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

Thank you, Carolyn. Thank you for joining us today.

I'm Pete Pounds, the company's Vice President of Finance. John Lowber our Chief Financial Officer is traveling and will not be able to join us on the call today.

Participating with me today are Ron Duncan, our President and CEO, Lynda Tarbath, our Chief Accounting Officer and our newest Vice President Tom Chesterman. We will be available in the question-and-answer session following my initial comments.

If you don't have copy of our detailed press release you can find it on our website. This conference call is being recorded and will be available for playback beginning at 4:00 PM Eastern Time today.

Information on the playback is available on our website and the website will be available for replay for the next 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.

This quarter has been an excellent one for GCI. We've seen growth improvements in many parts of our business.

for the second quarter of 2013 our consolidated revenues totaled $189.7 million, an increase of $13.6 million or 8% over the same quarter of last year. Sequentially revenues were up $3.4 million or 2%.

2%. Our EBITDA was $62.1 million, an increase of $2.7 million or 5% over the same quarter last year and sequentially we had EBITDA growth of $3.5 million or 6%.

Net income was $4.2 million or $0.10 per diluted share. That's up 5% compared to second quarter of 2012 net income of $4 million.

For the first six months of 2013, revenue was $375.9 million, representing an increase of $27.9 million or 8% over the first six months of 2012. EBITDA totaled $120.8 million, representing a $6.5 million or 6% increase over the six months of 2012.

Net income totaled $7.4 million, representing an increase of $2 million or 37% over the first six months of 2012. Our year-over-year growth is strong and healthy.

Before we go on to the segment results, I should remind you that we've changed our segment reporting methodology. Effective the 1st of this year, we are now organized in to two segments, Wireless and Wireline.

The Wireless segments includes the wholesale services that are now within the Alaska Wireless Network or AWN. The Wireline segment includes consumer, business services, formerly known as commercial and network access and finally managed broadband which also includes our regulated services.

The consumer and business services line will continue to report their respective shares to the retail wireless revenues to which they'll be contractually entitled. This is consistent with the structure that is now in place, following the AWN closing.

The comparative figures for 2012 have been recast to be consistent with the new presentation. We've posted supplemental schedules to recast all four quarters of 2012 to help with comparability on our website in the Investor Relations section.

Wireless, after nearly 14 months of working with an alphabet suit with government regulators, we finally received all required approvals from the DOJ, FCC and the SEC. we closed the transaction shortly thereafter.

And a tip of the hat to our AWN team as well as numerous folks in accounting network and legal, whose hard work and dedication were instrumental in the July 22nd, closing of AWN. The team has shown the ability to overcome a lot of significant challenges to date.

I look forward to see the improved customer acquisitions as we are now able to focus our energy towards items of significant interest to our customers, what expanding LTE coverage. We're currently offering expanded LTE service in the Anchorage and Matsu markets and we expect to have the same LTE network launches in Fairbanks and Juneau by the end of this year.

We are already rolled out with TurboZone, WiFi access to 1500 access points around the state. Wireless revenues of $35.6 million for the quarter increased $5.2 million or 17% when compared to the second quarter of 2012.

Wireless EBITDA of $14.3 million increased $1.7 million or 13% compared to the prior year quarter. These improvements are driven by rolling revenue and retail Non-Lifeline subscribers.

GCI served a total of 142,900 wirelesses subscribes at the end of the quarter representing year-over-year subscriber growth of 1900 and 1300 sequentially. At quarter's end 110,300 of those subscribers were postpaid and prepaid subscribers, that's an increase of 9% on year-over-year basis.

Additionally GCI serves 32600 lifeline customers at the end of the quarter. Wireline consumer, consumer revenues of $68.5 million for the second quarter of 2013 increased 1% over the same period in 2012.

Adjusted EBITDA is $18.9 million for the second quarter of 2013 increased $0.7 million or 4% compared to the second quarter of 2012. Increases in data and wireless revenue offset the decreases that we saw in voice and video revenues.

Operates only we experience and challenges on a subscriber count fronts but did well on ARPU. In the second quarter we had declines of 2800 voice lines and 2400 video subscribers and 1400 cable modem of subscribers, we added 900 wireless subscribers.

Traditionally, the second quarter has been the most challenging quarter for us on subscriber accounts. On a sequential basis ARPU was up $1.72 for cable modems, $0.72 for wireless and $0.02 for video.

During the quarter the company announced several improvements enhancements and new programs in the consumer area. We launched simply share in May a new pricing structure that provides the best pricing on shared wireless data nationwide and state wise in Alaska.

GCI TV powered by TiVo which provide the only TV service in Alaska that offers a DVR through which consumers can record up to 6 channels simultaneously. And GCI GO, GCI became the first Alaska based TV service provider to offer HBO GO and MAX GO, an offering that may expand by year end to as many as 25 networks.

We had Tier 1 Internet expansion, we upgraded an additional two communities to Tier 1 service, enabling internet speeds of up to 22 megabytes. And HD Expansion, we added two more networks to the HD platform, including Lifetime HD and Lifetime Movie Network HD.

Business Services: Business Services had another strong quarter with revenues of $56.9 million an increase of 12% over the same period in 2012. EBITDA of $18.2 million represented a 9% improvement over the same period in 2012.

And the improvements were driven by growth in data and video, while wireless showed a slight decline. Data revenues in particular benefited from the strength of oil and gas sector exploration, development efforts in Cook Inlet as well as Chukchi Sea.

From a key performance indicator perspective, Business Services had notable deals for the quarter including 700 new cable model subscribers, 4,200 new video subscribers and 400 new wireless subscribers. Managed broadband, our managed broadband revenues for the quarter totaled $28.8 million, that's an increase of 6% over the second quarter of 2012.

The year-over-year growth is due to continuing investment in terrestrial broadband facilities in rural Alaska and success in acquiring additional telemedicine and distance learning customers. But for the increased allocation of general corporate SG&A, EBITDA would have been flat on a year-over-year basis.

The managed broadband team is focused on the continued build out of the TERRA project. This year we expect to complete the system as far as known and by next year we expect to bring it all the way to cost of view.

Other matters of interest, the share repurchase program. GCI remained active on the share repurchase front during the quarter.

We acquired nearly 740,000 shares at an average price of $8.59 per share. Depending on the company's performance, market conditions, liquidity and subject to board oversight, we will likely continue to opportunistically acquire shares in the open market.

Guidance and economic prospects, as we've mentioned in previous calls, we've been hesitant to provide any forward-looking guidance and totally closed the AWN transaction and has some experience with AWN. We've now closed on the AWN transaction.

However having only 10 days under our belt as the managing member of AWN we are not currently in a position to provide guidance. We expect to be able to return to our practice of providing annual guidance at our third quarter conference call Capital expenditures and liquidity, the core of our capital program is increasing the speed, coverage area and reliability of our network.

This is true for both our wireless and wireline networks. Capital expenditures for the quarter totaled $50.4 million and were made in the following areas.

For our business lines including the wireless and business services, consumer and managed broadband, $18.7 million, for tariff, $10 million and for IT expenditures, maintenance and other, $21.7 million. For the year, we're anticipating $150 million in core cash CapEx and non-core capital is now expected to be approximately $35 million, which relates to the potential acquisition of Real Estate Housing, one of our key telecom facilities in Anchorage as well as other projects.

A simplified version of cash source and uses for the second quarter is as follows. Starting with EBITDA of $62.1 million, less interest expense of $17.4 million, less capital expenditures of $50.4 million, less stock buybacks of $6.4 million plus the use of restricted cash and our capital expenditures at $6.6 million.

This leaves an implied use of cash of $5.5 million, which is close to our actual reduction of cash on the balance sheet for the quarter at $4.6 million. With $26.2 million of cash on hand and $179.5 million available on our senior credit facility after funding the AWN transaction, we believe we have sufficient liquidity.

At quarter's end nearly 90% of our debt was at fixed interest rate, at an annual interest expense of about $70 million per year, compared to the last two quarters annualized cash flow of $241.6 million our interest coverage is approximately 3.45 times, our leverage on gross debt is 4.04 times and our net debt 3.93 times. In conclusion, we are pleased with the second quarter's financial results.

We are further pleased to close on AWN, which will add significantly to our strength in wireless. It's been exciting year so far and its working right now we'll continue.

We'll now be happy to answer your questions, Carol?

Pete, maybe just a clarifying question for you in terms of how you intend to communicate the AWN results going forward, I understand that those will be consolidated into your general numbers, but will we be then get granular detail at the individual AWN business level once that segment is reported?

We are going to be operating consolidated information, so you will see consolidated bump in EBITDA with the AWN transaction and we will be providing some information that will give you pretty close information on AWN, the wireless segment is basically AWN and so you are be able to do your calculations. However, you would like to on that for leverage whether that is take into one-third interest there or taking the preferred payments and how you want to deal with that.

So you will have the information there Anthony.

Great, and then on those preferred payments what are the schedules now around which that those are due to be paid to Alaska Communications, in other words, when are the first payments due to be made?

You don't have to look specifically. It's going to start, I can't recall it's exactly one month after and it's a one month and a little bit of lag but basically about month from now we will start making those payments Anthony and that will be basically 1-12 for the $50 million for the first two years and that will be 1-12 for the $45 million for the remaining few years.

Got it, okay. So are they on the monthly schedule, okay.

Yeah.

And then me may be just big picture strategically, so now you have repositioned to wireless business with the combination with the Alaska and then you obviously have been making pretty significant investments in the few of your other businesses, but where the portfolio stands today of assets, are there other assets that as you look at the landscape that you think make sense to include in the portfolio, you know, there is been a big push around datacenters in the lower 48 and a lot of carriers have gone into the datacenter business and some of the other managed hosting businesses. Could you talk a little bit about what other forms of investments and what the next face of CapEx you think, what the next round of investment will be geared towards now that AWN is complete?

You guys are up in this and we just like to keep going this is Ron, Anthony. We already are in the datacenter business up here we deployed over a year ago, our first development of datacenter facility here in Anchorage and we've been low key in the marketing on that, but it's had a good take rate with our commercial customers at this for the rest of our product offering and we're quite satisfied with the results those are included in the commercial and enterprise segment of the business were in reports today.

And as you know, we are also looking; we're actually also in the process of getting into the broadcast business for the acquisition of simple television stations which we hope will close sometime during this quarter. But beyond those two, I don't see other assets in this market that we're looking at right now; there may be a little bit further wireless consolidation in the form of doing retail partnerships with some other distributors.

But I don't think that would involve much in a way of asset acquisition. So, I would say primarily at this point, we're done in the datacenter space in terms of major CapEx that was actually mostly included in last year's capital expenditures and you will see some CapEx, probably mostly in the remainder of this year, associated with broadcast facility.

And would it be fair to say that your interest in things in the lower 48 or are probably a bit more challenge given that you don't have the natural synergy opportunity and often the evaluations on those assets just ones are being sort of more than what you can justify given your location?

We had a trouble coming up with a workable strategy to extend the quarter into the lower 48, I don't think you'll see us being a head on competitive with the private equity guys to purchase assets in the lower 48. If we found the right opportunity and had the right tie-in back to what we're doing in the core business up here, we are certainly want to look at that, but historically we've been cautious about how we've done that we continue to look for the right opportunities but for the foreseeable future the bulk of the benefit will be coming from the Alaska market.

And then a final question for me is on leverage, on a prior call John had indicated you know that a potential high watermark maybe for leverage would be five times and then coming down pretty quickly thereafter. Ron as you think about the sort of releveraging of GCI to do the AWN transaction between the bank debt drawn preferential payments, how do you think about capital allocation for shareholders returns and buybacks and things of that nature while you are at a higher leverage level?

The concerns have continued doing the buybacks at about the current level assuming that the economic performance continues as we expect in our forecast. If the economic performance were to fall off, we would revisit the stock repurchases.

We are repurchasing now at a rate that we don't think is actually driving the stock price. We don't want to be the driver of the stock price with those repurchases, but we would like to be consistently in the market.

And depending on how you view the preferred payment within AWN if you view that as part of the leverage, yes, we will see a spike in leverage here, but then it will fall off fairly rapidly as we make those preferred dividends on a monthly basis and the accounting treatment will probably show what leverage calculation for our lenders at least that we will have to treat the preferred payment as debt, but that will bring it down fairly rapidly actually on a monthly basis as we pay those out.

Now that AWN is closed, I am hoping to get, start to get a little bit more visibility. I know you are not giving guidance at this point, but just in terms of how the mechanics look.

If we start by just adding together your wireless results with ACS' results, what kind of puts and takes do we need to think about that business? I know for example, on retail, that's sold to each of the partners at a 30% discount, CETC, I think all of that revenue falls directly to AWN.

What else can you kind of shed light on to help us think about AWN?

I think we really need to wait for the next quarter. What you got is the correct mechanics of the deal and the deal was described pretty adequately in the disclosures to-date, but before we start trying to put any numbers on, let's us get in there and see how this actually falls together.

I mean the general expectation I think is consistent with the stuff we talked about when we put the deal together, but we've been locked out of the visibility through the changes over the last 12 months because during dependency of the deal, the competitive considerations for those from looking at updates on what was happening on the other side, we're just waiting in to that now. So while I don't expect the macro the result will be materially different than what we anticipated, I think it's counterproductive to try to speculate what you hear today as to how those pieces will come together.

We will be doing all that work over the next month or two and we'll give you a fairly detailed picture with the third quarter call.

And then just kind of on the same track, I will see if I can get a little more on this. You introduced the Simply Share wireless plan.

Is that something that's now through the joint venture and shares plans would then be available to ACS or is that something you are doing through billing software that remains at GCI?

The Simply share plan is a wholesale plan that will be offered by AWN to both AWN retailers and it's then the decision of the individual retailer to accept those plans. Generally all of the plans that we expect to offer I anticipate will originate as AWN plans, while retailers can price the plans anyway they want to structure the transaction makes it difficult for peoples who create plans just out of the billing mechanism.

The plans really will be created with AWN, although either retailer can go to AWN and request that it creates a specific plan and then it's a AWN's decision as to whether or not that economically makes sense for AWN. But generally, all the plans will originate as a wholesale offering from AWN.

Okay. And then my last question also on the wireless environment in the state of Alaska, obviously Verizon has entered the market, my understanding they don't have retail stores, no voice, and they are just selling jet packs and dongles to retailers like Best Buy, any updates on that anything different that you can update us on?

I believe the only place that your statement is not wholly correct I believe you can buy Verizon voice phones through some of the box stores, it's not just data stats I believe, then interestingly enough I believe you can buy Verizon 3G voice phones through some of the voice stores, which of course today will ride on the AWN network.

Okay.

No real large perception in the regional marketplace yet. We have seen the shadow of the Verizon players in the enterprise and commercial space.

And you are not seeing them opening any retail stores or any activities that they are lead in leasing retail space at this point?

We don't have to check with us before they do, but we have to see any signs go up.

In the prepared remarks you said second quarter is tough on the consumer side on the subscribers, but the cable modems were down about 1400, does it seems like quarter is a seasonally tight quarter for you on business side, is it?

You know there is couple of things that I think are going on there. Number one, we are seeing some draw downs in one of the basis up in Fairbanks, it's a kind of required draw down outsourcings, some challenges there.

Number two, it has been, we have been setting some records this summer which has not been helpful on the weather fronts for getting people to stay home. And certainly internet watch TV and clearly this is an area where ACS has been having some promotional activity here for the quarter and we are working and responding to that in the market.

On the commercial side, it looked like you had lower EBITDA margins year-over-year while you did have, is that a function of professional services or could it be as you roll out the data centers, are they eating into profitability?

No, Liam, you are right on your intuition there, basically the professional services are time and material activity that just has lower margins. We like the business because it tends to wrap in the full customer relationship there and keep those more commoditized products on a network there, but it does put it down on your margins.

And then lastly on Managed Broadband, you had down your over your EBITDA as you pointed out on the corporate allocation of overhead, do you see enough leverage in that business to get it back into positive profit growth?

Yeah, I think there is a couple of things. The number one are regulated line of business there, which is actually line of businesses of long term, but our regulated operations in managed utilities is like all wax challenged right now, and so that had a negative effect.

We are looking at some areas to improve the numbers over [UI]. And then secondly, there is, as you bring on new customers, we're offering new services and so we've had some new expenses come online for that, but this is an area that Managed Broadband still does have some growth left in it.

I just wanted to follow up on CapEx. I think at the last quarter, it sounded like you're guys were looking at I think around 165 of total CapEx scenario, and now you are 185.

I was curious if you kind of walk through the variance there and then if you had a sense of whether or not that number is likely to go higher as you move to the year, I'm talking I guess just a base business not including whatever happens on the JV?

Well, I'm not sure what was and wasn't in the -- was the building in the 165 total, we're buying out some real estate that currently houses us and that's a chunk of that and then there is miscellaneous other related to several of the new projects that we're undertaking including in part the broadcast stations. So I don't think it's likely to go higher than what you've seen right now and I'm not sure that I can get to the $185 million number but-

Yeah, I think when we look at the first quarter we were still having some regulatory uncertainty with the Denali Media transaction. So we had actively figured that in.

we now are feeling more confident that that's going through the regulatory process right and so we also have some more clarity on what the capital there is and some other capital areas. And so that's really what's driving the difference between the $165 million and the $185 million.

So you guys have pretty good visibility now into the $185 million for the full year.

Yeah.

Okay. and then in terms of costs overall have you guys or can you talk about just in your numbers year-to-date cost related to the JV or cost related to things that aren't going to repeat I'm just, you mentioned I guess the managed broadband margin hit, you mentioned the professional services margin hit.

I'm just trying to get at all the factors that are driven expense growth this year as I compare that to the revenue growth, just to kind of see what's driving the difference and then also what just what the organic numbers look like versus what maybe some one time issues in there.

Yeah Kevin and you are looking at overall SG&A there?

Well, I was looking at direct costs and SG&A. SG&A I guess is running below sales growth but direct costs are running significantly above, if not double I guess to the rate of revenue growth so like I said you mentioned the couple of things in the last question.

Yeah I think when you look at direct costs, clearly it's business services driving that. As far as some of the expenses within AWN, what we're going to do is we're going to train some basically attorney's fees on AWN for basically operational changes as we look to basically merge together the roughly 250 macro towers that ACS bought to AWN and a similar number that GCI brought to AWN to try and make that roughly 60% or so of the total 500 macro sales there.

So combining the towers is going to increase the expense and that should largely take the place of all the feelings that we've been having closing the AWN transaction.

And you guys have talked about deleveraging I guess with making the payments, the preferential payments, but I guess how do you think about, how do you think about free cash flow and then also the stock repurchase? Do you guys have, you're going to have a policy going forward that you'd like to be at least neutral after share repurchases?

Are you comfortable using cash to make stock repurchases as long as leverage stays flat within those metrics, I guess the EBITDA is growing. I am just trying to get a sense for not just leverage but how you guys think about cash and free cash flow in the context of share repurchases?

I guess, throw in to that mix as well the potential investment returns from new opportunities looks like and we were managing capital barely tightly within the Alaskan marketplace, we're the highest spender again this year. I think that we're not, leverage will come down naturally as a result of the dividend payoff on AWN and we are not motivated to use additional cash to pay down debt unless there are better uses for that capital or for that cash, but I suspect you will see neutrality after the neutral free cash flow after the stock buybacks and whatever other investments we make and if we get to a point, we can't pick up to get the stock buybacks and after them we will address what we do on the cash balance side, much of our debt is fixed anyway on the high yield and really can't be repaid.

So the cost of the rest of the debt is, so unanimously it doesn't make much difference. If EBITDA was not to grow I would become more concerned about leverage but I think you will see the continued EBITDA growth so leverage should continue to take down as a result of EBITDA growth and the $200 million approximately $200 million in nominal leverage reduction as a result of the AWN payout.

Okay. Yeah, I was just looking at in a context to just the first half of the year or your share repurchases were above, I mean I know I talking about you huge dollar amounts, but I just conceptually that you are spinning more on share repurchases than you are generating from the business at least right now, and so I was just trying to get a sense of that, sounds like you are saying that there wouldn't be the case going forward?

I don't think we will adjust the share repurchases unless something in our view of the macro environment changes. We are trying to kind of be on dollar cost average in places with share repurchases rather than trying to guess whether we can outcast the market with respect to when the stock is up or down.

I think it works better for us if we just stay consistently in the market continuing to buy at the steady levels which are close to the daily limits that we are allowed to buy anyway and keep back in the stock back in that way in a way that we feel is in the material driver on the price, and over the long run, we are confident that the leverage comes back down and I don't think you should expect to see us adjusting stock buybacks on a month-by-month basis or quarter-by-quarter basis and three actions in the free cash flow of that particular part.

I guess can you give us an idea about the discussions you had with that FCC regarding regulatory revenues specifically around the duplicate support and how that might be impacted by AWN?

Are you broke up in the last after that sentence, would you repeat it?

I am sorry, so I am wondering about conversations you had with FCC, it's specifically around the duplicate support does that put in the new rules and how that might be impacted by AWN transaction?

I think the AWN I mean, under the AWN order we have clarified with the FCC how the CETC payments to AWN are going to work and I don't think AWN per se raises an issue of duplicate support because from the regulatory perspective AWN is a network not a retailer is that, where you are going or are you going down on…

No that is what I was looking for so essentially whereas separately you all may have expected to lose some CETC support, was AWN being one network, you should maintain that level of support that you receive in points?

The AWN transaction itself as structured and approved does not change anything in the current structure with respect to support and it doesn't create two supports, where there once was one or anything like that because AWN is the network, but that whole structure of course is influx with the wireless to proceeding pending and all of the new rounds of bidding and there are revaluation periods that the FCC has built-in for the current rules of CETC which is for others in the south, none of that was addressed in the AWN thing, but AWN didn't change the landscape any with regard to the overall regulatory expectation.

First, I wanted to touch back on the discussion of the impacts you are seeing from rise in wireless entering the market, I know you said that on the consumer front it's so early and present seem very nascent. Is there any evidence that they are addressing the government or enterprise channels?

You've heard rumors of rise in sales calls to the enterprise and government channels, but we don't have direct knowledge of that and I certainly would expect them to show up there although with the extremely limited nature of their network and the ubiquitous state wide requirements that the government and enterprise users have. I suspect that they will be somewhat coming from behind in the initial rounds of those things as their network builds out, they'll be more competitive we anticipate.

Okay. And then just to confirm they would be roaming on AWN via the prior relationship with Alaska Communications, is that right on not LTE site?

That is correct, the 3G Verizon roaming is now on the AWN network.

Right, so you will be able to monitor really how much volume they have in terms of customers and traffic.

I don't know that we will be able to monitor how much volume, I mean we will be able to see what the roaming revenues are. We'll have no visibility into what they are doing on the LTE side and I think it's going to be an interesting challenge for them whether they want to be actively selling devices that put large amounts of traffic on our network whether they want to try to respond in ways that configure just to the LTE network.

I think the nature of their single technology build and their limited footprint will create some interesting challenges for them in the marketplace. And while we will see roaming revenues decrease as data traffic transitions to the LTE network that they do any sales in the market to drive legacy traffic only to the voice or the data side that could supplement what we are currently seeing on the roaming relationship.

And then you know you've talked about in the past about wanting to on the broadcast media side develop community content for your [Via] customers and I think that was pending through the second half. I just wanted an update on what you guys have cooking on that front.

Well, right now what we have cooking is double applications of FCC and we are hopeful if those will pop out shortly, if they do we would anticipate launching some of that new product starting with some substantially improved news product in the third or fourth quarter this year. At this point it's all completely dependent on one we get the approvals that we need from the FCC, but once that happens, you will see us start to turn up the dialogue and that start to develop some more content both for the broadcast and for the cable only side of the equation.

Alaska (inaudible).

I think it's probably enough Alaska programming on cable already in general although more in-depth coverage of some of the key events in Alaska I think would be the first the sporting events that we have with local college teams, maybe there is some high school stuff. They will get much more in-depth coverage and things that are more relevant to the Alaska market which will have surface level coverage from the news organization, but then more in-depth coverage would supplement the programming on the cable network.

It will evolve gradually overtime as we figure out what were expensed, but it certainly will give us some stuff that's not otherwise available.

Thank you, Caroline, and thank you all for participating on our call. We look forward to hearing from you all here in 90 days for the third quarter call.