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spk06: Hello, and welcome to the Liberty Broadband 2022 year-end earnings call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. At that time, if you have a question, please press star 1 on your telephone keypad. As a reminder, this conference will be recorded February 17th. I would now like to turn the call over to Shane Kleinstein, Vice President, Investor Relations. Please go ahead, Shane.
spk01: Good morning. Before we begin, we'd like to remind everyone 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 Form 10-K filed by Liberty Broadband and Liberty Trip Advisor with the SEC. These forward-looking statements speak only as of the date of this call, and Liberty Broadband and Liberty Trip Advisor expressly disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein to reflect any change in Liberty Broadband or Liberty Trip Advisors' 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 OIDA. Information regarding the possible GAAP metrics, along with required definitions and reconciliations, including preliminary notes in Schedules 1 and 2, as well as earnings releases for prior periods, which are available on Liberty Broadband's website. I'd like to introduce Greg Muffet, Liberty's president and CEO.
spk02: Good morning. Thank you, Shane. Today, speaking on the call, we will 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 also be available to answer questions. Also during Q&A, we will answer questions, we are available to answer questions with the Liberty Trip Advisor. Let me start with Liberty Broadband. As we mentioned in the last call in September, we began retaining approximately 50% of the cash flow from the charter sales to address our near-term liabilities. We have approximately a billion and a half related to the charter exchangeables that is due by October based on current prices. Therefore, from about the first of November to the end of January, we received two to nine million of proceeds from charter sales and spent only $177 million on Liberty broadband repurchases. The look-through price to charter on those repurchases was about $272 versus the current charter, just under $500, $400 a share. There's a slight mismatch on the timing of the proceeds when they come and when we spend them, and that may account for it being slightly more than the 50%. Going forward, we do plan to continue to apply 50% of proceeds from the charter share sales towards Liberty Broadband purchases. We do also expect total proceeds from charter to be lowered this year in 2023. Similar to last year, we are under the 26% fully loaded ownership cap early in the year, driven by charter's annual compensation grants. But as the year goes forward, we do expect a lighter buybacks at Charter compared to 2022 to the investments they are making at the company. And you've previously heard from them, and we'll discuss more in a bit. We will revisit capital allocation later in the year after our debt maturities are addressed. So let's look at Charter. We had lower broadband unit growth in 2022. Some of this is a COVID pull forward, no doubt. Some of it was lower move environment with fewer sales opportunities for a share taker like ourselves. fewer chances for us to get at the customer, and increased competition from new entrants, including fixed wireless. Though we would note that in many cases, fixed wireless has been a market expander, not a share-taker, and we do not view them over the long term as a competitor, although we surely feel them in the short term. Nonetheless, the Charter has posted strong operating results. In the fourth quarter, 92,000 residential broadband units were added, and we had sequential improvement over the prior two quarters. Spectrum One, our new pricing product, is helping drive momentum in mobile, and we recorded a record 615,000 mobile net ads in the fourth quarter. It has been a huge success compared to other mobile operators, and I would note cable share of mobile net ads in the fourth quarter was 35%, and charters was 22% of all mobile net ads. So charter was nearly a quarter of all the mobile net ads, which is a stunning number. We believe this demonstrates the value of cost savings to customers through bundling and seamless connectivity. As Chris Winfrey outlined in December, Charter is undertaking a series of initiatives to accelerate growth and attack large connectivity opportunities. That includes accelerating our network evolution plans through high split, differentiated converged product offerings like Spectrum One, and a rural build which we think has attractive returns with penetration way above expectations so far in initial bills, and we are targeting mid- to high-teens IRRs. By 2026, we do expect CapEx as a percent of revenue, excluding line extensions, to be below 22 and decline further, but in the interim, these investments will increase that CapEx as a percent of revenue. Liberty here have had a long, positive relationship working with Chris Winfrey and are excited by his strategy. that he's articulated both to the board and the marketplace. Even with the investments in the business, the increase in the stock price, charter, and Liberty Broadband both offer attractive free cash flow yields in a growth vehicle. I would note it's even more compelling relative value of Liberty Broadband. The charter free cash flow yield is about 9.1% despite their investments, and the Liberty Broadband looked through, 22 free cash flow yield was 12.9%. Let me turn now to TripAdvisor. The travel recovery continued in the fourth quarter, exceeding management's expectations. Full year trip revenue was 96% of the 2019 number, and the fourth quarter actually reached 106% of the 2019 number. The hotel matter recovery accelerated throughout the year. In the US in 2022, Hotel Meta reached parity with 2019 with strength in both auction pricing and volumes, and we are driving more revenue from paid traffic and less from free revenue, which is obviously hitting our margins to a degree. I'm going to talk more about that in a sec. 5-4 was up 115% in the fourth quarter over the prior year, and we've reduced losses despite the increased marketing spend. We continue to see benefits in improved customer improve conversion, and repeat customers, and we are very confident in the growth of this experiences segment. Management is focused on the long-term strategic opportunities and using product enhancements to drive growth. I would note they expect in 2022 to maintain flat margins through disciplined cost management and allocation despite increased investment in our growth segments, including experiences. And with that, I'll turn it over to Brian to discuss the financials.
spk10: Thank you, Greg, and good morning, everybody. At quarter end, Liberty Broadband had consolidated cash and cash equivalents at $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 1st 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 in 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 book minimum tax under the Inflation Reduction Act. We are approving for a higher tax rate in 23 while additional IRA guidance from the IRS and the Treasury is pending, though 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 VMT, 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 is 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. CCI also paid an additional $40 million in dividends to Liberty Broadband year-to-date so far in 2023, and we anticipate additional dividends will be paid this year. For the full year, revenue was flat and adjusted OIVDA grew 1% to $358 million, the company's highest ever adjusted OIVDA, driven primarily by data demand, which drove both subscriber and ARPU growth. In the fourth quarter, revenue was up 2% and adjusted OIVDA 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 but 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 bill to Dutch Harbor. The strength of the operating results led to continued deleverage. For the full year, GCI's net debt declined $57 million. Leverages defined in the credit agreement was 2.8 times at year end, and GCI has $397 million on draw capacity on its revolver. In 2022, GCI spent $156 million on net capital expenditures. This is net proceeds received from federal and state grant funding. CapEx spend was related primarily to improvements to the wireless hybrid fiber coax network and the Dutch Harbor fiber project. Net CapEx for 23 we expect to be approximately $185 million, which would be elevated due to the additional high returning investments in middle and last miles connectivity, with continued network expansion in rural Alaska, including the Bethel and AU Aleutians fiber projects. 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. Thank you, Brian.
spk02: To the listening audience, we appreciate your continued interest in Liberty Broadband and Liberty Trip Advisor. And with that, operator, I'd like to open the line for questions.
spk06: Certainly. When I'll be conducting a question and answer session, if you'd like to be placed in the question queue, please press star 1 on your telephone keypad. One moment, please, while we poll for questions. Our first question today is coming from James Ratcliffe from Evercore ISI. Your line is now live.
spk04: Thanks for the question. Greg, two if I could. First of all, regarding selling the charter buyback, you're creating cash at the moment, but does settling the Delaware litigation give you any additional flexibility around whether that 26.5% or 26% cap remains in place over time? Would you be open to raising it if the charter board were to? And secondly, you mentioned the exchangeables that are puttable in October. Can you talk about the factors we should consider in terms of how to refi those or pay them down, assuming that they are, in fact, put? Thanks.
spk02: 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 to note that the litigation settlement does open up more opportunities for us to have fruitful discussions with the 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 view it as 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.
spk09: Ben? 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 charter exchangeable to maintain optimal liquidity. Thank you. Thank you.
spk08: Thank you.
spk06: Thank you. Next question is coming from Doug Mitchelson from Credit Suisse. Your line is now live.
spk08: Oh, thanks so much. I just was curious, you know, I'm not quite sure the right way to ask this, but look, I think the street's looking for 2% EBITDA growth this year for Charter, and Charter's had high single-digit EBITDA growth with levered equity returns, and that was hard to beat. So I'm just curious your outlook for Charter as an investment at this point. You know, it's interesting that they're investing more versus buying back stocks. It'll look through buyback for you, which is, you know, relatively riskless versus, you know, mid to high routines returns on investing in cap backs. It's an interesting dynamic from a Liberty Broadband perspective versus, you know, a long-term Charter shareholder. So I guess, you know, my question for you is ultimately, you know, are you as excited about Charter as an investment as you were a few years ago? And what's the algorithm for Liberty Broadband in terms of returns from Charter looking forward?
spk02: Thank you, Doug. A couple of points, I think. First, look, when we were doing all those 2 million upgrades on the existing or additions on the existing network with relatively little capital, yeah, that's a damn attractive business. We'll stipulate. We'll all agree. The incremental capital that we have to spend is still a very attractive business and something we endorsed as Liberty at the board level and we're enthused about what they're doing. We think the investments are making a high split, really do give us a lot of runway on the existing network, and the rural build-outs are quite attractive on a return basis. And more attractive these set with the set of broadband investments made by state and local governments as well as the federal government than the RDOF bidding process, which in many cases led people to bid up higher, and then not actually fulfill, but the whole market got pushed up. I think these broadband initiatives are going to be very attractive IRRs, so we're enthused about them. You know, holding out, comparing that to the buyback over the long term is interesting, but the buyback opportunity probably isn't going to go away. And yes, we are making these investments, but we think they're worthwhile for the long haul, and we are attractive, and on an offensive and defensive basis for Charter. So I remain, Liberty remains, quite enthused about Charter's prospects, and, you know, The fact that we're buying back and have continued to buy back all the way through is some indication of that, though we do have these issues around attacking our own exchangeable, which is effectively deciding how much we're going to take on a current basis or the future basis, given we're going to issue some kind of other likely equity-linked security.
spk08: Do you see Charter returning to mid-single-digit or high-single-digit EBITDA growth in the not-too-distant future?
spk06: Yes.
spk08: Great.
spk06: Thank you. Thank you. Next question today is coming from Ben Swinburne from Morgan Stanley. Your line is now live.
spk03: Hey, good morning, Greg. I guess following up a little bit on Doug's question around charter, you know, you guys are obviously favorable around financial leverage. That's obviously been John's approach for many years. Rates are higher than they were. Growth is slower. Capital intensity is up. I'm sure there's some scenario, but is there a scenario you see an optimal leverage level for Charter lower today than where they're running it? Do you think that actually it should be higher given the stock has come off quite a bit over the last 12 months? And then I was on a somewhat unrelated topic, although tied to Charter. I was just curious if you guys are thinking about any implications from Gigi Sohn becoming the FCC chairperson, which is something that seemingly may happen in short order. Obviously, she's got a lot of strong views on the broadband market and cable, but I'd be curious if you have any perspective on things you're concerned about or watching on that front. Thank you.
spk02: Thanks, Ben. Look, on the leverage front, I think Charter can handle, in my view, more leverage, but the public markets today equity markets in particular are not enthused about more leverage, so there's no reason to push that up. We're not in an environment where people are buying that. You're right to note about increased costs, but if you look at the stack of debt that Charter has, it's really only very little which is floating or getting refinanced in any period, so the net increase in our actual borrowing cost is relatively de minimis, given how much is existing versus how much is getting rolled or floating. I think you could make a case For higher, as I said, I think it's harder to make a case for lower other than the capital markets are fearful. I think these businesses are very stable. We have a very sophisticated finance program, and I'm not worried about the leverage. And you're right to note the environment with increased costs and increased investment, but I would note the stock is half of what it was. So if you work all that out, it's still pretty attractive in my view. And on the second point about regulatory, I mean, that has been an existing risk or an ever-present risk in the cable business since the early 90s, right? Maybe earlier. John Leary could tell me earlier, but I would say certainly from the time I've spent around it, the early 90s, 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. And I do think there are many voices in Washington which are less aggressive and more understanding of the free market, 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 various times.
spk03: Yeah, and certainly the CapEx investments in rural should help, and fixed wireless still might be an actual silver lining, at least in this context.
spk02: I think those are both good comments, Ben.
spk03: Yeah. Thank you.
spk06: Thank you. Next question is coming from Barton Crockett from Rosenblatt Securities. Your line is now live.
spk07: Okay. Yeah, I'd like to ask two questions if I could. One is, just on GCI, I mean, we are looking at them. They seem to have some volatility in wireless subs, you know, up for the year. I think it was down this quarter. Can you just explain what's going on with the wireless subscriber numbers there?
spk02: Well, we could take a shot, but I'll first offer it up to our Alaskan counterparts, the Ron, do you want to answer that or Pete?
spk00: I think what you're seeing, on post-paid 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. And then 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 we'll 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 rank number one often by a factor of two or three, and that plus the bundling with the high-speed data products is helping the postpaid sales.
spk07: Can you break down the postpaid and prepaid mix?
spk00: I don't know that we publish those numbers. Do we, Pete?
spk07: No.
spk00: No.
spk07: Okay. All right. Then switching to a different topic. Greg, I'm noticing with some interest the news flow around the big RSM complex at Diamond, which is a big source of programming costs for the cable industry. And they've acknowledged that they've missed an interest payment and there's speculation that they're moving towards some type of bankruptcy. And this presents, I think, an opportunity for this to be rethought, reconsidered. And I was, you know, you guys, and you have a very interesting positioning on both sides as a distributor of these networks through charter and as owner of a sports team through the Braves on a different equity call, but maybe it can come in here a little bit. I was just wondering if you could talk about what you think is likely to play out. Does this present an opportunity for a reduction in programming costs for the cable companies? Is there some risk to the revenues for sports teams like the Braves?
spk02: Well, Barton, good question. It's a multi-headed hydra there. I think, you know, the diamond situation is quite complicated. And, you know, I think you may recall we've been very closely aligned with MLB in looking at it and ways to try and make it the best situation for baseball as well as an attractive investment. But first, putting on the charter hat, I think over time, you know, you will see reductions in RSN costs. That's just you'll see less carriage. I don't think it's public, but Charter continually renews that and renews it on attractive terms for Charter as best it can, but I suspect those costs will continue to go down on a relative basis. On the looking in from the BRAVE side, they have more than a dozen RSNs. My understanding from everything we know is for a lot of logical reasons, including the fact that we have the largest broadband territory, a very engaged fan base. And a relatively modest, certainly compared to the Dodgers, a relatively modest RSN fee or payments from Diamond. The Braves are a very attractive, we believe their most profitable RSN. So even in the event it's been speculated that there's a filing by Diamond, we think they are unlikely not to accept or will not reject as our contract in bankruptcy because it's a very attractive RSN for them. What will happen over the long term, I suspect there will be a slimmed down version of something that is owned by a diamond or a diamond successor that takes their profitable RSNs, maybe renegotiates some things, but it probably doesn't take all of them would be my speculation.
spk07: I mean, you mentioned MLB, you're being aligned. I mean, do you think there's an opportunity for the leagues to take ownership of the RSNs or of the rights and do something else maybe?
spk02: I think there is some opportunity for the leagues to look at, but we'll see. As I said, it's complicated. Honestly, it's just speculation more than that part.
spk07: Okay. Well, I appreciate it. Thank you for all that, Greg.
spk06: Thank you. Our final question today is coming from Michael Rollins from Citi. Your line is now live.
spk05: Thanks, and good morning. 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 sustain the program and funding, given the characteristics of it is around a defined amount at the moment. Thanks.
spk02: Yeah. You know, I think on the first point, once we get through our financing, we'll look at what the charter stock price is, what the Liberty Broadband stock price is, if there's the discount, what our long-term, if there's more clarity around the taxes, all of those factors will weigh. But it's quite possible and probably more likely that we'll be back to buying using 100% of free cash flow. I mean, free cash flow here defined for Liberty Broadband is basically what we get repurchased from charter, that we'll be using that to buy back stock. I think that's the most likely case. On the question of ACP, clearly, you know, we saw that as an attractive program during COVID that helped. One of the reasons why, and I'll let you comment on it, Ron, as well. One of the reasons why we've seen such declines in debt, bad debt, it's one of the reasons why we've seen, I think we saw such growth during COVID of the broadband units or broadband ads, net ads. So I think it's been an attractive program. We'll see what the funding is. Keeping track of all the funding in D.C., there are a lot of them going on. We'll see how much this one gets done. Ron, what might you add?
spk00: 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 benefits, 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 republicans in control of house it's unlikely to 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.
spk02: Thanks. It's really helpful. Great. 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.
spk06: 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 today.
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