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

Thank you, Chad. And thank you all for joining us today.

I am Pete Pounds, the company's Chief Financial Officer. Ron Duncan, our President and CEO is on the call today, as well as other members of the management 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 on to our website at www.gci.com and follow the instructions. The webcast will 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. First, some general commentary.

The highlight of the quarter was the work that our operating teams did. The transition of 87,000 wireless customers to GCI revealed that they were more than up to the challenge.

We have now moved over one-third of the customers off of the legacy billing platform and on to GCI standard wireless billing platform. I am thrilled to have a net loss of only 1% of our subscriber base in the face of acquiring 87,000 subscribers, who had previously elected to buy service from one of our competitors.

The solid operating result allowed us to start the quarter with the bond refinance that saved us $5 million a year in interest expense. This week, we were able to close on an amendment to our $275 million term loan B, which reduced our interest expense by an additional $2 million per year.

These two capital market transactions added a cumulative $7 million per year in free cash flow. Now, for a financial review.

I would like to note two significant events that affect comparability of our best ever second quarter. First is the wireless customer transition expense.

During the first and second quarters of 2015, we had $7 million and $6 million of transition cost respectively. On a sequential basis, there is very little change, but on a year-over-year basis, it makes 2015 look comparatively worst.

The second item is equipment installment plan. Since the beginning of the year, we've been guiding our customers to finance wireless handsets as opposed to subsidized handsets.

While in economic term, there is not a meaningful change to GCI's cash flow, there is a meaningful difference to reported EBITDA. During the first and second quarters of 2015, we had $4 million and $7 million of equipment installment plan revenue.

This accelerated revenue and EBITDA recognition, when compared to 2014. Adjusted EBITDA for the quarter was $88 million, that's an increase of $4 million or 4% over the second quarter of 2014.

After factoring out the two items previously mentioned, the increase was approximately $3 million on a year-over-year basis. On a sequential basis, the EBITDA increase was $13 million before adjustments and $9 million after adjustments.

Now, to the wireless segment. For the quarter, the wireless segment posted revenues of $68 million, representing a 2% decline year-over-year and a 15% increase over the prior quarter.

The year-over-year decline is primarily due to a simplification and how we internally allocate revenues between segments. If you look at the total wireless revenue across segment, they actually grew by $7 million on a year-over-year basis after adjusting for equipment installment plan revenue.

Roaming and backhaul revenues were $34 million for the quarter, that's 13% higher than in Q2 of 2014. The first quarter is traditionally a weaker roaming quarter.

And as such, sequential growth was strong at 42%. Adjusted EBITDA for the quarter was $46 million, that's an increase of $6 million year-over-year and $8 million sequentially.

The strong roaming revenue that I just mentioned is responsible for this growth. Operationally, we continue to expand our network reach and speed.

By yearend, we will cover nearly 80% of the population of Alaska with LTE and 98% of the population will have access to GCI wireless service. Now, on to the wireline segment.

The wireline segment revenue for the quarter was $180 million. When adjusted for equipment installment revenue, this represents growth of $18 million over the second quarter of 2014 and $5 million over the first quarter of 2015.

Wireline adjusted EBITDA was $42 million, which is a sequential gain of $4 million, but year-over-year decline of $2 million. This year-over-year decline is primarily due to the allocation of SG&A, which is predominantly allocated to the wireline segment.

I'll turn now to specific customer groups within the wireline segment for more detail. First, the consumer.

Consumer revenues of $89 million were up $21 million on a year-over-year basis and $5 million sequentially. These increases were attributable primarily to wireless in the following areas: first, new revenue from the acquired subscribers during the quarter; second, new equipment installment revenue; and third, the change that I had previously mentioned in how we allocate wireless revenues between the wireless and wireline segment.

However, we also had strong growth on our data product, which was up $5 million on a year-over-year basis and $1 million sequentially. Consumer wireless subscriber losses are attributable to churn in the acquired subscriber base, which I discussed earlier.

On the cable modem front, we did experience a nice gain of 600 subscribers in what is typically a seasonally challenged second quarter of the year. Moving on to business services.

Business services had revenues of $53 million, which was a 1% decline sequentially and a $2 million or 4% decline on a year-over-year basis. This year-over-year decline is the result of a $3 million reduction in video revenues.

The decline is a result of the particularly strong election year revenue stream in 2014. Managed broadband.

Managed broadband revenues for the quarter were $37 million, that's up $6 million year-over-year and $3 million sequentially. We continue to invest in our TERRA network and just completed a backbone capacity upgrade, which will provide faster services that some of the communities serve.

These investments are driving our revenue growth in rural Alaska. Some other matters of interest.

We did have two items of note at the bottom of our income statement. First, we recorded a $28 million charge to refinance our bonds.

This charge included call premiums and writing off fees associated with the old bonds. All-in, we've increased our cash flow by $7 million per year and increased our maturities meaningfully during the last four months.

I am pleased with that outcome. Second, we recorded a net loss of $8 million on investments.

We sold one investment at a gain and wrote down another investment. Moving on to capital expenditures.

For the quarter, we spent approximately $40 million in CapEx and that brings our total for the year to $77 million. Stock buybacks.

For the year, we've bought back approximately 2.3 million shares of our stock. That's over 5% of our outstanding shares.

Any future buybacks are contingent on a number of factors. These factors include leverage, Board approval and other opportunities in the market.

Liquidity, we ended the quarter with $34 million in cash on the balance sheet and $128 million of availability on our line of credit. With total current maturities of $12 million, I believe that we have more than adequate liquidity.

Our gross leverage is 4.34x and our net leverage is 4.24x. We remain within our comfort zone.

Now, for guidance and economic prospects, our revenue and CapEx guidance remains the same. That is to say, that revenues will be in the range of $920 million to $970 million.

And core cash capital expenditures will be approximately $170 million. On the EBITDA front, I am updating and simplifying our guidance.

Previously, I have noted that EBITDA guidance was $310 million to $335 million, before approximately $30 million in wireless transition costs. I'm now updating this to be a straight $310 million to $335 million.

This update reflects the fact that we're spending meaningfully less on transition we had expected and our continued success in promoting wireless equipment installment plans. In conclusion, we've had a great quarter financially.

The best second quarter that we've ever had. We've had a successful transition of wireless customers thus far and we've successfully refinanced or amended our capital structure to reduce interest expense and increase free cash flows by $7 million per year.

I am pleased with the results for the quarter. And I'll now be happy to answer your questions.

Chad, would you please open up for Q&A session.

So a couple of questions around the equipment installment. So first of all, we have seen this dynamic from all the national carriers and I just wanted to clarify that the accounting impact that you're seeing and the cash impact is similar to what we've seen from the national carriers, so that you're not booking the subsidy upfront from an accounting standpoint and that's being amortized -- well, actually, it's not a subsidy any longer, but the cost of the phone, so therefore, that's a positive impact on EBITDA.

But what we have seen is that there is a negative cash flow hit often, because there is no recovery, the price of the phone is lower. So again, just wanted to clarify that's the dynamic and to understand if you expect that you'll have an upfront negative cash impact from moving to installment?

No, Ana, we're not expecting negative cash impact. From my perspective, what we do is the cost are the same, it's simply revenue and accounts receivable difference.

And when somebody comes in with equipment financing, they will have on the books an account receivable for a phone that they otherwise would have been given. And instead of paying a higher monthly recurring cost for their plan fees, they will pay a lower monthly recurring cost for their plan fees and there will be a reduction in account receivable as they payoff that receivable over the next 12 to 24 months.

So net-net no impact on cash flow. Although, I will note that consumers that are spending their own money for phones will tend to extend the amount of time that they keep their phones, so handsets will be less of an issue going forward than they are today.

This will dampen our monthly plan fee ARPU, but it will not have a meaningful impact on economics. So my point here was just to give you guys the pieces to figure out what true cash flow and EBITDA was.

And so that's why I highlighted the equipment installment revenues in Q1 and Q2 was to allow you the pieces there.

And then, do customers still have the option between a traditional subsidized plan and installment or are you moving to all installment at this point?

At this point, there is the option, but we're at about 80% equipment installment plans. It's a pretty compelling choice for them to make.

People don't like being stuck in contracts, and while economically it's a pretty similar situation, it pretty clearly tells them that the choice is theirs, how often they'd like a new phone.

And then on the roaming, I wanted to switch to wireless roaming. So there was an increase year-over-year, what do you attribute the increase to?

Just increased usage by our wholesale carriers.

On that front just an update on where Verizon is with rolling out their network and kind of retail base in the state?

This is Ron Duncan. Verizon's network hasn't changed much yet this year.

We think there's some supplemental build going on. They do have stores and resellers open in the state.

To date from our perception, their retail market penetration has been low. Although, as they penetrate the retail market it does drive their roaming cost with us up, because not all of the units that they sell to Alaska customers stay on their network.

I've said it before and I'll say it again, roaming will ultimately decline. We don't know yet when ultimately it starts.

And then, just on the lower transition cost, just wanted to understand what worked out better than you had initially expected?

Yes, a couple of things on it. First of all, I've had pretty much split the transition cost into two pieces.

The first piece is really the hard cost that the payment that we made to ACS, that payment that we had for billing systems on our side and hard dollar cost like that and that was about $15 million of the $30 million. We are doing a little bit better in that area.

I would call it a couple $3 million bucks better in that area than expectation. The second piece is handsets.

We had expected to lose some subscribers in the transition. What it ended up being is that those were lost by the time that we acquired them and then we've done a pretty darn good job keeping the customers from the point that we acquired them.

So there is fewer handsets that went out the door. And those that are going out the door are really going out with the equipment installment plans as opposed to the old subsidy model.

So I would look at this as economically, we're $5 million to maybe on the high side $10 million better off. From an accounting perspective, we might be a $2 million better than that on the transition.

I wanted to follow-up on the prior comment you've just made on the roaming. When you report, you report roaming and backhaul together, that $34 million.

And backhaul, I understand, because I believe that Verizon is the customer of yours, but you're also saying that you're seeing a higher roaming revenue as a result of Verizon customers in the state roaming under your network?

When Verizon sells a handset to a customer in Alaska, that customer generates a material amount of roaming on the GCI network and that is part of what keeps Verizon's roaming bill from diminishing in spite of the fact that they've built network in the state. Because their network is not ubiquitous, customers are not chained into acreage where their stores are, they take the phones and they travel and they quickly travel out into our network.

Next question, in the first quarter you guys talked about a write-off of an internally developed billing software project and you're going go towards off-the-shelf external solution. Could you give us an update on the implementation of that project?

This is Greg Chapados. We are in a process right now of going through the later stages in RFP process to selected package billing solution.

And the process has two finalists right now. That's not the end of the project in terms of selecting a billing solution, there's lot of other pieces that integrate into that, but we will be making that decision in this next quarter.

And Greg, I'm assuming you're going to avoid at all cost software cutover during the Christmas season, so if anything we'd see occurring over there?

Let's step back here for a second. That's a way too accelerated schedule here.

This process, once you select a package billing solution, then you go through a discovery process, you go through a conversion process, and that will be at least probably take us to mid-2017 before you would have complete cutoff in new platform.

And then on the managed broadband business, you continue to have very, very strong growth there. And I guess, there is two components that you've talked about, you continue to build the network and you put out a number of press releases over the years on what you're doing with TERRA and then you're also seeing a good organic growth.

I'm trying to get a sense of how much of the growth we've seen over the last year has been a result of just expanding the network footprint and what the organic growth is in that business? Can you give me any help there?

Yes, Barry, we don't really disclose the exact areas of the growth, but we have had some nice additions over the last year. Nome and Kotzebue have been meaningful additions in the not too distant past here.

And so we've had some nice build out there and we will continue to build out the TERRA network over the next couple of years, but we're not going to disclose the exact areas of that growth.

And my last question, you've done an incredible amount in terms of a buyback activity in recent quarters. Could you just update us on in terms of what is currently remaining authorized by the Board of Directors for buyback?

Yes, that will some out in the Q here, but if you were to piece together our last Q on our buybacks for the quarter, you come up with I think about $95 million in that range is currently what you will see in the Q.

So plenty left even at the current high regional run rate?

Yes, that's a program that goes back to, I think, 2003. It's a pretty old program, Barry.

Just first question on Q3 versus Q2. So notwithstanding the guidance increase you've just given for the full year, should we expect potentially some weaker sequential comparisons, given the political benefit in the year-ago third quarter.

And just to remind investors how much was the one-time effect from last year's [ph] incentive raise and [indiscernible] initiative?

So Stanley, we're not guiding on any particular quarter, but to answer your specific question on the issue of political revenues, I would note that we've had, if you look back Q2 of 2013, we had $3.5 million of business services video revenue. Q2 of '14, we had $7.6 million and that included adding Denali Media to the mix.

And then that drops down to $4.6 million in the second quarter of this year. There is unfortunately no political campaign that's going on right now.

And so in broad terms, you ought to think of the video as being not what it was in the third quarter of last year in business services, but it should be fairly analogous to what the second quarter of this year is, i.e. about $4.6 million area.

And so then you would just deduct that from the other calculations that you do on Q3 of 2015.

And just staying with video, I didn't see the sub-count for enterprise video subs relative to Q1's 19,100. I guess, that will be in the queue, but just I guess a broader question since GCI isn't alone in emphasizing more high speed Internet-led bundles, how do you suggest that we take a look at trying to model kind of revenue per household?

I mean, for those of us that are still working on individual product as opposed RTU models, is there anything you can share in terms of pull-through of high speed Internet subs from 59 to 89 to 135 packages in order to not be flummoxed by potential reduction in consumer video sub-count?

I guess I would characterize it as the free cash flow yield on video is not nearly as significant as it was several years ago. And so we don't need very much pull-through at all without getting into the specifics of the percentages that we might expect there.

But as you go up the packages, you get meaningful ARPU growth there and that ARPU does not have programmers associated with it that nip away at the COGS quite so aggressively.

Just to put that in context, we would be very happy, if we woke up tomorrow morning and all of our linear video customers had decided to stop taking linear video and upgrade their cable modems speeds and go completely over the top. So benefit at this point on GCI is substantially greater to people to who increased their over-the-top consumption and hedged their data spend and decreased their video spend.

So we are well past the point of inflection, where we prefer massively preferred data to video and the contribution of video to the businesses down to the levels that it could be easily replaced by a slight continued growth in the data business. So we're sort of beyond caring about the video business.

No. And you're clearly not alone amongst MSOs in orienting the business and to package that way.

So I was just hoping you might have some thoughts in terms of pull-through, but as you say. Thanks very much, I appreciate the additional color there.

Thank you, Chad. And thank you all for listening.

We will talk to you all here in about 90 days.