Liberty Broadband (K) [LBRDK] Conference call transcript for 2022 q1
2022-05-06 16:29:08
Fiscal: 2022 q1
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Liberty Broadband 2022 Q1 Earnings Call. During the presentation, all participants will be in a listen-only mode. . As a reminder, this conference is being recorded, May 6. I would now like to turn the conference over to Courtnee Chun, Chief Portfolio Officer. Please go ahead.
Courtnee Chun: Good morning. 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 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 turn the call over to Liberty President and CEO, Greg Maffei.
Greg Maffei: Thank you, Courtnee, and good morning to listening audience. Today, speaking on the call, we will also have Liberty Broadband's Chief Accounting and Principal Financial Officer, Brian Wendling; and 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 happy to answer questions related to Liberty TripAdvisor. So beginning with Liberty Broadband, from the first of February through the end of April, we repurchased 5.1 million Liberty Broadband shares for $718 million. Over the same period, we received $753 million of proceeds from Charter share sales. This reflects two months of share sales as noted last quarter because we did not participate in the Charter buyback in February. The average look-through price to Charter on these repurchases was $451 per share. As a reminder, the annual tax rate on our Charter share sales for 2022 is expected to be, and 2023 is expected between 7% and 9%. For tax purposes, the share sales back to Charter are treated as dividend income and eligible for 65% dividends received deduction. Our tax basis in the Charter shares is reduced by the amount of DRD on a share-by-share basis. It will result in a gradual increase in our tax rate over time. Please note, we are not providing specific tax guidance beyond 2023 now because of the many variables outside of our control, including the cadence and timing of Charter's prices, our share repurchases, the pricing of those share repurchases, tax reform, et cetera. I'd also note that at LBRD, we sold the subsidiary Skyhook, and received approximately $170 million of net proceeds on May 2. Turning to Charter itself. They had reported strong financial results in the first quarter with revenue and EBITDA, both up 5% and free cash flow up 9%, excluding a litigation payment. Notably, the mobile momentum continues there, adding 373,000 lines in the first quarter. Charter continues to leverage its fixed network to drive an additional value to mobile customers, adding features such as mobile boost and CBRS small cells in the future. We remain confident in the hybrid capital-efficient approach to Charter's mobile rollout. Broadband net adds were softer at $185,000 in the first quarter, reflecting a low churn and low, therefore sales opportunity environment across the industry. We had expected moderation of broadband demand coming out of COVID, and that's obviously been exacerbated by the lack of move opportunities in the market today. Their market fears about FWA, fiber, have surely compressed cable multiples. Our Charter is voting with its feet and aggressively pursuing its active buyback. We are similarly bullish on the opportunity, and it seems like the market has at least gotten a bounce over the last couple of days and recognize that perhaps was overdone. Notably, Charter also unveiled a JV with Comcast to generate -- to develop rather a next-gen streaming platform. We think this provides a compelling path forward on video and a means of benefiting from revenue streams that are ancillary to linear video. This new operating platform will streamline and aggregate experience for our optimal customer user interface and the like and will enable a transition to IP delivery for video, allow additional spectrum to be deployed in other ways, particularly broadband. Turning to TripAdvisor. We had a strong start to the year. January was impacted by Omicron, but business materially improved throughout the quarter. In Q1, the consolidated revenue reached 70% of 2019, it's post-COVID peak. HM&P and E&D segments combined reached 75% of their 2019 levels, and we exited Q1 at 88% of the 2019 levels in March. The HM&P segment exit actually at 76% of the 2019 revenue and the E&D segment exceeded the 2019 revenue levels, growing 229% year-over-year and reaching 115% of 2019 levels. We continue to leverage high CPCs to drive paid traffic in the auction and are generating good returns in that auction. We also experienced very positive gross booking value at experiences and a key operating metric. European travel is returning, and we're seeing signs that Europe is almost at a par with North America as a destination, and we are also seeing strong repeat booking rates among the 2021 acquired cohorts. So the customers we acquired in 2021. Lastly, at Trip, we were thrilled to announce Matt Goldberg is joining as CEO on July 1. The market seems to agree. He has a long history as a proven operator, most recently at Trade Desk. He has experience in travel, media and digital content. And we want to thank Steve Copper for his long tenure as Founder and CEO. And with that, let me turn it over to Brian to discuss the financials.
Brian Wendling: Thank you, Greg. At quarter end, Liberty Broadband had consolidated cash and cash equivalents of $300 million, which includes $111 million of cash at GCI. The value of our Charter investment based on shares held as of May 1 and Charter share price at yesterday's close was $24 billion. And at quarter end, Liberty Broadband had a total principal amount of debt of $4.1 billion. We drew down $300 million on the Charter margin loan during the quarter and available capacity at the end of the quarter is $700 million. The drawdown was largely to fund share repurchases at LBRD given the timing difference when we received proceeds from Charter share sales. As Greg mentioned, we did not sell into Charter buyback in February and received only two months of proceeds from Charter share sales in this reporting period. Note the above amounts exclude the indemnification obligation and preferred stock. Looking at GCI. GCI had good -- had a good first quarter. The company generated solid free cash flow and continued to delever. Subsequent to quarter-end, GCI paid a $70 million dividend to Liberty Broadbanding -- Broadband using their cash on hand. Leverage as defined in its credit agreement was 2.9x at quarter-end prior to the impact of the dividend up to the parent. And GCI has $397 million of undrawn capacity under its revolver. Revenue and adjusted OIBDA were both down $9 million. As we noted at year-end, revenue and adjusted OIBDA are seeing the effects of the new roaming agreement agreed to in the fourth quarter of 2021, which is positive long-term, but does create some negative comparisons to the prior periods in 2022. 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 was offset by growth in our consumer broadband and wireless offerings. Over the last year, GCI has added nearly 5,000 revenue-generating wireless subscribers and nearly 10,000 cable modem customers. We believe many of these gains are directly attributable to our deployment of two gig speeds in communities across Alaska. 80% of Alaskans now have access to GCI's two gig speeds. I don't think any other state in the country even comes close. And we're deploying two gig in some of the most remote communities in the nation. Later this year, we'll light up our new 800-mile subsea fiber to bring two gig service to Dutch Harbor, which many of you probably recognize as home to the deadliest catch. Soon Dutch Harbor will be known for kick crab and virtually unlimited speeds and data. Safe to say, GCI is in bridging the digital divide, they're eliminating it. With that, I'll turn the call back over to Greg.
Greg Maffei: Thank you, Brian. And to our 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: . We'll take our first question from Doug Mitchelson with Credit Suisse.
Doug Mitchelson: Thanks so much. I guess just two questions, Greg. You've got the benefit of being a long-term investor. So I'm just curious, is there anything in the current environment for Charter that has surprised you or the team at Liberty. Obviously, the equity markets are telling you there is some surprise about either how much fiber is getting built or the efficacy of fixed wireless so far. So I'm just curious whether it's been a surprise for you folks who have been thinking longer-term. And I just think separate macro backdrop, Greg, does that rising interest rates and yet lower Charter equity influence how you think about managing capital for Liberty Broadband. Thank you.
Greg Maffei: Thanks, Doug. Yes. I think I'm surprised that the broadband net adds fell as much as they did. We can all speculate how much of that is due to at least five factors I can think of, which is just general saturation of the market, COVID pull-forward, lack of move, and therefore, lack of selling environment, increase in FWA or increase in fiber. I'm fairly confident that the fifth one is not been ramped up dramatically in the first quarter. There's just no way to do it. The market environment to actually build is not getting easier. It's getting harder in terms of availability of supplies and availability of labor. So there's no reason in my mind to think that's been ramped. Is there some potential that FWA has been ramped, not potentially, I don't think that's as much of a long-term threat, but that could have been popped in the quarter certainly. On the issue of the first three, I tend to think it's mostly, to some degree, we are going to be in a slowing environment in terms of saturation, but I really do think it's mostly COVID pull-forward and move among those five factors, which has caused the decline. So I remain optimistic that we have a growing broadband asset at Charter, and we will have increasing free cash flows, increasing margins and a big mobile opportunity. So I don't think our view on the business has fundamentally changed and the risk/reward at the prices we're talking about in terms of doing the share repurchase looks a lot more attractive. So I don't think that's a big change. As far as the overall market environment, we are in the business, as you know, Doug, of trying to be long-term investors. We do try and find opportunities in more attractive environments. And I suspect, as the ramifications of higher rates and more difficult equity markets plays through, there will be opportunities, and we have a lot of capital at broadband as well as a lot of capital at Swan and of the SPAC, but it takes usually a while for those to flow through. And we're not people who sort of get to play with the market down 10%, let's buy more, its longer-term deals that come our way, just the nature of how long deals take and how long it takes sellers in many cases to readjust their expectations. So I do think there will be opportunities, but I don't think it's like they're going to show up next week just because the market's fall off this amount.
Operator: And we'll go to our next question from Ben Swinburne with Morgan Stanley.
Ben Swinburne: Good morning, Greg. Just sticking with the Charter theme and sort of your buyback strategy, did you not sell in February because you don't want to sell at these prices or any other factors there? And just remind us how all that works with your ownership cap because obviously, it's charters buying and you're not -- if you're accreting? Yes, that would be great. Thank you.
Greg Maffei: Happy to try and clarify that the ownership cap is measured on fully diluted shares. So as they have issued some options and done some things related, we have more room under the cap and so we're not required to sell.
Ben Swinburne: And is there a reason for not selling in February, because you don't like where the prices are? Or was there anything technical in the quarter?
Greg Maffei: We're not trying to sell Charter stock. We're being obligated to sell into that, and we were not obligated to do so in February, because of their actions in terms of share issuance and the like.
Operator: We'll take our next question Barton Crockett with Rosenblatt Securities.
Barton Crockett: Hi, thanks for taking the questions. One question I wanted to touch on the fixed wireless commentary. And the question is this, I mean, they face the same environment that cable does right, people aren't moving, but they're adding a couple of million subs, T-Mobile is. I'm curious, Greg, where do you think those subs are coming from? And as they under a new market opportunity, maybe kind of a low-end household that the cable guys don't see just curious where you think that source is?
Greg Maffei: I think it's a good question, Barton. And I don't claim to have absent clarity, but my -- what I have seen, what I've read, what I believe is they probably have created some new market opportunity and they've taken some share of the growth in the market, particularly among customers in areas where cable is not competitive or where customers have relatively low end needs. But I don't believe FWA is a long-term solution for a vast majority of customers whom we're going to compete for, just the nature of how they fill their pipe and the nature of the relative attractiveness in terms of speeds and what will be available as that pipe fills.
Barton Crockett: Okay. All right.
Greg Maffei: So it's probably some of taking. I don't think they're taking a lot of our existing customers. I think our churn is low. I think they probably have taken, created some new growth in the market and taken some of the growth in the market, which has been more limited.
Barton Crockett: Okay. All right. That's helpful. And then switching gears completely I'm just -- I'm kind of curious about GCI in Alaska, and it's just price of oil is obviously kind of epically rebounded. That would seem to be correlated to a stronger economy in Alaska, which might help GCI fundamentally. I'm just wondering if you're feeling any dynamics like that at this point.
Greg Maffei: I'm sure that's the case. And I'll let Ron or Pete, probably you, Ron, wax eloquent about the Alaskan economy.
Ron Duncan: Well, I don't know there's a lot of eloquent wax yet. The state revenues are definitely up, and our legislature is still in session busily trying to figure out how to put away all those new revenues, but they haven't hit the economy yet. The mood up here is definitely more positive than it was 15 months ago, and I think we're looking at a reasonably strong economy between oil revenues and a tremendous amount, $16 billion of federal stimulus under the Infrastructure Act flowing into the state, fortunately only a small portion for broadband, over the next several years. But that really hasn't been reflected in the employment of the population yet. We're still in net negative outflows on the population and employment is coming back, but we're not at pre-pandemic levels yet. We're confident about the economy up here for the next 24 months at least. So that should be something of a tailwind. And quite frankly, our performance in the marketplace has not slowed down as much as the rest of the industry nor as much as we expected post-COVID. We're still adding both broadband and wireless at a respectable clip.
Operator: We'll take our next question from James Ratcliffe with Evercore ISI.
James Ratcliffe: Thanks for taking the question. Greg, a couple of things. One, first of all, are there circumstances where it could make sense to buy a cable asset or something like that at Liberty Broadband rather than Charter or with the synergies that you get by buying it charter, I mean that's the logical place for it? And secondly, I saw you sold Skyhook. Does that have an impact on structural flexibility or any tax implications? Thanks.
Greg Maffei: Okay. I'll take the second first. Thank you, James. No, no impact on structural flexibility. I think we were very pleased with the Skyhook sale in terms of most people's expectations were we might not be able to achieve that kind of valuation and determine the cash if that number is pretty good. Certainly higher than I've seen any other analyst that write about. So that's a plus. Why might we buy a cable company at Liberty Broadband rather than Charter? You could imagine there could be a couple of things. One is, we might do one in a way that created an ATB and gave us more flexibility for some other kind of structural transactions at broadband down the road or not inconceivable. There's an asset we liked that ultimately we wanted to own that might not be as appealing to Charter. But I suspect it's unlikely in both cases that, that's what happens.
Operator: We'll go to our next question from Michael Rollins with Citi.
Michael Rollins: Thanks. Just wanted to revisit the discussion on the Charter shares. And just given your views on Charter in the broadband category have you or would you like to reopen negotiations with Charter to hold on to your Charter shares and not be obligated to sell into the charter buyback program?
Brian Wendling: Well, I think it's a complicated topic in the sense that we like our Charter shares, but we don't exactly complain about buying Liberty Broadband back at the discount even net of the taxes. So yes, I always want more flexibility. We always like more optionality. But the current situation is certainly not a poor one.
Michael Rollins: And given the timing of the GCI transaction, should investors think about a time frame where at Liberty Broadband, you would have the greatest flexibility from a tax perspective to consider a full range of transactional opportunities?
Brian Wendling: Yes. I think given how the GCI deal was done, whatever flexibility we will get from GCI, which is good and very good, will not change over time. We already have achieved whatever flexibility we're going to get.
Operator: We'll go to our next question from Michael Bunyaner with TLF Capital.
Michael Bunyaner: Good morning. I have two questions. One, in light of the inflation forces on your comments in terms of the net adds losses. Can you discuss what your thinking is about the pricing power of cable versus your competition?
GregMaffei: Yes. First, I did -- I would not describe it as net add losses, I would describe it as a slowing of growth. We continue to be a growing asset an entity, and I believe we will -- that's the likely path going forward. I think if you look at most of the things I've seen that suggest that we have relatively low cost broadband compared to much of the competition. We have not taken price in the way that much of the other cable or other providers have. So I think there's actually pretty good pricing flexibility for Charter and pricing opportunity ahead, which has mostly been deferred, because they have continue to grow faster than most of the industry.
Michael Bunyaner: You were correct about the net adds. And I did not use the right description. You're absolutely correct.
Greg Maffei: No problem. I didn't -- I just want to commonly…
Michael Bunyaner: I'm glad you're correcting me.
Greg Maffei: No, no, no. We're sensitive to the idea that many analysts have written us if cable shrinking. That's not happening. So I don't foresee that happening.
Michael Bunyaner: Exactly. And the second question actually has to do with Qurate from a point of view of Liberty and also the indemnity to Qurate Retail. What are your thoughts about how long do you think it will take them to address the inventory issue and the fire at the warehouse and various other things that they have to block and tackle to fix the business?
Greg Maffei: Well, I'll try and be helpful, because we -- and I'll -- if Brian wants to add or in our Treasurer wants to add. I think they went into quite a lot of depth about how this on the prior call we had this morning. Sorry, you missed it. But that transcript will be available. And you can hear David Rollinson and Jeff be more articulate on the topic. But Brian, do you want to add anything?
Brian Wendling: I'll just add that in terms of how the indemnity works, Liberty Broadband is obligated to fund the premium over the face value. And so as the value of Charter's stock goes down, that indemnity gets smaller and smaller, which is in our favor.
Greg Maffei: In the favor of Charter -- excuse me, in the favor of .
Brian Wendling: In the favor of Liberty Broadband.
Greg Maffei: Right.
Michael Bunyaner: Thank you very much.
Greg Maffei: I think the fire was its a huge strategy, just to finish. That far is a huge strategy, it has had multiple effects, including businesses continuity. It's caused us to have less efficiency in terms of our ability to ship to customers less lower, therefore, lower satisfaction. There are a lot of knock-on effects. But I think if you look at that transcript, you'll get more articulate answers. You'll hear more articulate answers than I could give.
Operator: We'll take our last question from Matthew Harrigan with Benchmark.
Matthew Harrigan: Thank you. I was going to ask the pricing question, but I guess, in terms of to that. Is there much you can do to really increase the perceived value and the real value of the product, apart from just from the speed and the usage statistics, which are clearly working away. I mean, even when you look at something like UCaaS, a lot of it is just off the shelf. There's a lot more you could probably do in-house. I guess there's probably some benefit, possibly from the Comcast-Charter JV, but just a way to snazz up the product and just the overall bouquet, even included in voice, irrespective of just the usage techs?
Greg Maffei: Well, I think Charter is focused on trying to provide high-quality products that the market wants. And obviously, some of the things we're doing in terms of both on the broadband side with things like the high split in terms of being able to divide and provide upstream capacity as well. Downstream capacity is not purely a speed issue, though it's obviously speed related, working with strategic vendors like Toob to provide an improved broadband Wi-Fi experience and then also working on the mobile side, doing things, as I talked about, like our Boost opportunity inside the home, if you are a mobile customer. So I do think there's a lot around the interface and speed. Obviously, the -- as you noted, the JV with Comcast, I think, is going to improve our video offering and our video capabilities. Comcast has invested quite a lot, and it's already down the road on much of that with Flex. And I think that's an opportunity for us to work together. It will be a positive.
Matthew Harrigan: Thanks, Greg. Have fun in Miami.
Greg Maffei: Thank you.
Greg Maffei: Thank you to all of our listeners for your interest in both Liberty Broadband and Liberty Trip, and we look forward to speaking with you again next quarter, if not earlier.
Operator: And this concludes today's call. Thank you for your participation. You may now disconnect.
