Earnings Call Transcript - LBRDA Q3 2022

Operator, Operator

Welcome to the Liberty Broadband Corporation 2022 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 is being recorded, November 4th. I would now like to turn the conference over to Courtnee Chun, Chief Portfolio Officer. Please go ahead.

Courtnee Chun, Chief Portfolio Officer

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 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 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 Liberty President and CEO, Greg Maffei.

Greg Maffei, CEO

Thank you, Courtnee, and good morning to all on the call. Today speaking on the call besides myself will also have Liberty Broadband's Chief Accounting and Principal Financial Officer, Brian Wendling; Ron Duncan, CEO; and Pete Pounds, CFO of GCI, respectively will also be available to answer questions. Also during the Q&A, we will be available to answer questions related to Liberty TripAdvisor, but please do note that TripAdvisor has not yet reported on its third quarter results. So some of our answers may be limited. Turning first to Liberty Broadband. In the period of August 1st through the end of October, Liberty Broadband repurchased 5.5 million shares for $550 million, at a listed price of charter of about $319.76 per share. Over the same period, we received $616 million of proceeds from Charter share sales. I'd note we also increased our repurchase authorization in August, which now has $2.15 billion remaining on it as of the 1st of November. Towards the end of the quarter, we did pull back on some of our LBRD buyback. We did this with an intent to retain some portion of the cash flow from our Charter sales to address some of our near-term liabilities. Looking at Charter and its operating results for the third quarter, which was strong, revenue was up 3%. And we added 61,000 residential broadband net adds. That's a large sequential improvement and a meaningful beat against consensus. Importantly, we also added nearly 400,000 mobile lines even in a low move and low incremental broadband environment. Mobile revenue was up 40%. At the end of the third quarter, Charter had 4.7 million total mobile lines. We at Liberty and those at Charter remain very excited about the value of bundling mobile and the mobile opportunity overall with meaningful gains in share of mobile net adds. In October, Charter launched Spectrum 1. We think this is a differentiated converged offer to take to market, with compelling broadband Wi-Fi and mobile priced at $49.99 per month. You get 300 megabits of broadband speeds in mobile lines, and we do expect this will continue to accelerate mobile growth and drive broadband pull-through. Charter continues to expand its footprint through new builds. This remains a priority and we believe it's a very attractive economic opportunity. We are pleased with the early progress on RDOF and the additional subsidy opportunities in the pipeline. I do want to thank Tom for his leadership over the past 10 years, and we very much also look forward to continuing our partnership with Chris Winfrey, which will start when he becomes CEO on December 1. And with that, let me turn it over to Brian to discuss the financials in some more detail.

Brian Wendling, CFO

Thank you, Greg. At quarter end, Liberty Broadband had consolidated cash and cash equivalents of $203 million, which includes $37 million of cash at GCI. The value of our Charter investment based on our shares held as of November 1st in Charter share price from yesterday's close was $16.5 million. At quarter end Liberty Broadband had a total principal amount of debt of $3.9 billion. We opportunistically amended the terms of our Charter margin loans subsequent to quarter end, pledging an additional 6 million Charter shares, and importantly providing increased flexibility and improving our loan-to-value ratio there. Available capacity under the Charter margin loan is $900 million. Note, the above amounts exclude the indemnification obligation and preferred stock. Looking at GCI we had a solid third quarter. Revenue was up $2 million and adjusted OIBDA was up $1 million. As we noted at year-end, revenue and adjusted OIBDA are seeing the effects of a roaming agreement that was effective in the fourth quarter of 2021, which is positive long term for the company, but does create some negative comparisons in 2022 to prior periods. Additionally, our video business continues to shrink, which significantly impacts revenue, but does not meaningfully impact free cash flow. This decline in our video business and the impact of the roaming agreement were offset by growth in our consumer broadband and wireless offerings as well as our business data revenue. Over the last year GCI has added 6,300 revenue-generating wireless subscribers and over 8,000 revenue-generating cable modem customers, many of which are attributable to our deployment of two gig speed in communities across Alaska. GCI is continuing to expand its two gig offering expecting to launch in Unalaska by the end of the year. For GCI and Alaska, and certain members of our Investor Relations team this final slice of the fiber connecting to Dutch Harbor is as monumental as the Golden Spike that completed the US transcontinental railroad in the late 1800s. Cash for the quarter at GCI was down $43 million, with strong adjusted OIBDA offset by a $40 million dividend to Liberty Broadband. CapEx during the quarter and the normal seasonal increase in accounts receivable from the RHC program during the first quarter of RHC's fiscal year also were impacted. Leverage as defined in its credit agreement was 3.1 times at quarter end, and GCI has $397 million of undrawn capacity under its revolver. With that, I'll turn it back over to Greg for closing comments.

Greg Maffei, CEO

Thank you, Brian. We do look forward to seeing many of you at our Annual Investor Day on Thursday, November 17 in New York. Additional information is available on our website. John Malone and I will be hosting our annual Q&A session. If you'd like to submit questions in advance, you can e-mail [email protected]. We appreciate your continued interest in Liberty Broadband and Liberty TripAdvisor. And with that, operator, let's open the line for questions.

Operator, Operator

Thank you. Our first question comes from Ben Swinburne with Morgan Stanley. Please proceed.

Ben Swinburne, Analyst

Hey, good morning, guys. Thanks for the question. Greg, I wanted to ask about convergence at a little bit of a higher level, but also relevant to your Charter and GCI investments. In Europe, they've had converged fixed and wireless for a long time. And despite lots of enthusiasm that's been tough for cable. You'd rather own US cable than European cable. Maybe it's not because of the convergence element, but certainly conversion hasn't led to great results and you've seen pricing pressure when convergence turns into discounting. So with Charter, in particular, they're clearly leaning in here. There's a big debate in the market, whether that's going to be good or bad. So I'm wondering if you could just talk about your outlook for the impact of convergence on the US cable business, Charter in particular and whether you think the MVNO model can be a better model in the States than it's been in other countries, where it's been a low-margin business?

Greg Maffei, CEO

Yes, that's a great question, Ben. In Europe, we've witnessed a significant increase in fiber overbuilding, which has led to lower pricing as companies try to compete. The US market is different; we've reached similar valuations as mobile competitors, which I believe is a mistake. However, cable companies here have a stronger position compared to Europe. The broadband market in the US is more dispersed, allowing us to secure our position against less competitive threats, and we still have growth opportunities against DSL providers. Mobile operators are attempting to enter the broadband space, but that transition is challenging for them, while we have established mobile virtual network operator capabilities nationwide. This allows us to focus on markets with sufficient demand without unnecessary build-outs. We can use our MVNO relationship to our advantage, but we will expand where we can achieve better economics. Our MVNO partnership is ongoing, and we’ve already renegotiated for a better rate, with potential for future improvements. Importantly, we have a strong foothold in broadband, enabling us to add more mobile lines more easily than mobile operators can enter our sector. It's crucial to remember that the mobile market in the US is significantly larger than the broadband market. Therefore, while there are interesting comparisons, there are also key differences to consider.

Ben Swinburne, Analyst

Yes. No, that all makes sense. And just as a follow-up, strategically, do you think we'll see kind of convergence-driven consolidation in the US? We've got a lot of big companies out there. So the regulatory question is obviously a major one. But at the same time for those wireless-only players, they may need more fiber or want more fiber and maybe vice versa. I don't know if you have thoughts on that and then I'll shut up.

Greg Maffei, CEO

Well, one of the challenges is that mobile operators generally operate nationally and cable operators, fiber operators generally operate regionally or locally depending on your perspective. So there's sometimes a mismatch and there's probably more appeal for the mobile operator to get the fiber, the broadband operator, where he or she can rather than the case where the broadband operator sees the appeal of having a national mobile footprint compared to the regional footprint that they have. So there's a little bit of a mismatch there.

Ben Swinburne, Analyst

Yes. Thank you.

Operator, Operator

Our next question is from Michael Rollins with Citi. Please proceed.

Michael Rollins, Analyst

Thanks. Good morning. Just curious for an update. If you look at where the Charter share price is your thoughts on continuing to participate in selling into the Charter repurchase program, given the ownership limits that are currently set under the agreement. And if you think it's – the time is right to revisit that relationship?

Greg Maffei, CEO

I'll first start with – we have a pretty good position today, where the proceeds we're getting and the drag on tax that we have is less than the discounted NAV. So it's actually been the case that we are ahead of the game by repurchasing our stock with the proceeds we got from Charter. Might least want to revisit or think about how that relationship changes. We've had different caps at various times. I think that's something to be considered in the future but at the moment we're pretty happy with our hand.

Michael Rollins, Analyst

And are there any new thoughts on how to close that NAV discount that currently exists beyond the current course and speed that you're on?

Greg Maffei, CEO

Yes I think there are options out there to do that. We like the hand that we've got right now. This is our third earnings call today. I've had several variations on this. Our history is that we have generally gone out and created asset backs or created opportunities for mergers of entities like this. Over time what we thought that time was right and that potential surely exists somewhere down the road that we'll do that between Charter and Liberty Broadband. But we feel no rush. We feel we're continuing to benefit from our participation in Charter and we're continuing to benefit from the continued relationship and the continuing opportunity even as they repurchase shares to repurchase our stock at a discount.

Michael Rollins, Analyst

And just finally to follow up on some earlier comments that you made, given your views of cable and where values have come down to, is there any interest to use Liberty Broadband as a form of capital to invest in additional cable franchises, or are you content with what you currently own?

Greg Maffei, CEO

I wouldn't say there's no way we're going to buy another cable franchise. We did that quite attractively at GCI and you could imagine other benefits to it but you can imagine other transactions. But the reality is Charter has enormous synergies and we would first look to say, hey, does this acquisition fit better with Charter because they're going to bring a lot to the table. There may be some reason it doesn't. Maybe some reason we want to pursue it. But there's a lot of logic to putting any of those consolidation plays into Charter, because it's got an enormous potential to bring synergies to the table relative to what we can bring.

Michael Rollins, Analyst

Thank you.

Operator, Operator

Our next question is from Barton Crockett with Rosenblatt Securities. Please proceed.

Barton Crockett, Analyst

Thank you for the question. I'm interested in hearing Greg's thoughts on the current investment landscape. It seems that costs and equity values have decreased significantly, which previously allowed you to pursue advantageous deals. I'm wondering if this situation is presenting some enticing opportunities, or if the rising cost of capital due to increasing interest rates is making the environment less appealing. I’d like to hear your perspective on this.

Greg Maffei, CEO

Hi, Barton, thank you. It's kind of you to say that we've benefitted from past opportunities, and I believe that's accurate. The idea is to invest where others are feeling fearful, similar to what Buffet suggests, and there are certainly opportunities we've identified because of this. Your observation regarding the increased cost of financing making some opportunities challenging is important. In some instances, the limited availability of financing makes certain types of deals difficult, indicating that we might want to consider existing capital structures and take advantage of any discounts in the debt, or we might choose to pursue entirely equity-financed options. We have the capability and experience to handle both approaches. However, I’d like to add that seller expectations are adjusting much more slowly than buyer expectations in terms of how the pricing landscape has changed. Generally, sellers are looking for capital only out of necessity, particularly when they have debt obligations. Those who do not require financing are avoiding it, so we'll have to see how long they can maintain this stance and what opportunities emerge as sellers confront the reality of the changing marketplace.

Barton Crockett, Analyst

And just to follow-up on that point if we don't yet see the fear in seller's eyes or blood on the streets, but that might be coming. I mean, let's just argue that this is an environment where it makes sense for Liberty across your structures to start marshaling resources to be ready for when opportunities present. Is that something that's entering your mindset at this point?

Greg Maffei, CEO

Yes. I think you look and say capital is more dear. The risk of not having it is higher and the opportunities that may be created by having it are better. So yes, I would say that's a fair mindset.

Operator, Operator

Our next question is from James Ratcliffe with Evercore ISI. Please proceed.

James Ratcliffe, Analyst

Thanks. One Liberty Broadband specific is going more cable in general. On Liberty Broadband, any color on what drives the, A, versus buyback mix in a given quarter or period. Also I know you reached a deal with Dr. Malone to keep his ownership state from getting too high if you buy back the As, but anything else we should be thinking about on that? And relatedly, I think you mentioned near-term obligations more color on that with the margin loan or something else? And secondly, just on cable and competition, thoughts on how aggressively cable operators should respond to over builders, whether sort of do more to protect ARPU or kind of go scorch earth and say, we're not going to lose customers. And if there's going to be a transfer of value from us, it's going to go to the consumer, rather than to a competitor. Thanks.

Greg Maffei, CEO

It seems like there are three questions to address. First, regarding As versus Ks, we tend to purchase low-cost securities, which generally are the As. This aligns with the relationship you've mentioned with Dr. Malone, where voting is less of a concern for us. That's our main focus. I’ll have Ben Oren provide details on the maturities.

Ben Oren, Analyst

Yes. Again, in relation to the As and Ks, our quarterly buyback is quite substantial. We need to pay attention to liquidity levels. While purchasing more As might seem beneficial from a pricing standpoint, it could impact our liquidity. Therefore, we're cautious about that, which is why we emphasized Ks in the last quarter. Regarding maturities, our primary debt consists of the exchangeables, and we feel very comfortable with our ability to refinance that, along with the margin loan, which has strong support from a large group of lenders. We have a good ability to extend that as well. The margin loan and the convertible market generally have maturities in the three to five-year range, so we plan to extend those obligations as they approach maturity. As for cable competition, the situation is likely to improve. Fixed wireless has gained significant market share where there's capacity, but I don't think that capacity is limitless. Fiber overbuilders have grown slightly over the past few quarters, but their environment is becoming tougher as many seek equity or rely on debt capital. Additionally, Charter's activities, such as its overbuilds, are competing for limited labor and supply components, leading to a tighter market. This scenario benefits us on both the low and high-end fiber fronts. Historically, fiber overbuilders have struggled—John Malone has shared stories about the few successful ones. While they can disrupt the market, offering value to consumers is likely the best strategy. Charter knows how to compete effectively in these arenas. Furthermore, fiber overbuilders generally target easier opportunities, such as aerial fiber versus buried cables and higher-density markets, where there’s more DSL competition. This trend bodes well for Charter, as the fiber risk exists but isn’t likely to escalate in the near term.

James Ratcliffe, Analyst

Great. Thank you.

Operator, Operator

Our final question is from Doug Mitchelson with Credit Suisse. Please proceed.

Doug Mitchelson, Analyst

Thank you very much. Greg, can you share your confidence level regarding whether a DOCSIS 4.0 cable plant will be able to compete with fiber as it continues to expand in your area? Additionally, how might Liberty Broadband's strategy be affected if Charter decides to enter an investment phase next year, becomes more aggressive with rural buildouts, or accelerates network upgrades? I assume this could reduce your capacity for stock buybacks. Is this simply about the flow-through, or does it genuinely affect your overall strategy for Liberty Broadband? Thank you.

Greg Maffei, CEO

I will address the second part first. Your analysis suggests that we have less capacity, and buying back shares at a lower rate seems to be accurate. We are fully involved in this process. I'm part of the finance committee, which reviews all aspects of our buybacks and available alternatives. The entire Board has assessed the returns on our rural builds, and we find them to be appealing opportunities. We definitely support this initiative. As you pointed out, it actually alleviates some pressure on our cost cap. Regarding DOCSIS 4.0, I believe it has been a well-tested strategy and will be effective in fiber. It makes me chuckle, as some critics argue that no one requires more capacity, suggesting that Fixed Wireless Access (FWA) will surpass us, while others claim that everyone needs capacity, implying that fiber will dominate and leave little room for us. I have consistently held the view that both the bearish and bullish perspectives may be exaggerated. I believe cable is well-positioned with high split and eventually DOCSIS 4.0 to remain competitive across various markets. We are confident in the technological direction that Charter is pursuing.

Doug Mitchelson, Analyst

All right. Thank you.

Greg Maffei, CEO

So operator with that I think we're done. Thank you to our listening audience. As I said, we hope to see many of you in a couple of weeks in New York. And if not, I hope to speak to you on the next call if not sooner. Thank you very much.

Operator, Operator

Thank you. This does conclude today's conference. You may disconnect your lines at this time and thank you for your participation.