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GCI Liberty, Inc. (NASDAQ:GLIBA)
Q3 2020 Earnings Call
Nov 5, 2020, 11:15 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the GCI Liberty 2020 Q3 Earnings Call. [Operator Instructions]

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 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 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 one and two, 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 two 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 investorday@libertymedia.com. 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.

Greg Maffei -- Chief Executive Officer

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 two 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. The proxy does mention two lawsuits which were filed against GCI Liberty. One has been dismissed and the second is proceeding with expedited discovery. We do not expect the proceedings to delay the closing of the transaction.

With the date set for the vote and based on regulatory approvals we've already received, we now expect the deal to close no later than the first quarter of Q1 2021. Now on the third quarter results, starting with GCI Liberty. GCI had another great quarter. Revenue was up 11%, operating income was up $24 million and adjusted OIBDA was up 27%. Pete Pounds will discuss those results in a little more detail in a moment.

The 5G upgrade in Anchorage is complete and third-party tests have shown that the network is twice as fast as our competition. The company is in a very solid liquidity position with $105 million of cash and $271 million of undrawn capacity under its senior credit facility as of the end of the third quarter. Turning over to Liberty Broadband briefly. We did repurchase 3.4 million shares of Liberty Broadband stock for $488 million at an average price of $142. We consider these repurchases very attractive. And if you look at the look-through price to the underlying Charter, involves a price of $486.

This was a 23% discount to yesterday's close of $634. And given how the market is moving, I suspect it's a bigger discount yet. Charter had another fantastic quarter with outstanding financial results. Consolidated EBITDA grew over 13%. They generated $1.8 billion of free cash flow, up nearly 40%. They added 537,000 residential and small business Internet customers versus 380,000 last year. Over the past 12 months, Charter has added 2.3 million Internet customers. Growth in mobile lines has continued to accelerate as well, and they added 87,000 more in this quarter than the same period last year. Impressively and against most of the industry, they added another 670,000 video subs. Year-to-date, we are up in video subs. During the quarter, Charter repurchased 6.1 million shares for $3.6 billion at an average price of $592 per share.

Charter has shown an amazing ability to operate well under the circumstances, and it's really a testament to the hard work of the team and the investments they've made in various parts of the businesses over the last few years, which have allowed them to operate quite effectively remotely. LendingTree hosted their earnings call this morning and make sure you check out the replay. Lastly, TripAdvisor will host its earnings call tomorrow morning. Please tune into that for an update on their results as well.

And with that, I'll turn it over to Brian to discuss the GCI Liberty financials.

Brian J. Wendling -- Chief Accounting Officer And Principal Financial 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 its 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 -- Senior Vice President, Chief Financial Officer, And Secretary

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. Moving on to the five-band 5G upgrade. Our 5G deployment in Anchorage is now effectively done. We commissioned a drive test on the network in September, and the results are fantastic. Our network was twice as fast as our primary competitor, AT&T, and had substantially fewer dropped calls.

Rural Health Care update. On October 20, 2020, the FCC approved our cost-based rural rates for the funding year ended June 30, 2019 and June 30, 2020. We expect to collect the entire amount and accounts receivable related to these two funding years, approximately $175 million within three to six months. This is a significant milestone that will not materially affect the income statement, but will bring further liquidity to the balance sheet. On October 14, we announced that we won a $25 million federal grant to bring fiber connectivity to the towns of Unalaska, King Cove, Sand Point, Akutan, Chignik Bay and Larsen Bay. In total, this project will cost $58 million, including $33 million of our own money, and it is expected to be substantially complete by the end of 2022. This will greatly improve the connectivity in these locations from the current satellite technology, all the way to fiber to the premise in Unalaska and highlights our commitment to continue to be the premier telecom provider in Alaska.

Now I'll walk through our third quarter results. Revenue was up by $23 million or 11% and adjusted OIBDA increased by $20 million or 27%. Significant customer demand for data, cost-containment initiatives, lower healthcare cost and a continued move away from our lower-margin products, like video and time and materials, has enabled us to grow adjusted OIBDA dollars nearly as rapidly as revenues. On the consumer side, revenue was up 8% with data driving the growth. We gained 3,300 cable modem customers sequentially. Consumer wireless was also up 200 subscribers versus the second quarter despite our normal prepaid subscriber seasonality. With the sale of our broadcast business this summer, we've moved cable advertising sales revenue to consumer video. Absent this movement, consumer video revenues would have been down for the quarter. Over at GCI business, revenue was up 13%.

The growth was largely due to the growth in government, health and education revenue. This was partially offset by the movement of cable advertising sales revenue to consumer. The year-over-year growth of 3,800 cable modems is where you can see the low-cost cable modems that we're providing to school districts for their low-income households. Finally, capex. We spent $102 million thus far in 2020. Our primary capital project for the year, five-band 5G wireless in Anchorage, is effectively complete. Additionally, we're continuing to spend on projects to keep up with our increased data demand. We expect our total capex for this year to be similar to last year.

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

Greg Maffei -- Chief Executive Officer

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.

Questions and Answers:

Operator

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

James Ratcliffe -- Evercore ISI -- Analyst

Good morning. Thanks for taking the question. Greg, given your position in the cable industry, can you give us your thoughts on what, if it turns out, looks to be a sort of split government with a Democratic administration, could mean for cable, particularly in the areas of -- on the M&A front and regulation? Thanks.

Greg Maffei -- Chief Executive Officer

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'd note that during the prior administration, which at various times had Democrat control of all three branches of -- 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 -- Evercore ISI -- Analyst

Thank you.

Operator

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

Zack Silver -- B. Riley -- 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?

Greg Maffei -- Chief Executive Officer

So we are in discussions with the company and directors about modifications to the cap, and I think those will probably be productive. But I wanna emphasize that our tax rate, if we were forced to divest shares because of the nature of how we hold the stock effectively be treated as a dividend treatment, and our tax rate would be 8%-ish and given the 20-plus percent discount, I don't view, while we are not interested in really selling our Charter shares, I also -- a forced sale for which we were still 12% in the money in terms of the trade-off if we did further repurchases would not be the worst result. So while I am optimistic we will reach some resolution with the company that'll be positive, I also note that if we are unable to reach a resolution, it is not the worst outcome.

Zack Silver -- B. Riley -- 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?

Greg Maffei -- Chief Executive Officer

No. I mean, I don't think they've roll out. 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 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 empathizing. 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 -- B. Riley -- Analyst

Got it. Thank you very much. Our next question comes from Bentley Cross with TD Securities.

Greg Maffei -- Chief Executive Officer

Do we have the question, operator, or did we lose somebody?

Operator

Mr. Cross, you now have an open line.

Bentley Cross -- TD Securities -- Analyst

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

Ronald Duncan -- Chief Executive Officer And Co-Founder

This is Ron. I guess I'll take that one. We would expect some increase in the competitive nature of the market. But we'll have a long lead time. It'll probably be several years before they're able to -- I mean, it'll take them a while to close, and then they'll have to make substantial investments. I would expect we'd see some more fiber in their networks. But we're pretty confident in the quality of our product offerings, and the superiority of the hybrid fiber-coax plant and the network that we have designed. And that, combined with our bundled products, I suspect, will leave us in a position where it won't have a huge impact on us. Although we are planning for some increased competitive sets of activity in the market once it's closed and after they've made some investments.

Bentley Cross -- TD Securities -- Analyst

Thanks for the candor.

Operator

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

Matthew Harrigan -- Benchmark -- Analyst

Greg. Ajit Pai, despite being a pretty libertarian guy at various points, just really talked about how the cable industry had an almost unfair advantage with the small cell topology, and it's really wasteful just in the U.S. economic perspective from everyone else to do these duplicative builds. Do you think, as you pointed out, Verizon, there's a definite -- a move toward the mid-band growth? I mean, do you think that there's an increasing awareness on the part of some of the mobile companies that they'd like to work, obviously, specifically Verizon, that they likely work something out with cable on the small cell side? And are you drawing any inferences from your experience up in Alaska, which is obviously in that -- in the lead, far from the U.S. vantage point? Thank you.

Greg Maffei -- Chief Executive Officer

Thank you. I missed the first part. You said -- who said we had an unfair advantage?

Matthew Harrigan -- Benchmark -- Analyst

Ajit Pai, the FCC Chairman.

Greg Maffei -- Chief Executive Officer

Ajit. Yeah.

Matthew Harrigan -- Benchmark -- Analyst

Yup.

Greg Maffei -- Chief Executive Officer

I just didn't -- 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 work -- 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 -- Chief Executive Officer And Co-Founder

Well, we've said all along that 5G was gonna 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 the 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 -- Benchmark -- Analyst

Thanks, Greg. Thanks, Ron.

Greg Maffei -- Chief Executive Officer

Thank you

Operator

Our last question comes from Ben Phillips with Savoie Capital.

Ben Phillips -- Savoie Capital -- Analyst

Hi, good day. Quick question. I'm kinda 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.

Greg Maffei -- Chief Executive Officer

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

Ben Phillips -- Savoie Capital -- Analyst

I think, with respect to the convertible notes, first call dateis 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.

Greg Maffei -- Chief Executive Officer

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

Ben Phillips -- Savoie Capital -- Analyst

Yeah, I'd appreciate that.

Greg Maffei -- Chief Executive Officer

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

Operator

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

Michael Bunyaner -- TLF Capital. -- Analyst

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

Greg Maffei -- Chief Executive Officer

Thank you.

Michael Bunyaner -- TLF Capital. -- Analyst

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?

Greg Maffei -- Chief Executive Officer

Yeah. It's a great question. I think, if you look back two years ago, we were something like 38%, sub-40% self-install. And during the most recent quarter, we were, as you noted, over 80%. That's probably a couple of things. One, that is a great testament to the work that the Charter team has done on improving self-install capacity and making that process simpler for customers, and better -- and us making it simpler for them, and managing it more easily. I also think it's probably somewhat driven by the pandemic. The reality is that people don't necessarily want to see cable installers coming to their home. So, like many things in the pandemic, things born of necessity have become more convenient and more driven and more digital and more self-reliant.

That has also probably been somewhat the case impacted by the fact that some of our competition really almost shut down and were not doing any installs. They didn't have truck rolls and nor did they have the same self-install capacities or ease of use that Charter did. So all of that contributed to an acceleration in the growth of self-install. That has really reduced our cost of install. I'm not sure if that will have as much an impact on the ongoing cost once they're installed because I'm not sure the network management is really that substantially different. But I think it's both been a reduction in cost and an ability for us to gain market share during the time of COVID.

Michael Bunyaner -- TLF Capital. -- Analyst

If I may, just to follow up in terms of market share penetration. We were running at Charter just about 50% of the homes passed. What do you think ultimately, because of the quality of the service as well as the quality of the install, and now having the call centers essentially in the U.S., what kind of penetration over time could we reach and/or what do you think would be a reasonable goal, I don't know, three to five years from now?

Greg Maffei -- Chief Executive Officer

I'm not sure that the Charter management has set that goal or we have that forecast. I know -- I've heard Tom Rutledge believes that ultimately, it could get to 2/3 penetration, but I didn't -- he didn't have a time frame for that. But I appreciate the BHAG, the big, hairy, audacious goal that is, cause that's obviously a lot of market share gain. But I do think that cable has an advantage. And if you've seen the fact that we'll have added nearly, probably during this year, during the last 12 months, added something like almost 8% to 9% growth in its customer count in during the last 12 months, I'm not sure that's gonna continue to accelerate at the same rate, but that shows the potential that is there to grow. Cause that share point has probably gone up 2% or 3% during the last 12, 18 months. How high -- how long it's gonna take and how that slows as we hopefully exit pandemic, I don't know. But I'm still bullish on our ability to increase share. I think Tom is as well.

Michael Bunyaner -- TLF Capital. -- Analyst

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

Greg Maffei -- Chief Executive Officer

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

Operator

[Operator Closing Remarks]

Duration: 30 minutes

Call participants:

Courtnee Chun -- Chief Portfolio Officer

Greg Maffei -- Chief Executive Officer

Brian J. Wendling -- Chief Accounting Officer And Principal Financial Officer

Peter Pounds -- Senior Vice President, Chief Financial Officer, And Secretary

Ronald Duncan -- Chief Executive Officer And Co-Founder

James Ratcliffe -- Evercore ISI -- Analyst

Zack Silver -- B. Riley -- Analyst

Bentley Cross -- TD Securities -- Analyst

Matthew Harrigan -- Benchmark -- Analyst

Ben Phillips -- Savoie Capital -- Analyst

Michael Bunyaner -- TLF Capital. -- Analyst

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