Earnings Call Transcript - LBRDA Q3 2023

Operator, Operator

Welcome to the Liberty Broadband 2023 Third Quarter Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. As a reminder, this conference will be recorded on November 3. I would now like to turn the call over to Shane Kleinstein, Vice President, Investor Relations. Please go ahead.

Shane Kleinstein, Vice President, Investor Relations

Thank you. Before we begin, we would 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 most recent Forms 10-K and 10-Qs filed by Liberty Broadband and Liberty TripAdvisor with the SEC. These forward-looking statements speak only as of the date of this call and Liberty Broadband and Liberty TripAdvisor expressly disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statements contained herein to reflect any change in Liberty Broadband or Liberty TripAdvisor'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 Liberty Broadband, including adjusted OIBDA. Information regarding the comparable GAAP metrics, along with required definitions and reconciliations, including preliminary notes in Schedules 1 and 2, can be found in the earnings press release issued today, as well as earnings releases for prior periods, which are available on Liberty Broadband's website. Now, I'd like to introduce Greg Maffei, Liberty's President and CEO.

Greg Maffei, President and CEO

Thank you, Shane, and good morning to all. Today, speaking on the call, we will also have Liberty Broadband's Chief Accounting and Principal Financial Officer, Brian Wendling. GCI management will be available to answer questions. Also during Q&A, we will be available to answer questions related to Liberty TripAdvisor. But please note, TripAdvisor has not yet reported their third quarter results, so we will obviously not be able to comment on the current quarter. So beginning with Liberty Broadband, we did resume selling into Charter's buyback in October. We received $48 million of proceeds, and we deployed $13.1 million into Liberty Broadband buyback at an average cost of $88.18 per share. We anticipate that we will continue to buy back LBRDA and K shares with the substantial majority of the after-tax proceeds we received from Charter throughout the rest of the year. And now looking at Charter. Charter did report solid operating and financial results despite a tougher market and the Disney Exchange. Charter added 63 broadband net adds. We continue to benefit from rural expansion with 31,000 subsidized rural net adds in the third quarter, and we are already achieving 50% penetration after 12 months of those net adds into customer cohorts, well above the case that those were underwritten upon. We believe this reinforces the rural investment opportunity, which we think is an attractive use of capital allocation. There is high demand for Charter services, both broadband and mobile in those markets. Mobile strength does also continue. We added 594,000 mobile lines during the third quarter. We will begin to see the benefit of those in the fourth quarter as Spectrum One pricing opportunities roll off, and we begin to see closer pricing on those. These free lines will begin to convert into paid lines during the fourth quarter. And as you may have heard from management last week, we've seen low churn on those conversions from our trial cohorts. We did have a successful resolution with Disney, and we believe the new agreement is beneficial for both parties and does provide a path forward for both linear and over-the-top to work together with our network partners as a carriage provider. And that's a model we think can be good for all parties going forward. I'd also note that Xumo went live a month ago, our video platform, which allows convenient access to both linear and DTC content with unified search and an excellent discovery interface. We're excited for it. This distribution of Xumo across both Charter and Comcast we think could be a winner. Finally, 2023 has been an important year of investment. We believe this investment is excellent in establishing the foundation for our ongoing growth, and there are opportunities, which will be attractive headed forward, both upgrading and expanding our network. And we are pleased with the progress that was made across all these initiatives and confident that these investments will drive long-term results for Charter shareholders. Let me turn to Liberty TripAdvisor. As I noted, TripAdvisor hasn't reported their third-quarter results. I'm not going to comment on that. But we do feel good about the business and its strategic direction. Liberty TripAdvisor did move to OTC trading on October 30. This was due to non-compliance with some of the NASDAQ listing requirements. We did look at the range of alternatives and believe transitioning to OTC was the best course of action, and we do not anticipate this will have an impact or change Liberty Trip's business operations or strategy. And with that, let me turn it over to Brian to discuss the financials.

Brian Wendling, Chief Accounting and Principal Financial Officer

Thank you, Greg. At quarter end, Liberty Broadband had consolidated cash and cash equivalents of $88 million. This includes $38 million of cash at GCI. As of November 2, the value of our Charter investment was $19.4 billion, and at quarter end, Liberty Broadband had a total principal amount of debt of $3.9 billion. Note this excludes the preferred stock and the remaining indemnification obligation. After quarter end, the remaining LI LLC Charter exchangeable debentures will be redeemed, and a final indemnification payment will be made to Qurate Retail. Looking at GCI, revenue was down 3% for the quarter, and adjusted OIBDA was relatively flat. Strength in business data revenue was offset by declines in video and voice revenue and lower handset sales year-over-year, which impacts revenue but does not significantly impact margins. We also had the impact of a three-month fiber break in June that affected GCI's data, video, and wireless services provided on the North Slope and Western Alaska. The fiber break impacted both consumer and business revenue and in the aggregate negatively impacted revenue by approximately $5 million with a modest impact on adjusted OIBDA. The fiber break has since been fully repaired, which is good news. GCI has also been successful in moving consumers to its converged GCI plus product offering, which combines GCI's flagship data product with their wireless offering and provides significant savings to customers. This has negatively impacted GCI's ARPU but benefits churn, as GPI customers who bundle Internet and mobile have nearly 50% lower churn than standalone customers. We expect, and GCI expects margins on the products to increase over time as customers upgrade their services. Over the last year, GCI has added 3,800 revenue-generating wireless subscribers and 2,100 revenue-generating cable modem customers. Year-to-date, Liberty Broadband has received $65 million in dividends from GCI. Leverage, as defined in its credit agreement, was 3x at quarter end, and GCI has $397 million of undrawn capacity on its revolver. And with that, I'll turn the call back over to Greg.

Greg Maffei, President and CEO

Thanks, Brian. We look forward to seeing many of you next week at our Annual Investor Day on Thursday, November 9, in New York. Additional information is available on our website. John Malone and I will be hosting our Annual Q&A Session. If you would like to submit questions in advance, you can e-mail investorday@libertymedia.com. We appreciate your continued interest in Liberty Broadband and Liberty TripAdvisor. And with that operator, I would open the line for questions.

Operator, Operator

Thank you. We will now conduct our question-and-answer session. Our first question comes from Kutgun Maral with Evercore ISI. Please state your question.

Kutgun Maral, Analyst

Great. Thanks for taking the question. A familiar one relates to Charter. The discount seems to have recently widened quite meaningfully to historically high levels. Has that changed your approach or outlook on buybacks at Liberty Broadband, and whether it makes sense to maybe pursue opportunities to get more cash to the company to help fund these repurchases, whether it's levering up or exploring some flexibility with GCI? Thank you.

Greg Maffei, President and CEO

Thank you for the question. I think the widening of the discount, while unfortunate, actually does make our strategy of share repurchase that much more attractive. We are trying to maintain a careful balance of utilizing our cash received from Charter for, as I said, the vast majority for buybacks, but also being prudent on debt levels, particularly given the increased cost. While we have very attractive pricing on our margin loans, the reality is underlying rates have gone up, and so that's more expensive to maintain those. So we're trying to play that carefully. That's also made it probably more expensive to look at other alternatives for how to capture that advantage of that discount through third-party debt or something. But we are looking at all those alternatives, and we'll certainly keep them in mind.

Operator, Operator

Thank you. Our next question comes from Ben Swinburne with Morgan Stanley. Please state your question.

Ben Swinburne, Analyst

Thanks. Greg, should we be thinking about Liberty Broadband as a vehicle for cable or fiber asset acquisitions? And I asked that because obviously we see the cost of capital has gone up, but there were a lot of businesses funded on cheaper debt to compete with cable operators, et cetera, take advantage of broadband, a lot of fiber that's gone on the ground. Some of that stuff might come to market. And I didn't know if you thought we should be thinking about Liberty, like we might think of other sort of private equity vehicles out there that might be looking at picking up fiber assets or telecom assets or cable assets that might come to market, even if small. And then I just had a follow-up on the Charter front.

Greg Maffei, President and CEO

Yes. So Ben, thanks for the question. I think, look, we're looking at Charter as our primary vehicle for an investment in cable. Obviously, there are special situations like GCI where we thought it was attractive, it could achieve something, and there may be other special situations that come up that we would look at. We are looking all the time. But I guess I should say we would execute on. Your point about the cost of capital going up is correct. And that's hurt others probably more than even it's hurt us. So they do create these opportunities. But I would note, as we saw in the prior question, we've also seen an expansion of the discount, which means that we have a very attractive opportunity to buy what we think is a very attractive asset in Charter at a discount. So suddenly that alternative gets more attractive as well. So you're going to weigh all those various factors, and I'm not telling you we will not do it, but I'm also saying the bar got higher.

Ben Swinburne, Analyst

Yes. That makes sense. And then, interestingly, if you look at Charter, one of the things they told us last week is there's going to be more CapEx in the near-term, which all else equal lowers their buyback capacity, which lowers the cash you get to buy back your stock. I know you know all this already.

Greg Maffei, President and CEO

Yes.

Ben Swinburne, Analyst

I guess as an interest.

Greg Maffei, President and CEO

I'm actually on the Board and the Finance Committee, so I am aware of these facts.

Ben Swinburne, Analyst

Thanks for the broader group. I guess the question is, why are you so comfortable? You seem confident that this is the right strategy, essentially suggesting to increase spending as much as possible, as quickly as possible, for the sake of long-term value creation, especially given the double discount situation you’re experiencing with Charter.

Greg Maffei, President and CEO

Yes, I agree there is some tension because the buyback has become more appealing. Charter is currently more affordable than it has been historically, and Liberty Broadband is even cheaper. We are focusing on the longer strategic value and economic opportunities available. We believe there is a significant opportunity with the rural programs, especially considering their subsidies, and we see this as a worthwhile venture right now. Additionally, with our high split, we are not only creating more economic opportunities but also enhancing the business further. These factors provide attractive economic prospects, and we will continue to leverage the discount. There are at least three sets of appealing investment opportunities that we are evaluating against long-term growth and their availability.

Operator, Operator

Thank you. And our last question comes from Michael Rollins with Citi. Please state your question.

Michael Rollins, Analyst

Thanks and good morning. Two, if I could. First on GCI, can you share how the business has benefited and the customers of the business have benefited from ACP and how you see that playing out over time in terms of whether that gets incremental funding from Congress? And then just on the broader strategic front, last quarter, Greg, you made a comment that it could be logical at some point to combine Liberty Broadband and Charter. Just curious, your latest thoughts on that and what would be the catalyst to make that logical in terms of timing and function. Thanks.

Greg Maffei, President and CEO

I'll handle the second question first and then I'll let either Ron or Pete comment on ACP or if they want, Brian and I can take a shot. But on Liberty Broadband combining with Charter, I think you look, we've had these holding companies that we think have done very well and been very beneficial in some cases taken advantage of things like share repurchase or ridden growth in the underlying asset. But in many cases, we've also at some point merged them and closed the gap between their trading. Examples of that would be close examples would be Media and DIRECTV, Liberty Expedia and Expedia. Certainly cases we've gone that along the way, what's been proposed between LSXM and SiriusXM. We do that when we think the logical path is pursued on why we should be independent and it would be more beneficial to merge these entities. That day could clearly come somewhere down the road for Charter, probably will come based on our history, but we don't think that day is today. On GCI and ACP, Pete or Ron, do you want to take a shot?

Pete Pounds, GCI Management

Yes. Ron, are you there?

Ron Duncan, GCI Management

Yes, I'll go ahead.

Pete Pounds, GCI Management

Sure. Yes. I think what the ACP program has been a good program helping lower-income people get good broadband connectivity. It has been helpful for us as far as bad debt reduction as it's eliminated that aspect of revenue coming in. The longevity, we'll have to see if there's kind of some upheaval that is very, very difficult to predict how that will all pan out as far as this program going forward, but it's been a relatively small program, but very beneficial to several thousand of our customers.

Greg Maffei, President and CEO

Yes. I would just add, if I can, that as far as going forward, clearly if there's a lot of popularity in this program in Washington as far as we can tell. But there also is obviously a lot of dysfunction on what will get funded in what timeframe in Washington. So hard to guess how that plays out.

Michael Rollins, Analyst

Thanks.

Greg Maffei, President and CEO

Thank you. Operator, I think that's we are done with the questions for the day. To our listening audience, thank you for your interest in Liberty Broadband and Liberty TripAdvisor. We look forward to speaking with you next quarter if we don't see you in New York. And with that, operator, I think we're done.

Operator, Operator

Thank you. And that concludes today's call. All parties may disconnect. Have a good day.