GCI Liberty - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 revenue rose 6% year over year to $261M, operating income increased 70% to $51M, and operating margin expanded 730 bps to 19.5%; Adjusted OIBDA grew 26% to $108M, driven by strong Business data upgrades and cost efficiencies.
• Consumer revenue declined 2% (data -5%, video down, wireless +6%), offset by Business revenue up 14% (+18% in data), reflecting schools and healthcare upgrade cycle that began in Q3 2024.
• Management reaffirmed strategic priorities: exit the video business by year-end 2025, execute rural Alaska fiber projects (Bethel and AU-Aleutians), and target ~$250M net capex in FY 2025; trailing-12-month free cash flow was $153M and leverage fell to 2.3x.
• Regulatory backdrop improved: Supreme Court upheld the constitutionality of the USF, removing a key overhang for Alaska connectivity economics; management highlighted this as a positive catalyst for continued investment and service expansion.
• Stock reaction: aftermarket up ~1.67% to $38.30 on the day of the call, supported by clean execution and margin expansion.

What Went Well and What Went Wrong

What Went Well

• Business segment strength: Revenue +14% YoY (data +18% to $125M), reflecting continued upgrades in schools and healthcare across remote Alaska, driving higher gross margin to 81.7% (+730 bps).
• Cost discipline and efficiencies: Total operating expenses (ex-D&A) fell 4%; SG&A (ex-SBC) down 4% on lower external labor; margin expansion supported OIBDA growth (+26%).
• Management tone and regulatory clarity: “We were very pleased with the Supreme Court’s ruling… [USF] provides clarity for GCI to continue the critical work of bridging the digital divide” — Ron Duncan, CEO.

What Went Wrong

• Consumer softness: Consumer revenue -2% YoY with data -5%, pressured by ACP program termination and video declines; subscriber net losses persisted (cable modem subs fell 1,300 in Q2; -3% YoY to 154,500).
• Business wireless revenue declined 17% YoY to $10M, partially offset by strong Business data performance.
• Temporary network disruption: Rural subscriber growth was adversely impacted by a fiber break on a third-party network (though it also yielded temporary cost savings in distribution).

Transcript

Speaker 3

Welcome to the GCI Liberty 2025 Q2 earnings call. During the presentation, all participants will be in a listening-only mode. Afterwards, we will conduct a question-and-answer session. At that time, if you have a question, please press *1 on your telephone keypad. As a reminder, this conference will be recorded as of today, August 7, 2025. I would now like to turn the call over to Shane Kleinstein, Senior Vice President of Investor Relations. Please go ahead.

Speaker 1

Thank you and good morning. Before we begin, we'd like to remind everyone that this call includes certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual events or results could differ materially due to a number of risks and uncertainties, including those mentioned in the prospectus forming part of GCI Liberty's registration statement and the most recent Forms 10-Q filed by GCI Liberty and Liberty Broadband Corporation with the SEC. These forward-looking statements speak only as of the date of this call, and GCI Liberty and Liberty Broadband Corporation expressly disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein to reflect any change in GCI Liberty or Liberty Broadband Corporation's expectations with regard thereto or any change in events, conditions, or circumstances on which any such statement is based.

On today's call, we will discuss certain non-GAAP financial measures for GCI Liberty, including adjusted EBITDA, adjusted EBITDA margin, and free cash flow. Information regarding the required definitions, along with comparable GAAP metrics and reconciliation, including Schedule I, can be found in the earnings press release issued today, which is available on GCI Liberty's website. Today, speaking on the call, we have Ron Duncan, CEO of GCI Liberty; Brian J. Wendling, GCI Liberty's Chief Accounting and Principal Financial Officer; and also during Q&A, we will answer questions related to Liberty Broadband Corporation. Members of both GCI and Liberty Broadband Corporation management will be available to answer questions during the Q&A portion. With that, I will turn the call over to Ron.

Speaker 0

Good morning. We were pleased to complete the spin-off of GCI Liberty from Liberty Broadband Corporation last month, allowing me to speak to you today on our first quarterly call as a once-again public company. 2025 is off to a great start. GCI Liberty continues to lead in the provision of statewide service to all of our customers. This has been of particular value to our rural health and education customers. In the last 12 months, we have achieved significant upsells in this segment as rural schools and clinics have purchased additional bandwidth. We grew consumer wireless subscribers 1% year over year, ending the quarter with 207,000 subscribers. During the quarter, we added 4,700 consumer wireless lines. On the data side, we saw a 3% decline year over year, ending the quarter with 154,500 cable modem subscribers. During the quarter, we lost 1,300 data subscribers.

The decline of data subs over the past year is largely due to the elimination of the ACP program in 2024, the fiber break on a third-party network in which GCI Liberty uses capacity, Starlink competition, and wireless substitution. Financially, these results have translated into a record last 12 months EBITDA of $405 million as of the second quarter. The USF challenge at the Supreme Court, which had been the overhang on our business and led to a negative credit watch earlier in the year, has been definitively and favorably resolved. Looking at several other financial highlights, in March, we successfully refinanced our senior credit facility and pushed out maturities to 2030 and 2031. In the second quarter, we were able to reduce our net debt by $86 million, bringing our total leverage down to 2.3 times as defined by our credit agreement.

The combination of these events led S&P to eliminate the negative credit watch and raise our credit rating in July. We're proud of the progress, both financially and operationally, over the first half of the year. While we're now a standalone public company, it's business as usual for our team in Alaska. We remain focused on improving our infrastructure to deliver high-quality service to our customers, furthering our rural expansion to bridge the digital divide, and increasing the efficiency of our business. I'll go into a bit more detail in several areas. Starting with our network infrastructure, we are offering 2.5 gigabit broadband connectivity in areas that have fiber middle mile, which cover an overwhelming majority of our customers.

Material progress is being made in improving the broadband network in Anchorage, as we are in the process of upgrading the core, reducing node sizes, and upgrading the plant to 1.8 gigahertz. All the work that we are doing is DOCSIS 4.0 or 4.0 capable, enabling speeds that are multiple times what we have today. We will be rolling this out to other markets in the coming years, allowing us to get to 5 gigabits and ultimately beyond. We believe these changes will not only lead to higher speeds, but also a network that has fewer maintenance requirements. The strength of this offering positions us well against competitors today and into the future. On wireless, we are encouraged by early signs that our wireless postpaid business is growing again. We launched our unlimited test drive promotion in April of this year.

This offers our broadband customers a discounted price to gain access to unlimited broadband and add a wireless line. This promotion is driving growth for both our GCI Plus converged product and postpaid wireless lines, with sequential growth in postpaid lines of 3,400 in the second quarter. We expect to roll out other new pricing and packaging offers later this year to drive further growth in our wireless products. We plan to provide 5G wireless service to all Alaskans over the coming years. We continue to bridge the digital divide in Alaska with rural expansion. As I mentioned, we are happy to have the Universal Service Fund ruling behind us. This was an enormous win for the Universal Service Fund, the state of Alaska, and all of the providers in Alaska, including GCI. The Supreme Court's decision clearly affirms the legal foundation of this important program.

On the Alaska plan, we expect to complete the first phase and meet our build-out requirements in 2026. This will increase wireless speeds in the communities we're serving. The FCC's new Alaska Connect Fund will extend the Alaska plan and increase the amount of support. This will aid in the deployment of 5G wireless throughout Alaska. On BEAD, the state of Alaska was allocated up to $992 million in funding for infrastructure projects to connect unserved and underserved locations. Recent changes to the program make it unlikely that the state will be able to award the full amount of its allocation. GCI submitted several applications to participate in the Alaska BEAD program. Any monies that GCI has awarded will defray our capital costs as we expand in unserved locations, but this funding is not currently factored into our CapEx budgeting.

Finally, on our effort to increase efficiency in our business, for the past year and a half, we've been engaged in efforts to proactively manage our cost structure. In 2024, we reorganized our tech organization and early this year hired our first ever Chief Technology Officer, Troy Goldie, who has been leading the efforts to make sure that our technology team is both effective and efficient. I'm very pleased with the early results in the CTO group. We are continuing our efforts to streamline the business and increase efficiency by implementing new systems and applying the lessons learned in the CTO reorganization to other elements of the company. We expect these efforts will help maintain better discipline across our entire cost structure. Before closing, I should comment briefly on the Alaska economy. The market has been flat up here with a slowly declining workforce for over a decade.

The state government is challenged by the lack of a credible fiscal plan. The drop in oil prices has contributed to the malaise. There hasn't been much good news to talk about. However, the new administration's change in resource policy with respect to both oil and mineral exploration makes me cautiously optimistic about Alaska's economic future. More importantly, there could be a ray of hope on the horizon. For 50 years, Alaskans have dreamed about the construction of a natural gas pipeline from Prudhoe Bay to Tidewater. This has always seemed to be a pipe dream, if you will, that was just out of reach. While details are still emerging, the inclusion of significant purchases of Alaska Gas and the promise of investment by Japan in the president's recently announced trade deal could change the game.

Adding cheap energy to an environment where average temperatures are cooler and there is an abundance of land and water could make Alaska a very appealing location for participants in the AI economy. There's still a lot of skepticism and some genuine doubt, but we hope to know more over the next few months. The construction of a gas line and the export of material amounts of natural gas would clearly be cause for optimism. In the meantime, we welcome anyone else to join us here in Alaska, where we would remind you the water flows well, the climate stays cool, and the environment is wonderfully conducive to the demands of the ever-growing data center industry. To our listening audience of telco analysts, please spread the word.

In summary, we remain confident in our ability to deliver high-quality service to the state of Alaska with both the breadth and caliber of our network and service. We believe the quality of our infrastructure and durability of our financial results will drive value for customers, partners, and shareholders. With that, I'll turn to Brian to discuss the financials in more detail.

Speaker 4

Thank you, Ron, and good morning, everyone. As Ron said, the GCI Liberty spin-off from Liberty Broadband Corporation was completed on July 14th. Holders of Liberty Broadband Corporation Common Stock received 0.2 shares of the corresponding series of GCI Liberty Common Stock per share of the corresponding series of Liberty Broadband Corporation Common Stock held on record as of that day and on the record date. At quarter end, GCI Liberty had consolidated cash, cash equivalents, and restricted cash of $117 million and total principal amount of debt of approximately $1 billion. As a reminder, GCI refinanced its senior credit facility in March with a $450 million revolver that matures in 2030 and a $300 million term loan A that matures in 2031.

At quarter end, GCI's leverage, as defined by its credit agreement, was 2.3 times, and GCI's credit facility had $377 million of undrawn capacity net of letters of credit. Prior to the spin-off, but subsequent to quarter end, $10 million of non-voting preferred stock of GCI Liberty was issued to Liberty Broadband Corporation and then sold by Liberty Broadband Corporation to third-party buyers. The GCI Liberty non-voting preferred stock pays a 12% dividend with a redemption date in 2032. Now looking at GCI's results, GCI generated total revenue of $261 million, representing 6% growth in the second quarter. Adjusted EBITDA of $108 million increased 26%. Results in the quarter continue to benefit from a strong upgrade cycle in schools and healthcare corporations that began in the third quarter of 2024, as well as growth in consumer wireless and the cost efficiencies.

Note we expect a slowdown in adjusted EBITDA growth in the back half of this year, partially driven by fully lapping the upsell cycle with schools that began in the third quarter of 2024. Additionally, we have benefited from several other one-time items in the first half of the year, including lower employee benefit costs. GCI remains on track to fully exit the video business by the end of this calendar year. This will allow us to focus the business on the products and services that our customers need and want, but it will not have a significant impact on revenue or COGS, and the impact on free cash flow and EBITDA will be immaterial. Consumer revenue declined 2% to $119 million.

The majority of the decline was driven by a decline in data revenue, as well as the video segment, which we are exiting, slightly offset by growth in consumer wireless. Consumer wireless revenue increased 6% to $51 million, benefiting from wireless subscriber growth and an increase in federal wireless subsidies. Consumer gross margin is 70.6%, which is relatively flat compared to the same period last year. Business revenue grew 14% to $142 million. Most of the increase was driven by data revenue, which continued to benefit from the strong upgrade cycles noted above, which began in the third quarter of 2024. Wireless revenue declined $2 million, or 17%, largely driven by a decline in roaming revenue. Business gross margin increased to 81.7%, primarily due to temporary cost savings from the Quintillion fiber break combined with the data revenue growth.

Capital expenditures net of grant proceeds totaled $51 million during the quarter. Year to date, GCI Liberty had approximately $100 million in net CapEx investment and expects full-year net CapEx to be around $250 million. GCI Liberty generated $153 million in free cash flow on a trailing 12-month basis through the end of the second quarter. We believe presenting free cash flow on a trailing 12-month basis more accurately demonstrates our cash generation and liquidity profile by minimizing seasonal fluctuations, particularly around the timing of USF cash receipts. Typically, we have a delay in cash payments from our USF-supported revenue at the start of the new funding year, which begins in the third quarter of each year. Last year, we didn't start to receive meaningful amounts of cash until the beginning of Q1 of the following year.

However, the outlook for the rest of 2025 is favorable as we have received USAC approval for a significant amount of services already. We should start to collect cash over the next few months and meaningfully accelerate the timing of our cash flows versus the prior year. Lastly, based on recent stock prices, we currently expect the GCI Liberty spin-off will result in a basis step up of approximately $1 billion. Our combined federal and state tax rate is just under 30%, so that gives you an idea of the value of the tax asset, though we're not providing a timeline for its utilization, as that may depend, will depend on a variety of factors. With that, I'll turn the call back over to Ron.

Speaker 0

Thank you, Brian. We appreciate your interest in GCI Liberty and look forward to continuing to update you on our progress. With that, we'll open the call up for Q&A.

Speaker 3

Thank you. Ladies and gentlemen, as a reminder, if you would like to ask a question, please press *1 on your telephone keypad and the confirmation symbol indicates you're in the question queue. You may press *2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your headset before pressing the * keys. One moment, please. We'll be polling for questions. We have a question from Barry Sine with Litchfield Hills Research, which will be our last question on the call. Please proceed, Barry.

Speaker 2

Hey, good morning. I wanted to ask about your acquisition strategy. On the June 3rd call you guys did, you spoke about acquisitions likely being a key part of your strategy. If I think about the Alaska telecom environment, you've tried buying a TV station. Quintillion has ice scour issues. MTA is a co-op. You could always buy the Iditarod. Liberty has created a lot of value at Formula One. Would you go out of Alaska? Would you go out of your industry? What are your criteria for acquisitions? Thank you.

Speaker 0

Thank you, Barry. Yeah, I think buying the Iditarod would be great, and we'll turn that into an international sport and infuriate Peter beyond all belief. Obviously, there's not a lot of attractive acquisitions at scale in Alaska, so any acquisition strategy would largely be directed out of state. It wouldn't necessarily be within the business we're currently in today. I don't think we're looking at leveraging the operating resources of GCI Liberty in any future acquisition strategy rather than the financial resources and the tax assets. That said, GCI Liberty as a public company is not quite four weeks old. We haven't had our first full quarterly board meeting yet, and we don't have a developed list of acquisition targets or even necessarily a list of priorities and strategy for that.

You'll have to give us a little more time to develop that, but obviously, we have a lot of cash flow to deploy, and we have a lot of tax assets that can be accelerated. With that, I think we are done for this quarter, and we appreciate your interest in GCI Liberty, and we look forward to getting back to you at the end of the next quarter. Thank you.

Speaker 3

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you all.