Liberty Broadband Corporation (LBRDK) Earnings Call Transcript & Summary

All right. Good afternoon, everybody. I'm Bentley Cross with TD Securities. And I'm very pleased to have Ron Duncan here from GCI.

I want to start with some bigger-picture questions, Ron. I know it's somewhat ancient history at this point. But hopefully, the history will shed some light on what the future may hold. Why did you decide to combine with Liberty back in the 2017, 2018 time frame?

I think the principal reason is it's hard to turn down a transaction with John Malone. We have been in this business a long time. I think you know that we originally started out as a wholly owned subsidiary of TCI, and we went public as a spinout from TCI back in 1986. We grew the company and we're pretty successful over the subsequent 40 years. And we've been approached a number of times by private equity firms, but not by lower 48 cable firms. The market up here is different enough, but I think it was a little scary to the traditional lower 48 cable firms. And the PE guys would always come at us, but their deals will be better structured for them than they were for the shareholders. And my management team was a large portion of the shareholders. So that was never that interesting. But then one evening, I got a call from John saying that they had an idea that they'd like to explore. And they gave us a way to sell the company in a manner that would let us diversify into the broader national cable industry while maintaining our independence up here and pitching our upside to what their plans were. And I've been a fan of Malone's for 40 years. And if all you did was invest where he invested, you made a lot of money. So ultimately, the deal made a lot of sense for us.

I couldn't agree more. But since the deal, things have changed in the cable industry. And we see the guys in the lower 48 moving increasingly to wireless. Do you think that's changed the dynamics? I mean with the benefit of hindsight, do you think somebody in the lower 48 may come knocking down the road?

We're doing wireless a good bit differently than the folks in the lower 48, we're actually a mobile network operator. We're the largest in terms of footprint mobile network operator in the state. We're entirely on our own facilities, whereas the path into wireless for the cable companies in lower 48 has really been as a reseller, a mobile virtual network operator. I think we've proven to ourselves many years ago that wireless was a really good business for cable to be in, we're seeing that even more so now in the pandemic, and we can talk about that in a minute. But I think as the cable guys get into wireless, the similarities between the 2 companies will become more aligned. But I think we're sort of on a path at this point to go where Liberty wants us to go.

Not a bad place to be. Liberty wanted you to go in the direction of Charter, have you been able to leverage that relationship at all at this point? Or is that still a potential opportunity down the road?

To get the real synergistic dollar values out of leverage, I think companies have to wholly own each other. We've clearly gotten synergistic value out of the Liberty merger. We're no longer an independent public company. So we shed a lot of public company overhead. We no longer really have a finance function that all gets run for us through Liberty, and some of the corporate overhead has moved in that direction. But to capture the benefits of programming or more importantly, platforms like a customer service, customer experience platform, a streaming video platform, those sorts of things where GCI has subscale today, really can't get those unless you're in a wholly owned environment. Charter has always been very helpful to us. They've been open to our questions and to sharing of information on some of our strategies, but I don't think we'd see further synergies from the operating side until we were actually merged into some larger entity that was doing it on a national or global scale.

Okay. You mentioned subscale in that response. But despite the fact that you guys are somewhat subscale, you seem to be on the forefoot of technology, and you announced just last week, an ambition to deliver 2 gig speeds to 70% of Alaskans. I mean nobody else is doing that at this point. Why was it right time to lean into that opportunity?

We're lucky in that while we serve small communities that are separated -- relatively small communities, again, Anchorage is pretty small. It's only 250,000 people, and they're separated by large distances. Within the communities we serve we're relatively dense. And because of our history, we started out as a phone company, a competitive phone company and then bought the cable companies. We really have a tremendous fiber backbone, both middle mile connecting the communities and the state and a very fiber-rich environment within our distribution system. So in our HFC definition, the F is a capitalized and bolded because there's an awful lot of fiber. And we've been able to leverage the Hybrid Fiber Coax plant, very, very successfully. In fact, my expectation is that we will run all the way to 10 gigs without needing to go to fiber to the prem just by further cellularization of the plant by moving from today where we are with the low split to mid-split and ultimately high split, and by using extended spectrum DOCSIS and DOCSIS 4.0, we can get 10 gigs with a several gig return path. Our move to 2 gig really was motivated by the pandemic when we saw what we thought was several years of future overhead in our network, it consumes in the space of 9 months. We've been building ahead. We try to keep the plant distributed enough and cellularized enough that we don't run into any bumpers on the speed. And with the very large increase in customers and a huge increase in throughput with the pandemic, we started to press up against the limits of the network. So we were -- we moved faster than we would have to implement some of the next stages. But for 2 gig, the real gating item is just getting rid of linear video. And we struggled with that. A place where platforms matter again, we don't have the scale that Charter or Comcast does to develop and implement our own streaming video platform. We think we finally have a workable software solution, it is outsourced, but it's not great. We're going to turn that up in June. And once we turn that up and we can start turning down QAMs, that are currently used for linear video, we'll be able to get the 2 gig and beyond largely with the existing network.

Is it fair to say the upgrade cost is virtually 0 and that there's obviously some investment there, but relatively modest at this point?

We think it's never 0 when it comes to equipment or capital, but we think it fits nicely within our ordinary maintenance capital expansion plans. We spend $3 million to $5 million a year sort of maintaining the current network in terms of node divisions and those sorts of things. We'll spend a little more when we move in the next couple of years to mid-split. And then if we go to extended spectrum DOCSIS, we'll have to change out some taps and those sorts of things. When we start selling the 2 gig, we're going to have to swap out some cable modems, assuming we can get the cable modems. And we're going to have to swap out some WiFi gateways. But those are kind of customer premise costs, and they go with turning up the service anyway. So it's a very logical natural evolution for us. I am just a huge fan of the HFC plant. Everybody always says, oh, it's going to run out of steam next year. Well, I've been hearing that for 25 years, and it's sort of like when my guys promise me the delivery of a new product, next year never comes.

And are you seeing actual demand for a 2-gig product at this point? We had a company present this morning, and they said they're seeing less than 10% of loads coming in at 1 gig. So 2 gig just seems like a bit of a science experiment most at this point.

There's a difference between what people need and what people want. And I was shocked when we launched 1 gig 5 years ago at the enormous uptake that we had with that product. Today, almost 40% of our total modem customers are on the 1-gig platform. Now are they using all of the 1 gig? No. Probably 95% of those could get by successfully with one of our lower speed tiers, but people like the speed itself. It's an easy marketing message, and they want to be on the best plan, the best bundle, and that has worked tremendously well for us. And actually with the pandemic, we're finally beginning to see people who really do need that. If you've got 2 kids at home and they're doing remote learning and both you and your spouse are trying to do remote work. And somebody's got a streaming video running somewhere there on the TV in the kitchen, then you really do need the 1 gig and sending all that back. So we think the demand will grow. And when we started -- I launched the first beta business for GCI in 1996 with a 256 kilobit cable modem. That's kilobit with a K. You may not even know what that is, but take your megabit and divide it by 1,000. And people thought that was really great service. And then somebody said, well, gee, we could go a megabit and others said, well, what on earth would anybody ever use a megabit for. So be patient, it will come.

As we think about the opportunity and more growth that you've shown, I mean growth across the industry has been tremendous in recent quarters. Can we kind of flush out what part of that is coming from lower churn versus higher gross adds? And then if we really get into the details, if you can expand on out of the churn, what's coming from better non pay churn versus mover churn? Any color you want to provide would be appreciated.

Well, I think the pandemic sort of provided the complete solution to churn. People stopped moving and they stopped disconnecting. And connects went up enormously because people needed the service, and there's an interesting point I'll come back to in a moment there. And the relief efforts that the government created, gave everybody the money to pay for the service. So really, in the end, people were worried, gee, we're not allowed to disconnect people for a period. Well, it really didn't matter because people were so flushed with the relief funds or with personal savings as a result of no longer commuting, no longer going out, no longer spending on other entertainment that our bad debt went down to insignificant levels. People didn't disconnect at all during the heart of the pandemic, and we got this in rush of customers. We figure about 75% of the passings actually take some form of Internet, and we probably got 75% of the 75%. A large portion of the ones before the pandemic who weren't taking it were wireless-only homes. They were people that were effectively using wireless substitution because they had kind of mobile lifestyles, and they didn't really have the need for the intense dedicated bandwidth from the wired side of the service. Well, the pandemic, first of all, took mobile people and made them immobile, and it put them in an environment where they had to be able to run their whole workload from home. And that just didn't work through the mobile phone. So my suspicion, and it's backed up in what we can see in our traffic stats as both a mobile and a fixed operator, is that a substantial portion of the adds that we got over that period really came from terminated mobile substitution, people kept their mobile lines, but they also went and added a fixed line because for the sorts of things like what we're doing here today, in fact, your instructions to me in how to set up for today, very clearly said, do not use a mobile phone for your video link. And we understand, even though you can get 100 megabits out of your GCI mobile phone here in Anchorage now. I understand why the 1 gig line that I'm talking to you on is a better one. So I think it was a perfect storm of things to just eliminate churn.

And do you think that sticks?

I don't know what to expect when the relief drugs from the stimulus plan start to fade off. We just launched the emergency broadband benefit plan, which in Alaska is was $75 per month subsidy because all of Alaska is defined as tribal lands. The uptake on that has been a decent but moderate pace, in part because the sign-up process is difficult with all of the disclaimers that the FCC makes you acknowledge. And we're seeing some interesting things there. We're seeing about 70% of the sign-ups are existing customers and 30% of the sign-ups are new customers. While we offer it both on the wired and the wireless side, we've had no takers on the wireless side yet, kind of reinforcing my theory that in this environment, people need wired. I worry what happens, particularly to our existing customers. If they go 2 years without paying for the service, and they let their household budgets grow once they get back to normal to consume other things. What's really going to happen when we start to withdraw the support that has been provided to the economy? And that's a specific worry about EBPP, but it's also a generalized worry about what happens when the world goes back to some version of normal in terms of consumer spending and those sorts of things. So I look at it the economy, and I get worried by the fact that consumer savings is at an all-time high. But when we talk to the people who run the largest -- the largest apartment complexes in the state, they tell us that 30% of the low-end departments, people renting for less than $1,000 a month are more than 3 months in arrears. And they're paying their cable bill, but partly because they're not paying their rent. And I just don't know how that unwinds. I'm nervous, I would say, as to what happens in the fourth quarter of this year and the first quarter next year when some of that unwinds.

I mean you expressed a similar sentiment on last quarter's call. But at the same time, it seems like finally, the oil price is recovering. And historically speaking, Alaskan economy is largely tracked to oil price So can we just cross our fingers and hope that the oil price stays? Or has there been a decoupling between the oil price and the Alaskan economy at this point?

You need 2 things to keep the oil economy flowing in Alaska. You need good oil prices, probably not as good as you think, Alaska was actually profitable down at $40 a barrel oil. But you also need to be able to drill for it. And under the prior administration, you could get a drilling permit basically by sending in a postcard. And they sent you something back and it said, yes, go ahead and drill. That post office box has now been closed, and the people who inhabit the far end don't answer their phones, and it's very, very difficult for the oil companies to expand their footprint. The nature of the fields up here is that the existing ones that you're pumping ultimately run dry and you got to keep spreading the footprint, it's not a very big footprint but you got to keep spreading the footprint, and you've got to keep drilling new wells to keep the pipeline filled. We had a disaster this year when the court shut down Conoco's drilling season on the North Slope because of a failure in one of their environmental permits. One of the groups that constantly sues to stop this stuff, won a technical victory. You've only got 3 months a year up here when you can drill. You've got to do it in the winter when you get there on the ice roads. And that got shut down. It's now very hard to get permits. So that's the problem for the oil piece of Alaska's economy is how much can we develop and things like the Dutch Court decision on Shell this morning. None of that adds to an equation that's helpful for a resource economy like we are.

Okay. We'll get back to court decisions later. But first, going back to penetration and pushing that higher. I mean you touched on penetration a little bit earlier but it seems to me like your penetration isn't that high relative to what we know here in Canada or relative to the lower 48. Do you think the opportunity exists to push that penetration rate higher? And how much of that needs to come from your own investment versus government programs? And maybe within that, you can talk about your Aleutians fiber project as well.

Sure. Within our existing footprint, I think there's gradual penetration increases, depending on whether or not there's a blip or an adjustment as we get post-COVID here, that we see continued growth of the number of homes that take the wired service. And I think the pandemic has certainly helped to prove that. And to the extent that people can afford the service, I think much of what we've added in the last 2 years or the last 14 months, will stay. Will all of it stay once they have to pay for it? Probably not. But I think as the products continue to improve, that will continue our subscriber growth. The issue of where you grow beyond that. Alaska, this isn't the lower 48 model where you need to run 2 miles of plant to pick up a farmhouse. This is a model where you have dense clusters of population separated by distances, the length of the lower 48 coast to coast. So our fiber from Kodiak to Dutch Harbor is almost as far as going from New York to L.A., and we're doing it to pick up a densely clustered community on the far end that will probably add a couple of thousand connects. So the name of the game up here isn't picking up isolated homes. It's picking up isolated communities and to serve them effectively, you really have to have good middle mile, which means either high-capacity microwave or fiber.

Okay. Going back to lawsuit conversation. I mean RHC has been, I think, the topic of every conference call you've had since you've been married with Liberty. Can you kind of flush out for investors that maybe not -- don't know the story as well, what the heck is RHC? Why does it exist? And why has it been so contentious?

Sure. RHC is the Rural Health Care program. It's a program that the FCC instituted, I think as the fallout of the '96 Telecom Act. It was something authored by Ted Stevens, and it was designed to help the rural areas get traction on -- really telehealth was the driving impetus for creating it. And what it does is it allows clinics and health care facilities, health care providers in qualifying areas to purchase broadband connectivity at equivalent urban rates. So a health care provider in Kotzebue, which is up on the Northwest Coast of Alaska, can purchase connectivity to the system for the same rate that Providence Hospital here in Anchorage purchases that connectivity. It has made the system affordable to the rural health care providers, and it has stimulated in an enormous boom in telemedicine. Before we launched these products 25 years ago, medicine in rural Alaska was Medevac. If you had more than the health aid in the village could accommodate or more than the very competent but thinly staffed clinics in the regional centers could accommodate, it was a Learjet to Anchorage, and that was $50,000 a pop. And we've turned that around. We've cut Medevac probably by 90% because people are being treated both in the village and in the regional centers. We have a very extensive network of high-speed, high-quality 2-way video. People have actually -- general practitioners have actually done surgery in the remote hospitals under the guidance of specialists in the urban centers, the health aids in the villages are able to do much more under the direct video supervision of the docs in the regional centers, the quality of care has gone up enormously, and the system has just blossomed. Under the last administration, the FCC decided that they didn't like the particular program that Alaska was benefiting from on telehealth. There are multiple programs, but there's one that Alaska took most of the money from. They didn't like how much money was going to Alaska. And they didn't like the fact that GCI was taking a lot of the money that was going to Alaska. And they decided they wanted to reinvent it, rein it in and have less money flow to Alaska. And that led to a very substantial period of disagreement. The rules were changing, they're complex. They asserted that we violated those rules in some places, although I think it's going to turn out that there's -- there's always room for argument there. But they launched the attack on telehealth in Alaska, and they actually reinvented the whole program and changed it around to a new database program that is supposed to take effect for the whole company, for the whole country, starting in July of this year. In January of this year, the FCC realized that their new program was totally unworkable. The database was completely screwed up. And that it wasn't going to work for Alaska. So they rescinded it for Alaska. They suspended it for 2 years and said, all right, we're going to use previous approved rates for 2 years. And then just recently, they came back at the request of lower 48 providers and said, well, golly gee, it doesn't work in the lower 48 on the new paradigm either. So all bets are off, erase what the last administration did. Let's go back to the drawing board. And that's what you've seen from us in the last 4 to 5 months is the breaking of the ice jam and the flowing of the funds again. And the program, I think, is now on a stable footing for the next couple of years, at least, probably a long answer, I apologize for that.

Don't apologize. I appreciate the color. But to make it even more of a long answer, your disclosure historically has allowed us to infer that it was roughly north of $100 million in payments coming from RHC. Can we expect that to be the status quo going forward?

We see that market continuing to grow, not as rapidly as it did initially. The bandwidth demand is insatiable. The revenue growth will be constrained both by the need to build new network to meet the bandwidth demand and by decreasing per megabit prices has been with volumes go up. So don't be surprised when you see continued growth in telehealth revenues. Don't look for the growth that you would have seen if you were following us in '17 and '18.

Okay. Outside of you -- of the health care initiative, there's a bunch of other high-cost support initiatives for Alaska, in particular. Can you break down the buckets?

Sure. We've disclosed publicly that 29% of total revenue comes from federal support programs. The telehealth the RHC program is the largest, followed not-too-distantly by the education support program, which provides support for connectivity to schools. And then after that, it's what's called The Alaska Plan The Alaska Plan was the FCC's version of RDOF or it's RDOF alternative for Alaska. It subsidized Alaska carriers who serve remote areas, essentially on a per subscriber basis. And that program was adopted and it's currently slated to run in its present form through 2026. We are in the process, along with the rest of the industry in the state right now of working on new service commitments and the like that would extend that. And I suspect all 3 of those support programs that fund money to Alaska will continue in some way, shape or form for the foreseeable future. Alaska wouldn't have quality communications in the rural areas without them. And if you look at -- in fact, if you look at the current iteration of our RDOF, it's 3 to 4x as big as the prior funding for that. There's actually some argument that Alaska funding on The Alaska Plan should go up as well.

Okay. We're almost out of time, but I didn't want to leave with at least touching on wireless. You guys have one of the most robust networks when you combine the DOCSIS plan plus the 5G network you guys have been building. But your 5G network seems to rely mostly on mid- and low-band spectrum versus others in the lower 48 and here in Canada that are somewhat embracing millimeter wave. Is there a place for millimeter wave for GCI? Or is it topography is such that you'll never bother to invest in that spectrum?

It's a combination of the fact that we are so rich in low and mid-band spectrum that we simply don't need the millimeter wave and the fact that there are limited venues where millimeter wave would be really useful up here. We're not -- we are clusters of people, but they're not packed densely together like you would be in your major metropolitan areas in Canada or the lower 48 states. And the average wireless distance is probably a couple of thousand feet, millimeter wave really isn't effective or necessary. We have much fewer population and much greater bandwidth as a wireless provider than any other wireless provider in the country. We're probably the most spectrum-rich wireless provider when it comes to low and mid-band spectrum. And given the population we serve, we can do everything we need with that. Now some of that may be if you're a spectrum engineer, you might view it as wasteful that we use mid-band spectrum for in-building coverage and that sort of thing where a millimeter wave would work. But we own the spectrum, it's available, and it works really well, and it gives us better coverage in the long run. So a little different situation in the lower 48, but a big benefit for us.

Ron, we're pressed against time. So I'm going to say thank you very much. Much appreciate it. I wish we had more time.

Thank you, Bentley. Have a great day.