GLIBA - NASDAQ

Ladies and gentlemen, thank you for standing by. Welcome to the GCI Liberty 2020 Q2 Earnings call. During the presentation all participants will be in a listen-only mode. After afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded August 10. I would now like to turn the conference over to Courtnee Chun, Chief Portfolio Officer and Senior Vice President of Investor Relations. Please go ahead.

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, Liberty Broadband and Liberty TripAdvisor 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 TripAdvisor'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 OIBDA and adjusted OIBDA margins. Information regarding the comparable GAAP metrics along with required definitions and reconciliations, including preliminary note and schedules one and two can be found in the earnings press release issued today, which is available on GCI Liberty's website. Now, I'd like to turn the call over to Liberty President and CEO, Greg Maffei.

Thank you, Courtnee, and good morning to you all. Today speaking on the call, we will have: GCI Liberty's, Chief Accounting Officer and Principal Financial Officer, Brian Wendling; GCI's CFO, Pete Pounds. And during the Q&A, we'll be available to answer questions related to not only GCI Liberty, but also Liberty Broadband and Liberty TripAdvisor. Last Thursday, we announced that Liberty Broadband and GCI Liberty will combine in a stock-to-stock merger. We expect this combination will close in the first half of 2021 subject to potential COVID-19-related delays. If you would like more information on the combination, I do encourage you to look at the slides we posted on our website and listen to the replay of the call. Now on to the second quarter results starting with GCI Liberty, GCI had another strong quarter despite the challenging backdrop. The network continues to perform well. This team has stayed committed to providing excellent service and support to the Alaskan community. In the second quarter, total revenue grew 5% with both business and consumer revenue up. Adjusted OIBDA grew 18%. Pete will discuss these results in a bit more detail in a moment. We continued with the Anchorage 5G upgrade with 66 5G sites turned on already and just 5 -- 10 more to go this year. We also announced on July 31, that we had sold the television broadcasting business at GCI, great televisions good transaction for GCI. The business results were relatively immaterial contributors to financials and the sale will allow GCI to focus on its core connectivity business going forward. The company is in solid liquidity position with $88 million of cash and $271 million of undrawn capacity under the senior credit facilities. Turning to Liberty Broadband. At the corporate level, we increased our buyback authorization by $1 billion bringing the total authorization to $1.2 billion. We do note that the discount has widened and find it attractive. Charter had another outstanding quarter. It remains focused on supporting communities during this difficult time delivering services that enable remote working distance learning telehealth services and family communications. In June, residential data usage was up 20% from the fourth quarter. But it remains well below max capacity and the network continues to perform well. The second quarter subscriber metrics and operational metrics were very strong. Charter added 850,000 residential and SMB Internet customers 325,000 mobile lines and 100,000 video customers in the second quarter. Charter has grown Internet customers by over 2.1 million over the last 12 months. Our consolidated revenue was up 3.1% despite some challenges in the advertising market and the enterprise business. Adjusted EBITDA grew 7.3% and free cash flow was up nearly 70% to $1.9 billion. Charter finished the quarter with good liquidity with $2.1 billion of cash and $4.7 billion of availability under its revolving credit facility. We also issued $3 billion of high-yield debt in July at very attractive rates. Charter repurchased 2.3 million shares during the quarter for $1.2 billion at an average price of $4.99 per share. Charter's ability to grow connectivity service this year for new and existing customers is a testament to the team's operating strategy quality of products and significant investments over the past several years. Turning to LendingTree. They also executed well in the second quarter despite a challenging backdrop. The results demonstrate the benefits of their diversification program and their flexible cost structure. The home and insurance businesses both grew revenue and profit compared to last year led by a strong mortgage business. The consumer segment was understandably challenged. Adjusted EBITDA exceeded prior guidance and is a reflection of the team's discipline in managing expenses through this time. Trip -- excuse me, Tree completed various financing schemes in July to bolster cash and liquidity and today have nearly $200 million of cash on hand and continue to generate positive free cash flow. Lastly, at Liberty TripAdvisor, while it's clearly a challenging time for the travel business, the team has undertaken prudent actions to increase efficiency and preserve liquidity. Monthly user traffic has shown early signs of recovery with notable improvements in restaurant traffic particularly in Europe. Trip saw better financial results from the April lows, and estimates that July's performance improved further. TripAdvisor strengthens its liquidity position by amending its revolving credit facility, replacing the net leverage ratio with a minimum liquidity covenant through 2021 in September and they also completed a successful high yield bond offering. With that, I'm going to turn it over to Brian to discuss GCI Liberty's financial results in a little more detail.

Thank you, Greg, and good morning, everyone. At quarter end GCI Liberty had consolidated cash and cash equivalents of $552 million, which includes $88 million of cash held directly at GCI. The value of the public equity securities at GCI Liberty as of Friday's close was $10.5 billion, which includes our $3.2 billion interest in Charter, $6.2 billion interest in Liberty Broadband, and $1.1 billion interest in LendingTree. 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 a $1.3 billion margin loan outstanding against its Liberty Broadband shares, which is fully drawn; the Charter exchangeable debentures; and $1.4 billion of debt including finance leases and tower obligations that are held directly at GCI. GCI's leverage at quarter end as defined in its credit agreement was 4.2 times compared to a maximum allowable leverage of 6.5 times. GCI has $271 million undrawn borrowing capacity as of quarter end, which puts GCI in a strong liquidity position. Note the above amounts exclude the indemnification obligation and preferred stock. With that, I'll turn it over to Pete to talk more about GCI's operating results.

Thanks, Brian. Starting with the COVID-19 update. We've been monitoring the COVID-19 situation closely. Thus far we have not experienced any uptick in bad debt expense while at the same time we benefited from increasing demands for our data network and have seen lower health care costs. This has resulted in positive financial outcomes thus far as we remain committed to ensuring we meet all of the connectivity needs of our customers. We continue to work with educational facilities to ensure that Alaska students have access to the connectivity they need as schools will be opening shortly, many of them virtually. I'd like to thank the employees for their hard work and dedication as we work to support the Alaskan community through this difficult time. Moving on to the five-band 5G upgrade. We are making continued progress on our five-band 5G deployment in Anchorage and are now over 85% complete. Alaska residents are noticing our improved network. And as our numbers show, more of them are moving to our 5G network. We're on track to complete the Anchorage upgrade later this year. Now I'll walk through our second quarter results. Revenue and adjusted OIBDA both increased by $12 million. Significant customer demand for data and cost containment initiatives, lower health care costs and continued move away from our lower margin products like video and time and materials has enabled us to match our strong revenue growth dollar-for-dollar on the adjusted OIBDA side. On the consumer side, revenue was up 5% with data driving the growth. During the quarter we gained 6,500 paying cable modem customers. The promotional customers that signed up in the first quarter as well as earlier in the second quarter have overwhelmingly elected to continue as paying customers. Consumer wireless is another bright spot. Thanks in large part to a rapidly improving Anchorage 5G network, we saw 4,400 new revenue-generating wireless lines in the second quarter versus the first quarter of this year. Even with wireless subscriber counts slightly lower than last year, revenue increased 6% due to customers selecting higher-value plans. Over at GCI business, revenue was up about 6%. The growth was largely due to growth in government, health and education revenues. As Greg mentioned, we sold our broadcast television business on July 31st. Due to this transaction video revenue will be slightly reduced in GCI business going forward. However, the broadcast business was immaterial to adjusted OIBDA. We are pleased with the transaction, as it will allow us to continue to focus on our core Alaskan connectivity business. Finally, CapEx. We've spent $62 million thus far in 2020. Our primary capital project for the year five-band 5G wireless in Anchorage is going well. Additionally, we are continuing to spend on projects to keep up with our increased data demand. I'll now hand the call back over to Greg.

Great. Thank you, Brian and Pete. Given the ongoing pandemic, we have decided that Liberty's Investor Day this year will be virtual and will be split over two days. On Thursday, November 19, we will cover Liberty Media and Liberty TripAdvisor; and on Friday, November 20, we will cover Qurate, Liberty Broadband and GCI Liberty. These sessions will run from 11 to 12 Eastern on both days. More details will be provided on our website, so please mark your calendars. As always, we appreciate your continued interest in GCI Liberty, Liberty Broadband and Liberty TripAdvisor. And with that operator, I'd like to open the floor for questions.

[Operator Instructions] And our first question comes from

Okay. Great. Thanks for taking the question. The first one is just around the LendingTree stake. Obviously, going to be a smaller piece of the pro forma entity versus how big of a piece it was at GLIB.A. Just wondering how strategic you think that Tree investment is at this point and what your intentions could be for that stake.

I think Tree has done an amazing job and has a good position. I think when we got the stake from IAC at the bottom in 2009, it was worth $17 million. Today it's worth well over $1 billion. Credit to Doug Lebda and his team. They're in a good space and they've done well in it. So we'll weigh it. Obviously, the primary focus of Liberty Broadband cable connectivity businesses in the form of its Charter stake and GCI but we also like how Tree has performed so we'll watch it.

Okay. And then the second one is just on last week's call you announced, obviously the increase of the buyback authorization at Broadband. Also said, I think that the buyback window for now closes when the proxies go on file. How should we think about how aggressive you're willing to get on buybacks at both GLIB.A and broadband during this window? And for GLIB.A is there enough visibility in the Alaskan business at this point, where you'd be comfortable with ramping up the buyback which has been muted for the last couple of quarters?

Well I'll -- we can start buying now -- once that proxy is out. The -- we'll watch this. I think we've gotten renewed and increased confidence in the Alaskan business, not only -- many of the regulatory issues look a lot better but obviously like many connectivity businesses the strength of the business has been enhanced and renewed. So all of those give us much more confidence in the GCI asset. That having been said in the combined company Liberty Broadband-GCI Liberty, the value of the Charter stake really dominates the -- well over $30 billion the value of GCI. So it will really primarily be about the strength of Charter and the fact that we can buy that at discount. As we have locked in some of these arrangements, I think we have gained confidence not only in the GCI business but where we're going forward. And we'll take advantage of it. I don't know how to measure that as aggressive or not we'll see. But we will take advantage of it.

We'll go next to Bentley Cross of TD Securities.

Greg just touched on having a little bit better visibility on the regulatory front. Just wondering, if there's anything around the corner that you see on the regulatory front or if kind of what we see is what we get for the time being at least.

Well, I should say we've had -- I should probably articulate and said that we've had some better results on the regulatory front. Better visibility would be something I would say be less apt description. I think we are -- the GCI team has done a good job managing it. I'll let them comment further if they'd like. But it's a very complicated area. It's not one where the visibility is high. It's one where there are certain forces that are less enthused about some of the rural subsidies and there are other forces which they're more enthused about them. And those are not always aligned, as you might guess and we try and work through it. I don't know, if Ron or Renee or somebody else would like to add anything.

I think it's still an uncertain time line. The ultimate resolution is undetermined. So not much to add now.

And we'll go next to Matthew Harrigan of Benchmark.

Thank you. We see some variance in the realized price increases for high speed among a lot of cable operators. I mean, Charter has always been reticent to push pricing. All fees has been a real outlier. But when you look at the logarithmic growth off COVID on the usage at home including work-from-home, where do you think the levers are to push the price path up over time. I know use of base pricing has kind of been discredited politically at idea. And there's some correlation between speed and consumption. But you will see if we get 8K not everyone wants a light field dinosaur in their living room. But at least, objectively do you feel a lot better about the path for broadband pricing over the next two to five years, given everything that's happened in the economy and look at the QoS and the product of the speed? Thank you.

Thank you, Matthew. I think a couple of things. The COVID crisis and the push to work-from-home has shown the value of connectivity services and showed the strength and appeal of the cable plan. Charter's strategy has been to upgrade its plant work to manage it remotely. And that's actually been a huge benefit that their ability to do installs far better than many of its competitors. It's part of the reason not only due to demand, but I think the more able capabilities that Charter has to do upgrades is why we were able to -- and do think remote installs is why we had such an amazing quarter with those 823,000 residential adds. All of that has said that you're an essential service, the Charter's strategy has also been to try and grow faster and have pricing as a capability down the road potentially. And I think the political environment is such that it's probably not a great time to be raising prices. So I think that the strategy is working. They're growing faster than everybody else. They're core to higher multiple than anybody else in cable other than CableONE for those reasons and they deserve it. And price is an opportunity down the road that they may be able to take and I think they'll monitor it carefully. I think most of the things that they're doing are trying to provide more bandwidth to more people at attractive pricing. And you see now there are rural initiatives in the same way. And in the political environment where obviously many Americans are hurting and there are many attempts to ensure that they have connectivity, these -- particularly for education from home and the like. It's probably not a wise time to be thinking about price increases. I think it's a lifetime you're trying to serve your customers well and Charter has done that very well. So I think that's time to you and I'm entirely onboard.

Our next question comes from John Melo of Truist.

Good morning. I was wondering if you could comment on what the pro forma capital structure will look like after the combination with Liberty Broadband.

I think we put forward that in the slides and I would encourage you to go look at those slides. It will be a stronger capital structure and measured in several ways. The GCI Liberty has free cash flow and Liberty Broadband has a much larger asset base with less debt as a percent of the assets or as a -- against equity. So by some measure it's going to strengthen on both sides. But I encourage you to go look at the slides we posted last week.

Thank you. And are there any - are there any planned actions regarding the GCI LLC bonds?

When we have actions we will be sure to let you know.

Thank you…

Nothing to account today.

And our next question comes from David Thomas of Avalon Capital. Mr. Thomas your line is open, please check your mute button first.

Hey guys, thank you. Thanks for taking my question. Greg you've been open in prior calls both on Liberty Broadband and Formula one that you guys would like to see Charter raise the 26% cap so that broadband can accrete a higher ownership level in Charter as Charter continues to shrink its share count through the buybacks. However and correct me, if I'm wrong on this -- but so far it doesn't seem like the Board at Charter has consented to that. And by doing the merger, if I'm reading the documents correctly it looks like we're accelerating the timeframe under which broadband is going to hit that 26% cap. And this is my math it looks like by -- you're pulling it forward by about a year based on Charter's kind of run rate buyback base. So I'm curious just what gives you and the Board the confidence to do the transaction and accelerate that timeframe of putting broadband in the potential for selling position without the confirmation from Charter they're going to lift the cap. Why not wait until we have the certainty on the cap raise before going ahead with the deal? Thanks very much.

Yes. A couple of things. We have not sought formal approval of that 26% cap and it is still a year out probably before it becomes an issue. But we have had productive dialogue with the independents. And I think as we outlined on the call last week they have -- many of them have their issues to be worked. But many have a similar view to us that having your largest strategic shareholder forced to sell is not attractive and in fact many of the public holders would not find it attractive to have 25% of all the capital being utilized in buyback go to Liberty. Your question about are we accelerating the timeline because we are merging these two is open to discussion about whether there was already going to be attribution of the GCI Liberty stake to Broadband given how the documents read. So that's not as clear as you're making it sound by any means. And lastly as I think I outlined on our call last week, we -- it's a little bit of -- if the worst scenario is we are forced to sell we're going to pay an 8% or less tax rate as the dividend received deduction against some basis we have. And we're going to be able to utilize that capital to buyback stock at currently a discount which is exceeding 21%. So while it is not our desire or intent to sell Charter, if we were forced to sell currently that's not a horrible outcome from a Liberty Broadband shareholder net asset value perspective.

And our next question comes from Michael Bunyaner of TLF Capital.

Good morning, gentlemen. I have a couple. Would you just share your lessons learned from the installation of 5G and more importantly the customer uptake and the ARPU effect on the total per customer or per account?

Ron, I'll let you or Pete take a cut at that?

All right. I think our principal lesson to date is that speed continues to sell. We've seen a very substantial performance increase in the network as we moved to the 5G implementation, particularly on the 4G side. The 5G radios and network supplement the 4G installation and greatly increase the speeds on the 4G network and that has translated into a very, very positive consumer reception. We've started adding postpaid wireless lines again for the first time in quite a while. And we believe that the demand in the marketplace for the increased speed and capacity is significant. So we're very pleased with that. We think we're also a little bit ahead of the competition in the market with that implementation and that's helpful.

And as a follow-up also from a business point of view, and this is probably for you Greg, when you think about lessons learned, either in the implementation of this and/or the uptake, what can be evaluated in terms of additional installations, not for GCI, but for Charter elsewhere in the U.S.? What are the lessons that we could use for the marketplace elsewhere?

Thank you for the question. I'm not sure we can say just positively, we know what the lessons are for all table at Charter. But, I think, what it's shown is that the platform that cable has is an excellent platform for 5G and offers opportunity for increased bandwidth -- mobile bandwidth for customers. It is interesting to see with the 325,000 lines that Charter added during the quarter, that puts it right at the top of all of the mobile adds of any nationwide carrier. And realizing that Charter is only a regional carrier in many ways, it's really very impressive to see that increase in lines. When you combine that with the 5G capabilities that we will be receiving from our MVNO relationship with Verizon and you combine that with the potential we've got to do our own build-out in the most attractive locations, I think, it just sets us up very well and shows that cable and at least at Charter can be a very effective force in mobile.

And any thoughts about the ARPU effect on a total basis in terms of incremental?

I am reluctant to say that, because I've generally been of the view that this mostly, because of competition, gets dissipated away. If you look what happens with 4G and to some degree 3G or LTE or the 4G equivalent, you've seen that most of that did not result in increased ARPU. And I'm somewhat reluctant to imagine, we're going to have major increases in 5G, but we'll see.

And, clearly, the value of the network and the broadband network, specifically, as a backbone, for 5G, is now obvious. Is that correct?

I love the way you say it it's now obvious and I hope you're right--

Well to you. To you. To you.

But I think I don't know if it's now obvious. But I think hopefully it's being proven and I agree with your thesis.

Thank you. And one last one. First and most important congratulations in terms of the merger between the two company. Did I read correctly that the team from GCI will stay and continue to manage the business and there's not going to be any change?

Yes, you read that correctly. Thank you all and thank you for the hard work and continued success.

And we'll go next to James Ratcliffe of Evercore ISI.

Hi, one on L-Trip if I could. Trip shares are now sort of notably above the $17 the base price in the preferred. How do you think about paying the preferred coupon going forward in terms of cash pay versus PIK-ing? And are there potential sources of liquidity you wanted to pay down in cash going forward?

Again thank you. I think there are potential sources, but I suspect given that's a noncash flowing holding company we're most likely to PIK it. And -- but we'll see what other choices we have along the way. But I would say PIK is the most likely alternative.

And we'll go next to Bentley Cross with TD Securities.

Thanks for the follow-up. Greg just because you opened the door, you mentioned you see the discount at 21%. Number one is that pro forma? And number two what are you assuming your GCI stake is worth in those calculations?

Yes, that is pro forma. And we have a range of values. So, I'm not going to lock down on the GCI value. We let the marketplace do that. But we -- it's somewhere in the 20% -- just over 20% range.

And our last question comes from Wesley Whitehead of TET Education and Life Earnings [ph].

Good morning. I was hoping to get some insight into why is the 0.58 ratio the same for Class A and B shares of GCI Liberty when the GCI Liberty Class A shares will be losing their voting rights if the transaction goes through with Liberty Broadband?

Thank you for the question. I believe since this was done by two independent committees both the independent committee at GCI Liberty and the independent committee at Liberty Broadband they believe that was the fairest the case which the shareholders see have higher liquidity. Given the strength and size of the B vote I think the A votes were viewed to be not -- I'm guessing at our view is meaningful but really this was driven by two independent committees. They made the decisions and I believe they thought it was fair to both sides.

Thank you.

Thank you, operator, that is I believe is our last question and I want to thank all of our listeners for their continued interest in Liberty businesses. We look forward to speaking with you again next quarter if not before and stay healthy. Enjoy the rest of the summer as best you can. Thank you.