Liberty Broadband Corp
NASDAQ:LBRDA
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Liberty Broadband Corp
Earnings Call Analysis
Q1-2023 Analysis
Liberty Broadband Corp
Liberty Broadband has shown resilience and strategic foresight in managing its finances. They demonstrated this by issuing $1.3 billion of 3.125% charter exchangeable debt and using the proceeds, along with available cash, to repurchase $1.4 billion of exchangeable debt due within the year. The careful navigation of debt obligations indicates a meticulous approach to maintaining a robust balance sheet.
The company celebrated solid operating results with significant customer growth, adding 76,000 new Internet subscribers. Mobile also showed strength with 686,000 new lines, nearly double compared to the previous year. Financial metrics reflected positive trends, with revenue and EBITDA increasing by 3.4% and 2.6% respectively despite a period of heightened investment, signaling both strategic investment and operational efficiency.
With consolidated cash and cash equivalents standing at $169 million, including $59 million at GCI, and a total principal amount of debt at $3.8 billion, Liberty Broadband has displayed solid capital management. Their investment in Charter was valued at $16.8 billion, showing a significant holding and potential for future capitalization.
GCI's performance was commendable; it managed to add nearly 6,500 wireless subscribers and 4,500 table modem customers over the last year. The $40 million dividend sent to Liberty Broadband in the quarter is a testament to GCI's capacity to generate and share wealth, hinting at further dividends throughout the year.
Liberty Broadband, notably through GCI, has implemented a bundling strategy which has effectively reduced churn and increased EBITDA. Nearly 40% of wireless customers are on the GCI Plus plan, signifying successful penetration and customer uptake of their offers. This strategy has led to churn rates that are half or less than those of standalone products.
Despite being counter-cyclical and experiencing population challenges, the Alaskan market shows no sign of consumer spending slowdown. This resilience, indicated by stable bad debt levels and difficulty in finding employees due to high demand, demonstrates the region's unique economic traits and potential for sustained business performance.
The building of a base of mobile subscribers is expected to yield negotiating power for subsequent contracts and enhance margins using the CVRS spectrum. These forward-looking statements underscore the company's growth trajectory and strategic positioning for future profitability.
Liberty Broadband anticipates a tax rate of 7% to 13% on Charter's share sales, likely trending towards the lower end due to the current pause in buybacks. This prudent financial forecasting aligns with managing tax implications efficiently and ensuring returns on buybacks are maximized.
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Welcome to the Liberty Broadband 2023 Q1 Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference will be recorded on May 2nd.
I would now like to turn the conference over to Shane Kleinstein, Vice President, Investor Relations. Please go ahead.
Thank you and good afternoon. 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 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 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.
Thank you Shane and good afternoon to all. Today speaking on the call, we will also have Liberty Broadband’s Chief Accounting and Principal Financial Officer, Brian Wendling, Ron Duncan, CEO of GCI, and Pete Pounds, CFO of GCI, will also be available to answer questions.
I’d note also during the Q&A, we will be happy to answer questions related to Liberty TripAdvisor, but note, Liberty TripAdvisor has not yet reported its Q1 results, so we will be unable to comment on the current quarter. So beginning with Liberty Broadband, in the first quarter, we issued $1.3 billion of a 3.125% charter exchangeable, and we used the proceeds and some cash we had on hand to repurchase $1.4 billion of charter’s exchangeable debt that was due this year.
Note that also since we are under the 26% fully diluted ownership cap early this year, driven by charter’s annual compensation grants, we have not bought any stock back since January, any of the charter stock back. We have not sold any into the buyback since January. We expect to resume sales into charter’s buyback pursuant to our stockholder agreement, though we do anticipate lighter buybacks this year at charter due to investments by the company.
With the near-term liabilities addressed, our plan is also to resume LBRDA and K buybacks using the majority of our after-tax proceeds from those charter sales. And looking at charter itself, we had solid operating results. We added 76,000 new Internet subs in the quarter, good growth given the current broadband environment, and that was a sequential improvement through Q1.
Mobile continues to be an area of continued strength. Spectrum One, is resonating in the market. I’d note beginning in the fourth quarter, these free lines associated with Spectrum One will be converted to paid, and we expect them to drive margin improvement and a tailwind to EBITDA growth. So we added 686,000 mobile lines in that first quarter, nearly double what we did last year.
Cable share of mobile ads, total mobile ads, continues to increase, and it’s estimated to be 55% in the first quarter and 35% in the fourth quarter. We overall reported good financial results. Revenue was up 3.4% and EBITDA was up 2.6% during a period of heightened investment. Broadband revenue was up 5%, benefiting from both ARPU and customer growth. Broadband ARPU alone was up 4%. We are pleased with some of the progress that is underway at Charter on key initiative investments that Chris and his team have made, including on the network upgrade, the rural build, and mobile convergence.
And with that, I’d like to turn it over to Brian to discuss the financial results in more detail.
Thank you, Greg. At quarter end, Liberty Broadband had consolidated cash and cash equivalents of $169 million, which includes $59 million in cash held directly at GCI. The value of our Charter investment based on our shares held on May 1st and Charter share price at the day’s close was $16.8 billion.
At quarter end, Liberty Broadband had a total principal amount of debt of $3.8 billion. Note this excludes preferred stock and remaining indemnification obligations. As Greg mentioned, we did not have proceeds from Charter share sales in the period from February 1st through April 30th. We do expect to resume our share sales to Charter as required in our stockholder agreement to maintain our fully diluted ownership percentage of 26%.
For the full year of 2023, our annual tax guidance on Charter share sales remains in the 7% to 13% range. Looking at GCI, GCI had a good first quarter. Solid performance has allowed the company to send $40 million in dividends up to Liberty Broadband during the quarter, and we’d expect additional dividends to be paid this year.
Leverages defined in its credit agreement was 2.87% or 2.87 times as a quarter end, and GCI had $397 million of undrawn capacity under its revolver. Revenue and Adjusted OIBDA were up $13 and $3 million respectively. The revenue growth was led by additional data sales, primarily to our RHC and school customers. This was partially offset by continued declines in our video business, which significantly impacts revenue but does not meaningfully impact pre-cash flow.
Adjusted OIBDA grew less than revenue, primarily as a result of inflationary pressures primarily in labor and lapping a couple of one-time benefits recognized last year in bad debt and property taxes. Over the last year, GCI has added nearly 6,500 revenue-generating wireless subscribers and nearly 4,500 table modem customers.
And with that, I’ll turn the call back over to Greg.
Thanks, 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.
Thank you. [Operator Instructions] Our first question comes from Barton Crockett with Rosenblatt Securities. Please go ahead.
Okay. Thanks for taking the question. And, really I think for you, Greg, and also maybe by implication and extension to GCI, I’m just curious, Greg, about your view of the substance of the promotional kind of push that Charter is making into mobile, which obviously has been subject to some back and forth with Charter and T-Mobile. And, really the question is, are they adding substance or kind of empty calories in terms of the subscribers that they’re bringing on with, essentially buy one, get one free push and the low pricing?
Do you think that this is something that can drive EBITDA growth or are they empty calories? And if it does drive EBITDA growth, are there some elements of it that are extensible to GCI up there in Alaska?
I’ll take the first part and comment on Charter and then let Ron talk about the implications for GCI. So thanks, Bart, for the question. Look, I think this is a great strategy. I think unlike many, we’re still mostly not subsidizing devices, but we are subsidizing lines that are relatively low cost for us that we expect will add substantial margin, really kicking in in the fourth quarter. They’re probably contributing some of our broadband growth and certainly will continue to contribute to our reduced churn. And I think it’s a win for us to broaden our relationship and our EBITDA potential out of every household, every client, every customer. So I think it’s a great strategy and we’re fully behind it. Ron?
Thank you. Our mobile situation is a little different than Charter’s because we’re our own mobile network operator. We’re not a reseller. So our economics are different and help us drive EBITDA a little sooner. But we are bundling and we’re bundling heavy. We have almost 20% of our data customers and almost 40% of our wireless customers on what we call our GCI Plus plan. It’s a very substantial savings to the consumer. It’s beneficial for us and it also very materially reduces churn. We’re experiencing churn for both bundled data and wireless customers that’s half or less than the standalone product churn. So for us it’s a good EBITDA generator and it’s a very, very powerful inoculant against churn. So we’re very, very enthusiastic on the combination of the wireless and the wired data.
That’s helpful.
I also would note one more thing, Barton, if I could go. As we continue to build out this base of mobile subscribers, I think two benefits are going to happen down the line. One is that will be a substantial group of customers with whom to negotiate for a subsequent MV&O. And as we scale, the opportunity to build out in the most attractive markets and utilize the CVRS spectrum that we purchased is another opportunity to enhance margins. So I like the strategy.
That’s great. And then I was just curious in terms of Alaska. I was just wondering if you could comment on how the consumer is feeling there. There’s so many questions about the macro backdrop, and I don’t think people often ask about Alaska as an indicator, but I’d be kind of curious. What are you seeing up there?
I’m not sure we’re a very good indicator of the nation because we tend to be counter-cyclical and our economy still is struggling up here in terms of adding and losing residents in the state. But the consumer, as far as we can tell, seems to be doing fine. Bad debt has come up slightly since last year, but it’s still very well below the pandemic. We’re tight for employees, have a hard time finding them. People still seem to have money to spend. We don’t see any signs of the consumer slowing down in our business, and we’re probably less robust than most of the markets in the lower 48.
Great. Thank you.
Our next question comes from James Radicle from Evercore ISI. Please go ahead.
Hi. Thanks for taking the question. Two, if I could. Greg, first of all, any update on the prospect for lifting the charter ownership cap? It’s been a moot point of late because the buybacks have eased off, so it’s still been below 26. But thoughts on whether that’s appealing and what the prospects of doing that are?
And secondly, just any update on where you’re seeing tax leakage from the buyback and using to fund other buybacks? Thanks.
Yes. Thanks for the question, James. On the first point about lifting the cap, had some discussions with management and independent board members, and I believe there is, now that we’re post-settlement on some shareholder issues, I think there’s more openness to that. I don’t think I’m misspeaking Chris’s view that Liberty is a positive, as a substantial shareholder, long-term shareholder, and that having us increase is only a statement that would speak to our belief in the company, which I think it would. And having more of the buyback devoted to other shareholders, non-Liberty shareholders, would be a positive in the marketplace. So lots of reasons why we think it’s good, and I believe Chris feels the same. And I’ve had, as I said, some positive discussions with independent board members, though we’re certainly not complete on that. I do think, you’re right to note, it probably would be less of an issue this quarter, next coming months, but it’s something we certainly plan to address. I’ll let Albert discuss the tax leakage situation.
Yes. With respect to any sort of tax leakage, it’s, as long as there’s not buybacks, we’re not experiencing any of that. For the year, I think it could be in the 7% to 13% range with respect to a tax rate. I think it’s going to tend to be towards the lower end, given the absence of repurchases at this time.
Great. Thank you.
Our next question comes from Matthew Harrington with Benchmark Company. Please go ahead.
Thank you. It was more or less a quasi-investor day question, but do you have any concerns about the dysfunction in Washington on tax policy in particular that might make it difficult to implement Section 355 transaction at some point? I mean, I know that there are interpretations of the black letter law, but nonetheless, Treasury and IRS can get politicized, to say the least, and the government is certainly looking for revenue.
I’ll let Albert go on this one as well.
We’ve not seen anything from a legislative perspective that we think would impact anything that we’ve any sort of transactions we would be pursuing.
Thanks, Albert.
All right, operators. Thank you. I believe that’s the last of our questions. Thank you again to our listening audience. We hope to speak with you next quarter, if not sooner.
That concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.