Earnings Call Transcript - LBRDA Q4 2022

Operator, Operator

Hello and welcome to the Liberty Broadband 2022 Yearend 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, February 17. I would now like to turn the call over to Shane Kleinstein, Vice President, Investor Relations. Please go ahead, Shane.

Shane Kleinstein, Vice President, 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 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 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 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 introduce Greg Maffei, Liberty's President and CEO.

Greg Maffei, President and CEO

Good morning. Thank you, Shane. Today 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, who will also be available to answer questions. During the Q&A, we will address questions related to Liberty TripAdvisor. Let me start with Liberty Broadband. As mentioned in our last call in September, we began retaining approximately 50% of the cash flow from the Charter sales to manage our near-term liabilities. We have about $1.5 billion related to the charter exchangeables due by October based on current prices. Therefore, from the beginning of November to the end of January, we received $291 million from Charter sales and spent only $177 million on Liberty Broadband repurchases. The purchase price to charter on those repurchases was about $272, compared to the current charter price of just under $400 this year. There is a slight timing mismatch between when the proceeds are received and when we spend them, which may explain why it appears to be slightly more than 50%. Moving forward, we plan to continue applying 50% of the proceeds from Charter share sales to Liberty Broadband purchases. We also expect total proceeds from Charter to be lower this year in 2023. Similar to last year, we are under the 26% fully-loaded ownership cap early in the year, influenced by Charter's annual compensation grants. As the year progresses, we anticipate lesser buybacks at Charter compared to 2022 due to their ongoing investments, which I will discuss further. We will revisit capital allocation later in the year after addressing our debt maturities. Now, let’s discuss Charter. We experienced lower broadband unit growth in 2022, partly due to COVID-19 pulling demand forward and a more challenging moving environment with fewer sales opportunities, limited customer reach, and increased competition from new entrants including fixed wireless. However, we note that in many cases, fixed wireless has expanded the market rather than taken market share, and we do not perceive them as long-term competitors, even though they impact us in the short term. Nonetheless, Charter delivered strong operating results. In the fourth quarter, we added 92,000 residential broadband units, showing sequential improvement over the previous two quarters. Our new pricing product, Spectrum One, has driven momentum in mobile, resulting in a record 615,000 mobile net additions in the fourth quarter—a significant success compared to other mobile operators. To note, cable's share of mobile net additions in the fourth quarter was 35%, while Charter accounted for 22% of all global net additions, which is impressive. We believe this highlights the value of cost savings for customers through bundling and seamless connectivity. As Chris Winfrey outlined in December, Charter is launching initiatives to accelerate growth and target substantial connectivity opportunities. This includes speeding up our network evolution plan through high-split differentiated converged product offerings like Spectrum 1 and rural construction, which we find has attractive returns—initial build penetration has exceeded our expectations, targeting mid to high teens IRRs. By 2026, we expect CapEx as a percent of revenue, excluding line extensions, to fall below 22% and decline further; however, these investments will increase CapEx as a percentage of revenue in the short term. Liberty has a longstanding positive relationship with Chris Winfrey and we are enthusiastic about his articulated strategy to the board and the marketplace. Even with business investments, the rise in stock prices for Charter and Liberty Broadband both present appealing free cash flow yields in a growth context. Liberty Broadband's relative value is particularly compelling. Charter's free cash flow yield stands at approximately 9.1% despite their investments, while Liberty Broadband's estimated '22 free cash flow yield was 12.9%. Now, I will turn to TripAdvisor. The travel recovery continued in the fourth quarter, surpassing management's expectations. Full year Trip revenue was 96% of the 2019 figure, and the fourth quarter actually hit 106% of the 2019 number. The hotel recovery accelerated throughout the year. In the US, hotel meta achieved parity with 2019 levels, with strong demand in both collections and pricing, and we are generating more revenue from paid traffic and less from free channels, which is impacting our margins to some extent. Viator grew by 115% in the fourth quarter compared to the prior year, helping to reduce losses despite a higher marketing spend. We continue to benefit from improved conversion rates and repeat customers, and we are confident in the growth of the experiences segment. Management is focused on long-term strategic opportunities and leveraging product enhancements to drive growth. They expect to maintain flat margins in 2022 through disciplined cost management and allocation despite increased investment in growth segments, including experiences. Now, I'll hand it over to Brian to discuss the financials.

Brian Wendling, Chief Accounting and Principal Financial Officer

Thank you, Greg, and good morning, everybody. At quarter end, Liberty Broadband had consolidated cash and cash equivalents of $375 million, which includes $85 million of cash directly at GCI. The value of our charter investment based on our shares held as of February 1 and Charter share price at yesterday's close was $18.9 billion. At quarter end, Liberty Broadband had a total principal amount of debt of $3.9 billion. Note that this excludes the indemnification obligation and preferred stock. I'll reiterate Greg's commentary that we expect reduced proceeds from Charter share sales to Charter in the early part of 2023. However, for the shares we do sell, we are updating our annual tax rate guidance for '23 to 7% to 13% compared to our previous guidance of 7% to 9%. The high end of the updated range assumes the DRD, dividend received deduction, does not apply to Charter share sales for the booked minimum tax under the Inflation Reduction Act. We are accruing for a higher tax rate in '23, while additional IRA guidance from the IRS and the Treasury is pending. So we believe clarification is possible this year. I'd note that any book minimum tax paid for '23 will carry forward to offset regular income tax in future years to the extent regular income tax exceeds the BMC, making this more of a timing impact for us. We are not providing specific tax guidance beyond '23 as there are many variables outside our control, including cadence and pricing of Charter share repurchases and clarification around certain aspects of the Inflation Reduction Act. Looking at GCI; 2022 was a great year for the company with record adjusted OIBDA, despite headwinds from the roaming contract that impacted year-over-year comparisons through the third quarter. GCI generated solid free cash flow and distributed $110 million of dividends to Liberty Broadband during the year. GCI also paid an additional $40 million in dividends to Liberty Broadband year-to-date so far in '23, and we anticipate additional dividends will be paid this year. For the full year, revenue was flat and adjusted OIBDA grew 1% to $358 million, the company's highest ever adjusted OIBDA, driven primarily by data demand, which drove both subscriber and ARPU growth. In the fourth quarter, revenue was up 2%, and adjusted OIBDA was up 14%. This was also driven by strong data growth as well as lapping the impact of the roaming agreement that we entered into in 2021, which is positive long term that created negative comparisons from Q4 '21 through the third quarter of this year. Operationally, GCI added 5,300 consumer cable modem subscribers and 5,900 consumer wireless customers in 2022. The network quality continues to improve with growth in the 5G wireless network, increased satellite capacity, and the completion of the fiber build to Dutch Harbor. The strength of the operating results led to continued deleverage. For the full year, GCI's net debt declined $57 million. Leverage as defined in the credit agreement was 2.8 times at year-end and GCI has $397 million undrawn capacity on its revolver. In 2022, GCI spent $156 million on net capital expenditures. This is net of proceeds received from federal and state grant funding. CapEx spend was related primarily to improvements to the wireless hybrid fiber networks and the Dutch Harbor fiber project. Net CapEx for '23, we expect to be approximately $185 million, which should be elevated due to the additional high-returning investments in middle and last mile connectivity with continued network expansion in Rural Alaska, including the Aleutians fiber project. We're taking a proactive approach in rural connectivity projects, which we view as critical to securing the necessary government funding. And with that, I'll turn the call back over to Greg.

Greg Maffei, President and CEO

Thank you, Brian. 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 line for questions.

Operator, Operator

Our first question today is coming from James Ratcliffe from Evercore ISI. Your line is now live.

James Ratcliffe, Analyst

Greg, if I could ask two questions. First, regarding the sale to the Charter buyback, you're generating cash at the moment, but does settling the Delaware litigation provide you with any additional flexibility regarding whether the 26.5% or 26% cap remains in place over time? Would you be open to raising it if the Charter board is interested? Secondly, you mentioned the exchangeables that are putable in October. Can you discuss the factors we should consider for refinancing those or paying them down, assuming they are indeed put?

Greg Maffei, President and CEO

Thanks, James. I'll handle the first one, and I'll hand it to our Treasurer, Ben Oren, to give you some color on the second. So on the first, I think you're right. You can note that the litigation settlement does open up more opportunities for us to have fruitful discussions with Charter, and we've had some preliminary ideas about that. We would be open to raising the cap. And we do think that many shareholders, other than Liberty, would find this positive because given the increased investments by Charter in 2023, many productive high-returning assets. Nonetheless, they are investing more in the business and less in buybacks, the buyback will go down quite a bit on a relative basis, and we would be able to ameliorate that or lessen that by taking our 26% off the table, the 26% that goes to us. So I do think that is something that could get done, and we are optimistic it might get done in 2023, something we'd like to do. Ben?

Ben Oren, Treasurer

With respect to the charter exchangeables, you're right. We are accruing a meaningful amount of cash. I think what we would say at this point is that we have the option to address those with some combination of cash on hand accessing the margin loan that we have related to Charter shares and potentially a new exchangeable with probably a slight preference between margin loan and a new Charter exchangeable. We'd probably prefer a Charter exchangeable to maintain optimal liquidity.

Operator, Operator

Our next question is coming from Doug Mitchelson from Credit Suisse. Your line is now live.

Doug Mitchelson, Analyst

I was curious about your outlook for Charter as an investment right now. The market seems to be expecting 2% EBITDA growth this year for Charter, while Charter has previously achieved high single-digit EBITDA growth along with strong equity returns. It's noteworthy that they're focusing more on investing rather than stock buybacks, which are typically seen as low risk compared to the potential returns from capital expenditures. This creates an interesting dynamic from the perspective of Liberty Broadband in relation to long-term Charter shareholders. So, are you still as excited about Charter as an investment as you were a few years ago? Also, what are Liberty Broadband's expectations for returns from Charter moving forward?

Greg Maffei, President and CEO

Thank you, Doug. I have a few points to make. First, when we upgraded two million connections on the existing network with relatively low capital, we realized it's an attractive business model. The incremental capital we’re investing remains appealing, and we support these decisions at the board level, feeling positive about their direction. The investments in high-split technology provide significant opportunities for our existing network, and the rural expansions offer good returns. These new broadband investments from various government levels are more promising compared to the RDOF bidding, which in many cases led to inflated bids that were not fulfilled, impacting the market overall. I believe these broadband initiatives will yield attractive internal rates of return. We're excited about those developments. While comparing these investments to stock buybacks in the long term is valid, the opportunities for buybacks aren’t going away. We continue to invest, believing it's beneficial for the long term, and we are positioned both offensively and defensively for Charter. Liberty remains very optimistic about Charter’s future, and our ongoing buybacks signal that commitment, despite the challenges we face with our exchangeable strategy as we navigate how much we will engage currently versus in the future, considering likely additional equity issuance.

Doug Mitchelson, Analyst

Do you see Charter returning to mid-single-digit or high single-digit EBITDA growth in the not-too-distant future?

Greg Maffei, President and CEO

Yes.

Operator, Operator

Our next question today is coming from Ben Swinburne from Morgan Stanley.

Ben Swinburne, Analyst

Following up on Doug's question about Charter, you seem to be positive about financial leverage, which has been John's strategy for years. Given that interest rates are higher, growth is slower, and capital intensity has increased, do you see an optimal leverage level for Charter that is lower than what they're currently using? Or do you believe it should actually be higher since the stock has declined significantly over the past year? Additionally, although not directly related to Charter, I'm interested in your thoughts regarding Gigi becoming the FCC Chairperson soon. She has strong opinions about the broadband market and cable, so I'm curious if there are any concerns or factors you're monitoring in that regard.

Greg Maffei, President and CEO

Thanks, Ben. On the leverage front, Charter can handle more leverage, but currently, the equity markets aren't receptive to that, so there's no reason to increase it. The environment isn't favorable for acquiring more leverage. While there are increased costs, the majority of Charter's debt is stable, with only a small amount floating or needing refinancing soon. Therefore, our actual borrowing cost increase is quite minimal compared to the existing debt. You could argue for a higher leverage, but just as easily, it's tough to justify lower leverage because the capital markets are hesitant. These businesses are stable, and we have a strong finance program, so I'm not concerned about the leverage. It's true there are rising costs and investment needs, but it's important to note that the stock price has significantly decreased. Overall, I find the current situation still quite attractive.

Ben Oren, Treasurer

And on the second point about regulatory, that has been an existing risk, an ever-present risk in the cable business since the early '90s, right, but maybe earlier John could tell me earlier, but I would say, certainly, from the time I've spent around it, the real cable regulatory has always been a risk. We went through a relatively activist regulatory environment during the Obama administration with Title II regulation that we navigated successfully. I think it's unlikely that we would see something more aggressive than that, but that is always one of the things that we are constantly vigilant about. I do think there are many voices in Washington, which are less aggressive and more extending the free market attractiveness and what a great job that the broadband industry had done through COVID and building out now. So while it's certainly a risk, I don't look at it as an increased risk that we've ever seen over a period of time.

Ben Swinburne, Analyst

Yes. And certainly, the CapEx investments in rural should help and fixed wireless still might be an actual silver lining at least in this context?

Greg Maffei, President and CEO

I think that those are both good comments, Ben.

Operator, Operator

Next question is coming from Barton Crockett from Rosenblatt Securities.

Barton Crockett, Analyst

Okay. Yes, I'd like to ask two questions, if I could. One is just on GCI, we are looking at them. They seem to have some volatility in wireless subscribers after the year. I think it was down this quarter. Can you just explain what's going on with the wireless subscriber numbers there?

Greg Maffei, President and CEO

Well, we could take a shot, but I'll first offer it up to our Alaskan counterparts. Ron, do you want to answer that or Pete?

Ron Duncan, CEO of GCI

I think what you're seeing on postpaid wireless subs, we've been up for 11 consecutive quarters. There's volatility in the prepaid business, both due to seasonality. There's a very strong surge in the summer and the fall months with prepaid sales to the fishing industry in a number of our communities, and then those fall off. This year, there was an overall decrease in prepaid due to some problems we're having with the platform. We're working on improving the platform right now to make it more competitive, which will stabilize that, but the core measure of our wireless success is really on the postpaid side, and that has been uniformly up for the last almost three years, and we believe it will continue to grow. We've got far and away the best 5G network, the best network in Alaska. If you look at speed test comparisons, we always ranked number one by a factor of two or three, and that plus the bundling with the high-speed data products is helping the postpaid sales.

Barton Crockett, Analyst

Can you provide a breakdown of the postpaid and prepaid mix?

Ron Duncan, CEO of GCI

I don't know that we publish those numbers. Do we, Pete?

Pete Pounds, CFO of GCI

No.

Barton Crockett, Analyst

Okay. Then switching to a different topic. Greg, I’m noticing with some interest the news flow around the big RSN complex at Diamond, which is a significant source of programming cost for the cable industry. They’ve acknowledged that they’ve missed an interest payment, and there’s speculation that they are moving towards some type of bankruptcy. This presents an opportunity that we considered. You have a very interesting position as a distributor of these networks through Charter and as the owner of sports teams like the Braves on a different equity call. I was wondering if you could discuss what you think is likely to happen. Does this present an opportunity for a reduction in programming costs for cable companies? Is there a risk to the revenues for sports teams like the Braves?

Greg Maffei, President and CEO

Well, Barton, that's a great question. The Diamond situation is quite complicated. We've been closely aligned with MLP, trying to find the best outcome for baseball while also making it an attractive investment. From Charter's perspective, I believe we will see reductions in RSN costs over time; that's inevitable. Charter can renew contracts continually and on favorable terms, so I expect those costs to decrease relatively. From the Braves' standpoint, they have more than a dozen RSNs. Given that we have the largest broadband territory and a very engaged customer base, along with a relatively modest RSN fee compared to teams like the Dodgers, the Braves are very attractive. We believe they are the most profitable RSN. Even if there’s speculation about Diamond filing for bankruptcy, we think they will be unlikely to reject our contract because it’s a very appealing RSN for them. In the long term, I suspect there will be a streamlined version owned by Diamond or a successor, taking their profitable RSNs and possibly renegotiating some terms, but they probably won’t keep all of them, which is my speculation.

Barton Crockett, Analyst

You mentioned MLB, you're bringing aligned. Do you think there's an opportunity for the leagues to take ownership of the RSNs or the rights and do something else maybe?

Greg Maffei, President and CEO

I believe there is some opportunity for the leagues to explore, but we'll see. As I mentioned, it's complicated. Honestly, it's primarily speculation, Barton.

Barton Crockett, Analyst

Okay. Well, I appreciate it. Thank you for all that, Greg.

Operator, Operator

Our final question today is coming from Michael Rollins from Citi.

Michael Rollins, Analyst

Greg, you mentioned earlier in the call that you would revisit capital allocation later in the year after you get through the upcoming maturity. Can you give us a preview of your consideration set for Liberty Broadband? And then secondly, just curious if you could share how meaningful ACP has been for both GCI and Charter, if there's some quantification of that and your expectation for how this program will evolve to potentially seen the program and funding given the characteristics of it is around a defined amount at the moment.

Greg Maffei, President and CEO

I think once we finalize our financing, we'll assess the charter stock prices, the price of Liberty Broadband stock, any potential discounts, and the clarity around taxes. All these factors will influence our decision, but it's quite likely that we'll return to using 100% of our free cash flow for stock buybacks. For Liberty Broadband, free cash flow essentially refers to what we gain from Charter repurchases, and we intend to use that for buying back stock. I believe this is the most probable scenario. Regarding ACP, we found it to be an appealing program during COVID, which contributed to a decrease in bad debt. It also explains the significant growth we experienced in broadband net adds during that time. We believe it has been a beneficial program, and we'll monitor the funding situation as there are many developments happening in D.C. We'll see how much progress is made. Ron, do you have anything to add?

Ron Duncan, CEO of GCI

We've been particularly benefited by ACP in Alaska, and I think it's the primary reason that our bad debt has run at such almost absurdly low levels. We were six-tenths of a percent of total revenue for bad debt last year versus an industry norm and a GCI norm pre-COVID of 1.2% to 1.5%. And we've got a material number of subs less than 10,000, but a material number of subs. In Alaska, we qualify for the tribal benefit, so we're getting $75 a month. And I think what it's doing is it's taking the lowest end of our subscriber base that would ordinarily turn on and off and making them good, stable customers. That said, we're projecting the benefits of that program to go away sometime early in '24, and our bad debt to return to more normal levels because we think in the current political environment with the Republicans in control of house, it's unlikely that the funding necessary to continue ACP would be provided, and the actual termination date of the program when it runs out of money is unknown, but it's likely in the first half of '24. It depends on the ongoing expenditure rate.

Greg Maffei, President and CEO

So with that, operator, I think we're done. Thank you very much for your interest in both Liberty Trip and Liberty Broadband. We look forward to talking to you next quarter if not soon.

Operator, Operator

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation.