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Executives

John M. Lowber - Chief Financial Officer, Senior Vice President, Treasurer, Secretary

Ronald A Duncan - President, Chief Executive Officer and Director

Dana L. Tindall - Senior Vice President - Legal, Regulatory and Governmental Affairs

Analysts

Jonathan Atkin - RBC Capital Markets

Anthony Klarman - Deutsche bank

Jonathan Schildkraut - Jefferies & Co

Ana Goshko - Banc of America

Michael Grondahl - Key Colony Fund

Mark Bishop - The Boston Company

General Communication, Inc. (GNCMA) Q1 2008 Earnings Call May 8, 2008 2:00 PM ET

Operator

Welcome to the General Communications first quarter earnings call. (Operator Instructions) I would now like to turn the call over to John Lowber.

John Lowber

We’ve got the usual supporting cast here today. We’ve got Ron Duncan, our President and CEO. We’ve got Dana Tindall who runs our Regulatory Operations, Lynda Tarbath who’s our Chief Accounting Officer. We’ve got Bruce Broquet, our VP of Finance. Our Corporate Counsel, Bonnie Paskvan and not to overlook Peter Pounds our support analyst in the finance department, we got a full crew here today.

We will all be available to participate in the question and answer session, which will follow my initial comments. If you don’t have a copy of our press release you can find it on our website. The call is being recorded and will be available for playback for 72 hours beginning at 4 pm Eastern Time today.

Playback number is 800-216-4459 with an access code of 7461. In addition to the conference call you may access the conference through the Internet. To access the call via net conferencing log on to our website at www.gci.com and follow the instructions. The webcast will be available for replay for the next two weeks.

I will now read a cautionary statement about forward-looking comments and then we will get underway. Some of the statements made by GCI in this presentation are forward-looking in nature. Actual results may differ from those projected in the 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.

As expected we had a very busy first quarter with no let up in sight, the year is off to a great start. We had a very decent quarter from a financial and an operating perspective, but we had even better results on the strategic front. The first quarter was pretty straight forward and that unlike a year ago we didn’t have much in the way of unusual items affecting EBITDA.

As noted in the press release we are characterizing our net income and earnings per share as preliminary as we are still working on refining our depreciation and capitalized interest calculations. It appears that our depreciation method may be a little aggressive with respect to calculation of depreciation on assets in the year that they are placed in service.

We had been using a half year convention that may tend to overstate depreciation expense during the first half of the year. In addition our interest capitalization policy did not capture all of the items on which capitalized interest should properly be applied resulting in a potential overstatement of interest expense.

We are in the process of calculation the potential impact of a retroactive change to our policies and it is possible that it may result in an increase in our previously reported net income and earnings per share at least on an annual basis. Because these policies were not in conformance with GAAP the effect of any changes to them will be deemed to be the correction of an error.

Since revenues and EBITDA are not affected, at least not expected to be affected, we elected to proceed with our earnings release on a preliminary basis while we calculate the affect of these non-EBITDA effecting items. If we are unable to complete and evaluate the results of our analysis in time to accommodate the timely filing of our first quarter 10-Q we will file the Form 10B-25 to give us a little more time.

If we determine that the affect of these errors on our prior financial statements is material, we'll file a Form 8-K to communicate the same. The first quarter financial results in the underlying business metrics were strong. Revenues of a $134.7 million represented an increase of 7.7% year-over-year and 2.6% sequentially.

Preliminary net income after applying our hopefully now GAAP compliant depreciation and interest capitalization policies totaled $2.7 million with earnings per share of $0.04. Our EBITDA totaled 38.2 million this compared to last years $34.4 million representing an increase of $3.8 million or 10.8%. On a sequential basis EBITDA decreased by $0.6 million or approximately 1.5%. Our total assets now exceed $1 billion for the first in our history.

Last week we completed our efforts to putt in place the necessary financing to fully fund our business plan. We have now eliminated financing as a potential risk to the execution of our plan. We amended our credit agreement to provide for an incremental term loan in the amount of a $145 million.

The interest rate on our facility was increased from LIBOR plus 2% to LIBOR plus 4.25% and the rate on the undrawn revolving facility was increased from 37.5 basis points to 50 basis points. The new money included an OID of 2%. Our incremental raise was over subscribed and we were very pleased that our senior lenders were so supportive in the face of such difficult market conditions.

Another positive development included the fiber capacity agreements we put into place since the first of the year. We currently have a backlog of fiber capacity agreements valued at almost $60 million of which approximately $53.5 million will be realized in the form of cash, of that $53.5 million we expect more than $45 million of that cash to be received during 2008.

None of these agreements had any effect on our first quarter results nor were they contemplated in our EBITDA guidance of $165 million for 2008. We expect the revenues from these agreements will be amortized over the life of respective agreements. Consumer, robust performance in the consumer segment continued during first quarter revenues were up 14.5% over the prior year and 5.9% on a sequential basis.

Voice, video, data, and wireless revenues all increased on a year-over-year and sequential basis. The gross margin percentage was up 72 basis points compared to the year ago quarter and was down 352 basis points sequentially. Our local services expansion into new markets in Alaska is giving us the opportunity to offer our bundled products to new customers.

Another quarter of strong and customer metrics bodes well for future financial performance. Our customers seem to really be enjoying our cable modem speeds in our new HD DVR offerings. We think they will also enjoy our new video on demand product that which we just recently rolled out. During the quarter, the consumer segment added 2400 local service lines 2900 cable modems, 4800 local service lines converted to our own facilities 2700 basic cable subscribers and deployed an additional 5200 HD DVR converter boxes.

The consumer business signed up another 3000 wireless subscribers and we are now serving approximately 73,000 consumer wireless subscribers. Consumer EBITDA totals $12 million for the quarter as compared to $9.9 million year ago and $14.6 million in the prior quarter. The year-over-year improvement in EBITDA was directly related to the increase in revenues while the sequential decline was due to an increased allocation of SG&A costs.

Commercial, the commercial business units showed some improvement. First quarter revenues were up almost 10% compared to the same quarter of 2007 and we are down slightly on a sequential basis. Increases in video, data, and wireless revenues offset a $0.6 million decrease in voice revenues as compared to the prior year quarter resulting from a decline in our average rate per minute. Voice revenues were up sequentially, while video revenues were down due to a seasonal decline in advertising revenues and data revenues decreased due to a 600,000 reduction and professional services.

The gross margin percentage dropped 220 basis points compared to the prior year quarter and increased 208 basis points sequentially. SG&A cost declined approximately $300,000 as compared to the prior year and were essentially flat on the sequential basis. Commercial EBITDA increased almost 29% compared to the first quarter last year and 8.2% sequentially.

Notable commercial metrics include an increase since the first of the year of 300 cable modem subscribers, 700 commercial video subscribers, 400 access lines and an additional 900 local service lines move to our own facilities.

Network access services, the network access business was stable although revenues and gross margin were down slightly from a year ago they were both up on a sequential basis. Revenues were down 2.9% versus the prior year quarter but we are up 1% sequentially.

The gross margin percentage improved 171 basis points versus the prior year quarter and 348 basis points sequentially. We carried approximately 314.6 million network access minutes during the first quarter as compared to 315.8 million in the prior-year quarter. Network access minutes were up $19 million or approximately 6.4% on a sequential basis. Current quarter EBITDA totaled $19.9 million as compared to the same $19.9 million in the prior-year and just over $18 million in the fourth quarter.

Our average rate per minute for all of our long distance traffic during the first quarter totaled $7.63 per minute compared to $8.34 per minute year ago and $8.22 per minute in the prior quarter.

Managed Broadband, Managed Broadband revenues were up 8.8% compared to the year-ago quarter and we’re pretty much flat on a sequential basis. Revenues for the first quarter totaled $7.5 million, this compared to $6.9 million in the same quarter of the prior-year.

Quarterly EBITDA was up $800,000 as compared to the year ago quarter and was down $200,000 on the sequential basis. The Managed broadband business enjoyed another successful renewal cycle with the addition of two new school districts to its customer list. These new accounts will begin generating annual revenues of $2.7 million beginning in the third quarter.

Other items of interest. New shareholder, some of you may have noticed during the quarter that we added new shareholder that is now also our largest shareholder. We are delighted that one of our Alaska’s largest and most successful native regional corporations has taken a substantial ownership position in the company. We are pleased that one of our neighbors has invested in us and we look forward to working with them to advance our mutual economic interests in Alaska.

Local service expansion, our state wide local services expansion continued during the quarter as we added the Homer to the list of markets we now serve on a facilities basis. Last year we expanded into 12 new markets and this year we expect to roll out local services in five additional new markets, including Homer.

Wireless expansion in transition, our efforts in this area are currently a little less visible or that we are in the process of enhancing what we call our urban wireless infrastructure in anticipation that’s converting our GSM customer base to our own facilities beginning early next quarter. At the same time, we are enhancing our CDMA facilities to meet the requirements of our strategic roaming agreement with Sprint.

We will be the first in the market to deploy EV-DO Rev as part of our obligation to Sprint. We are also working on our rural wireless expansion and we expect to have service deployed in two regions encompassing approximately 45 rural villages by year end.

Legal and regulatory, our regulatory folks continue to be focused on negotiations for local service in our connection with incumbent carriers. Today we have interconnection agreements in place that cover 90% of the access lines in the state and as a result, we’ve initiated service in 26 communities. We completed negotiations and have submitted our agreement with Alaska Telephone Company to the Regulatory Commission for approval.

We have new negotiations underway in some of the remaining areas. These efforts will allow us to eventually provision local services in these new markets. Our applications for the required FCC approval of the United Utilities, Alaska DigiTel and Alaska Wireless transactions remain pending. Yesterday, we received the necessary approval from the Regulatory Commission of Alaska. The FCC approvals are now the pacing items with respect to closing our pending acquisitions. We hope the necessary approvals will soon be forthcoming.

Last week, the FCC adopted an interim state based cap on high cost USF support to competitive, eligible telecommunications carriers. We are pleased that as a part of this order the FCC recognized the vital role for new service deployments to tribal lands and Alaska native regions like GCI’s rural wireless project and provided a limited exemption for their benefit. As this is an interim measure, the regulatory team is continuing to monitor further FCC efforts to curve growth in Universal Service Fund.

Satellite launch update, during our last conference call, we mentioned that the satellite on which we owned transponder capacity was expected to reach its end of life during the second quarter of this year. The end of life estimates is pretty fluid but it’s now expected to remain operational through early July. The replacement satellite Galaxy 18 is expected to be launched on May 21stand maneuvered into position in time to accomplish an orderly transition in service to the new satellite.

Once the new satellite is in its assigned orbit location and is operating within its performance specifications and made available for our use, we will record the present value of the minimum lease payments on our books as a capitalized least in the approximant amount of $98.6 million. Once delivered we expect to use is capacity for the 14 years.

Our financial guidance assumes that the new transponder capacity will be launched and delivered on schedule and that the transition to the replacement satellite occurs prior to the existing satellite reaching its end of life.

Stock repurchase program, our stock repurchase program has been curtailed for the time being. Under the terms of our amended credit agreement we are precluded from repurchasing our stock until our leverage falls below four times EBTIDA.

Subject to compliance with our debt covenants and general market conditions, it would be our intention to being repurchasing stock when we are once again generating free cash flow.

Guidance and economic prospects, we expect this will be the last year we provide financial guidance on a quarterly basis, beginning next year we will provide guidance on an annual basis only. Each quarter we will indicate whether or not we believe we are on track to meet the financial goals we established for the year.

Last quarter I mentioned that we expect that we had generate first quarter revenues in the range of a $130 million to $133 million and EBITDA in excess of $37 million. We exceed the high end of our revenue guidance and our EBITDA target and consequently remain on track to meet our prior revenue on EBITDA guidance for the year.

Our cash EBITDA including expected cash receipts from prepaid fiber capacity agreements is know expected to exceed $210 million. Our EBITDA and revenue guidance contemplates mid year closings of our pending acquisitions of Alaska Wireless and United Company’s and will likely to be affected if the actual closing dates are materially different from those contemplated. The Alaska economy appears to be holding up quite well. As I noted before, we expected it will remain counter cyclical to what happens in the lower 48 states. High energy prices have historically had a favorable effect on state revenues on the Alaska economy and there seems to be an escalation of interest in exploring means to transport Alaska, natural gas to the marketplace.

Liquidity and capital expenditures, we ended the first quarter with more than $70 million on cash and $66 million available to draw under our revolver. Pro forma for the recent amendment to our senior facility we now have approximately $127 million in cash on hand and approximately $96 million available under our revolver. As mentioned earlier we now have a facility in place that will meet the reasonably foreseeable requirements of our business plan. Our senior facility is now amended; we’ll require approximately $2.7 million in principle amortization during the remainder of 2008.

We invested approximately $52.7 million in capital expenditure on a consolidated basis during the first quarter. Our capital expenditure requirements for 2008, excluding the capital lease of a new satellite capacity are expected to total approximately $225 million. During the first quarter we made investments in the following areas. For our business lines primarily setup boxes and item supporting our statewide rollout of local service, $21 million for IT projects$4.5 million, for support and expansion of our network $4.7 million.

The product management primarily focused on providing local services on a statewide basis $2 million, for expansion of our wireless facilities including those of our wireless subsidiary $6.6 million, the construction of our new fibers to Fairbanks and in southeast Alaska $11.8 million, include administrative support approximately $2.1 million.

Our major capital expenditures, initiatives for 2008 include approximately $78 million for expansion of our wireless facilities, $51 million for long-haul fiber and network capacity. $25 million for our statewide rollout of local services and $71 million for other projects including cable plan expansion, digital cable conversions, real estate, IT, new products including video on demand expansion capital for the Company’s we plan to acquire and growth and maintenance capital.

To recap, our cash sources and users for the quarter on a simply basis we generated approximately $38.2 million in EBITDA we borrowed $20 million against our revolving credit facilities.

Our net change in accounts receivable and payable generated an additional $11 million in working capital to total sources of $69.2 million. From that we spent $52.7 million in capital expenditures, $14.9 million in cash interest expense including our semi annual bond interest payment and half a million in principal payments, employing a net increase in cash of $1.1 million, which is reasonably close to actual increase in cash with $4.1 million during the quarter.

At quarter’s end, the interest rate on approximately $321 million of our $561 million in debt was fixed. Of cash interest expense, at then applicable rates on our facilities at the end of the quarter, was running at approximately $35.2 million per year. Pro forma for the additional financing we just concluded, our total debt is now a $676 million, of which $498 million will be fixed, once we follow through on our agreement to fix the rate on half of our senior term facility.

Pro forma annual cash interest expense at current rates, on our current borrowings is now approximately $49 million. Compare to the last two quarters, annualized cash flow of approximately $153.9 million, our cash interest coverage is approximately 3.14 times, and our pro forma leverage on net debt is 3.53 times cash flow and on gross debt, our leverage is 4.39 times.

In conclusion, we are very pleased with what we’ve accomplished so far this year. The first quarter financial performance exceeded our plans, our underline business metrics have been consistently strong and certain of our key strategic initiatives have been accomplished. Much of work remains to be done as we look forward to integrating our pending acquisitions, completing the conversion to our own state wide wireless system, and executing our business plan, but the year is certainly off to a good start.

We will now be happy to answer your questions. Okay, if the moderator is listening, we would now accept questions.

Question and Answer

Operator

(Operator Instructions) Your first question comes from Jonathan Atkin – RBC Capital Markets.

Jonathan Atkin - RBC Capital Markets

Can you elaborate a little bit on how much capacity you’re providing and then kind of the timing of the cash receipts, I think you talked about a total amount for ‘08 but, what sort of timing would that have involved, and what would be the kind of the outlook for -- going forward in 2009 in terms of cash receipts. I guess on the operation part of that deal and then, second question is on CapEx guidance for the year I apologize if I missed any comment you made on that, but can you give us a flavor for what we’re looking at for the current year for CapEx?

Ronald Duncan

With respect to the AT&T agreement, we are pretty much limited to what we said in the press release, which describes that it is a large amount of capacity if you assume that large was sufficient to serve the entire existing needs of the marketplace that would be a good definition of large and we expect to receive a $25 million of the $8 million of the AT&T payment within the next 90-days or so and the balance before year-end, I think that’s probably about the limit of what were going to be able to disclose on the AT&T transaction.

Jonathan Atkin - RBC Capital Markets

And is there an amount in ’09 and going forward, kind of probably a smaller amount annually that you would be getting?

Ronald Duncan

They would make an annual O&M payment of amount that’s not large for ongoing operations and maintenance and then they have certain options to acquire additional capacity we estimated in the press release that cumulative amount of its capacity options would be less than $10 million, it’s hard to say when or if those would be triggered.

Jonathan Atkin - RBC Capital Markets

And given that the large amount currently being sold is enough to serve the entire existing needs in a marketplace, sounds like the -- it would seen un likely that they would exercise that option, would or would it not?

Ronald Duncan

The options are both for incremental capacity and some incremental facility routes the might be exercise, so I suspect some limited amount of the options will be exercise in the next 24 months, but I would be surprise to see additional capacity options exercise in the near-term.

John Lowber

Then the recap, the CapEx about $78 million for wireless, $51 million for loan haul fiber, that includes Fairbanks and the Southeast fiber, $25 million for our statewide rollout of local services and $71 million for other projects, which I mentioned include cable plant expansion, digital cable conversions, real estate, IT, video on demand, and little bit of expansion capital for the companies that we are going acquire and then for growth and also for maintenance capital.

Jonathan Atkin - RBC Capital Markets

And then on wireless and maybe this was during the same two minutes that I cut out when you’re talking about the CapEx, but can you tell us about the, where do think stand with the build out and as long as your deploying all these technologies, Greenfiled. Have you put any thought to assessing the demand for 4G services given that there is I guess kind of a WiMax operator in state? What did you see from that competitor and might you consider as long as you’re building a network of adding that kind of capability?

Ronald Duncan

I think what we’ve heard from you is that we are not spending enough capital right now. So, I’m sure the market will reactive even better if we announce the 4G build out today, which we will reframe from doing. We are monitoring what’s happening on the 4G side, we are going to be essentially 3G with EV-DO Rev A on a state wide, essentially state wide basis, all of the terrestrially served areas and we will continue to monitor what happens between LTE and WiMax and other technologies. We have expressly reframed in the near-term from making a 4G commitment on the GSM side in part to figure out how the other technologies are going to involve, but long-term obviously we need to do something there.

Jonathan Atkin - RBC Capital Markets

And the launch would be state wide all at once or in Phases?

Ronald Duncan

We are turning up our GSM radio area networks between, essentially in the third quarter and something like 75% of the pars will be covered with our radio area network on the GSM side by the end of the third quarter and there is a similar pattern to the over build of the digital network with the EV-DO Rev A.

John Lowber

And then of course the rule will go out in phases with 35 villages by the end of this year and then the continued expansion for the next couple of years in that area.

Operator

Your next question comes from Anthony Klarman - Deutsche Bank.

Anthony Klarman - Deutsche bank

Couple of questions, first with respect to the agreement that you signed with AT&T for the under sea fiber optic capacity, it sounds like perhaps this was something that was not included into the guidance and so, given that you’re getting a bit of a windfall of cash in hear. I think you said $35 million in 2008, and I guess $60 million in total value.

Does that change at all with respect, the funding considerations that you had for the CapEx plan. It sounds like you should be generating more cash particularly from that IRU sales and perhaps was contemplated and might that change. How quickly you, how densely you deploy some this capital into the network?

John Lowber

I guess, in our initial business plan we did scope out some fairly significant fiber sales, but they were so speculative that we really didn’t count on then either in the guidance that we’d given previously, nor did we include them in our financing requirement. So, to the extent that we have cash from fiber sales, which I think I said, AT&T is not the only one.

You aggregate the once that we expect to see before year-end, we are looking at probably north of - probably a little bit north of 45, maybe little less than 50 million by year-end and that really is incremental cash and it will basically give us an additional cushion and flexibility. So it is in fact a reduction in our borrowing requirements going forward.

Anthony Klarman - Deutsche Bank

So in fact, I guess maybe the different way to ask it which is, that’s what I was beating around on the bush on. I think in the past on the earnings calls and in the presentation that you have on the website. You’ve talked about what you though peak leverage might look like through this rollout and the debt raise.

I assume, I guess then from your comments that this 45 million would reduce that net debt obligation, I think you had shown around something a little over five times at one point. This would seem like it should probably mitigate some of that additional leverage?

John Lowber

Well that is right, Anthony it would reduce that probably by a quarter churn if you are basing it on a $200 million run rate, so. We figured that it might, our borrowing might peak at just over five times and this will I think probably keep it under the five times level, depending on timing.

Anthony Klarman - Deutsche Bank

Obviously one of your competitors up there made an acquisition of the crest fiber and obviously has some plans to do some other fiber building there. I was wondering if you have seen anything competitively change in that market and whether you’d had any early conversation with Verizon or Sprint on things you might be able to do to lengthen the terms of the existing arrangements that you have.

Ronald Duncan

We are talking to our carrier customers all the time and trying to figure out how to best serve their needs. I think that’s about the extend of that comment, certainly you should deduce from the fact that AT&T was able to buy a large amount of capacity at a fairly attractive price that there are some changes happening in the pricing in the carrier market not once that are beyond what we expected when ACS announced their entry and we pretty standby our expectations that our carrier business and our network access service business will remain flat over the next couple of years.

Anthony Klarman - Deutsche Bank

Can you remind us where you are in terms of transitioning off of the ACS local loops and on that Cable Telephony platform, how far you are in that process and that was left to be done?

John Lowber

What do we got our facility now, something over 50 some odd 1000.

Unidentified Company Representative

Just under 70, 0000 on our own….

John Lowber

On our own facilities with another what, 40 or 50 to go, yes 40 or 50 to go on top of that.

Anthony Klarman - Deutsche Bank

Okay so, well over 50% of the way there and I guess what is your experience been in terms of the incremental cost savings in terms of what you are paying to them in the loop cost versus what you are looking at now going forward?

John Lowber

I think the average loop cost is around 25 bucks and that pretty much disappears and gets replaced by maintenance of the network. So, it's pretty much all margin for us.

I think we said in the press release the run rates savings on what we have in place now is what 16 or 17 million.

Operator

Your next question comes from Jonathan Schildkraut - Jefferies & Co.

Jonathan Schildkraut - Jefferies & Co

I had a couple questions, let me first just start with the follow-up on the last question with 50,000 access lines left on local loops. At one point I thought that there was a certain push in our view access lines that you didn’t feel that you were going to be able to get on to your own network. Is that no longer the case or is there still some percentage of those 50,000 that you estimate will remain on ACS as local loops longer term?

Ronald Duncan

Our goal is to essentially transition all, as you get down to smaller number the final wins become more difficult. I would say for the planning purposes you could assume that it will take half of what's left of this year and then half of the remaining half next year and maybe two years from there to get the final 25% off, but we are on a plan with our fiber to the premises project for our commercial and small enterprise customers to be a 100% facilities independent within the five year plan.

Jonathan Schildkraut - Jefferies & Co

I notice that your market share on local access lines again creeped up and it continuous to move in a positive direction, but I was wondering if you could give us some color on what percent of the access lines in Alaska are currently addressable given your local access footprint?

Ronald Duncan

We believe that assuming the pending interconnection agreements are approved and put in place that we should be able to address about the 90% of the access lines in the state with our own facilities.

Jonathan Schildkraut - Jefferies & Co

Great and what's the number as of the end of the quarter, percent of access line that you can address?

Ronald Duncan

Its 80 something I am sure and there is very little left to go, but it’s got to be in the 80 somewhere. There is not much that we are not capable of addressing although some of that is relatively new.

Jonathan Schildkraut - Jefferies & Co

All right great. Last question on the new agreements on the debt side, when you talk about the leverage ration needing to be under four times debt to EBITDA, is that debt trailing 12 months EBITDA last quarter annualized EBITDA. I assume that it's not a net debt number?

John Lowber

It’s not net debt and it’s a trailing for and it’s a total debt and that would include satellite transponders and other minor stuff.

Operator

Your next question comes from Ana Goshko – Banc of America.

Ana Goshko - Banc of America

I’m looking at some of the cost trends on a sequential basis, the two things that jumped out where the much higher cost of service in the consumer segment so -- and then secondly it looks like there is an improvement actually on the SG&A side, on the network access side. So I wanted to know if those are permanent or temporary that type trends.

John Lowber

It’s really the effective allocations I think more than anything, as consumer continues to ramp up in terms of its increasing share of the overall business, its going to get tagged with increasing amounts of the SG&A costs. So I think really the best way to look at that is -- at the margin line first and then on a total company basis second and I think you would see that I think SG&A is actually down as a percentage of revenues year over year and may have just crept up slightly on a sequential basis.

Ana Goshko - Banc of America

Yes, on the consumer side, I was focused on the cost of service, on the cost goods sold. So that went up by $5 million sequentially and there is a significant decline in the gross margin?

John Lowber

The consumer side, at least on a sequential basis is suffering from, I think it had some favorable items that benefited in the last quarter, I think the last quarter was a little bit higher -- the pendulum kind of swings back and forth but there were number of small things, none of which were individually significant, but when you add them all together benefited the consumer segment in Q4. So it’s basically stepped back to more normalized levels in Q1 and we will see where it goes from there.

Ana Goshko - Banc of America

Okay, so the -- have the margins that you had in the consumer business are a pretty good run rate until we see more of the kind of on net benefits going forward, but otherwise it’s a pretty clean[Cross Talk]..

John Lowber

They should expand as we get further into the year.

Ana Goshko - Banc of America

Okay, second question is, just after the AR&T agreement. I apologize if I missed this, but what’s the life of the IRU?

Ronald Duncan

The life of the IRU is the life of the facilities which would differ. The west facility I think has a 20 year expected life or something and the east facility has 15 years left or something like, but they are traditional IRUs they are the life of the facility.

Ana Goshko - Banc of America

Okay and then, actually the root of that question really is so -- in 2008 you are getting a good cash EBITDA benefit from the upfront payments. I wanted to know what the kind of non cash revenue and EBITDA impact are going to be in an annual basis, so I basically just take the 35 divide it by about 20, so it will be a couple of million dollars of non cash revenue that you’ll be amortizing over the years of the contract, if that’s the right way to look at it?

John Lowber

Yes, that’s a good rough approach, 20 might be a little bit weighted, a little bit long, but I guess considering the allocation of the value, that’s probably not a bad place holder.

Ana Goshko - Banc of America

Okay and then final question. Is on the $60 million of total value that you mentioned in the press release and in your comments that are coming from the AT&T and other fiber IRU’s is that the upfront payments as well as the ONM over the life of the IRU’s?

John Lowber

No that’s just the value of the up front stuff. We haven’t factored in the value of the recurring ONM.

Operator

Your next question comes from Mike Grondahl – Key Colony Fund.

Michael Grondahl - Key Colony Fund

Could you talk a little bit about the competitive environment you are seeing from your major business lines? Wireless, cable, and then kind of commercial/enterprise, could you talk about what you’re seeing and kind of your strategy today?

Ronald Duncan

Well, I think that’s a long answer and I said I wasn’t going to do long answers today, so if that, will abbreviate it. Competitive conditions continued to be significant, I mean this is a tough business and we face stiff competition both from AT&T and ACS all the time and enterprise space, we are not seeing any erosion of share.

In fact, we are seeing a slight gradual increase in share, we do see price pressures, although they are not, I don’t think accelerating from what they were a year ago, we certainly see a lot of effort from ACS, but as I said presently our share continues to grow very slowly in the enterprise space.

We are obviously growing wireless subs, looks like a little better than at least one of the other players in the market is right now. There was a very significant price reduction in the wireless space led by ACS in January of this year by our calculation as much as the 30% reduction in the average planed revenues that were implemented in the wireless space.

We had factored wireless rates going to national average levels over a couple of year period, it looks like its going to happen faster than that, but wireless looks like its highly competitive space and maybe even more so after ACS’s or AT&T entry into the market place, but other than that, price reduction – I don’t know that there is a huge change in the way it will land from what it was a year ago and you can obviously look at our metrics and see that our fundamental metric count across the board is solid. So there is certainly no indication that anything that’s happening in the market place is any eroding share or performance on our part.

Michael Grondahl - Key Colony Fund

Okay and then what about in the cable business. I mean it seems like your cable ads, your high speed ads, everything there seems to be really strong. Can you talk a little about how you are winning there?

Ronald Duncan

We continue to deploy new and better services. We are turning up HD channels at a significant clip, we are putting out HD DVR boxes as fast as we can get them from the manufacturer essentially and we just turned up our video on demand service that seems to be having a very good initial reaction from our customers.

Our pricing in that space is aggressive in the sense that we are pushing high value bundles and customers seem to be responding if you look at the average revenue per customer trends in that space, they are ticking up largely because customers are acquiring higher value or deeper levels of service.

They are buying more channels; they are taking more speed on their cable modems. They are buying video on demand units, they are upgrading to the High Definition DVR’s and there seems to be a good reception there that may in part be a reflection that the Alaska economy is still going quite strong and each day when you look at the new daily high and the price of oil, you could think that’s probably also a new daily high for the Alaska economy.

Michael Grondahl - Key Colony Fund

Okay, last question and anybody can take this one, but with the very strong competitive environment in enterprise and wireless. Is there any thoughts of modifying the CapEx plan, I mean you kind of have a contingency plan if you want to spend less, if you will and pull that back a little bit. Have you through any of that?

Ronald Duncan

We’re comfortable with our CapEx plan and we had factored into our five-year plan that wireless rates were going to trend towards essentially by the end of the five-year period be it national average rates. I think what happen to change as they jumped right national rates at the front although we still expect those rates to trend down over the five year period, since we’re starting the equation with relatively low share that has a limited impact on the net return over the five year period.

We are building out a wireless network that would be much more extensive than that provided by any other operator in the market and we are starting with the share that’s in the -- barely in the teens, in terms of statewide on the wireless fronts. So, we are very comfortable there and we’re not seeing any erosion in our enterprise business. We are real happy with that and as we’ve stated repeatedly we expect the network access business to be flat, but the network access and the carrier business is not where we are investing capital, we are investing capital in wireless and in our consumer business.

Operator

Your next question comes from Mark Bishop – The Boston Company.

Mark Bishop – The Boston Company

I just had two things first about this IRU deals. First of all you said that they are in guidance yet. Does that mean that, is this like revenue you are getting anyway on an annual basis that you kind of sold to them upfront instead so kind of the cash EBITDA actually kind of would go down going forward because you collected it early or is this capacity that was sitting around unused and unsold and that you wouldn’t sold, it wasn’t in the plan to sell and so now it’s extra money that you will report in an non-cash basis as incremental EBITDA above what people had before.

That’s for question one and second question on the same thing, is somebody else had calculated maybe its 35 million divided by 20 years or something but, it isn’t it -- since they are paying it upfront it represents a present value of all those years of payments. I would think so if you do just a annuity basis wouldn’t the impact be more like 5 or 6 million a year of revenue that you get -- that you’ll be showing from these IRU’s?

Ronald Duncan

I think the technical term for what we got here would be Manna from heaven. It falls into the category of unused capacity on our network sold to somebody who was essentially wasn’t riding our network today for largely that our future capacity needs. Probably also in the category of would have been sold by somebody else had it not been sold by us. So, we’re very happy to have it. I think the prior question on the 35 divided by 20 was for the accounting treatment. This isn’t money we’re getting today, we’ll get the cash but rather than recognizing the cash in any form of GAAP accounting upfront. We’re requiring amortizing it linearly over the life of the service agreements. Fortunately, the accountants haven’t yet though of trying to apply a present value treatment to that, but I am sure that would be here. The Accounting Standards Board would be happy to contemplate that the further complicate our accounting lives. The reality is you get the cash upfront and there would be some non-cash attribution to revenue over the next 20 years, as we amortize the prepaid revenue but from our perspective the focus is on the cash.

Operator

Your next question comes from David Rossiter

David Rossiter

As a long suffering shareholder okay, with all the build outs and everything else that’s going on here what’s in for the shareholders?

Ronald Duncan

Well, we believe that if we can achieve our plan.

David Rossiter

I mean your going to turn this business around and make some money.

Ronald Duncan

Well, we have stated publicly, we anticipate exceeding $200 million in EBITDA next year and we have a five year target that puts us above 250. We think the market is significantly under valuing us right now. We told you a little earlier in the call we’re going to turn $200 million plus in cash out of the business this year when you valuing the payments coming from the IRU sales.

We think that the long run value of the business in the marketplace is extremely attractive. We considered the option of selling out the current business essentially by stopping the CapEx and paying the cash out for the shareholder, which would leave us in a seriously degraded competitive position. We don’t think that maximizes the long run value of the company, we think the long run value the company is maximized by maximizing the present value of the future cash flows, and that’s what those investments are intended to do.

We suffer like you do from the fact that the Street doesn’t seen to appropriately reflect the value of the business and certainly on a day when we can announce $60 million in totally unexpected value and watch the stock but down rather than up. You can take your question to the efficient market theorist and ask him what’s going on with the Street valuation, but we’re focused on the long run cash flows from the business.

David Rossiter

You haven’t had any discussions with anybody about selling this company, have you?

Ronald Duncan

No, would be the answer to that.

David Rossiter

Would you be open to it, if somebody came along?

Ronald Duncan

Somebody came along with the right price, we would certainly contemplate but we don’t think that prices anywhere near the current priced.

Operator

There are no further question sir

John Lowber

Again thank you very much and we will catch you in the next one.

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Source: General Communication, Inc. Q1 2008 Earnings Call Transcript
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