Earnings Call Transcript - LBRDA Q2 2022

Operator, Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Liberty Broadband 2022 Q2 Earnings Call. As a reminder, this conference is being recorded, August 5. 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 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's 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 note 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.

Gregory Maffei, President and CEO

Thank you, Courtnee. Good morning. Today, speaking on the call, we will also have Liberty Broadband's Chief Accounting Officer and Principal Financial Officer, Brian Wendling; Ron Duncan, CEO of GCI; and Pete Pounds, CFO of GCI, will be available to answer questions. Also during the Q&A, we'll be able to answer questions related to Liberty TripAdvisor. So looking first at Liberty Broadband. From May 1 to the 31st of July, we repurchased 9 million LBRD shares for $1 billion. This includes 2.7 million LBRDA shares at an average cost per share of $114.08. We were capitalizing on the spread between the As and the Ks. These Liberty Broadband buybacks have been additive to our NAV about 3% per share over this period compared to Charter at 1% per share. And we bought at a look-through price on Charter, these repurchases of about $373 a share on Charter. Over the same period, we received $1.1 billion of cash proceeds from Charter share sales back to Charter. Looking at Charter itself, it was a strong quarter of financial results with revenue up 6% and adjusted EBITDA up 10%. Organic broadband was a relatively disappointing 38,000 customers if you exclude the 59,000 customers disconnected from the Affordable Connectivity Program. The market environment does remain more challenged than we've had in recent memory with low move activity and increased investment in promotion in fixed wireless by certain players. Spectrum mobile continues to expand at a rapid clip with 344,000 new wireless lines. Mobile revenue is now up 40% year-over-year and represents over 5% of total Charter revenue. I want to reiterate that mobile has a real revenue and profit opportunity, and we remain in the very early stages. As far as Charter itself, Liberty feels very comfortable with its strategic position and technical edge in the vast majority of our markets. We are still optimistic on the broadband outlook, including new rural builds, which will extend the growth opportunity, and we believe mobile is a competitive advantage as well as a revenue opportunity and will help further solidify our value proposition versus competitors. Turning to TripAdvisor. We had our earnings call this morning for Trip, which welcomed Matt Goldberg, the new CEO who started on the 1st of July. Consolidated results have reached the 2019 levels by the end of the quarter. The European recovery rate has caught up with the U.S., especially in the hotel auction. We're seeing the strongest recovery in Viator and TheFork, which are both exceeding the 2019 revenue levels. Viator EBITDA reached breakeven in the second quarter, and we believe the attractive unit economics of the business are very appealing. We believe in the ability to build a large repeat revenue basis off relatively low marketing costs. We are focused on new customer acquisition and retention strategies as well as brand marketing for Viator. TheFork also exceeded its 2019 booking levels. European dining restrictions have eased, and diners are returning to restaurants. Consistent with the above results, TripAdvisor announced new reporting segments, which better reflect the growth profile and maturity stages of our respective three businesses. We believe this will allow investors to better track the progress of our performance across our growth areas. And with that, let me turn it over to Brian to discuss the financials in more detail.

Brian Wendling, Chief Accounting Officer and Principal Financial Officer

Thank you, Greg. At quarter end, Liberty Broadband had consolidated cash and cash equivalents of $301 million, which includes approximately $80 million of cash held directly at GCI. The value of our Charter investment based on our shares held as of August 1 and Charter share price at yesterday's close was $23 billion. On May 2, we sold our subsidiary, Skyhook, for aggregate consideration of $194 million, which includes $23 million of cash that's held in escrow. At quarter end, Liberty Broadband had a total principal amount of debt of $3.9 billion. We repaid $200 million on our Charter margin loan during the quarter, and our available capacity is $900 million. Note the above amounts exclude the indemnification obligation to Qurate and preferred stock. Now looking at GCI's results, GCI had a good second quarter. The company generated solid free cash flow. Cash for the quarter was down $31 million, with strong cash from operations offset by a $70 million dividend to Liberty Broadband and CapEx during the quarter. Subsequent to quarter end, GCI paid an additional $40 million to broadband using cash on hand. Leverage as defined in its credit agreement was 2.9x at quarter end, and GCI has $397 million of undrawn capacity under its revolver. Revenue was flat. Adjusted OIBDA was up $1 million in the second quarter due to a better mix of higher-margin revenue. As we noted at year-end, revenue and adjusted OIBDA are seeing the effects of a new roaming agreement effective in the fourth quarter of 2021, which is positive long-term 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 margin or free cash flow. This decline in our video business and the impact of the new 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 5,000 revenue-generating wireless subscribers and over 9,000 revenue-generating cable modem customers, including 900 broadband subscriber additions in the second quarter of this year. We believe many of these gains are directly attributable to our deployment of 2-gig speeds in communities across Alaska. GCI is expecting to launch 2-gig residential internet speeds in Unalaska by the end of the year. Last week, the company announced that the subsea fiber for the AU-Aleutians fiber project completed its 12,000-mile journey from Germany and has arrived in Unalaska. The 800-plus miles of fiber will bring these 2-gig speeds to some of the most remote communities in the country.

Gregory Maffei, President and CEO

Thank you, Brian. I want to remind some of you who may not know. Our Annual Investor Day will be Thursday, November 17 in New York. Please save the date. Additional details will be provided soon. We hope to see many of you there. We also appreciate your continued interest in Liberty Broadband and Liberty TripAdvisor. And with that, operator, I'd like to open the floor for questions.

Operator, Operator

And we'll go ahead and take our first question from James Ratcliffe with Evercore ISI.

James Ratcliffe, Analyst

I have two related ones for Greg and one for Ron, if I could. Greg, recently a significant increase in discussion of potential cable M&A and at the same time, there also seems to be greater uncertainty about the M&A regulatory environment in general. Can you give us a read on what you're seeing in terms of the interest in cable assets among strategic and financial investors and also your sense of what the antitrust environment looks like right now for cable consolidation? And Ron, seeing a lot of attention on fixed wireless in the lower 48 at the moment. Is it relevant as a competitor or opportunity for GCI?

Gregory Maffei, President and CEO

So thank you, James. I'll go first. I think Charter's perspective has been consistent. There are a series of assets at the right price that we could be effective consolidators of and add value in terms of our ability to be more efficient in customer touch, our ability to bring scale synergies, our ability to run them on a nationwide basis on a more consistent, attractive level. I don't think that's changed. I think some of the prices have obviously come down, which would make that a more interesting opportunity potentially if we were a cash buyer. The regulatory environment is very unclear, and I think you really have to look at what scale you're talking about on a deal. It's something we believe we could defend of any of the stuff that's out there. But obviously, there have been a lot of changes in what's going on between DOJ, FTC and FCC, so we'll see. It's hard to predict with certainty, but I'm comfortable and optimistic we could do a transaction or get one to discuss, which has been publicly rumored. Ron?

Ronald Duncan, CEO of GCI

Thank you. And the short answer to is fixed wireless relevant to us, in Alaska, is no for two principal reasons. T-Mobile, who is probably the most aggressive fixed wireless provider in the lower 48, doesn't operate its own facilities in Alaska. They roam on our network in Alaska. So there's no direct retail competition from T-Mobile. And Verizon, the other principal competitor, does not have C-band spectrum in Alaska. The C-band auction did not cover Alaska because we still use C-band for important long-haul satellite connectivity in the states. So the FCC excluded C-band in Alaska from the auction. And C-band is the principal frequency, which Verizon is using for fixed wireless access. They are doing some in millimeter wave, but Alaska doesn't have any locations that are nearly dense enough to make millimeter wave fixed wireless access a significant competitor. So we haven't seen anything on that front and don't expect to.

Operator, Operator

And we'll go ahead and move on to our next question from Barton Crockett with Rosenblatt Securities.

Barton Crockett, Analyst

Greg, I wanted to just ask about kind of the evergreen question, but what your current thinking is about the merits from your perspective and how you might kind of characterize the Charter perspective of a potential combination of Liberty Broadband and Charter? It seems like we've settled into a pattern where you're pretty happy sitting pat. They're buying some stock back; you're buying some stock back. Seems like a pretty steady equilibrium, but the bigger possibility still remains and could be interesting. I'm just wondering what you think about that now. Is there any reason to think that, that would be desirable or not at this point?

Gregory Maffei, President and CEO

I think you're right that the equilibrium is attractive for us. We continue to increase our NAV per share at a faster rate than Charter because of taking advantage of that discount, even net of taxes. We also like our role and our involvement on the governance side and our oversight and understanding of the business better by being there. So I think it's a positive. Will it be a forever condition? I don't know. Not something we are contemplating today to change, but we always remain flexible on that. I think you were on the earlier call. We have taken a lot of actions historically to take advantage when we thought it was the right time, whether it be Expedia, the GCI transaction, DIRECTV, so never say never.

Barton Crockett, Analyst

Okay. I would like to ask another question. I'm also interested in your thoughts on what used to be a major issue for the industry, which is the possibility of reorganizations among telecom and cable companies, including potential mergers of major players, with Charter mentioned in some discussions. We don't seem to hear as much about that anymore. I've noticed that telecom and cable companies are becoming more competitive with each other. Has that possibility faded away, or is it something that could still be considered in the future? How do you see that evolving over time?

Gregory Maffei, President and CEO

Yes. I believe the progress we are making in wireless on our own is quite appealing. There might be some logic to consider a combination in the future. One persistent issue has been the challenge of merging broadband and wireless, especially since offering wireless in regions without broadband is less attractive and would be the case if we merged with or acquired a national wireless provider. We are pleased with our positions in both broadband and wireless, particularly as we enhance our broadband capabilities. While circumstances could change in the future, and some people envision scenarios where cable companies acquire other assets, we remain very confident about our growth prospects in both broadband and wireless. Their combined potential on our existing footprint is advantageous for us.

Operator, Operator

And we'll go ahead and take our last question from Michael Rollins with Citi.

Michael Rollins, Analyst

Two topics. The first, Greg, you made a comment in your opening comments that you're comfortable in the vast majority of Charter's markets when you thought about the strategic and technical position. Just curious what would be the characteristics of markets or the state of systems in which you wouldn't be comfortable? And then switching gears to ACP. Ron, I'm curious if you could share more about the ACP experience. Is it getting easier for customers to qualify? And how does this tool instruct you in terms of the risk of recession and maybe this program being able to have something in your toolbox that you haven't had before as you try to help customers during what could be just a tougher period for some?

Gregory Maffei, President and CEO

Yes. I'll go first. I think maybe I wasn't clear enough or you didn't hear me right. I believe that I prefer our position where we have less competition from fiber. Those are the situations where I feel happiest and believe our strategic and technical advantages are stronger. Obviously, we capture more market share against DSL and similar technologies. I think we perform well against fiber, but I prefer competing against non-fiber competitors. Ron?

Ronald Duncan, CEO of GCI

All right. The ACP has been a very powerful tool for GCI. I believe our success in transitioning customers from the previous emergency broadband protection program to the ACP has contributed to our continued growth in broadband subscribers, even amid a slowdown across the industry. We experienced good growth this last quarter despite typically expecting a down quarter. It's important to note that Alaska is considered tribal land, allowing us to qualify for the $75 subsidy rather than the $30 subsidy on ACP. This program has become crucial for us, and we have actively marketed it, including converting our lifeline wireless customers to the ACP program. It benefits us on both the wireless and broadband fronts. I view it as a significant counterbalance to any recessionary impacts because a wide range of customers is covered by or eligible for ACP, and they are often the ones who would churn the most during tough economic times. Thus, we see it as a particular strength, and it has been a key aspect of our consumer marketing efforts over the past six months.

Michael Rollins, Analyst

And just one other follow-up. Is the proposed tax legislation for either Liberty Broadband or GCI have any specific implications that investors should be mindful of?

Gregory Maffei, President and CEO

I don't believe so, but do we have Albert or Tim there or who wants to add anything?

Brian Wendling, Chief Accounting Officer and Principal Financial Officer

No, they're not in the room, but nothing that we're aware of.

Gregory Maffei, President and CEO

Yes. Yes. I think that was our last question. Thank you very much for your continued interest in Liberty Broadband and Liberty TripAdvisor. We hope to speak with you next quarter, if not sooner. And again, hope to see many of you in November at our Investor Day. Thank you very much, and have a great rest of your summer.

Operator, Operator

And with that, that does conclude today's call. Thank you for your participation. You may now disconnect.