Liberty Broadband Corp
NASDAQ:LBRDA
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Liberty Broadband Corp
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Welcome to Liberty Broadband Corporation 2022 Third Quarter Earnings Call. [Operator Instructions] As a reminder, this conference will be recorded November 4. I would now like to turn the call over to Courtnee Chun, Chief sorry, Portfolio Officer. Please go ahead.
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'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 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 release 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.
Thank you, Courtnee, and good morning to all on the call. Today, speaking on the call besides myself, we 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 to Liberty Broadband. In the period of August 1 through the end of October, Liberty Broadband repurchased 5.5 million shares for $550 million, a look-through price to 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 One. We think this is a differentiated converged offer to take to market with compelling broadband Wi-Fi and mobile priced at $4.99 -- $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 also 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 having to continue on our partnership with Chris Winfrey, which will start when he accelerate rather 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.
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 1 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 alone 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 2 gig speed and communities across Alaska. GCI is continuing to expand its 2 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 U.S. 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 3.1x 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.
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 investor@libertymedia.com. We appreciate your continued interest in Liberty Broadband and Liberty TripAdvisor.
And with that, operator, let's open the line for questions.
[Operator Instructions]
Our first question is from Ben Swinburne with Morgan Stanley.
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, I think, enthusiasm, that's been a tough place for cable. You'd rather own U.S. 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 U.S. 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 obviously a low-margin business.
Yes. I think great question, Ben. Look, in Europe, I think the U.S. market -- stock markets watch that closely and taken some lessons, which may not be complete. In Europe, you've obviously seen that convergence where you see much more fiber over building as a percent. You've seen the PTT pay a bigger percentage of the fiber building and you've seen definitely a race to the bottom, starting with lower rates to begin with, less attractive pricing to begin with and then declining rates as the 2 converge. I think the U.S. model is a little different. We have already basically achieved the same multiples as the mobile competitors, which I think is a mistake.
But the cable companies, I believe, are better positioned here than they are relatively in Europe. First, the broadband market is more distributed. You've got, I think, positions where we're more secure in many cases with lower grades of competition or competition that we're more able to handle, still many opportunities to gain share from DSL players and the like. I also think that clearly, in many cases, the mobile operators are trying to get into broadband and that is a longer, harder road for them than it is for us, who now have a complete MVNO everywhere in the nation and have the opportunity to pursue owner economics in markets that are attractive where there is sufficient volume. So we don't need to -- do not need to build out in markets where there is insufficient volume. We can leverage our MVNO relationship, but we can build out where we can get owner economics that are more attractive than that MVNO relationship.
I'll remind you that's a perpetual relationship, one we've already rebid once to a better rate, and I think there'll be future opportunities to continue to make that a better margin opportunity for us. But most importantly, I think we have a very secure broadband position and the opportunity to add those mobile far more easily than the mobile operators have to come into our business. And I do remind you what you surely know, Ben, that the mobile business is more than twice as big as the broadband business here in the United States. So I think the analogies are interesting, but there are some key differences, too.
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 U.S.? You'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.
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 they -- 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.
Our next question is from Michael Rollins with Citi.
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?
I'll first start with -- we have a pretty good position today where our -- 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.
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?
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 when 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 feeling to benefit from the continued relationship and the continued opportunity even as they repurchase shares to repurchase our own stock at a discount.
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?
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 another -- 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.
Our next question is from Barton Crockett with Rosenblatt Securities.
I was curious about, Greg, your kind of thoughts about the current environment for buying things, making investments because we've got kind of cost credits, right? The stock equity values, probably private market value is on top of that have come way down, which has been set up. Where in the past, you guys have been able to swoop in or do some historic deals. Maybe -- so I'm curious if this seems like it's approaching a situation where you might see some really attractive opportunities? Or conversely, as the cost of capital has gone up so much with the increase in interest rates that things are not particularly attractive right now because of the cost of capital. Just your thought about the landscape there would be interesting.
Barton, thank you. You're generous to say, we profited from those times in the past, and I -- but I do think that's right. You want to invest where others have fears, I think, the Buffet line, and certainly, some of the opportunities we've seen in because of that. Your point about the rent, the increased cost of finance, the raise cost of finance making some of those hard. Really, in some cases, just the complete availability of financing making that hard to do certain kinds of deals suggest that in some cases, you may want to already bind to existing capital structures and take advantage of discounts that may be in the debt or you may want to do things, which are entirely equity financed. We have capability and capacity to do either or an experience of doing both rather.
But I would note one more thing. The seller expectations are much slower to come around than buyers' expectations about how the landscape has changed pricing. And sellers are generally only seeking capital where they have to, where they're forced to, where they have debt obligations that push the issue. People who don't need financing are trying not to seek financing. So we'll see how that -- how long they can hold their breadth and what opportunities arise as sellers face the reality of a change marketplace.
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?
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.
Our next question is from James Ratcliffe with Evercore ISI.
One, Liberty Broadband specific and one so more cable in general. On Liberty Broadband, any color on what drives the A versus K 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 the how aggressively cable operators should respond to over builders, whether sort of do more to protect ARPU or kind of go scorched 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.
So on the -- like 3 questions. The first one on A versus Ks, we buy the low-cost security, which has tended to be the As. And now that we readily have the relationship you pointed out with Dr. Malone, where the vote is less of an issue. That's our focus. I'll let Ben Oren comment on the maturities.
Yes. And so again -- and also with respect to the As and Ks, the scale of our quarterly buyback is quite large. So we do have to cater somewhat to where there is liquidity. And we are sensitive to the fact that the more As we buy, despite the benefit from a dollar price perspective, we do risk storing liquidity there. So we want to be sensitive to that. And that's why you did see in the last quarter an emphasis on Ks. With respect to maturities, really, our only debt there is the exchangeables, which we feel very, very comfortable in our ability to refinance and the margin loan, which has tremendous support from a significant group of lenders. And so our ability to extend that is also pretty great. Margin loan and the convertible market in general is a, call it, 3- to 5-year type of maturity. And so you look for us to extend each of those obligations as we get closer to maturities.
And addressing how cable competes, I'd say, the environment is actually likely to get better. You've seen fixed wireless gain quite a lot of share where they have capacity. I don't think that's an infinite amount of capacity. And you've seen a market where fiber overbuilders have been consistent grown a little bit over the last several quarters, but I actually think the environment for them because many of them are either still seeking equity capital or using debt capital will get more difficult. And also the competition and things that Charter is doing like its own overbuilds, we're competing for both labor and components that are being supplied.
So that market is likely to get tighter, not looser. So all of those, I think, actually make a better market condition on both sides, both the low end and the theoretical high-end fiber. The history of fiber overbuilders is not good. John Malone has talked to me about history that probably predates all of us about how many successful overbuilders there have been, and you'd have to look far and wide to find any. That doesn't mean they can't s**** up your market. And so I think being aggressive in offering value to consumers is probably the better strategy. And I think Charter is well aware of how to compete effectively in those markets.
I'd also say one more thing, which is fiber overbuilders probably go after the low-hanging fruit, and that low-hanging fruit is several things. It's aerial versus -- the aerial fiber versus buried cables. It's higher density markets, both of which they probably attack for a while. And it also goes with places where there is far more DSL and low-hanging fruit in terms of the competition. So I think that probably all portends pretty well for Charter as well in terms of what the fiber risk is. It's there, and there will always be some leakage, but I don't think it's a growing risk in the near term.
Our final question is from Doug Mitchelson with Crédit Suisse.
So Liberty is pretty -- typically pretty smart at technology. I'm just curious your level of confidence with DOCSIS 4.0 cable plant can compete with fiber as it's built out further in your footprint. And then does the strategy for Liberty Broadband get impacted at all at Charter decides to go through an investment cycle next year, get more aggressive with rural buildouts, pull forward network upgrades. And I assume that lowers your stock buyback capacity. But as simple as that, that we just think about a flow-through? Or does it actually impact how you think about strategy for Liberty Broadband?
So I'll take the second first. I think your analysis that it just means we have less and we buy back at a lower rate, it's probably the right analysis. We're fully involved. I'm on the finance committee, which looks at all of how they do their buybacks, what alternatives are out there, have looked at -- full Board has looked at the rates of return on many of these rural builds, and I think they're attractive opportunities. So we're certainly behind that. And as you rightly noted, it actually takes some pressure off our cost cap or our ownership cap rather.
As far as DOCSIS 4.0, I think it's been a well-tested strategy. I think it will be very effective in fiber. I have to laugh because the bears have us saying that nobody needs capacity. Therefore, FWA is going to eat our lunch or alternatively, everybody needs capacity, therefore, fiber is going to eat our lunch, and there's no room for us. Obviously, I'm overstating to make the bear and bull case look less substantial than I think they are, but I think they're wrong on both of those fronts. Cable is well positioned, both with high split and eventually DOCSIS 4.0 to be very competitive in all sorts of markets. And I think we're confident in where the technological direction Charter is headed.
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.
Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.