GCI Liberty, Inc. Series A GCI Group Common Stock When Issued

Thank you, Keisha. Thank you all for joining us today.

I'm Pete Pounds, the Company's Chief Financial Officer; Ron Duncan, our President and CEO is on the call today, as well as a number of other members of our team. We will all be available to participate in the question-and-answer session, which will follow my initial comments.

This conference call is being recorded and will be available for playback. To access the call via net conferencing, log onto our website at www.gci.com and follow the instructions.

The webcast will be available for replay for the following two weeks. Some of the statements made by GCI in this presentation are forward looking in nature.

Actual results may differ from those projected in forward looking statements due to a number of factors. Additional information concerning such factors can be found in GCI's filings with the Securities and Exchange Commission.

I will start out with some general commentary. This last quarter was our best ever EBITDA quarter.

Our record financial performance was driven by exceptionally strong roaming revenues during the third quarter, which is normally our best roaming quarter. We do not believe that this level of roaming revenue is sustainable and as we've noted in our press release, we expect roaming in backhaul revenues to decline in 2016.

In addition to our financial success, we had some good progress operationally. This quarter, continued the momentum in our consumer high speed data product with subscribers, up 7,300 on a year-over-year basis.

On the wireless front, we continued to make progress, converting the customers we acquired in the AWN transaction to our network, as well as billing platforms. As of September 30, we were nearly halfway through converting customers from the legacy billing platform to our standard billing platform.

Now for a financial review, adjusted EBITDA for the quarter was $97 million, that's an increase of $3 million or 4% over the third quarter of 2014. And on a sequential basis, the EBITDA increase was $9 million or 10%.

Both the sequential and year-over-year comparisons benefited from our strong roaming quarter. Now for the wireless segment.

The wireless segment posted revenues of $80 million for the third quarter, that represents a 5% increase year-over-year and an 18% increase sequentially. This growth was mainly the result of the strong roaming revenue, that I mentioned earlier.

Adjusted EBITDA for the quarter was $57 million, which is an increase of $10 million year-over-year and $12 million sequentially. Again the theme here is strong roaming.

By year-end, we will cover approximately 81% of the population of Alaska with LTE. Our goal is to be Alaskans choice for high speed connectivity, whether that's provisioned via wireless, fiber, microwave, satellite or copper facilities.

Moving onto the wireline segment, the wireline segment revenue for the quarter was $178 million that's up $14 million or 8% from the third quarter of 2014, and down $1 million or 1% from the previous quarter. Wireline adjusted EBITDA was $39 million, which is a decline of $7 million year-over-year.

This decline is primarily due to $4 million in transition costs, and a $6 million decline in cable advertising revenues. You may recall that 2014 featured a hotly contested US Senate campaign that's off $50 million spent on advertising in Alaska.

Turning now to the specific customer groups within the wireline segment for more detail. First, consumer.

Consumer revenues of $88 million were up $15 million, on a year-over-year basis and down $2 million sequentially. The increase over the last year is attributable to data subscriber and ARPU growth, as well as wireless in the following areas.

First, we have new subscribers that we acquired in the wireless transaction and there is revenue there. Secondly, the new equipment installment revenue of $8 million in the quarter.

And finally, there was a change in how we allocated wireless revenues between the wireless and wireline segments. Business services had revenues of $52 million, which was a 2% decline sequentially, and an $8 million or 13% decline year-over-year.

The year-over-year decline is the result of a $6 million reduction in video revenues, due to the particularly strong election year of 2014. This was combined with rate compression in the voice and data markets, which also contributed to the sequential declines.

Managed Broadband, managed broadband revenues for the quarter were $38 million, that's up $6 million year-over-year and $1 million sequentially. These gains are the result of our continued and stout investments in rural Alaska.

Other matters of interest, capital expenditures for the quarter, we spent $47 million, bringing our total for the year to $126 million. Stock buybacks, we bought back an additional 400,000 shares during the third quarter, and that brings our total for the year to 2.8 million shares of stock.

Future buybacks as always are contingent on a number of factors these factors include leverage, board approval and other opportunities. Liquidity, we ended the third quarter with $60 million in cash on our balance sheet, and we had $128 million of availability on our line of credit.

With total current maturities of $12 million, I'm satisfied with our liquidity. Our leverage remains within our comfort zone.

We have gross leverage of 4.3 times and net leverage of 4.1 times. Now for guidance and economic prospects.

Our guidance for the year remains unchanged. Revenues in the range of $920 million to $970 million.

EBITDA of between $310 million and $335 million and core cash capital expenditures of approximately $170 million. We are anticipating ending the year towards the top-end of our revenue and EBITDA ranges.

In conclusion, first we had extraordinary roaming revenues and these propelled us to our best quarter yet. Secondly, we continue to have great success on the consumer data front, the rollout of our 1 gigabit service positions us for continued success.

And finally, our operating teams continue to do a commendable job on the AWN transition. The challenges have been significant, but they've been equal to the challenge.

We will now be happy to answer your questions. Keisha?

Hi, thanks very much. And I am going to have to ask you for more color on the roaming commentary.

First of all, with the extraordinary roaming revenue in the quarter that probably means it was either a very good summer for Tourism in your state or potentially Verizon has added a lot of new subscribers. So, I just wanted to color on what was driving the increase in roaming?

It's not that much the latter. Verizon continues to grow, but not by leaps and bounds up here.

It was a strong travel summer, and also in there is an increase in our footprint and an upgrading capacity in previous years, coming up legacy network that we acquired, we have been blocking roaming during peak periods. And in the last 15 months, since we put the networks together and focused on expanding network quality.

We believed much of those blockages and that will allow a lot more of that traffic to get through.

Okay. And then, secondly, I think the commentary in the press release for even in the comment was that you expect this to potentially be the best roaming quarter ever.

So, what is the dynamic that will not allow you to replicate this next summer?

I don't know that we've said ever, but certainly for the foreseeable future. We've been working to put all of our roaming arrangements on long-term agreements, so that we keep the traffic on a network, it's not that different than what we did over our history where we worked with our carrier customers to make sure that the price of using our network was more cost effective for them than building out their own networks, and we believe close to getting all of our roaming partners on to term contracts that we believe will give us a higher probability of maintaining a material amount of traffic over the long term, but those will come with reductions, just as they did in our carrier business over the last 20 years.

And is that it's kind of thinking behind that is to incent Verizon to actually not build out in certain areas? Is that?

Our carrier strategy has always been to offer pricing to carrier customers, whether it's wireless or wired at rates that make it attractive for them to use our network. And I think that's about, as far as we want to go with that.

We're trying to maximize what we see is the long run net present value of the revenues, that we can receive from our carrier customers factoring in capital expenditures that we have to make.

Okay, great. And then, finally, I'm looking at the table of the subscriber numbers, and it looks like there is a net loss of consumer postpaid wireless, just wanted an update on the trends there and what kind of share you think you're taking or losing?

Yes. Ana, I would say that we took on approximately 87,000 customers in the transaction.

Those 87,000 customers had proactively chosen a carrier other than GCI to provide their wireless services to them. At this point, we've moved roughly half of those customers over to the GCI platform and our losses over the last two quarters, while that happened was about 67,000.

And so you can see that we're losing about 15%. If you were to just say, those were the only two factors involved there.

So some of it has also just as we clean up the system, some of those customers are not full customers in the way that we would have thought of them as we clean up the systems that we acquired there. So does that provide you enough color there, Ana?

Sure. Okay, great.

Thank you very much.

Good morning, folks. I wanted to stay on the same topic in terms of consumer wireless customers and get a sense, obviously I'm not in Alaska, I can't walk into your stores today.

What are you offering in the market today, are you pushing promos on handset financing, service plan, what is your go-to-market strategy? And how is that working in the market?

Barry, there's really, there's no magic to it like most carriers, the equipment installment plans is what's leading the pack here on our offerings. We are a price leader in the State of Alaska.

And so more or less, we're taking our cues from the spreads in teemos [ph] in the Lower 48, who are driving nationwide pricing and we priced a little bit below the market. And so, there is some definite bundling that goes into there but it's basically we are the value provider of wireless services in Alaska and we've managed to have the most comprehensive LTE footprint at the same time.

Barry, it's Greg Chapados, as well. The other aspect of this is that if you are being talking about, for example, handset availability, handset availability has improved for us.

The iPhone 6s launch, a couple of weeks later after the major carriers, we got our phones and we were able to go to market at the same time as the big carriers, that's also positive.

Okay and then, staying on wireless, on business wireless customers, you saw a pretty nice growth there. So what are you doing there?

Are you offering something different in terms of bundling wireless with other business services?

Yes, Barry, I would call, most of that change between consumer and commercial noise, as we move from one billing platform to another. So I wouldn't put too much value into any changes between the individual categories here over the last two quarters.

Okay and then, also on the cable business, like a lot of carriers you're seeing good data growth, and I think you pretty much lead the industry now that you've got gigabit speed across your footprint. But video that tends to continue to a trend, and I know you guys have been pretty aggressive in terms of passing on for RAM price increases or getting rid of programming then think it was additive.

What's going on there, and are we likely to see more of the same more emphasis on broadband and less emphasis on video?

I think the trends will continue. The program providers continue to try to strangle themselves by raising rates.

We are resistant to continuing price increases, because we think we're at the limit of what customers can absorb. In fact, all the feedback you get in the marketplace says that customers would like 40 channels for about $40 well, quite frankly, we'd like to be able buy those same 40 channels for about $40.

But that's not the way the economics of this business work. And I think that you'll see a continued not rapid, but a continued erosion of linear video model as more people cut the cord, and that will drive the data model.

I just got back from a conference and we saw some real interesting results in a study that indicated that when people cut the cord, their data traffic jumps about 30%. And given how small our margins on linear video are.

I think, we're well insulated that if people decide to forgo their product and increase their data consumptions. We're fine with that, and our video strategy, unlike many of our cable peers, is very much to drive over the top content to help our customers find ways to access the content they want over the top.

And if that leads them to a decision to discontinue linear video, we're okay with that.

And, Barry, I would add that you'd mentioned gigabit through our entire footprint. We will have Anchorage entirely 1 gigabit by year-end but the rest of the state will not yet be at those levels.

And that will be something that will continue to expand our 1 gigabit footprint but we're not statewide.

Thank you, I wanted to follow-up on Ana's question on roaming earlier and I guess the question in my mind is whether the certainty of the roaming revenue staying on your network changes the way you think about the capital needs for the wireless business and the wireless network, especially as it relates to potentially needing more spectrum going forward or pretty with a low band auction where to have to build out certain areas of the state that you might not have considered otherwise. And was that at all a contractual part of the negotiations you've been involved with the carriers and keeping the roaming traffic on that?

Well, first of all, I don't think there is a certainty that traffic will stay on our network. We're trying to price attractively so we can sell the service.

And yes, service level agreements and capacities and quality of what we're providing to our roaming customers are a consideration in the negotiations and capital requirements were factored into our this kind of cash flow analysis, so what kind of proposals made sense. Will it drive us outside our previously issued capital guidance on wireless?

No, I don't think so. But if we're successful in carrying more traffic on the network, it will ultimately require more network.

Right now, I don't think we have a spectrum issue. We're fairly spectrum-rich.

And this is not a state where the density of population drives a compelling demand for lots more spectrum. We've got very few pops and lots of spectrum.

So, the spectrum for pop is a lot higher up here in terms of what we get to do. So not looking with great concern about, the spectrum capacity is available to us and certainly nothing in the near-term horizon that would change previous expectations of how we allocate capital.

And then, at some point, would we expect you to file something with the details of the roaming agreement or I guess maybe a broader question for Pete, how should we think about sort of modeling this other than the anecdotal commentary you provided about this being at least the near-term peak for roaming?

If you expected a filing, you would be wrong. We will probably offer you some more guidance on the overall picture when we offer the year end results and the first quarter guidance sometime in March next year.

But you just going to have to [throw down] the numbers where we will never reveal details of individual carrier contracts and we don't intend to provide a whole lot more detail than what we summarized here. We just believe that because this was a very high quarter and because the nature of the marketplace was changing, we needed to put something on the table.

First of all, congratulations on the strong third quarter. I want to ask you about the wireless transition again.

You mentioned in the last quarterly call that those costs were going better than expected. I was just wondering, you said you're halfway through, all those costs sitting that hit the finale, or you're halfway through those, what is the total cost you expect now and is the guidance for the full year include those costs?

Yes, the guidance for the year does include all of the costs of the transition. So you [ought to] just simply add our bottom-line EBITDAs for the first three quarters and add whatever you think for the fourth quarter and we're guiding towards the top-end of the 310 to 335.

Those still continue to come in well. We had estimated in the area of $30 million.

Those are going to come in the area $20 million for the year and we'll largely be through the transition cost here this year. There is some legacy billing platform costs that will continue to give us, gets here a little bit into the future, but we're pretty much through our costs at this point.

Okay, great that's helpful and then just a follow-up question. There was an article couple weeks ago about a civil penalty you guys paid related failure register cell towers.

Now, I just curious, I was fully settled, was those Alaska Communication towers and are there other more things like that on the comm?

Yes. This is Tina Pidgeon.

I have the pleasure, I guess, of dealing with that issue, but really it's a little bit of a bad news good news story. We had discovered that some of our processes were not up to the level where they needed to be.

We also discovered that perhaps this is not quite uncommon because it was the same. The issues were no different if not worse for towers we had acquired through acquisition along the way.

But when we discovered it, we engaged proactively and productively with the SEC. So what you've seen in terms of the penalties was a result of that consent decree.

And that's the final negotiated amount between us and the Commission. And editorial comment the Enforcement Bureau, the SEC has been very active lately.

So as surprising it may sound, we're actually happy with the outcome and the ability to work with the Commission. And finally, as a result of that negotiation, we are under a three year consent decree that requires remediation and compliance in particular with dates in between and a three year date of oversight with the FCC.

So I'm expecting that we continue the new procedures we have in place and that won't be an issue but that's certainly part of the requirement the FCC placed in terms of reaching this agreement.

That's helpful, thanks. Congratulations again on the strong quarter.

Thanks, Michael.

Thanks for taking my question. I guess one follow up from the prior question related to television.

It looks like this was the first quarter and quite some time if you actually added basic TV subs but that's just a function of additional homes passed? Or is there something that's stabilizing in the video business at this point?

I don't think, we characterize it is stabilizing, we have been more aggressive in pursuing one of our lower end price offerings in that business and we've seen a large percentage of customers over the last 15 months shift. We have a price offering that essentially matches the satellite guys promotional price offering with the discounted first year and slightly stepped up second year.

And we've been pushing that more aggressively in an effort to retain customers who would otherwise be disconnecting because of the price. And I think what you're seeing is lower churn and a little better sales as a result of that.

It's actually a lower margin product for us, because we do discount the price. So, if anything it reflects sort of the continuing malaise of the video business as we are caught in the squeeze between what customers are willing to pay and what programmers think that their content is worth.

Obviously, we'd like to maintain our fair share of the video product in the marketplace but I think over time you should still expect that product to the linear video product to diminish. If we would ever get the flexibility that we'd like to have to structure our offerings differently, so that we could offer sort of these smaller tiers and the like bundles that everybody's talking about, I think that we could actually materially reverse that and if we had the flexibility, which we don't in our program agreements to offer multiple tiers at better price levels, I think the linear video would be a whole different prospect.

But it's quite likely that it's going to get choked to death by the programming constraints delivered by the programmers would say you've got to put everything in one big bundle, and every time the contract renews we're going to double our rates, which quite literally is what's happening. We're going into program negotiations now and the opening offers are more than a 100% increase on the front end, and 10% to 15% per-year-over multiple years thereafter.

And it's totally unrealistic. That's why linear video is going to be a very, very challenged product.

Michael, I'd also add that there is a little bit of seasonality in what you're seeing. We typically, as we end the second quarter, the fishing is hot and the daylight is out 24 hours, and so people are less inclined to sit in front of their TV.

As we hit the end of September, people are more inclined to sit in front of their TV. So, we do see generally some disconnects in the second quarter and some reconnects at the end of the third quarter.

That's helpful. One additional question as it relates to Verizon more generically, could you just speak a little bit about what you're seeing on the retail front there in terms of new store openings and just overall advertising presence, and then I guess, to the extent that as they're adding new subscribers in the metro areas, are you seeing commensurate roaming increases as those subs then move outside of the metro areas?

I would characterize Verizon's market entry as somewhat muted. They've opened two of their own stores.

They have a number of kiosks in some of the malls. I don't think they're doing a material amount of advertising beyond the national flow through that comes with their national media buys.

We have seen their subscribers growing not as rapidly as we had originally anticipated. And yes, we see roaming from Verizon Alaska customers both within their Alaska footprint and in the area where we're the only service provider.

So, they are slowly taking some steps in the marketplace it has not been a huge charge up the hill.

Okay, well, thank you Keisha and thank you all for taking the time to listen in. We'll see you back here early March to discuss the year end results.

Thank you very much.