GLIBA - NASDAQ

Ladies and gentlemen, thank you for standing by. Welcome to the GCI Liberty 2019 Q1 Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded May 9. I would like to now turn the conference over to Courtnee Chun, Senior Vice President of Investor Relations. Please go ahead ma'am.

Thank you. Before we begin we'd like to remind everyone that this call 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 SEC. These forward-looking statements speak only as of the date of this call, and GCI Liberty and Liberty Broadband 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 or Liberty Broadband'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, including adjusted OIBDA and adjusted OIBDA margins. Information regarding the comparable GAAP metrics along with required definitions and reconciliations, including preliminary note in schedules 1 and 2 can be found in the earnings press release issued today, which is available on our website. Now I'd like to introduce Liberty's President and CEO, Greg Maffei.

Thank you, Courtnee, and welcome to all of you. Good afternoon. Today, speaking on the call, we'll also have GCI Liberty's CFO, Mark Carleton; and GCI's CFO, Pete Pounds. During the Q&A, we will be available to answer questions related not only to GCI Liberty but Liberty Broadband. So beginning with GCI Liberty, the stock has been very strong this quarter. We were only able to purchase $4 million of stock or repurchase $4 million of stock as the price increase and reduced spending under our grid. We did take advantage of the double discount from the underlying Charter and we will continue to do so when we can. Turning now to GCI, the operating unit, we are obviously in a challenging operating and a very tough regulatory environment. The GCI team continues to execute against that growing the data revenue. And they are also addressing their cost structure including having taken some job cuts in response to the regulatory setbacks that they have experienced. We are focused on investments that will drive future value here. Looking briefly at Liberty Broadband, Charter posted a strong first quarter. Business is driving the benefits of the well executed integration that Tom and team are leading. They increased their PSUs, their customer relationships primarily through strong Internet ads and they have continued upside there. We've only penetrated roughly 50% of the crossings that we – passings rather that we have with Internet product today. We also experienced strong residential revenue growth across the residential, commercial and mobile lines. We ended the quarter with 310,000 mobile lines. And we will continue to make progress in that area in the quarters ahead. EBITDA growth combined with falling capital expenditures and intensity yielded strong free cash flow growth, combining that with having repurchased $963 million worth of stock in the quarter led to a dramatic increase in cash flow per share. Charter continues to deliver on the investment thesis of levered free cash flow shrink with the potential for significantly reduced share count. With that, let me turn over to Mark Carleton to discuss the financials.

Thank you, Greg. At quarter end, GCI Liberty had consolidated cash of $422 million which includes $96 million of cash at GCI. The value of the public equity securities at GCI Liberty as of today's close was $7.5 billion, which includes our $2 billion interest in Charter, our $4.2 billion interest in Liberty Broadband and our $1.3 billion interest in LendingTree. GCI Liberty has $900 million margin loan, outstanding against its Liberty Broadband shares. At quarter end, GCI Liberty had a total principal amount of debt of $3 billion, which includes the aforementioned margin loan, the Charter exchangeable debentures and $1.6 billion of debt including finance leases and tower obligations at GCI. GCI has leveraged as defined in its credit agreement with 5.9 times, compared to a maximum allowable leverage of 6.5 times. And as we noted in the 10-Q GCI exceeded the in current space maximum leverage threshold in the terms of its Senior Notes. And therefore we don't have access to additional funding under the revolver. But we continue to be incumbent, we have plenty of cash on hand to operate the business and we're in compliance with our maintenance covenants. So with that, I'll turn it over to Pete.

Thank you, Mark. Let me start out with an update to our HC matters. As described in our press release, we received notices from USAC, denying requested funding from one of our RHC customers back in November. The customer filed an appeal which was denied by USAC on May 6 of 2019. We expect that our customer will be appealing the decision to the Wireline Competition Bureau of the FCC within 60 days from the May 6 denial. At this point, we've taken a reserve for $21.3 million to account for the revenues related to this customer from July 1, 2017 through March 31, 2019. This reserve impacted adjusted OIBDA in the quarter. Going forward, we will not be recording revenues of approximately $1 million per month, until there is a new bid process that is completed or greater certainty surrounding collectability. With respect to the October 10 letter that we received from the FCC whereby they notified us of their decision to reduce our funding for the year ended June 30, 2018 by $27.8 million. We appealed that on November 9, 2018 and continued to pursue all available options towards resolution. I don't have any other updates on that particular appeal at this point. In other areas, the first quarter of 2019 was a challenging one, but we're starting to see some momentum. The April issue of the Anchorage employment report is showing that on a preliminary basis we saw slight job growth during the quarter. This was the positive change in the economy that we had been anticipating. During 2019, we're focusing on our network in Alaska. Accordingly, we have reduced the size of our low margin time and materials business particularly in the lower 48. This will allow us to increase our focus on bringing faster wireless and wireline speeds to market in 2019 and beyond. Additionally, now that our new billing system has been in place for nine months, we've rolled out a number of product updates and are starting to see new momentum for our products which bodes well for future performance. Operating results, revenue was down approximately 1% during the quarter with declines in voice and wireless being somewhat offset by increases in data revenues. As I noted earlier, in 2019 we are focusing on enhancing our network in Alaska which we believe will ultimately lead to improved wireless revenues. Additionally, that focus on Alaska operations will lead to a decline in the low margin time and materials revenue particularly from customers in the lower 48 going forward. Excluding the $21.3 million reserve that I mentioned earlier, adjusted OIBDA was down approximately 3% for the quarter. The revenue declines and higher costs in our time and materials business masked progress in our cost reductions elsewhere. On April 4, we took steps to significantly reduce our time and materials costs particularly in the lower 48. On the consumer side, revenues were down slightly with declines in voice, video and wireless being mostly offset by increases in data revenues as customers migrated to faster service plans. As I noted earlier, we are now able to put new products in the market after a significant restriction from doing so while we implemented our new billing system. On April 1, we launched our new wireless prepaid unlimited plan which has been instrumental in stemming losses to nationwide wireless providers. We have refreshes to our Cable TV and Cable Modem product coming online over the next several months. On the business side, business revenues were down slightly largely due to declines in wireless revenue driven by declines in the wireless backhaul revenue. CapEx, for the quarter we invested approximately $30 million in capital expenditures. Expenditures were primarily for wireless network improvements, fiber, and hybrid coax improvements. We expect to spend approximately $140 million in CapEx in 2019 which is down from the $160 million estimate I provided on our last earnings call. Now I'll hand the call back to Greg.

And with that operator, I think we're ready to open up for questions.

Thank you. The question-and-answer session will be conducted electronically. [Operator Instructions] Our first question will come from

Okay, great. Thanks for taking the question. First one for Greg, clearly, many of us have been thinking about the potential to combine GCI Liberty and Liberty Broadband. And if you were to combine the two entities, how would you think about valuing GCI in that transaction? And then additionally, when you're thinking about the full NAV at GLIBA, are you baking in the Liberty Broadband's NAV discount as well?

Thank you for the question

Yes. That's very helpful. Thank you. And then maybe one for Pete, I think, that the economy in Alaska has shown signs of improvement and yet the system of the subscriber metrics were a bit soft in the quarter. So is this really just that there is kind of a lag and the Alaskan economy improving or is there anything else going on, a competitor or potentially something else that we're not thinking about?

Yes,

Okay. Really helpful. Thank you.

Thanks.

Our next question will come from James Ratcliffe with Evercore. Please go ahead.

Right, thanks for taking the question. Two if I could. One for Pete, and one for Greg and again sorry, Mark.

Thanks so much, James.

I'm trying, I'm trying. Pete for the $12 million run rate on the denied appeal RHC revenue, is there material cost associated with that or is that sort of a $3 million roughly quarterly hit to EBITDA? And secondly Greg coming back to GLIBA and Liberty Broadband, just procedurally how would that process be considered? Would it be purely just the directors who are not on both boards involved in that or would you and John have any sort of role in that process? Thanks.

All right. I guess I'll pick the first one there. So James as far as are there material cost? The answer is yes. However, they are mostly fixed costs. So it's a very expensive network to build and the recovery of those costs will not be forthcoming, but don't look at this as an opportunity where we'll be shedding significant variable costs as a result of this.

James we haven't thought too much about the process as I said because we really have no plan or intent on any of that. But I would expect that any transactions that will occur would be primarily driven by the non-independent directors of the – excuse me, the independent directors, the non-overlapping directors of the two companies. I'm sure they might have asked management their opinion on facts and circumstances but I would expect they would have their own independent financial advisors and own independent counsel to ensure that there was – there was no questions about whether they were unduly influenced.

Great. Thank you.

Thank you. Our next question will come from Matthew Harrigan with Buckingham Research Group. Please go ahead, sir.

Thank you. Clearly you could recover some of the discount or close to discount if everything was just roll together in the Charter, Liberty Broadband and GCI, particularly if the Sprint-T-Mobile deal gets nixed in Washington which is what people seem to think. Your position could have even more economic value to someone outside of Charter. I know that there are reciprocal blocking rights and strategic things that you and Charter command. But how do you feel about your position and relative value positioning for M&A and maximizing the value of your position if you do get some people hunting around because they're trying to look say [indiscernible] is looking for another solution for Sprint. Thanks.

Well, thank you, Matthew. I think Charter's results were strong. We feel Charter is well positioned not only on the current book of business, but on the potential for its network and the potential to add incremental products down their network, including wireless both through carriage on our network, but the MVNO relationship we have. If a buyer shows up and there are buyers, I think you're right, who might find us to have a strategic value, we'll look at the opportunities that they offer us at the time and we'll consider the potential that the network has on its own and the potential the business has on its own weight against any potential offers.

Is there any sunset on the blocking rights that you and Charter would have on moving that position or is that something you can't comment on?

I'm sorry. I'm not sure exactly what blocking rates you refer to?

In terms of if you wanted to sell your 20% roughly economic stake in Charter to an outside party, my understanding is that Charter would be able to block that, just as you'd be able to block any moves that you thought were undesirable by Charter. Is there any sort of...

No, I think we can – I think if we could – there may be certain rights that we have that might go away in a sale. But I believe we're allowed to – we'd be able to sell our position. And I don't think we have any blocking rights other than we do owe 25% of stock. And I think our economic interest is almost up to somewhere between 22% and 23%. So we're a substantial shareholder, and hopefully there is some voice.

Okay great. Thank you.

Thank you. Our last question will come from Bentley Cross with TD Securities. Please go ahead sir.

Greg, I wanted to ask question that falls on with the last one, and it's a question I know you've been asked time and time again. But just wondering your overall thoughts on potential consolidation within the cable space?

I think largely a good thing. It adds a lot of economic value. There are synergies around costs. There are synergies around not only cost on the content side, but cost on the operating side, cost on the purchasing side, so I think it's something that adds economic value and add streamlines for the benefit of consumers and shareholders alike. That having been said, there isn't that much left to buy as a practical matter, right. You've got Comcast with mid 20s on broadband, high 20s on broadband and low 20s on video, us at 16 of video and 25 of broadband and then it's a substantial drop to people, who have maybe – three million and four million subs. So there is potential for some more modest consolidation. Cox has a very attractive business. But I don't think the Cox family, the Kennedy's and Alex Taylor they don't – I haven't seen them putting up of a sale sign. So I think Charter would be very interested in any consolidation that could occur, but it's not obvious where that's going to happen.

Very fair. Thank you.

Thank you very much to the listening audience. Operator, I believe we're done. I look forward to talking with any of you again at conferences in the near term or if not the call next quarter. Thank you very much.