General Communications is an Alaskan quad-play cable and wireless operator that also owns a fiber network. The company trades at a 13% 2017 FCF yield with 45% upside to $21 near term (10x FCF) and should continue to compound with 20% free cash flow growth and quality capital allocation, thereafter.

1. Investment Merits

• Quad Play Wireless and Cable – insert my QBR CN points or any other VIC cable thesis points on the merits of quad play and cable broadband in rural areas with limited competition

• GNCMA has an all digital DOCSIS cable network with 1gbps broadband and very limited competition in an extremely rural footprint (in both cable and wireless)

• Quality Management – Capital allocation is very thoughtful. Also, the CEO co-founded the company, the Chairman was previously an executive at TCI and the rest of the board/management seems to be connected with local Alaskan politics, FCC/DC regulatory groups and national cable/broadband lobby

• Cheap and Growing/Predictable Free Cash Flow – I’m at a 13% FCF yield in 2017 with FCF growth at 20%+, not including equity shrink or high return capital reinvestment

2. Why is the Stock Misvalued?

• Lazy Short Thesis – focus on low oil prices and impact to the Alaskan macroeconomy, along with lack of free cash flow generation in 2016

• This is especially apparent in the drop in consumer wireless ARPU from $32.05 in Q4 2015 to $24.51 in Q1 2016

• Change in Roaming Revenue Agreement – change in a roaming revenue agreement with Verizon has resulted in a drop in roaming revenue from $128.5m in 2015 to an estimated $73.5m in 2016 – this is extremely high margin revenue that falls straight to the bottom line.

• Illiquid Stock – from what I understand, there was a large, forced seller who’s done now

Myths Busted:

• Lazy Short Thesis

• While oil prices have affected the Alaskan economy, that pressure isn’t expected to increase as oil is higher and telecom spend is considered less discretionary

• The ARPU decline from Q4 2015 to Q1 2016 is more of a function of the shift from owned to leased handsets

• If we exclude the change in equipment revenue, the ARPU change is actually negligible, especially because citizens get $2k in October from the Alaska Permanent Fund, driving Q4 handset sales

• Very robust free cash flow in 2017

• The company sold its towers for 20x cash flow or $90m, which they are using to loop their fiber network. They believe this is a very good use of capital and will support low-teens managed broadband revenue growth for several years

• Post growth capex from the fiber build, overall capex in 2017 should be in the $160m range, yielding mid $70’s mm in 2017 levered FCF

• Roaming Revenue Agreement – in Q1, GNCMA’s roaming revenue agreement with Verizon changed, resulting in a drop in extremely high margin roaming revenue from $128.5m in 2015 to an expected $73.5m in 2016

• This revenue stream was previously growing, while now, it’s capped, based on a 15+ year (estimated) agreement with Verizon

• While this has resulted in a drop in EBITDA from $337m in 2015 to an expected $$325m in 2016, it significantly de-risks the GNCMA story since it stops Verizon from over-building wireless outside of Juneau and Anchorage and reinforces GNCMA’s overall monopoly

• Illiquid Stock – not much to say here; selling pressure should abate, going forward and the company is likely to continue buying back stock

3. Modelling

1. Wireless Revenue – this segment refers to ‘wholesale’ wireless revenue the company receives that’s divided into 3 segments, (1) wholesale wireless, (2) roaming & backhaul and (3) USF support

1. Wholesale wireless – very predictable flat revenues from monthly wireless sub service costs – hold constant at $84m/year

2. Roaming & Backhaul – Carrier fees from tourists from the lower 48 roaming on the GNCMA network. as per discussion above, flat $73.5m based on 15 year contract

3. USF Support – government revenue stream which should stay constant at current $55.2m rate

4. Overall, totally flat revenue in the wireless segment post the drop in Roaming & Backhaul discussed above

1. Wireline Revenue – this segment refers to everything else, cable and wireless sales to both consumers and businesses as well as the managed broadband fiber network

1. Consumer wireless

1. ARPU – pricing is correlated to pricing in the lower 48 since Verizon prices nationally and GCI follows – this should be flat

2. Subs – 2% growth as per historical growth rates

2. Business wireless

1. ARPU – ACS has been price competitive here so we assume constant 6% declines

2. Subs – 2% growth as per historical growth rates

3. Consumer broadband

1. ARPU – 9% growth, not as much because of pricing increases but continued expectations that customers move up to more expensive plans

2. Subs – 6% annual growth based on target of 60% of homes passed within 3 years

4. Business broadband

1. ARPU – 2% annual declines given ACS competition

2. Subs – 1% growth as competitive environment somewhat stabilizing

5. Consumer video

1. ARPU – 2% growth from price increases

2. Subs – 2-3% sub declines as per historical trends

6. Business video

1. ARPU – flat pricing

2. Subs – flat sub growth

7. Consumer fixed telephony

1. ARPU – 2% growth from pricing increases

2. Subs – 6-7% declines as per historical secular trends

8. Business fixed telephony

1. ARPU – 6.7% declines from increased competition

2. Subs – 1.5% declines due to ACS competition

9. Managed broadband

1. Expect 14% annual growth due to limited competition and looping of fiber network

2. Costs

1. Assume slightly increasing gross margins in wireless and 65% incremental gross margins in wireline

2. Assume 3% annual SG&A increases and constant stock comp expense, yielding mid-single digit EBITDA growth