Earnings Call Transcript - LBRDA Q4 2023

Shane Kleinstein, Senior Vice President of Investor Relations

Thank you. 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, followed 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 statement 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 and 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 turn the call over to Greg Maffei, Liberty's President and CEO.

Greg Maffei, President and CEO

Thank you, Shane, and good morning. Today, speaking on the call, we will have Liberty Broadband's Chief Accounting Officer and Principal Financial Officer, Brian Wendling; Ron Duncan, CEO of GCI; and Pete Pounds of GCI, who will also be available to answer questions. During Q&A, we will also be available to answer questions related to Liberty TripAdvisor. So I'm going to begin with Liberty Broadband. We resumed repurchases of our Liberty Broadband shares using proceeds from the Charter share repurchase sales in October. From the 1st of November to the end of January, we repurchased $385 million of proceeds received from Charter sales and spent $255 million on LBRD repurchases. Remember last year, under our 26% fully diluted ownership cap, the early 2024 grants that Charter made slowed down their repurchases for our requirements to be repurchased. Therefore, we do not expect to sell into the Charter buyback in the next few months. Once we exceed the cap of 26%, we plan to resume the LBRD buyback. Looking at Charter itself, we certainly acknowledge there were near-term headwinds in the quarter that impacted broadband unit growth. The fourth quarter also felt the delayed impact from the Disney dispute at the end of the third quarter. There's been a consistent trend in 2023 of increased competition for fixed wireless, but we do believe the competitive noise will lessen over time. Fixed wireless assets will have capacity issues over the long term, and the operators have been clear on their limitations. We do believe that bandwidth demands will continue to increase among consumers which will favor higher speeds. We are long-term shareholders. We are confident that the strategic investments that Charter is making will generate excellent returns and accelerate growth over the next few periods. Charter's assets will provide the highest speed of a converged offering at the most competitive prices for consumers. Spectrum 1 is continuing to drive mobile growth and reduce churn. Charter was able to add 2.5 million mobile line net ads during 2023, which is a nearly 50% growth over the prior year. We saw no uptick in churn from the initial cohorts who were rolling off the promotional periods in the fourth quarter. As you would expect, the internet plus mobile customers are stickier than internet-only customers. Now, the positive news is that the rural expansion is beating penetration, ARPU, and ROI targets. The network evolution at Charter remains on course with fast low-cost upgrades at about $100 per passing. We don't believe competitors can replicate that upgrade path over their footprint. As management has outlined, the long-term CapEx outlook, excluding BEID, is expected to materially step down from 2027 to normalized levels. Let me touch on Liberty Trip. We filed an amendment to our 13D. We were authorized by the board to engage in acquisition discussions, and we will not comment further on those discussions unless definitive documents are executed or discussions are terminated. Looking at TripAdvisor itself, TripAdvisor had strong 2023 operating results, particularly in the back half. Q4 revenue was up 10% over the prior year. Q4 EBITDA and margin expansion exceeded expectations. There was outperformance at the recently renamed brand TripAdvisor. The Viator breakeven profitability was reached earlier than anticipated, along with marketing efficiencies at brand TripAdvisor and Viator that allowed us to have better than expected performance. We continue to move on cost-saving actions, which are improving margins. The diversification of revenue at TripAdvisor has been successful, with Viator and TheFork nearly accounting for 50% of 2023 revenue; in comparison, they were less than 10% in 2015, and experiences are now almost half the level of brand TripAdvisor. We've also seen increased repeat rates among customers. For example, at Viator, the Q4 gross booking value from repeat customers exceeded new travelers for the first time. Management is focused on long-term strategic opportunities and Gen-AI-driven product enhancements like Triptools to drive engagement and growth, and we think we are optimistic about those results. Now, I'll turn it over to Brian to discuss the financials.

Brian Wendling, Chief Accounting Officer and Principal Financial Officer

Thank you, Greg. At quarter end, Liberty Broadband had consolidated cash and cash equivalents of $158 million, which includes $79 million of cash at GCI. The value of our Charter investment based on our shares held as of February 1st and Charter share prices from yesterday's close was $13.5 billion. At quarter end, Liberty Broadband had a total principal amount of debt of $3.8 billion. Note that this excludes the preferred stock. We are updating our annual tax rate guidance on our Charter sales for 2024 to low double digits. This conservatively assumes that the dividend received deduction does not apply to Charter sales for the book minimum tax under the Inflation Reduction Act. We are accruing for this higher tax rate in 2024, while additional guidance from the IRS and Treasury is pending. I note that any book minimum tax paid for 2024 will carry forward to offset regular income tax in future years to the extent regular income tax exceeds the book minimum tax, making this more of a timing impact. Consistent with prior years, we're not providing specific tax guidance beyond the current year. Looking at GCI, 2023 was a good year for the company. With record revenue and adjusted OIBDA, GCI generated solid free cash flow and distributed $65 million of dividends to Liberty Broadband during the year. For the full year, revenue and adjusted OIBDA grew 1% to $931 million and $361 million respectively, driven by the strong performance in business data revenue, offset by declines in other revenue, primarily video and voice. In the fourth quarter, revenue was flat and adjusted OIBDA decreased 1%. While we continue to see strong business data growth, this was offset by declines in other revenue and increased costs, primarily in SG&A. Operationally, GCI added 1,400 consumer cable modem subscribers and 4,800 consumer wireless customers in 2023. GCI's leverage, as defined in its credit agreement, was 2.9x at year end, and GCI has $397 million of undrawn capacity under its revolver. We'd note that subsequent to year end, GCI paid down an incremental $40 million under its revolving credit facility. In 2023, GCI spent $216 million on capital expenditures, net of proceeds received from federal and state grant funding. This is above prior expectations, largely due to the timing of receiving certain grant proceeds. GCI's net capital expenditures for 2024 are expected to be approximately $200 million related to additional high-returning investments in middle and last-mile connectivity, with continued network expansion in our most important markets in rural Alaska, including Bethel and the AU-Aleutians Fiber Projects. Taking a proactive approach in rural connectivity projects is critical to securing necessary government funding.

Greg Maffei, President and CEO

Thank you, Brian. To our listening audience, we appreciate your continued interest in Liberty Broadband and Liberty TripAdvisor. With that, operator, I'd like to open the line for questions.

Operator, Operator

Thank you. We will now be conducting a question-and-answer session. Our first questions come from the line of Michael Rollins with Citi. Please proceed with your questions.

Michael Rollins, Analyst

Thanks. Good morning. Two questions. First, what are your expectations as to whether or not the ACP program will be discontinued? Can you share your thoughts on the possible implications for each of GCI and Charter? Secondly, just given the comments on being a long-term investor in Charter, does the current price for Charter change Liberty's interest to sell shares into Charter's buyback when needed to stay under the 26% cap? Thanks.

Greg Maffei, President and CEO

Thank you for the question. I'll address ACP and the impact of Charter, my expectations. Then Ron, maybe you'd like to talk about ACP and potential impact to GCI. I'll come back and talk about buyback. Whether ACP will be renewed or not is certainly a guess into the uncertain world of Washington. There is an enormous amount of support for it among many of the congressmen and senators to our knowledge, many of whom are in red states that actually received the majority of the ACP proceeds. So there is some reason for optimism. But trying to assume a clear path forward in Washington is beyond my capabilities. The impact is a little unknown; many of the ACP customers at Charter were customers prior to the ACP program. We think customer demands for bandwidth have grown. One of the complaints among some people in Washington is that this is a subsidy program, which isn't necessary because customers want the bandwidth, and that is a reason why some may not vote against it. This isn't particularly helpful for us in securing ACP funding, but it may also indicate that most customers will continue to take our broadband, even without ACP. It's hard to speculate on how much impact eliminating ACP would have or the cessation of ACP would have, but it's on a positive note.

Ron Duncan, CEO of GCI

Just briefly. We're expecting minimal impact from an ACP discontinuance at GCI. Most of the customers on ACP were broadband customers to begin with, and we have budgeted a slight increase in bad debt and anticipate a little bit of an uptick in churn. I think ACP for us was doing more to reduce the churn ratio among customers who may struggle from bill-to-bill. But at the end of the day, I doubt that the effects of the ACP shift will be perceptible on the broadband side. We do believe there's an upside opportunity on wireless because nationwide half of ACP goes to wireless providers. With our GCI plus offering in the market being hugely less expensive than the cheapest AT&T and Verizon wireless offerings, the disappearance of ACP for wireless should create a competitive opportunity for us to grow wireless subs at the expense of AT&T and Verizon as they phase their customers off of ACP. So we see more positives coming from the wireless side and expect very little impact on the wired side.

Greg Maffei, President and CEO

I'd just add that all those statements about wireless and the impact are likely to have the same effect. The charter is how we're pushing our Spectrum One program. On the buyback issue, we believe that it is long-term interesting, and the question about whether to raise the cap or continue to read and therefore not sell shares to Charter or continue to buy back at our own on the LBRD. Look, you see us spending the majority of proceeds from Charter on LBRD repurchases. You've also seen some amount of debt reduction at LBRD, utilizing the capital for that, and the reality is because we're buying at a substantial discount to the LBRD price, via the LBRD price to the underlying charter, we still have the same set of incentives to use our capital for share repurchase at LBRD rather than raising the cap today, because the discount is so much larger than the tax leakage. I’m not sure it actually changes our program.

Michael Rollins, Analyst

Thanks.

Operator, Operator

Thank you. Our next questions come from the line of Barton Crockett with Rosenblatt Securities. Please proceed with your questions.

Barton Crockett, Analyst

Okay, thanks for taking the question. I guess two things. One just kind of big picture for Greg, and then another kind of nuts and bolts on numbers. So the bigger picture question Greg is, I was curious about your thoughts on some of the new skinny bundles or streaming bundles that are emerging from the media companies in terms of legality or appropriateness from an antitrust perspective. Specifically the skinny sports bundle from Disney, Warner Brothers, Fox, do you believe that Charter would have rights to offer the same kind of bundle or not, and do you think there are any antitrust questions there? Similarly, I guess there are some reports that Comcast and Paramount have been discussing perhaps combining streaming efforts, and their streaming services include a lot of content from the broadcast networks NBC, CBS. There is a prohibition at the FCC on dual network ownership and some antitrust questions about the video market there. How do you feel about antitrust and do you think that ends up being an issue that affects this? So that's kind of the big picture question. I'll come back later with just a small numbers question.

Greg Maffei, President and CEO

Okay Barton, you know I'm only good on the big picture, so thank you for starting with that. The skinny bundles, I'm not sure how skinny that bundle is, but I'm also uncertain about the antitrust implications. I've heard knowledgeable observers on both sides, and I really have not dug into it enough to have a firm view of my own. The question about Charter, I think there is potentially an opportunity as bundles are created, that we are a distributor of that and have long-term positives without risk while continuing to drive demand for broadband as those packages shift. So I think – we certainly have not seen all of it at Charter and made a full evaluation of what it will do. On the margin, it feels positive to me both as an economic opportunity and as something that drives broadband.

Barton Crockett, Analyst

Okay, great. And then just on the numbers question, I wanted to make sure I'm clear. When you say $200 million on CapEx this year, is that comparable to the $216 million or is that just on the expansion, and would the actual comparable number be something different? Also, your commentary on the tax rate for sales of Charter shares, can you just give us a number? I'm not sure I quite followed what I should assume for a tax rate there.

Brian Wendling, Chief Accounting Officer and Principal Financial Officer

Yeah, on the tax rate…

Greg Maffei, President and CEO

Brian or Ron. Go ahead, Brian. Thank you.

Brian Wendling, Chief Accounting Officer and Principal Financial Officer

Tax rate, we're just giving you low double digits at this point, Barton. And then on the CapEx, yes, it's a comparable number, the $200 million to the $216 million.

Barton Crockett, Analyst

Okay, thank you.

Operator, Operator

Thank you. Our next questions come from the line of Ben Swinburne with Morgan Stanley. Please proceed with your questions.

Ben Swinburne, Analyst

Thank you. Good morning, Greg. I think these are big picture, so I think for you.

Greg Maffei, President and CEO

Don't scare me with those details. Come on, Ben.

Ben Swinburne, Analyst

Thank you. I ask you the question I asked John back in November on Charter, which is, why is 4.5x still the right leverage level? I think I know what your answer is, but obviously the market has spoken at least for now on what they are thinking about Charter stocks. So I'd be curious if there's a scenario where you think lower leverage is actually optimal. Looking back on the Disney dispute and you mentioned it in your prepared remarks that it has weighed on subs. Do you think that the objectives and what was extracted from that agreement by Charter have been worth some of the disruption in the business? Again, broadband net ads have an outsized impact on Charter stock versus their video business. So just wondering how you reflect on that.

Greg Maffei, President and CEO

I'll start with the leverage part. The question is certainly we have some shareholders asking the question, and we're weighing the relative merits. The Charter management team has shown the Board multiple scenarios about what lower leverage or higher leverage might mean. For the moment, we're pretty confident that riding the course, given the diversity of maturity, the likely movement in interest rates, even under most scenarios, we're better off holding the 4.5x leverage. It's certainly a question that's open in the sense of being responsive to our shareholders in general. For the 26% holder, I think I'm correctly relaying their views for the 12% holder at Advanced Stinghouse, I think we're in agreement with management's proposal that 4.5 is the right number. But we do look at it, and to the degree that there was massive pushback from shareholders, you would want to pay attention. I don't think we've received that yet. I think we've received questions on the margin. The stock price is not a function of leverage; it’s a function of perception of broadband growth and how we're doing competitively in the marketplace rather than net leverage. Disney is a long-term bet – a long-term play, not just about the impact in a quarter or rolling bleeding into a second quarter, about how to have a stable video business where we are more aligned and partnered with people like Disney, and I think you can make the same argument regarding the sports bundle. Having ourselves aligned with them and having a role where we can be a distributor of that and in these over-the-top offerings is the right strategy for the long-term, and I think management stands by that view.

Ben Swinburne, Analyst

Got it. Thank you.

Operator, Operator

Thank you. Our next questions come from the line of Alex Nordhagen with Balyasny. Please proceed with your questions.

Alexander Nordhagen, Analyst

Hey, thank you for taking my questions. I had two really around the cap stack. The first one, with the 2051s, the half coupon offset coupon that are put and callable from March ‘25, what is the base case plan to deal with those, assuming that there isn't any sort of transaction? I would think you'd need to have a plan in place given the low cash balance at Liberty Trip right now. The second question I had was just in theory; with respect to any acquisition discussions, if Sotaras was involved, would that need to be disclosed to the market or not? Thanks.

Greg Maffei, President and CEO

Ben, are you there? Do you want to touch on our plans? I think we're evaluating. We're not going to go reveal all. But Ben, what would you want to add?

Ben Oren, Analyst

Yeah, I think we monitor it regularly, Alex. We think about what the different strategies are for addressing either repayment of those securities or an extension of maturity, but we're probably not going to go into detail at this time.

Greg Maffei, President and CEO

I think I've said I wouldn't comment on it further, but I'll just say that the disclosure we made about being approached is the only disclosure we'll make until we comment further, and whether Sotaras or anyone else made the offer is really beyond what we're going to reveal today under the 13D disclosure rules.

Alexander Nordhagen, Analyst

Okay, and thanks Greg. And if I may just ask a follow-up then. With the debt being callable from next month about six weeks away, do you have any intention to call it?

Greg Maffei, President and CEO

I think I'd refer to Ben's comments earlier. We're evaluating all these things and looking at all our alternatives. If we do not disclose our intention to call it, we will not announce it.

Alexander Nordhagen, Analyst

All right. Thank you very much. Appreciate it.

Greg Maffei, President and CEO

Sorry to be unsatisfying, but at least I know you tried.

Operator, Operator

Thank you. Our last questions will come from the line of Barton Crockett with Rosenblatt Securities. Please proceed with your questions.

Barton Crockett, Analyst

Okay, thanks. So I took the opportunity to come back. Hopefully, this qualifies as big picture. Just for you, I'm curious about the statement that fixed wireless is competitive now but won't be over the longer term. Do you have any sense in your mind of how long it is before fixed wireless ceases to become competitive and becomes more of a source of win back for cable? There's a lot of consumers feeling pretty stretched, and it seems it would be pretty sticky for a low price service, but there are technical constraints. What do you think is the timing here?

Greg Maffei, President and CEO

Yeah, Barton, I think I would, the way you initially stated the premise that fixed wireless isn't competitive. I would say that differently. I would say there are certainly customers for whom fixed wireless is the answer that they believe they need. I think that customer set will reduce over time as broadband demands grow. Potentially, as FWA becomes less interesting, that network will have more users, and performance is less attractive. I'm not saying it’s a binary thing; it's a relative thing. The attractive bandwidth and the needs among consumers for more bandwidth shift in our favor over time. The question of when capacity is constrained, T-Mobile has been clear about how many they are willing to go out with. You can judge that quickly. Verizon has been less clear about their plans in this space. Looking at reasonable expectations and the run rate, you can make your own judgment about when that starts to slow down. We've already seen it slow a little, and we've seen T-Mobile begin to increase prices for FWA, which suggests there is not an unlimited amount of capacity for FWA.

Barton Crockett, Analyst

Okay, thanks.

Greg Maffei, President and CEO

Thank you. I believe that is our last question today. Thank you all for joining. Thank you all for your interest in Liberty Broadband and Liberty TripAdvisor. With that, operator, we will end today’s call.

Operator, Operator

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of the day.