Earnings Call Transcript - LBRDA Q1 2024

Operator, Operator

Welcome to Liberty Broadband 2024 Q1 Earnings Call. As a reminder, this conference will be recorded, May 8. I would now like to turn the call over to Clare Adams, Senior Manager, Investor Relations. Please go ahead.

Clare Adams, Senior Manager, Investor Relations

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 most recent Forms 10-K and 10-Q 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 the 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.

Gregory Maffei, President and CEO

Thank you, Clare, and good morning to all. Today speaking on the call, we will have Liberty Broadband's Chief Accounting and Principal Financial Officer, Brian Wendling; Ron Duncan, CEO of GCI; and Pete Pounds, CFO of GCI, will also be available to answer questions. Also during Q&A, we will be available to answer questions related to Liberty TripAdvisor. So beginning with Liberty Broadband. Similar to last year, early in the year, we remain under the 26% fully diluted ownership cap, largely due to Charter's annual compensation grants. We do expect to resume sales into Charter's buyback this summer, and we also expect that the majority of proceeds, which have historically gone to LBRD purchases will continue somewhere going in the future and we will evaluate the best uses we receive proceeds. But I do expect in the near term, we will have a greater focus on debt reduction. So you might see some of us have a reduced pace of buyback in the near term. Looking at Charter itself, Internet adds have been challenged across the industry with lower growth across the board in the first quarter. Charter experienced a 72,000 subscriber net loss, largely from continued elevated competition, early headwinds from the upcoming ACP expiration and reduced move activity given, among other things, historically high mortgage rates. The churn does remain at historically low levels and the company did experience solid EBITDA growth at 2.8% in the first quarter. We are comfortable management can achieve EBITDA growth throughout the year while investing in the business and despite facing industry pressures, and they'll achieve that largely due to expense management, which is working quite well. Mobile, bright spot continues to perform nicely. Charter surpassed 8 million total mobile lines, and mobile service revenue accelerated 38% versus the prior year. We're quite pleased with the Spectrum One performance, and we're seeing improving mobile EBITDA as the promotional lines continue to roll off and the business achieves economies of scale. The anytime upgrade program is going to expand our market opportunity, and we do see increased stickiness with customers, Internet churn is down versus the prior year. As many of you know, unfortunately, the ACP program was not renewed. In light of that, Charter is offering a range of options to retain ACP customers, including the Spectrum Internet Assist program, the Internet 100 product and a retention offer of free mobile for 1 year. Looking briefly at the balance sheet at Charter, we do expect leverage will move toward the midpoint of the 4 to 4.5 leverage target while maintaining the buyback this year. Turning briefly at L-TRIP. Many of you may have seen that we filed a 13D this morning, which outlined the ceased transaction discussions with third parties. We do continue to discuss strategic alternatives with TripAdvisor Special Committee. We will not be able to comment further on this unless definitive documents are executed or discussions terminate. Looking at TripAdvisor itself. TripAdvisor had a good start to the first quarter, but it did also offer more muted guidance on its call this morning. Travel and experiences remain high priorities for consumers despite geopolitical activity and inflationary pressures. At brand TripAdvisor, Hotel Meta performance was driven by sustained pricing strength offset by lower click volumes. Trip's AI tool is continuing to scale very well and the addition of bookable experiences embedded in itineraries is generating 50% higher average revenue per user. Viator itself saw record app downloads, conversion growth, and app bookings. So with that, I'll turn it over to Brian to discuss the financials.

Brian Wendling, Chief Accounting and Principal Financial Officer

Thank you, Greg. At the end of the quarter, Liberty Broadband had consolidated cash and cash equivalents totaling $108 million, which includes $70 million at GCI. Our investment in Charter, based on the number of shares we held as of May 1 and the Charter share price at yesterday's close, was valued at $12.3 billion. Liberty Broadband's total principal debt amount was $3.8 billion at quarter end, excluding preferred stock. Looking at GCI, its revenue and adjusted OIBDA were flat in the first quarter. While there was growth in data revenue from both business and consumer sectors, this was offset by declines in other revenue, mainly driven by lower video revenue. It's important to note that the video business does not significantly affect margins or free cash flow. Over the past year, after adjusting for reclassification from GCI business, GCI added 3,500 revenue-generating wireless subscribers but saw a slight decline of 200 cable modem customers. GCI reduced its revolver by $60 million during the quarter thanks to strong cash from operations. At quarter end, its leverage, as defined by its credit agreement, was 2.8x. GCI's credit facility had $457 million of undrawn capacity after accounting for letters of credit. After the quarter ended, GCI distributed $150 million to Liberty Broadband, funded by cash on hand and drawing from its revolver. These funds were used to pay down the Charter margin loan and did not affect Liberty Broadband's net debt. Adjusting for the dividend payment, GCI's leverage was just under 3.2x with $327 million of undrawn capacity remaining under its revolver after letters of credit.

Gregory Maffei, President and CEO

Thanks, Brian. And to the listening audience, we appreciate your continued interest in Liberty Broadband and Liberty TripAdvisor. And with that, operator, I'd like to open the call for questions.

Operator, Operator

Our first question today comes from Ben Swinburne of Morgan Stanley.

Benjamin Swinburne, Analyst

Greg, I have a couple of questions regarding Charter. Yesterday, a bipartisan group of senators introduced an ACP Extension Act in the Senate. I noticed you didn’t mention this in your prepared remarks, so I'm interested to know if there's any hope that there might be a last-minute solution for the ACP. Similarly, regarding Charter, one could argue—though I understand you might not agree because of the Liberty perspective—that deleveraging could potentially enhance equity value more than repurchasing stock at this time. I’m curious about your thoughts on this, especially considering interest rates and the current state of the credit markets in relation to the stock price and the company's free cash flow generation.

Gregory Maffei, President and CEO

I recently learned a bit about the discussion on the ACP extension, but I don’t have much to add to it. There’s always hope, but while there seems to be some agreement between Republicans and Democrats on extending it, there also appear to be a number of procedural issues that could cause delays, so we can't rely on it happening. Regarding leverage, Ben, you may have noticed that in the near term, we plan to use more of the cash flow we receive from Charter for buybacks to pay down our debt at Liberty Broadband. Charter also aims to reduce its leverage from around 4 to 4.5 to a point within that range. They seem to understand that while both companies can handle these debt levels, we want to demonstrate to the market that we are responsive to the higher cost of interest, which is why we will be working to lower overall leverage at both companies.

Operator, Operator

The next question comes from Jeff Wlodarczak of Pivotal Research Group.

Jeffrey Wlodarczak, Analyst

I'll also focus on Charter. Charter's EBITDA valuation is about as cheap as it's ever been. It's a discount to the telcos or most of the telcos. Just wondering if your thoughts, Greg, on the idea that maybe Charter should think about slowing down its footprint expansion and freeing up cash to do larger share repurchases? And then assuming ACP does happen, how successful do you think Charter is going to be with the tools that it has in not seeing some sort of ARPU hit in the second and third quarter and keeping most of those subscribers.

Gregory Maffei, President and CEO

Thank you for the question, Jeff. Regarding the slowdown, there are attractive opportunities with the beat and other programs, but they are being more cautious due to alternatives and the market’s preference for free cash flow over line expansion. Chris and the team have appropriately taken a thoughtful and balanced approach. Concerning ACP, there are several appealing programs, and we should be able to take measures to reduce potential losses. I don't expect significant declines in average revenue per user given our current customer base and the expected outcomes of those programs.

Operator, Operator

The next question comes from Barton Crockett of Rosenblatt Securities.

Barton Crockett, Analyst

Okay. I also wanted to ask you, Greg, for thoughts on a cable question, which is the growth of mobile seems to be kind of the bright spot in the industry right now with headwinds on broadband and pay TV at the moment. And there's certainly been some great arguments put up by Charter about the success of some of the buy one get one free programs and the conversion on that. So Greg, I'm just wondering from your perspective, given that mobile is a great growth story, but it's still pretty small, not material, not really moving the needle in terms of investor sentiment. Do you think that there's an opportunity to invest more in mobile to move quicker to make it more material to pursue that future where your cable companies are the dominant kind of mobile providers like they were with plain old-fashioned telephone in years past? Do you think there's scope to do that? Just your thoughts there would be interesting.

Gregory Maffei, President and CEO

Thank you for the question, Barton. I believe you are correct in pointing out that mobile has been a strong area for us. Charter has been the most proactive among cable companies in this sector. I'm unsure how much further they can intensify their efforts. Generally, there has been a decline in foot traffic in stores, so the process has become slower. They are likely maximizing their mobile offerings at this point and will continue to promote this product. I am optimistic about their growth in mobile and confident they will keep gaining market share.

Barton Crockett, Analyst

Okay. And then if I could switch gears and just ask on Liberty Broadband, given kind of the depressed valuations for cable assets all over the place, is there an opportunity for Liberty Broadband to look at rolling up other cable companies generally, is there some opportunity there? Is the door really closed on that thought at this moment?

Gregory Maffei, President and CEO

Barton, I don't think the door is closed, but in general, given the synergies that Charter has, I think in most cases, we'd be better off trying to pursue it with Charter or through Charter than doing it directly. But you can't say never. There could be one that makes more sense for us for one reason or another or Charter's appetite is less likely. But in general, I think we're quite aligned that it's an attractive opportunity, but there are an enormous number that are available now that would be appealing even given Charter's synergies.

Operator, Operator

The next question is from Michael Rollins of Citi.

Michael Rollins, Analyst

Just on Liberty Broadband, another question regarding just the broader NAV discount that you're currently assessing. What do you think the factors are that are driving that discount? And can you discuss the way the Board is prioritizing the possibility of shrinking that discount and the methods that you want to use to do that?

Gregory Maffei, President and CEO

Yes. I think we've talked about how these discounts have risen in the past. There are fewer peers, there are fewer funds which arbitrage the opportunity. There's more higher cost to borrow on some of those things. We've talked about all that. We're really not the key market participants to judge, but that's what we hear. On what we're doing, generally, what we do is we take advantage of the discount by doing share repurchase at the discounted number and we find that attractive. Obviously, that's slowed a little bit with the pace of Charter's buyback itself. And that's our primary fuel for doing incremental buybacks, though we do get free cash flow on GCI also. The ultimate mitigation of that usually comes in the form of what we've done with LSXM and SXM or what we did with Liberty Expedia and Expedia or what we did with Elmedia and DIRECTV, where we eventually somehow spin and combine it or if it's already spun, combine our holdco with the opco and end up with a fully valued stock. So that's the ultimate resolution. And in the interim, the primary means is share repurchase to try and take advantage of it.

Michael Rollins, Analyst

And in terms of that resolution, is there a significant amount of OpEx synergy or other considerations in the case of Liberty Broadband that investors should be mindful of?

Gregory Maffei, President and CEO

Well, Liberty Broadband has some corporate overhead, which would be eliminated in any kind of a transaction. And there, I suspect, would be synergies between GCI and Charter and GCI's ability to do more effective purchases of programming, more effective purchases of any network elements that would probably be more efficient than GCI can do on a stand-alone basis. So yes, there are probably some synergies there.

Operator, Operator

Our last question today comes from Jeff Bronchick of Cove Street Capital.

Jeffrey Bronchick, Analyst

I'm going to discuss Trips. My quick question for you is, do you think the negotiations have reached a critical point where the main focus is on acquiring the L-TRIP for control, which may be facing pushback from all shareholders? Or is that not applicable?

Gregory Maffei, President and CEO

I don't know enough about Paramount what's going on or not going on there. I only read what I read. So I can't make the analogy or not. I can say as we had productive discussions with the special committee. We continue to have those discussions. And I don't think there is tension about any kind of Liberty Trip premium versus Trip. I don't think we've seen that tension in the discussions. And afraid, I really can't comment further than that.

Jeffrey Bronchick, Analyst

Paramount, where, obviously, someone would like to buy the Redstone stake and I have to offer all other shareholders anything would be my reference.

Gregory Maffei, President and CEO

In general, I mean, just as a final point, we have worked hard to try and make sure that we treat all shareholders fairly and not disadvantage them. And I certainly haven't sought some big premium from the position; we thought to try and make this the best possible transaction for all shareholders. With that, operator, I think we're done. And thank you to our listening audience once again, and thank you for your interest in Liberty Broadband and Liberty Trip. We look forward to speaking with you again next quarter, if not sooner.

Operator, Operator

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