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Edited Transcript of GLIBA earnings conference call or presentation 26-Feb-20 10:00pm GMT

Q4 2019 Liberty Broadband Corp and GCI Liberty Inc Earnings Call

ANCHORAGE Mar 12, 2020 (Thomson StreetEvents) -- Edited Transcript of GCI Liberty Inc earnings conference call or presentation Wednesday, February 26, 2020 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian J. Wendling

GCI Liberty, Inc. - Principal Financial Officer, Senior VP & Controller

* Courtnee Alice Chun

GCI Liberty, Inc. - Chief Portfolio Officer & Senior VP IR

* Gregory B. Maffei

GCI Liberty, Inc. - CEO, President & Director

* Laura Baldi;Vice President & Assistant Treasurer

* Peter J. Pounds

GCI, LLC - Senior VP, CFO, Secretary, Treasurer & Director

* Ronald A. Duncan

GCI, LLC - Co-Founder, CEO & Director

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Conference Call Participants

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* James Maxwell Ratcliffe

Evercore ISI Institutional Equities, Research Division - MD & Senior Analyst

* Matthew Joseph Harrigan

The Benchmark Company, LLC, Research Division - Senior Equity Analyst

* Michael Rollins

Citigroup Inc, Research Division - MD and U.S. Telecoms Analyst

* Michael Patrick Kerrane

SunTrust Robinson Humphrey, Inc., Research Division - Senior Fixed Income Research Analyst

* Zachary Alan Silver

B. Riley FBR, Inc., Research Division - Associate

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Welcome to the GCI Liberty 2019 Q4 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded, February 26.

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, Courtnee.

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Courtnee Alice Chun, GCI Liberty, Inc. - Chief Portfolio Officer & Senior VP IR [2]

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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 Form 10-K 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 statements 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 margin. Information regarding the comparable GAAP metrics along with the required definitions and reconciliations, including preliminary notes and 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 turn the call over to Liberty President and CEO, Greg Maffei.

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Gregory B. Maffei, GCI Liberty, Inc. - CEO, President & Director [3]

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Thank you, Courtnee, and good afternoon to all of you out there on the call. Today speaking on the call besides myself, we'll have GCI Liberty's Chief Accounting Officer; Brian Wendling; GCI's CFO, Pete Pounds. During the Q&A, we'll be available to answer questions also related to Liberty Broadband.

So starting first with GCI Liberty. As Ron noted in the release, we had a solid operational quarter. There were pluses and minuses on the regulatory front, but overall, it resulted in a benefit in the fourth quarter of $4 million, as Brian will discuss further in a moment. For the full year, despite a challenging business environment, there were stable consumer revenue as there were gains in data from sub growth and consumers moving up the stack, which offset losses in video and voice.

We also generated expense savings from operational efficiencies and a focus on the core Alaska business. GCI continues work on the Anchorage 5G buildup, which we expect will be completed later this year.

Turning to LendingTree, which reported its Q4 results yesterday, they added over 3.6 million users to My LendingTree during 2019, bringing the total number of customers to 14.3 million. LendingTree continues to diversify its business effectively. Insurance is now the largest business and grew 37% pro forma versus Q4 last year. The home and consumer segments also grew double digits over the prior year. Yesterday, as I noted on the earnings call, and Tree (sic) [LendingTree] issued 2020 guidance for another year of double-digit revenue and adjusted EBITDA growth.

Turning over to Liberty Broadband. It was a great year for Charter. They created over 1.1 million new customer relationships and net added over 1.4 million Internet customers. They added over 900,000 mobile lines and plan to begin offering 5G in Q1. For the full year, cable adjusted EBITDA grew 6.6% despite it being a nonpolitical advertising year, and cable free cash flow grew by over 100%. We expect the cable EBITDA growth will, combined with declining capital intensity and a disciplined capital deployment strategy, will continue to drive continued strong free cash flow, particularly on a per share basis. We do expect cable CapEx intensity in 2020 to continue to decline from the 15% in 2019.

So with that, let me turn over to Brian to further discuss the financials.

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Brian J. Wendling, GCI Liberty, Inc. - Principal Financial Officer, Senior VP & Controller [4]

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Thank you, Greg. At quarter end, GCI Liberty had consolidated cash and cash equivalents of $570 million, which includes $61 million of cash at GCI. The value of the public equity securities at GCI Liberty as of today's close was $9.4 billion, which includes our $2.8 billion interest in Charter, $5.7 billion interest in Liberty Broadband and $1 billion interest in LendingTree.

At quarter end, GCI Liberty had a total principal amount of debt of $3.2 billion, which includes a $1.3 billion margin loan outstanding against its Liberty Broadband shares, the Charter exchangeable debentures and $1.4 billion of debt including finance leases and tower obligations at GCI.

In the fourth quarter, GCI Liberty increased borrowings under the Liberty Broadband margin loan by $400 million. Proceeds were used to repay a portion of the GCI senior credit facility and for general corporate purposes.

GCI's leverage at quarter end, as defined in its credit agreement, was 5.1x compared to a maximum allowable leverage of 6.5x. Note that the above amounts exclude the indemnification obligation and preferred stock, which are separately identified in the cash and debt table on the release.

On our 10-K that's filed later, you will notice that GCI is remedying a material weakness in its internal controls over financial reporting. The material weakness resulted from an aggregation of issues identified in IT general controls over access to various systems as well as issues in the design and operation of business process controls. Our control issues persist. We are working toward remediation and are implementing various activities to strengthen the control environment going forward, including process redesign, enhanced training and personnel development. We note that the issues were not an external breach and did not result in any material misstatements in our reported financial results.

Before I hand it over to Peter, there are 2 significant Rural Health Care events that impacted GCI's results in the fourth quarter that I'd like to walk through. First, in December of 2019, GCI became aware of compliance issues on certain active and expired RHC contracts. Because of these issues, we have accrued a loss of approximately $17 million to SG&A in the fourth quarter. We continue to work with the SEC to resolve this issue, and you can find much more disclosure around this in our 10-K.

Separately, on February 19, 2020, the SEC issued an order, which granted one of GCI's RHC customers' appeal to reverse a previous funding denial, which have resulted in a loss of approximately $21 million that we recognized in the first quarter of 2019. This new SEC order led to the reversal in the fourth quarter of the $21 million previously recognized loss. We will evaluate in the first quarter of 2020 to determine what amount of revenue related to this contract for the last 9 months of 2019 and going forward into 2020 we can recognize.

GCI has continued to provide service for all periods, and this will be taken into account in our analysis. At this point, we would expect to recognize all or the majority of this revenue, barring new information from the SEC. The loss accrual and reversal together resulted in a net $4 million benefit to GCI's adjusted OIBDA in the fourth quarter and a $17 million negative for the full year.

With that, I'll turn it over to Pete to talk about GCI's operating results in more detail.

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Peter J. Pounds, GCI, LLC - Senior VP, CFO, Secretary, Treasurer & Director [5]

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Thank you, Brian. Revenue was down in the full year 2019 as compared to 2018 primarily due to reductions in consumer video and voice as well as business wireless and video revenues. When comparing the fourth quarter results, 2019 Q4 revenue was down 1% primarily based on reduced business video revenue from a lack of political advertising revenue in a nonelection year.

Adjusted OIBDA was down $10 million or 4% for the year. Excluding the RHC matters Brian noted, it would have increased $7 million or 3%. For the fourth quarter, we showed strong adjusted OIBDA year-over-year growth of $13 million or 21%. Adjusted OIBDA would have been up $9 million or 15% even without the benefit of the RHC matters Brian discussed. This adjusted OIBDA improvement is mostly due to our focus on cost efficiencies.

Moving on to consumer. We're just starting to see signs of life in the Alaskan economy after a few years of flat cable modem subscribers. We finally had 2 great quarters in a row of sequential cable modem subscriber growth. In the fourth quarter, we grew 2,400 data subscribers and continue to move customers up the product stack, which helped us reach a 5% and 6% growth rate in consumer data revenue on a quarterly and annual basis, respectively. Consumer wireless revenue was up slightly due to increased handset sales. We continue to make our Anchorage 5-band 5G upgrades, which we expect to complete this summer.

On the business side, revenue was down slightly in the fourth quarter and full year, with losses in wireless, voice and video offsetting good performance in business data. The decline in wireless was due to lower backhaul and roaming revenue. The video losses were due to nonelection year advertising revenue declines. On the data side, revenue increased in the fourth quarter due to additional services provided to our health care and education customers and was flat for the full year as the loss of revenue from the previously mentioned RHC customer offset these additional services.

For the year, we invested approximately $133 million in capital expenditures. Expenditures were primarily for improvements to our wireless, fiber and coax networks. We expect to spend a similar amount in 2020.

I'll now hand the call back over to Greg.

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Gregory B. Maffei, GCI Liberty, Inc. - CEO, President & Director [6]

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Thank you, Brian, and thank you, Pete.

We have scheduled our 2020 Investor Meeting for Thursday, November 19 in New York. So please mark your calendars.

As always, we appreciate your continued interest in GCI Liberty. And we look forward to chatting with you next quarter, if not before. And with that, operator, I'd like to open up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Michael Rollins, Citi.

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Michael Rollins, Citigroup Inc, Research Division - MD and U.S. Telecoms Analyst [2]

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Curious if you could discuss, at the GCI level, what the most appropriate target leverage ratio should be for the company and the capacity you would have to either increase investments or repurchase stock or consider other usage for the capital?

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Gregory B. Maffei, GCI Liberty, Inc. - CEO, President & Director [3]

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Pete will take that. As I said -- Laura, why don't you talk about where we are in terms of leverage, both in the constraints we currently have at the GCI level, given covenants?

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Laura Baldi;Vice President & Assistant Treasurer, [4]

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Sure.

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Gregory B. Maffei, GCI Liberty, Inc. - CEO, President & Director [5]

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This is Laura Baldi, our Treasurer.

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Laura Baldi;Vice President & Assistant Treasurer, [6]

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So GCI operates under both the credit agreement and some public bonds. With respect to the credit agreement, we are at roughly a 5.1x total leverage ratio using that metric. On the bond covenants, we are approximately 5.5x versus a 6x covenants. Obviously, we've seen some fluctuations in it, excuse me, seeing some fluctuations in the leverage covenants due to the write-offs and then the reversals of the RHC issues. And we are working towards reducing those covenants over -- I mean the calculations over time. Please note that RHC issues that were effective in first quarter '19 will begin to anniversary off this quarter -- in the first quarter, sorry. And that will improve these calculations going forward.

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Peter J. Pounds, GCI, LLC - Senior VP, CFO, Secretary, Treasurer & Director [7]

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Well, I think -- thank you, Laura. And I think to note what is the right level, given the fluctuations potentially in our regulatory matters, we have been conservative against what this might be. And we're probably at the levels, and we try and build a little cushion. Particularly at various times, we had incurrence issues. We're out of that now, but we want to make sure that we don't have those issues. And the regulatory fluctuations have made that harder.

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Michael Rollins, Citigroup Inc, Research Division - MD and U.S. Telecoms Analyst [8]

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And just an operating question. In Alaska, do you find that there's a greater sensitivity to natural resource pricing, for example, like the oil market, whether it's on the business side or the consumer side of the cable business? Just curious how to think about some of those sensitivities over time.

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Gregory B. Maffei, GCI Liberty, Inc. - CEO, President & Director [9]

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Well, if I understand your question correctly, you're basically asking how much of the price of oil drive business activity in Alaska. And I think there are people on it from the GCI side who could certainly be more articulate, but the answer is quite a lot. And particularly with some lag on what projects get started, what things get built out and what -- particularly in areas like the Northern slope, what people do is very much tied to where they think where oil has been, where oil will be. I don't know, Peter, if -- Ron, you want to comment further?

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Ronald A. Duncan, GCI, LLC - Co-Founder, CEO & Director [10]

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This is Ron. I'll just add, there's a substantial damper between current fluctuating oil prices in the climate in Alaska. Most oil revenue in Alaska comes to us by being recycled by the state government. So low oil prices have an impact on state budget deficits that really aren't reflected immediately in the economy. And the companies that are investing on the north slope are using a very long-term horizon that's unlikely to be influenced by short-term perturbations in the per-barrel price of oil. Obviously, if it stays down where it is, that has a long-term impact. If this is a 3- or 6-month cycle, we won't see much results from it.

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Operator [11]

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Next up, we'll hear from James Ratcliffe, Evercore ISI.

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James Maxwell Ratcliffe, Evercore ISI Institutional Equities, Research Division - MD & Senior Analyst [12]

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Two, if I could. There's a comment in the release that there's an impairment loss of $167 million related to wireless licenses. And can you just talk about what drove that reassessment about long-term wireless revenue? And secondly, the -- on the Liberty Broadband side, the Newhouse proxy is coming up next May. It looks though like, if I'm doing the math right, that you should be pretty close to, if not over 25% by then anyway, at least with the GCI Liberty's help. But if you could just -- any thoughts on how you plan to approach that?

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Gregory B. Maffei, GCI Liberty, Inc. - CEO, President & Director [13]

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Sure, James. I'll take the second question first and let -- we'll divvy among who's -- I think it's going to be Brian who's going to answer on the wireless question. But on the Liberty Broadband question, I think you rightly note that proxy will expire. I think there are several potential remedies to ensure that we don't have regulatory issues around the Investment Act of 1940. Potential remedies could first be extending the proxy. I don't know whether the Newhouse still want us involved. But my guess is they do, given that they have been largely holding their percentage constant and selling into the marketplace. Having things that would cause us to be either sellers or less involved would probably not be a plus for them. And more importantly, I think John Malone, in particular, and the Newhouse families have a partnership for 30 years, that's been very successful. And this is -- this Charter investment has worked out well for both parties. So I suspect they might be willing to extend, but we have not really talked about that.

Secondly, as you rightly know, the -- Charter continues to buy back stock and could very well, depending on the rate of their repurchases, we could very well end up over 25% on our own when you combine the monies that we have and the votes that come across from GCI Liberty to Liberty Broadband.

And lastly, there are things we could certainly do, including buying more stock in Charter directly. We intended to put our purchases of -- to Liberty Broadband because it trades at a discount, but we could do things you've seen us do. For example as we did with Tree, use a relatively collared purchase that is financed that would not cause us to have a massive outlay of capital, would give us some upside in the stock and some downside protection, both, and get us over the 25% hurdle.

So while it's certainly something we pay attention to, I think we have a lot of ways to solve any regulatory issues related to this that may arise.

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Brian J. Wendling, GCI Liberty, Inc. - Principal Financial Officer, Senior VP & Controller [14]

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And then on the wireless impairment question, as required by GAAP, that at the end of each year is you're required to look at all your various nonamortizing intangibles. So it's a standard process that we went through. We won't disclose. We're going through too many of the details on the various variables that drive that valuation. But there was increased uncertainty related to certain customers that flow through the valuation process, which resulted in the impairment.

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Operator [15]

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Our next question today will be from Zack Silver, B. Riley FBR.

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Zachary Alan Silver, B. Riley FBR, Inc., Research Division - Associate [16]

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Okay. Great. I know that there are a lot of moving pieces on the RHC, both the plus and the minus you guys disclosed today. But wondering if you could sort of directionally give us a sense of how that may impact OIBDA in 2020?

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Gregory B. Maffei, GCI Liberty, Inc. - CEO, President & Director [17]

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I think you would expect, all else being equal, that we should be receiving positive impacts on that. We -- the contracts that were suspect, we took the $17 million reserve on. There is a potential we could end up with a larger reserve on that. But I think we're comfortable we have the right reserve based on the facts and circumstances we know. You've seen that we reversed the $21 million. There is more -- roughly $3 million a quarter that we were undertaking that are sitting -- stored on our balance sheet for...

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Brian J. Wendling, GCI Liberty, Inc. - Principal Financial Officer, Senior VP & Controller [18]

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3 quarters.

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Gregory B. Maffei, GCI Liberty, Inc. - CEO, President & Director [19]

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3 quarters' worth. So there's $9 million more that is sitting there in dispense. The variables around that are what reimbursement rate we get from the FCC. If we were to get the same reimbursement rate that we received, the $17 million revenues, we would recognize all of that money. So on the margin today, you'd have to think that we are more likely than not to receive revenue rather than -- or receive revenue off the balance sheet from those FCC issues rather than we would not incur new issues. I don't know if anyone else, Brian, Ron or Pete, wants to add to my answer there.

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Brian J. Wendling, GCI Liberty, Inc. - Principal Financial Officer, Senior VP & Controller [20]

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Well summarized.

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Zachary Alan Silver, B. Riley FBR, Inc., Research Division - Associate [21]

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Yes, that's helpful. And then more of a higher level one, just given the T-Mobile/Sprint decision recently, big horizontal merger, I would love to hear your take on -- Greg or Ron or whoever, implications for M&A -- large-scale M&A at Charter. Does this precedent with this decision open the door for things that you may have not thought would have been possible before?

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Gregory B. Maffei, GCI Liberty, Inc. - CEO, President & Director [22]

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Brian, do you want to add any comments? Or…

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Ronald A. Duncan, GCI, LLC - Co-Founder, CEO & Director [23]

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I think that was more targeted towards the Charter level, like T-Mobile -- the T-Mobile deal is clearly good for GCI by -- T-Mobile is our largest roaming partner, and we get a lot of benefit from them. We will have access to additional spectrum that comes to us through their merger with Sprint, which we will be able to deploy in Alaska. And it also will have a near-term revenue effect to replace some of the roaming revenues that we weren't getting from Sprint. So from a GCI perspective, it's a big win.

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Zachary Alan Silver, B. Riley FBR, Inc., Research Division - Associate [24]

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Sounds interesting.

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Brian J. Wendling, GCI Liberty, Inc. - Principal Financial Officer, Senior VP & Controller [25]

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Looking at the larger issues about what it might mean for Charter, I think on the margin, it was probably a slight negative, not enormous just because you have a stronger competitor. But on the other hand, it may have meant that a less -- a slightly less competitive environment is maybe an opportunity for Charter. So you weigh all those -- those 2 pieces, hard to know for certain.

What does it say about what are some other implications, without claiming to have complete presence by any means. The fact that the states were beat back is probably a positive for imagining other large-scale deals. The fact that people were very interested in seeing 5G rolled out, and what that might mean about other combinations and the willingness to overlook potential detriments in the deal or potential problems with the deal in pursuit of enabling 5G, that might portend things that we could do otherwise. But I'm not sure it's a massive impact one way or another. We'll see. The stronger T-Mo -- is a stronger T-Mo a real threat? I think that's the biggest issue.

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Zachary Alan Silver, B. Riley FBR, Inc., Research Division - Associate [26]

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Yes, that makes sense.

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Operator [27]

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Next up, we'll hear from John Melo, SunTrust.

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Michael Patrick Kerrane, SunTrust Robinson Humphrey, Inc., Research Division - Senior Fixed Income Research Analyst [28]

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This is Mike Kerrane from SunTrust. Most of my questions have been asked and answered. But I just wanted to ask you if I could get more color on the $400 million of additional margin loans? I mean what's the -- if you can remind me like what's the rate that you get on those margin loans? What I'm just trying to figure out is whether it makes sense to pay down more debt with those types of loans, whether it's revolver or the [$67 million and extra $25 million]?

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Laura Baldi;Vice President & Assistant Treasurer, [29]

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It's Laura Baldi again. The loans that we pay -- a spread of LIBOR plus 185 on the margins from this and we could use approximately -- to partially repay back LLC facility, which is (inaudible).

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Brian J. Wendling, GCI Liberty, Inc. - Principal Financial Officer, Senior VP & Controller [30]

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And we did that. And the presence of this loan is for (inaudible) some regulatory reasons.

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Operator [31]

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And our final question comes from Matthew Harrigan, Benchmark.

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Matthew Joseph Harrigan, The Benchmark Company, LLC, Research Division - Senior Equity Analyst [32]

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Apologies for asking the same slightly indelicate question as last quarter, but you still have to cope with the still fairly hefty discounts on LBRDA and GLIB. A. And you can't get a better ruling from IRS anymore. Is there anything in Washington, given all the uncertainty, that would make it desirable to collapse the Russian ball structure this year, particularly as the Alaskan asset has shown clearly better performance, although I imagine you probably couldn't even necessarily complete a regulatory review before if there was a change in Washington, if there was a change in Washington?

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Gregory B. Maffei, GCI Liberty, Inc. - CEO, President & Director [33]

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That, we clearly obviously have no plan or intent on that, but we have certainly read that others have suggested it. And some of the logic for that might be just reducing overhead, taking advantage of various discounts, consolidating some of our holdings in one spot. That would obviously be subject to some issues around tax, some issues around probably investment company. I do not believe in the way you're sort of suggesting, Matthew. I don't believe -- always ready to be surprised, that there'll be significant FCC or DOJ-type issues, antitrust. I think most of the issues will be largely around IRS and SEC to work through.

Thank you very much to everyone who was on the call. Thank you to our friends up in Anchorage who -- for their comments. Thank you to everyone here in Colorado. And as I said, we look forward to speaking with you all again next quarter, if not sooner.

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Operator [34]

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Ladies and gentlemen, that does conclude today's conference. Thank you all for your participation. You may now disconnect.