter, $6.4 billion interest in liberty broadband, and a $1.1 billion interest in lending trade. At quarter end, GCI Liberty had a total principal amount of debt of $3.2 billion, which is relatively unchanged from last quarter. This includes the $1.3 billion margin loan outstanding against its Liberty Broadband shares, which is fully drawn, the charter exchangeable debentures, and $1.4 billion in debt, including finance, leases, and power obligations at GCI. GCI's leverage at quarter end is defined in its credit agreement as 3.7 times, compared to a maximum allowable leverage of 6.5 times. GCI had $271 million undrawn borrowing capacity as of quarter end. Note that the above amounts exclude the indemnification obligation to curate and the outstanding preferred stock. After quarter end, GCI LLC, a subsidiary of GCI Liberty, raised $600 million of senior notes through 2028. Proceeds from this debt raise along with cash on hand and borrowings under the senior credit facility were used for being all outstanding principal of its existing senior notes through 2024 and 2025. GCI LLC also amended its existing senior credit facility in October, extending the maturity to 2025 and increasing total borrowing capacity to $950 million. You'll likely note that corporate and other expenses were elevated during the quarter, largely due to expenses related to the proposed GCI Liberty and Liberty broadband combination.

And lastly, you will note in our 10-Q, which will be released later today, that we sold our interest in Evite during the quarter. With that, I'll turn it over to Pete to talk about DCI's operating results.

Thanks, Brian. Starting with COVID-19, thus far we have not experienced any uptick in bad debt expense. At the same time, we've benefited from increased demands for our corporate data network and lower health care costs. This has resulted in positive financial outcomes as we remain committed to ensuring we meet all the connectivity needs of our customers. We continue to work with educational facilities to ensure that Alaskan students have the access to the connectivity that they need. With the start of the school year, we worked with school districts across the state to bring connectivity to approximately 4,000 low-income students with students who otherwise would not have had access to school online. Moving on to the five band 5G upgrade. Our 5G deployment in Anchorage is now effectively done. We commissioned a drive test on the network in September, and the results are fantastic. Our network was twice as fast as our primary competitor, AT&T, and had substantially fewer dropped calls. Rural healthcare update. On October 20, 2020, the FCC approved our cost-based rule rates for the funding years ended June 30, 2019 and June 30, 2020. We expect to collect the entire amount in accounts receivable related to these two funding years, approximately $175 million, within three to six months. This is a significant milestone that will not materially affect the income statement but will bring further liquidity to the balance sheet. On October 14, we announced that we want a $25 million federal grant to bring fiber connectivity to the towns of Onalaska, King Tove, Sand Point, Accutane, Chignik Bay, and Larson Bay. In total, this project will cost $58 million, including $33 million of our own money. and it is expected to be substantially complete by the end of 2022. This will greatly improve the connectivity in these locations from the current satellite technology all the way to fiber to the premise in Unalaska and highlights our commitment to continue to be the premier telecom provider in Alaska. Now we'll walk through our third quarter results. Revenue was up by 23 million, or 11%, and adjusted EBITDA increased by 20 million, or 27%. Significant customer demand for data, cost containment initiatives, lower health care costs, and a continued move away from our lower margin products, like video and time and materials, has enabled us to grow adjusted EBITDA dollars nearly as rapidly as revenues. On the consumer side, revenue was up 8% with data driving the growth. We gained 3,300 cable modem customers sequentially. Consumer wireless was also up 200 subscribers versus the second quarter, despite our normal prepaid subscriber seasonality. With the sale of our broadcast business this summer, we've moved cable advertising sales revenue to consumer video. Absent this movement, consumer video revenues would have been down for the quarter. Over at GCI Business, revenue was up 13%. The growth was largely due to the growth in government health and education revenue. This was partially offset by the movement of cable advertising sales revenue to consumer. The year-over-year growth of 3,800 cable modems is where you can see the low-cost cable modems that we're providing to school districts for their low-income households. Finally, CapEx. We've spent $102 million thus far in 2020. Our primary capital project for the year, 5-band 5G wireless in Anchorage, is effectively complete. Additionally, we're continuing to spend on projects to keep up with our increased data demand. We expect our total CapEx for this year to be similar to last year. I'll now hand the call back over to Greg.

Thank you, Brian, and thank you, Pete. We hope you will all join us for our virtual Liberty Investor Meetings on November 19th and 20th. We do appreciate your continued interest in GCI Liberty, Liberty Broadband, and Liberty Trip Advisor. And with that, operator, we'd like to open the line for questions.

If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that is star 1 to ask a question. And we'll go ahead and take our first question now from James Ratcliffe with Evercore ISI.

Good morning. Thanks for taking the question. Given your position in the cable industry, can you give us your thoughts on what, if it turns out, looks to be a split government with a Democratic administration could mean for cable, particularly in the areas of and regulation? Thanks.

Thank you for the question, James. I suspect anything that looks somewhat like the current regime is probably pretty good for cable. Cable has done, in my judgment, an excellent job of supplying broadband connectivity during the pandemic and admirably increased capacity and increased number of lines and handled the growth in upstream and downstream traffic very well. So continuing that trend and letting cable do what it can do well, I think it's a positive. That having been said, I'd note that during the prior administration, which at various times had Democrat control of all three branches, or the two branches of the legislature and the executive branch, charter was able to operate very well equally under a Title II regulation. So I remain optimistic. On the M&A front, realistically, there is not that much M&A for Charter to do. There are only a couple of large-scale cable companies which are not Comcast or Charter, and I think most of those would probably be still substantially small enough that I wouldn't anticipate that there would be enormous antitrust issues given the regional nature of the business. you know, that remains to be seen.

Thank you.

We'll take our next question from Zach Silver with B. Riley.

Okay, great. Thanks for getting the question. The first one is just any update on the discussions with Charter about increasing the cap on the equity ownership there, and if not, Are there any other mechanisms available where you guys wouldn't have to take a tax hit on selling charter shares to get back under the cap?

So, we are in discussions with the company and directors about modifications to the cap, and I think those would probably be productive, but I want to emphasize that our tax rate if we were forced to go less shares because of the nature of how we hold the stock, effectively be treated as a dividend treatment, and our tax rate would be 8%-ish, and given the 20-plus percent discount, I don't view, while we are not interested in really selling our charter shares, I also, a forced sale, for which we were still 12% in the money in terms of the trade-off, if we did further repurchases, would not be the worst result. So while I am optimistic we will reach some resolution with a company that will be positive, I also note that if we are unable to reach a resolution, it is not the worst outcome.

Okay, that makes sense. And then one more, if I could. Just around fixed wireless, Verizon continues to be optimistic on 5G home and seeing Keno roll out a pretty aggressive plan with its home internet offering. And just curious, Greg, whether you have a change of heart around fixed wireless as a competitive threat to cable?

No. I mean, I don't think there's more competition. You know, there's more competition... a positive. I think Cable has shown it's able to operate very well during this time. Cable has done a great job of providing connectivity. Cable is going to extend its footprint into new regions, partly fueled by RDoS. So I think Cable has done an excellent job of growing its footprint and serving its customers and serving potential future customers. We'll be seeing What happens on fixed wireless, you know, as far as I can tell, and I don't know what's inside the head of the Verizon management, but it appears to me that they're backing off on some of the 28 and 38 gig. They're emphasizing, and most people seem to think that Timo's efforts in the mid-band are more effective. So to be seen, but I don't view it in the near term, you know, as a massive competitive threat to our business. Got it. Thank you very much.

Our next question comes from Bentley Cross with TD Securities.

Do we have the question operator or did we lose somebody?

Mr. Cross, you now have an open line.

Quick question for the DCI folks. Wondering if

alaska communications privatization might change any dynamics in the market or if you have any thoughts on it in general well this is ron i guess i'll take that one um we would expect some increase in the competitive nature of the market but we'll have a long lead time it'll probably be several years before they're able to i mean it'll take them a while to close and then they'll have to make substantial investments I would expect we'd see some more fiber in their networks. But we're pretty confident in the quality of our product offerings and the superiority of the hybrid fiber coax plant and the network that we have designed that that combined with our bundled products, I suspect, will leave us in a position where it won't have a huge impact on us, although we are planning for some increased competitive sensitivity. activity in the market once it's closed and after they make some investments.

Thanks for the gander.

Our next question comes from Matthew Harrigan with Benchmark. Thank you.

As you saw, despite being a pretty libertarian guy at various points, just really talking about how the cable industry had an almost unfair advantage with its small sociology and its really wasteful just in the U.S. economic perspective from everyone else to do these duplicative bills. You could, as you pointed out, Verizon, there's definitely a move toward the mid-band approach. I mean, do you think that there's an increasing awareness on the part of some of the mobile companies that they'd like to work on, obviously specifically Verizon, that they'd like to work something out with cable on small cells? side, and are you drawing any inferences from your experience up in Alaska, which is obviously in the lead bar from the U.S. standpoint? Thank you. Thank you. I missed the first part. You said, who said we had none for advantage? Ajit Pai, the FCC chairman. Ajit, right. Yeah. I just didn't, I didn't hear Ajit. Okay. Well, I It's nice that the FCC commissioner thinks that we have the right technology. I believe Charter's goal is to serve its customers well. And for the benefit of the nation, having more ways that people can connect is not a terrible thing. I think we have an excellent service and an excellent network with a lot of capabilities that I've set up. We're looking to extend that network. How 5G interacts. and how 5G operates on top of it, I think we could be a good partner, as you note. We already are Verizon's partner through the MVNO relationship, and you've seen us look to extend some of our network capabilities by purchases of spectrum, CBRS spectrum. So I think they can work pretty well together, hand in glove. Ron, I don't know if you'd add anything about based on our 5G experience in Alaska?

Well, we've said all along that 5G was going to be as much a backhaul game as it was a wireless networks game. And I think part of the reason that we're doing well with our 5G up here and we've got the jump on other folks is that the HFC plant gives us a much better backhaul network. So we're confident in cable's ability to drive 5G wireless. And in the long run, either have a superior competitive platform or have our competitors come to us because only the cable industry can really drive the kind of last 100-foot backhaul that you need for the 5G small cells.

Thanks, Greg. Thanks a lot.

Thank you.

Our last question comes from Ben Phillips with Savoy Capital.

Hi, good day. Quick question. I'm kind of new to the story, so I just wanted to get some color around the $575 million convertible notes. I think 2.75% converts through 2050. Just a little more color on what that transaction is and what that all means for the cap structure. Thank you. We'll let Ben Oren talk about the convertible notes.

I think with respect to the convertible notes, put call dates in 2023. And so, you know, as we take a look at the ability to refinance those opportunistically between now and that date, continue to watch the charter share price and, you know, determine what the best window is.

We're happy to take it offline if you need more details on that. Yeah, I'd appreciate that. Thank you. I think there's one more question. Is that correct, Operator?

Yes, we'll take our last question from Michael Bunyaner with TLF Capital.

Thank you for including me. Good morning, and congratulations on excellent results. I have a question related to your network. I believe this past quarter, over 80% of individuals essentially self-installed, which clearly is changing the economics of servicing an average customer. Could you just walk us through what does that mean in terms of the economics of managing the network on an ongoing basis? Because I would think that this would be a significant savings on a per unit basis.

Yeah. That's a great question. I think if you look back two years ago, We were something like 38%, sub 40% self-install. And during the most recent quarter, we were, as you noted, over 80. That's probably a couple of things. One, that is a great testament to the work that the charter team has done on improving self-install capacity and making that process simpler for customers and us making it simpler for them and managing it more easily. I also think it's probably somewhat driven by the pandemic. The reality is that people don't necessarily want to see cable installers coming to their home. So like many things in the pandemic, things born of necessity have become more convenient and more driven and more digital and more self-reliant. That has also probably been somewhat the case impacted by the fact that some of our competition really almost shut down and we're not doing any installs. They didn't have truck rolls and nor did they have the same self-install capacities or ease of use that charter did. So all of that contributed to an acceleration in the growth of self-install. That has really reduced our cost of install. I'm not sure it will have as much an impact on the ongoing cost once they're installed because I'm not sure the network management is really that substantially different. But I think it's both been a reduction in costs and an ability for us to gain market share during the time of COVID.

If I may just follow up in terms of market penetration. We were running at Charter just about 50% of the home space. What do you think ultimately, because of the quality of the service as well as the quality of the and now having the call centers essentially in the U.S., what kind of penetration over time could we reach, and or what do you think would be a reasonable goal, I don't know, three to five years from now?

I'm not sure that charter management has set that goal or we have that forecast. I know I have heard – Tom Rutledge believed that ultimately he could get to two-thirds penetration, but he didn't have a timeframe for that. But I appreciate the BHAG, the big, hairy, audacious goal that is, because that's obviously a lot of market share gain. But I do think that cable has an advantage, and you can see the fact that we'll have added nearly, probably during this year, during the last 12 months, added something like almost 8% to 9% growth in its customer count during the last 12 months. I'm not sure that's going to continue to accelerate at the same rate, but that shows the potential that is there to grow because that share point's probably gone up 2% or 3% during the last 12, 18 months. How long it's going to take and how that slows as we hopefully exit the pandemic, I don't know, but I'm still bullish on our ability to increase share. I think Todd is as well.

Again, thank you very, very much, and congratulations to everyone.

Thank you. So with that, operator, I think we're done. Thank you again all for your continued interest in the Liberty family, and we look forward to speaking with you either next quarter if not sooner.

This concludes today's call. Thank you for your participation. You may now disconnect. We'll be right back.