U.S. Markets closed

Edited Transcript of GLIBA earnings conference call or presentation 11-Nov-19 10:00pm GMT

Q3 2019 Liberty Broadband Corp and GCI Liberty Inc Earnings Call

ANCHORAGE Dec 2, 2019 (Thomson StreetEvents) -- Edited Transcript of GCI Liberty Inc earnings conference call or presentation Monday, November 11, 2019 at 10:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* 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

* Peter J. Pounds

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

* Ronald A. Duncan

GCI, LLC - Co-Founder, CEO & Director

* Tina M. Pidgeon

GCI, LLC - General Counsel, Chief Compliance Officer & Senior VP of Governmental Affairs

================================================================================

Conference Call Participants

================================================================================

* Bentley Cross

TD Securities Equity Research - Associate

* James Maxwell Ratcliffe

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

* Matthew Joseph Harrigan

The Benchmark Company, LLC, Research Division - Media and Entertainment Equity Analyst

* Michael Rollins

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

* Zachary Alan Silver

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

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for standing by. Welcome to the GCI Liberty 2019 Third Quarter Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded today, November 11, 2019.

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, ma'am.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

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 margin. Information regarding the comparable GAAP metrics along with 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 the President and CEO, Greg Maffei.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Courtnee, and good afternoon to all of you on the line.

Today, speaking on the call, we will have GCI Liberty's Principal Financial Officer, Brian Wendling; and GCI's CFO, Pete Pounds. Also during Q&A, we will be available to answer questions, if there are any, related to Liberty Broadband.

So starting with GCI Liberty. GCI's third quarter had a series of solid results. Revenue and adjusted OIBDA grew as the team began to see benefits of the strategic changes they've made to focus on driving value in the core Alaska business, continue to move customers up the stack to higher bandwidth data products and improve their wireless, cable modem and video offerings. Business data revenue grew in part driven by higher sales to schools and libraries and health care customers. And the 5G build-out that we are underway with Ericsson in Anchorage is moving with expected completion of mid-2020.

Looking now at LendingTree and the third quarter results there. They experienced record levels of revenue, variable marketing margin and adjusted EBITDA. The mortgage business continue to gain momentum and return to growth, and the insurance business continue to move forward in a good fashion. They are -- the diversification in their portfolio has allowed the team to weather segment challenges while continuing to invest in improving the marketing machine and leading to increased guidance for the year.

Over at Liberty Broadband, Charter had strong third quarter results, continue to grow revenue and customer relationships as the team improves their consumer experience. They're now offering minimum speeds of 200 meg in 60% of footprint. And they launched advanced in-home Wi-Fi in Austin and will begin rolling out in additional markets in the fourth quarter.

We ended the quarter with all of 800,000 spectrum mobile lines. EBITDA growth and declining capital intensity led to 124% growth in cable free cash flow, decreased CapEx guidance for the year to below $7 billion, and they expect the CapEx to continue to decline in 2020. In addition, they repurchased $3 billion of shares in the quarter.

With that, let me turn it over to Brian to discuss the financials in more detail.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Greg.

At quarter end, GCI Liberty had consolidated cash and cash equivalents of $410 million, which includes $82 million of cash that's held directly at the GCI level. The value of the public equity securities at GCI Liberty as of today's close was $8.7 billion, which includes our $2.5 billion interest in Charter, $5 billion interest in Liberty Broadband and a $1.2 billion interest in LendingTree. At quarter end, GCI Liberty had total principal amount of debt of $3 billion, which includes a $900 million margin loan outstanding against its Liberty Broadband shares, the Charter exchangeable debentures and $1.6 billion of debt, including financing leases and -- finance leases and tower obligations at GCI.

GCI's leverage, as defined as credit agreement, was 6x at quarter end compared to a maximum allowable leverage of 6.5x. As discussed in previous quarters, GCI exceeded the incurrence-based maximum leverage threshold in the terms of its senior notes and, therefore, was unable to access additional funding under the revolving portion of the senior credit facility.

As noted in the 10-Q, GCI now has the ability to access additional funding under the revolving portion of the senior credit facility so long as GCI is in compliance with the senior credit facility covenants after giving effect to any additional borrowings. Based on the current leverage of 6x, GCI has the ability to access $67 million under the revolver. With our cash on hand at quarter end and availability under the revolver and the broadband margin loan, we are very comfortable with our liquidity position.

Now I'll turn it over to Pete.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Brian.

Starting with our 5-band 5G upgrade. In the second quarter, we announced our partnership with Ericsson to build the first 5G network in Alaska. That network is currently being built, and the CapEx for this year is included in our 2019 guidance. We expect the Anchorage build to be completed in mid-2020. In the meantime, customers are already starting to see improvements as each new site gets turned on.

Onto an update of the Alaska state economy. The oil and tourism industries are going well in 2019. However, we are still facing challenges in the economy as protracted state government debates around permanent fund dividends and large budget cuts have reduced confidence in the state economy. Overall, jobs in Anchorage are up 400 from the prior year as of the end of September, a small but helpful gain.

With regard to the outstanding RHC matters, we continue to pursue open appeals with the FCC but don't have any color at this time on the timing or resolution of those appeals.

Third quarter operating results were strong as we began to see the benefits of product enhancements and operating efficiency initiatives. Revenue for the quarter increased 3% on a year-over-year basis due to increases in consumer, data and wireless. Adjusted OIBDA was up 5% on a year-over-year basis due to improvements in both revenue and SG&A expenses.

Last quarter, we noted that we were able to roll out a number of product changes after being unable to do that for quite some time during the billing system conversion. New launches include enhancement to our prepaid wireless, postpaid wireless, video and cable modem products. Those changes were significant in driving the revenue improvements in the quarter. We also mentioned efficiencies on the expense side that we made during the second quarter in order to narrow our focus towards the core Alaska business. Those changes also led to the significant expense reductions in the third quarter.

Consumer. Consumer revenue was up 5% with increases in data and wireless being partially offset by declines in video and voice. The wireless growth was driven by lapping the 2018 billing conversion, where we credited 1 month of service for many of our customer accounts as we move them from billing in arrears to billing in advance. The data growth was due to higher ARPUs as our customers increasingly upgraded to our premium packages. This quarter, we also added a net 500 new consumer data customers, and we're pleased with the sequential increase.

Business. Business revenues were flat for the quarter. We continue to see declines in the video business, but we are seeing gains in the data business due to up-sales in our health care business. These gains in data were partially offset by the closure of the lower 48 time and materials business last quarter, and the ongoing headwind of the RHC customer that was denied funding earlier this year.

Finally, CapEx. For the year, we have invested $97 million in capital expenditures. Expenditures were primarily for wireless network improvements, fiber and hybrid fiber coax improvements. We expect to spend approximately $140 million in CapEx in 2019. Q4 CapEx is generally elevated as we push to complete projects before the ground freezes at the end of the year.

Now I'll turn it over to Greg.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you for that, Pete.

We are -- as been noted several times today, we have our investor meeting next week. We look forward to seeing many of you there. There is a link to register for that on our homepage. We appreciate your continued interest in GCI Liberty. And with that operator, I'd like to open up for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) First, we will hear from James Ratcliffe with Evercore ISI.

--------------------------------------------------------------------------------

James Maxwell Ratcliffe, Evercore ISI Institutional Equities, Research Division - MD & Senior Analyst [2]

--------------------------------------------------------------------------------

Three, if I could. First of all, Pete, on the GCI side, if you decide at some point or the appeals fail on the RHC customer, where funding has been canceled, how much OpEx is associated with providing that service to that customer? And sort of how much benefit could you see on that? Secondly, Greg, this is, I guess, the second call in a row that you've actually sort of mentioned the operating performance of Tree. In the past, you've seemed to have regarded that more as a potential monetization source. Should we read anything into that about your views on that stake? And third, you've seen the -- both the Liberty Broadband and, by proxy, the GCI Liberty spreads versus Charter move out pretty substantially in the last month or 6 weeks. Any thoughts on what might be driving that?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Pete, do you want to go first?

--------------------------------------------------------------------------------

Peter J. Pounds, GCI, LLC - Senior VP, CFO, Secretary, Treasurer & Director [4]

--------------------------------------------------------------------------------

Sure. So first, on the question of OpEx savings potentially due to the customer that did not get funded for RHC. Really, the significant cost there is the massive capital expenditure to build the network. And secondarily, it is to maintain that network. That is a network that will stay in place. There's no earth stations or microwave towers that will be turned down as a part of that. And so I would not expect to see a meaningful reduction of SG&A, if those circuits were turned down.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

And as far as the operating -- we're talking about the operating performance of Tree. I think it's somewhat a reality that Tree, not only because it's now inside a smaller entity, GCI Liberty, but also more importantly, it's grown so much in value. I think we discussed it at the bottom, when we inherited it in the '09 recession, I think our stake was worth $17 million. Now it's well, well, well over $1 billion. Credit to the team there.

So it's important both because of their own efforts and where it sits are more noticeable. They're going to be at our Investor Day. We certainly have no plans to use it as a source of capital. We're happy being a major shareholder at Tree and enjoying the benefits.

As far as the spread between Charter and GCI Liberty and the like, I really don't know why that has moved out so much. I think it probably relates to just the pace at which Charter has been buying back stock relative to the modest toe dips that we've done, either with selling puts or buying stock, which have been far more modest in the efforts, a little bit like the situation, but not quite as much as the situation in Sirius and Liberty Sirius where the share repurchases of SIRI have been more aggressive than our Liberty Sirius repurchases. But I don't have any great insights.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

And moving on, we'll hear a question from Zack Silver with B. Riley FBR.

--------------------------------------------------------------------------------

Zachary Alan Silver, B. Riley FBR, Inc., Research Division - Associate [7]

--------------------------------------------------------------------------------

Okay. Great. One -- first one for Pete. Over the summer, you mentioned that the FCC had announced some changes to the RHC reforms. You said it was too early to tell directionally what impact that would have. I'm curious, 3 months later, if you have any idea how that's going to break for you guys.

--------------------------------------------------------------------------------

Tina M. Pidgeon, GCI, LLC - General Counsel, Chief Compliance Officer & Senior VP of Governmental Affairs [8]

--------------------------------------------------------------------------------

This is Tina Pidgeon, GCI's General Counsel. It is still early to tell. There's a process that has to be undertaken by the Universal Service Administrative Company. The idea of setting rates at a median is one that we're looking very closely at. But really, that data has to be collected, and it involves some additional decisions that have to be made in the details before I think anyone would know what the outcome of that new process is going to be.

--------------------------------------------------------------------------------

Zachary Alan Silver, B. Riley FBR, Inc., Research Division - Associate [9]

--------------------------------------------------------------------------------

Great. And then for Greg, I hate to ask 2 questions on repurchase in the same day. But on GCI, it's been, I guess, since May that the buybacks have been paused there. I'm just curious as to what's driving that. And how should we think about buybacks going forward?

--------------------------------------------------------------------------------

Gregory B. Maffei, GCI Liberty, Inc. - CEO, President & Director [10]

--------------------------------------------------------------------------------

Certainly, we'll look at buybacks and, as the prior caller noted, there is a spread there between the value of what we think GCI is worth than the underlying Charter, et cetera. The -- I think that pause has been somewhat related to the -- where our financing sits at GCI and the fact that we've been restricted from some of the access to some of those flows in our lines. We've had -- we did some refinancings, which stabilized the situation but didn't necessarily give us access to the incremental lines and free cash flow being generated. So we're being probably cautious on that front even with the discounts there. This is one where that opportunity probably is going to exist for a little while, so we'll see how we're able to take advantage of in the future.

--------------------------------------------------------------------------------

Operator [11]

--------------------------------------------------------------------------------

Next question will come from Michael Rollins with Citi.

--------------------------------------------------------------------------------

Michael Rollins, Citigroup Inc, Research Division - MD and U.S. Telecoms Analyst [12]

--------------------------------------------------------------------------------

Two questions. First, can you describe if there are opportunities for GCI and Charter to leverage each other, whether it's for technology, purchasing power as well as marketing best practices. And then second, in the quarter itself for GCI, did the increase in the USF factor for pass-through charges have any impact on the revenues across the segments?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

So I'll take a cut at the first one, and anyone from GCI who would like to add, please do. I think there's been ongoing dialogue about when GCI -- probably more when GCI has issues or where they're headed or what technologies they want to utilize. They've been trying to leverage expertise at Charter and experience because, in many cases, given Charter's scale, they've either done more work on it, or they may have done earlier work on it. And that dialogue has gone on in several topics. I expect that's going to continue. On the other hand, Charter, while they're friendly, they -- it's not clear why they would extend or have the ability to extend discounts on purchasing or something like that. They don't have a common ownership. They have some common parentage, but they're not commonly owned in the same way, right? So that's more of a friendly relationship. I think one in a contractual or an ownership relationship, which generates those kind of benefits. But I don't know if anybody from GCI would like to comment further.

--------------------------------------------------------------------------------

Peter J. Pounds, GCI, LLC - Senior VP, CFO, Secretary, Treasurer & Director [14]

--------------------------------------------------------------------------------

No, nothing further on that one, Greg. I would note on the question on the USF contribution factor changes. Those happen typically on a quarterly basis, and none of that would have risen to the level of any changes of note on the publicly filed information.

--------------------------------------------------------------------------------

Operator [15]

--------------------------------------------------------------------------------

Our next question will come from Matthew Harrigan with Benchmark.

--------------------------------------------------------------------------------

Matthew Joseph Harrigan, The Benchmark Company, LLC, Research Division - Media and Entertainment Equity Analyst [16]

--------------------------------------------------------------------------------

Three questions. One, you're unique, I guess, among the U.S. MSOs in being integral to 5G build with Ericsson in Anchorage. Have you drawn any surprises from that in terms of the applicability of the cable to policy for 5G and small cells? I mean that's actually an area where you could be the instructor, I guess, to a number of other people. Secondly, on the seasonality, last year, your revenues were up in Q4, but your expenses were up significantly more. Would that apply this year as well? Or is that just some noise in the numbers? And then I guess thirdly, for Greg, of all the political mess in the U.S., are you getting increasingly nervous on possible risk to telecom regulation over a longer period of time?

--------------------------------------------------------------------------------

Ronald A. Duncan, GCI, LLC - Co-Founder, CEO & Director [17]

--------------------------------------------------------------------------------

Well, this is Ron Duncan. I guess I'll take the first piece on 5G, and then I'm going to let Greg back, clean up on the politics. We're early in the process to really be able to demonstrate the benefits of combining a 5G wireless network with the extensive hybrid fiber coax plant that we have. We'll know a lot more about how well that actually works by the first half of next year. But clearly, our vision is to leverage the small cells of 5G with the extensive spectrum holdings that we have and the virtually unlimited backhaul that we're able to deploy throughout our communities, all the way down to the subscriber residence level. So we see a real synergy there in marrying the 2 on the production front. We also believe there are important synergies in tying those products together from a consumer perspective. But in terms of whether we're ready to teach that class, I'd say we have to see how it plays out in the first half of next year.

Pete, did you want to deal with seasonality?

--------------------------------------------------------------------------------

Peter J. Pounds, GCI, LLC - Senior VP, CFO, Secretary, Treasurer & Director [18]

--------------------------------------------------------------------------------

Yes. On seasonality, I would say that, historically, we've been very seasonal on the revenues, but that has declined fairly significantly over the last few years. So the revenue side, I wouldn't expect much seasonality there. The expenses, you do see a little bit of seasonality in expenses with Q4 and Q1 being a little bit heavier on expenses than Q2 and 3. Q4 last year, probably had a little more of the onetimer, unusual stuff than normal. But we're not giving guidance on what those numbers are, other than the note that you are correct, there is some seasonal higher numbers in expenses in the fourth quarter there.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

And I'll comment first, but rather than discussing the politics, I'll comment on -- I mentioned a minute ago, that in many cases, Charter has done more work on a topic just because of their scale. This is a case where, because of the 5G installation, I think there's a lot that certainly, we at Liberty can learn and perhaps they can learn at Charter as well. And so obviously, we watch what's happening with 5G with great interest and having an installation on our own will be a very powerful learning zone. On the politics, there's always risks around politics. That's just the way it is. I'm not sure how many actionable items we have because of that, but we certainly watch the -- all of them with interest. In general, who would have guessed that the -- in a time when the DOJ was more of a problem or was less of a problem and the FCC was more, we've now got it reversed. So who knows where this will all go?

--------------------------------------------------------------------------------

Operator [20]

--------------------------------------------------------------------------------

And we will move on to our final question from TD Securities, we have Bentley Cross.

--------------------------------------------------------------------------------

Bentley Cross, TD Securities Equity Research - Associate [21]

--------------------------------------------------------------------------------

Quick question for Greg on Liberty Broadband. Just thoughts as we look out forward to the expiration of the Advance/Newhouse Proxy. Is there anything to be done there? Or should the buybacks take care of themselves so that your ownership issue and that 25% threshold is a nonissue altogether?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. I don't know if it's a nonissue. I would point, there are probably 3 ways it gets solved. One is some sort of a renewal of that proxy. Certainly, good relations between particularly John Malone and the Newhouses and commonality there. Secondly, as you rightly know, Charter continues to repurchase, and that alone may drive us over the 25%. And third, we've, in the past, used relatively efficient ways to increase our ownership and not take massive amounts of economic risk with collars and the like that could drive us over the 25% on our own. So I can't say there's no risk, but it's not one that keeps me up at night by any means.

So thank you to all of the listeners and questioners, and as we said, we hope to see many of you next week in New York. And if not, we'll speak again next quarter, if not beforehand. Thank you very much, operator.

--------------------------------------------------------------------------------

Operator [23]

--------------------------------------------------------------------------------

And once again, ladies and gentlemen, that does conclude our call for today. Thank you for joining us. You may now disconnect.