Earnings Call Transcript - LBRDA Q3 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by. Welcome to the GCI Liberty 2020 Q3 Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. As a reminder, this conference is being recorded November 09. I would like to now turn the conference over to Courtnee Chun, Chief Portfolio Officer. Please go ahead.

Courtnee Chun, Chief Portfolio Officer

Thank you. Good morning. Before we begin, we'd like to remind everyone 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 statements 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 margin. Information regarding the comparable GAAP metrics, along with required definitions and reconciliations, including preliminary note and schedules 1 and 2, can be found in the earnings press release issued today, which is available on the GCI Liberty website. Please remember to register for our Virtual Liberty Investor Meeting. On Thursday, November 19, we will cover Liberty Media and Liberty TripAdvisor. On Friday, November 20, will include Qurate, GCI Liberty and Liberty Broadband from 11 A.M. to 2 P.M. Eastern on both days. After the presentations on both days, John Malone and Greg Maffei, along with presenting CEOs, will host a Q&A session. Please pre-submit questions by Friday, November 13 to [email protected]. You can find a link to register and all of these details on our homepages. Now, I'd like to turn the call over to Greg Maffei, our President and CEO.

Gregory Maffei, President and CEO

Thank you, Courtnee, and good morning to all. Today, speaking on the call, we will also have GCI Liberty's Chief Accounting and Principal Officer, Brian Wendling; and GCI's CFO, Pete Pounds. Also during Q&A, we will be available to answer questions related to Liberty Broadband and Liberty TripAdvisor. First, I'd like to give a few updates on the proposed combination between GCI Liberty and Liberty Broadband. The HSR waiting period expired on October 9. The FCC approved the transaction on October 23, which will become final on December 2, if there aren't any applicable challenges. We are still waiting on Regulatory Commission of Alaska approval. We filed our application with them on September 16, and are looking to expedite that as quickly as we can. The proxy for the transaction went effective on October 30. And our special meeting for the shareholder vote is scheduled for December 15.

Brian Wendling, Chief Accounting and Principal Officer

Thanks, Greg. At quarter-end, GCI Liberty had consolidated cash and cash equivalents of $553 million, which includes $105 million of cash held at the GCI OpCo level. The value of the public equity securities at GCI Liberty as of yesterday's close was $10.9 billion, which includes our $3.4 billion interest in Charter, $6.4 billion interest in Liberty Broadband and a $1.1 billion interest in 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 the $1.3 billion margin loan outstanding against Liberty Broadband shares, which is fully drawn, the Charter exchangeable debentures and $1.4 billion of debt, including finance leases and tower obligations at GCI. GCI's leverage at quarter-end, as defined in its credit agreement, was 3.7 times compared to a maximum allowable leverage of 6.5 times. GCI had $271 million undrawn borrowing capacity at quarter-end. Note that the above amounts exclude the indemnification obligation to Qurate and the outstanding preferred stock. After quarter-end, GCI, LLC, a subsidiary of GCI Liberty, raised $600 million of senior notes due 2028. The proceeds from this debt raise, along with cash on hand and borrowings under the senior credit facility were used to redeem all outstanding principal of its existing senior notes due 2024 and 2025. GCI, LLC also amended its existing senior credit facility in October, extending the maturity to 2025 and increasing total borrowing capacity to $950 million. You'll likely note that corporate and other expenses were elevated during the quarter, largely due to expenses related to the proposed GCI Liberty and Liberty Broadband combination. And lastly, you will note in our 10-Q, which will be released later today that we sold our interest in Evite during the quarter. With that, I'll turn it over to Pete to talk about GCI's operating results.

Peter Pounds, CFO

Thanks, Brian. Starting with COVID-19. Thus far, we have not experienced any uptick in bad debt expense. At the same time, we've benefited from increased demand for our corporate data network and lower healthcare costs. This has resulted in positive financial outcomes as we remain committed to ensuring we meet all the connectivity needs of our customers. We continue to work with educational facilities to ensure that Alaskan students have the access to the connectivity that they need. With the start of the school year, we worked with school districts across the state to bring connectivity to approximately 4,000 low-income students or students who otherwise would not have had access to school online.

Gregory Maffei, President and CEO

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

Operator, Operator

And we'll go ahead and take our first question now from James Ratcliffe with Evercore ISI.

James Ratcliffe, Analyst

Good morning. Thank you for the question. Greg, considering your role in the cable industry, could you share your perspective on what a split government with a Democratic administration might mean for cable, especially regarding mergers and acquisitions and regulation? Thank you.

Gregory Maffei, President and CEO

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

James Ratcliffe, Analyst

Thank you.

Operator, Operator

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

Zack Silver, Analyst

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

Gregory Maffei, President and CEO

We are currently discussing potential changes to the cap with the company and its directors, which I believe will be fruitful. I want to stress that if we had to sell shares due to our holding structure, it would be treated like a dividend and our tax rate would hover around 8%. Even with a significant discount, while we are not keen on selling our Charter shares, a necessary sale would still leave us 12% ahead in terms of returns if we were to consider further buybacks, which wouldn't be an unfavorable situation. I remain hopeful we will find a positive resolution with the company, but if we cannot, the outcome may not be as bad as it seems.

Zack Silver, Analyst

Okay. That makes sense. And then one more, if I could. Just around fixed wireless. I mean, Verizon continues to be optimistic on 5G Home and soon T-Mo will roll out a pretty aggressive plan with its home internet offering. And just curious, Greg, whether you have had a change of heart around fixed wireless as a competitive threat direct at cable?

Gregory Maffei, President and CEO

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

Zack Silver, Analyst

Got it. Thank you very much.

Operator, Operator

Our next question comes from Bentley Cross with TD Securities.

Bentley Cross, Analyst

A quick question for the GCI folks. Wondering if Alaska Communications' privatization might change any dynamics in the market, or do you have any thoughts on it in general.

Ronald Duncan, CEO

This is Ron. I will take that one. We anticipate an increase in market competition, but it will have a long lead time. It may be several years before they can close deals and make significant investments. I expect we'll see more fiber in their networks. However, we are quite confident in the quality of our products and the advantages of our hybrid fiber coax plant and network design. Together with our bundled offerings, I believe we will remain in a strong position, and it shouldn't significantly affect us. Nonetheless, we are preparing for increased competitive activity in the market once they are established and have made their investments.

Bentley Cross, Analyst

Thanks for the candor.

Operator, Operator

Our next question comes from Matthew Harrigan with Benchmark. Please go ahead.

Matthew Harrigan, Analyst

Thank you. Ajit Pai, despite his libertarian views, highlighted the cable industry's unfair advantage with small cell deployment, arguing that it creates unnecessary duplicative builds from an economic standpoint in the U.S. Considering Verizon's shift towards mid-band growth, do you believe there is a rising awareness among mobile companies, particularly Verizon, about the potential for collaboration with cable companies regarding small cells? Additionally, can you share insights from your experience in Alaska, which offers a unique perspective far from the typical U.S. landscape? Thank you.

Gregory Maffei, President and CEO

Thank you. I missed the first part. Who said we had an unfair advantage?

Matthew Harrigan, Analyst

Ajit Pai, the FCC Chairman.

Gregory Maffei, President and CEO

Yeah. I didn't hear Ajit. Okay. Look, it's nice that the FCC Commissioner thinks that we have the right technology. I believe Charter's goal is to serve its customers well. And for the benefit of the nation, having more ways that people can connect is not a terrible thing. I think we have an excellent service and an excellent network with a lot of capabilities. And I've said that we're looking to extend that network. How 5G interacts and how 5G operates on top of it, I think we could be a good partner. As you note, we already are Verizon's partner through the MVNO relationship. And you've seen us look to extend some of our network capabilities by purchases of spectrum, CBRS spectrum. So, I think they can work pretty well together hand in glove. Ron, I don't know if you would add anything to that based on our 5G experience in Alaska.

Ronald Duncan, CEO

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

Matthew Harrigan, Analyst

Thanks, Greg. Thanks, Ron.

Gregory Maffei, President and CEO

Thank you.

Operator, Operator

Our last question comes from Ben Phillips with Savoie Capital.

Ben Phillips, Analyst

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

Gregory Maffei, President and CEO

I'll let Ben Oren talk about the convertible note.

Ben Oren, Financial Officer

I think with respect to the convertible notes, first call date is in 2023. And so, as we take a look at the ability to refinance those opportunistically between now and that date, continue to watch the Charter share price and determine all the best windows.

Gregory Maffei, President and CEO

We're happy to take it offline if you need more details on that.

Ben Phillips, Analyst

Yeah. I'd appreciate that.

Gregory Maffei, President and CEO

Thank you. I think there's one more question. Is that correct, operator?

Operator, Operator

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

Michael Bunyaner, Analyst

Thank you for including me. Good morning and congratulations on excellent results.

Gregory Maffei, President and CEO

Thank you.

Michael Bunyaner, Analyst

I have a question related to Charter's network. I believe this past quarter over 80% of individuals essentially self-installed, which clearly is changing the economics of servicing an average customer. Could you just walk us through what does that mean in terms of the economics of managing the network on an ongoing basis, because I would think that this would be a significant savings on a per unit basis?

Gregory Maffei, President and CEO

It's a great question. Looking back two years ago, we had about 38% self-install rates, and in the most recent quarter, that has risen to more than 80%. This reflects the hard work of the Charter team in enhancing our self-install capabilities and simplifying the process for customers. The pandemic has also played a role, as many people prefer not to have cable installers come to their homes. Necessity has led to greater convenience, with a shift towards digital and self-reliant solutions. Additionally, some of our competitors were unable to perform installations, which allowed us to stand out with our self-install options. This shift has contributed to the growth of self-installation and significantly reduced our installation costs. However, I'm not sure if this will greatly affect ongoing costs after installation, as network management may not differ substantially. Overall, we've seen both a reduction in costs and an opportunity to gain market share during COVID.

Michael Bunyaner, Analyst

If I may follow up regarding market share penetration, we were at Charter just about 50% of the homes passed. Given the quality of the service, the quality of the install, and now having the call centers based in the U.S., what level of penetration do you think we could achieve over time, and what do you consider a reasonable goal three to five years from now?

Gregory Maffei, President and CEO

I'm uncertain if the Charter management has established that goal or if we have a forecast for it. I know that Tom Rutledge believes it could eventually reach two-thirds penetration, though he did not provide a timeframe. I acknowledge the ambitious goal, as achieving that would mean significant market share gains. I believe cable has an advantage, and we've seen about 8% to 9% growth in our customer count over the last year. I'm not confident that this growth will continue at the same pace, but it indicates the potential for growth, as our market share has likely increased by 2% to 3% in the past 12 to 18 months. I'm unsure how long it will take or how growth might slow as we move out of the pandemic, but I'm optimistic about our capability to increase share, and I think Tom feels the same way.

Michael Bunyaner, Analyst

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

Gregory Maffei, President and CEO

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

Operator, Operator

This concludes today's call. Thank you for your participation. You may now disconnect.