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Edited Transcript of LBRDA earnings conference call or presentation 9-May-19 9:00pm GMT

Q1 2019 Liberty Broadband Corp and GCI Liberty Inc Earnings Call

ANCHORAGE May 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Liberty Broadband Corp earnings conference call or presentation Thursday, May 9, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Courtnee Alice Chun

Qurate Retail, Inc. - IR

* Gregory B. Maffei

Qurate Retail, Inc. - Chairman

* Mark David Carleton

GCI Liberty, Inc. - CFO

* Peter J. Pounds

GCI, LLC - Senior VP, CFO, Secretary, Treasurer & Director

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Conference Call Participants

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* Bentley Cross

TD Securities Equity Research - Associate

* James Maxwell Ratcliffe

Evercore ISI Institutional Equities, Research Division - MD & Senior Analyst

* Matthew Joseph Harrigan

The Buckingham Research Group Incorporated - Analyst

* Zachary Alan Silver

B. Riley FBR, Inc., Research Division - Associate

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Welcome to the GCI Liberty 2019 Q1 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded, May 9. I would like to now turn the conference over to Courtnee Chun, Senior Vice President of Investor Relations. Please go ahead, ma'am.

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Courtnee Alice Chun, Qurate Retail, Inc. - IR [2]

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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 our most recent Forms 10-K and 10-Q filed with the SEC. These forward-looking statements speak only as of the date of this call, and GCI Liberty and Liberty Broadband expressly disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein to reflect any change in GCI Liberty or Liberty Broadband'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, including adjusted OIBDA and adjusted OIBDA margin. Information regarding the comparable GAAP metrics, along with required definitions and reconciliations, including preliminary notes in Schedules 1 and 2, can be found in the earnings press release issued today, which is available on our website.

Now I'd like to introduce Liberty's President and CEO, Greg Maffei.

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Gregory B. Maffei, Qurate Retail, Inc. - Chairman [3]

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Thank you, Courtnee, and welcome to all of you. Good afternoon. Today speaking on the call, we also have GCI Liberty's CFO, Mark Carleton; and GCI's CFO, Pete Pounds. During the Q&A, we will be available to answer questions related not only to GCI Liberty but Liberty Broadband.

So beginning with GCI Liberty, the stock has been very strong this quarter. We were only able to purchase $4 million of stock -- or repurchase $4 million of stock as the price increased and reduced spending under our grid. We did take advantage of the double discount from the underlying Charter, and we will continue to do so when we can.

Turning now to GCI, the operating unit. We are obviously in a challenging -- operating in a very tough regulatory environment. The GCI team continues to execute against that, growing their data revenue, and they are also addressing their cost structure, including having taken some job cuts in response to the regulatory setbacks that they have experienced. We are focused on investments that will drive future value here.

Looking briefly at Liberty Broadband. Charter posted a strong first quarter. Business is deriving the benefits of the well-executed integration that Tom and the team are leading. They increased their PSUs, their customer relationships, primarily through strong Internet adds, and they have continued upside there. We've only penetrated roughly 50% of the crossings that we -- passings, rather, that we have with Internet product today.

We also experienced strong residential revenue growth across the residential, commercial and mobile lines. We ended the quarter with 310,000 mobile lines, and we will continue to make progress in that area in the quarters ahead.

EBITDA growth, combined with falling capital expenditures and intensity, yielded strong free cash flow growth. Combine that with having repurchased 3 -- $963 million worth of stock in the quarter, led to a dramatic increase in cash flow per share. Charter continues to deliver on the investment thesis of levered free cash flow shrink with the potential for significantly reduced share counts.

With that, let me turn it over to Mark Carleton to discuss the financials.

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Mark David Carleton, GCI Liberty, Inc. - CFO [4]

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Thank you, Greg. At quarter end, GCI Liberty had consolidated cash of $422 million, which includes $96 million of cash at GCI. The value of the public equity securities at GCI Liberty as of today's close was $7.5 billion, which includes our $2 billion interest in Charter, our $4.2 billion interest in Liberty Broadband and our $1.3 billion interest in LendingTree. GCI Liberty has a $900 million margin loan outstanding against its Liberty Broadband shares. At quarter end, GCI Liberty had total principal amount of debt of $3 billion, which includes the aforementioned margin loan, the Charter exchangeable debentures and $1.6 billion of debt, including finance leases and tower obligations at GCI.

GCI's leverage as defined in its credit agreement was 5.9x compared to a maximum allowable leverage of 6.5x. And as we noted in the 10-Q, GCI exceeded the incurrence-based maximum leverage threshold in the terms of its senior notes, and therefore, we don't have access to additional funding under the revolver. But we continue to be confident we have plenty of cash on hand to operate the business, and we're in compliance with our maintenance covenants.

So with that, I'll turn it over to Pete.

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Peter J. Pounds, GCI, LLC - Senior VP, CFO, Secretary, Treasurer & Director [5]

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Thank you, Mark. Let me start out with an update to RHC matters. As described in our press release, we received notices from USAC denying requested funding from one of our RHC customers back in November. The customer filed an appeal, which was denied by USAC on May 6, 2019. We expect that our customer will be appealing the decision to the Wireline Competition Bureau of the FCC within 60 days from the May 6 denial.

At this point, we've taken a reserve for $21.3 million to account for the revenues related to this customer from July 1, 2017 through March 31, 2019. This reserve impacted adjusted OIBDA in the quarter. Going forward, we will not be recording revenues of approximately $1 million per month until there is a new bid process that is completed or greater certainty surrounding collectability.

With respect to the October 10 letter that we received from the FCC whereby they notified us of their decision to reduce our funding for the year ended June 30, 2018, by $27.8 million, we appealed that on November 9, 2018, and continue to pursue all available options towards resolution. I don't have any other updates on that particular appeal at this point.

In other areas, the first quarter of 2019 was a challenging one, but we're starting to see some momentum. The April issue of the Anchorage employment report is showing that, on a preliminary basis, we saw slight job growth during the quarter. This was the positive change in the economy that we had been anticipating.

During 2019, we're focusing on our network in Alaska. Accordingly, we have reduced the size of our low-margin time and materials business, particularly in the lower 48. This will allow us to increase our focus on bringing faster wireless and wireline speeds to market in 2019 and beyond. Additionally, now that our new billing system has been in place for 9 months, we've rolled out a number of product updates and are starting to see new momentum for our products, which bodes well for future performance.

Operating results. Revenue was down approximately 1% during the quarter, with declines in voice and wireless being somewhat offset by increases in data revenues. As I noted earlier, in 2019, we are focusing on enhancing our network in Alaska, which we believe will ultimately lead to improved wireless revenues. Additionally, that focus on Alaska operations will lead to a decline in the low-margin time and materials revenue, particularly from customers in the lower 48 going forward.

Excluding the $21.3 million reserve that I mentioned earlier, adjusted OIBDA was down approximately 3% for the quarter. The revenue declines and higher costs in our time and materials business masked progress in our cost reductions elsewhere. On April 4, we took steps to significantly reduce our time and materials costs, particularly in the lower 48.

On the consumer side, revenues were down slightly with declines in voice, video and wireless being mostly offset by increases in data revenues as customers migrated to faster service plans. As I noted earlier, we are now able to put new products in the market after a significant restriction from doing so while we implemented our new billing system. On April 1, we launched our new wireless prepaid unlimited plan, which has been instrumental in stemming losses to nationwide wireless providers. We have refreshes to our cable TV and cable modem product coming online over the next several months. On the business side, business revenues were down slightly largely due to declines in wireless revenue driven by declines in the wireless backhaul revenue.

CapEx. For the quarter, we invested approximately $30 million in capital expenditures. Expenditures were primarily for wireless network improvements, fiber and hybrid coax improvements. We expect to spend approximately $140 million in CapEx in 2019, which is down from the $160 million estimate I provided on our last earnings call.

Now I'll hand the call back to Greg.

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Gregory B. Maffei, Qurate Retail, Inc. - Chairman [6]

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And with that, operator, I think we're ready to open up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question will come from Zack Silver with B. Riley FBR.

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Zachary Alan Silver, B. Riley FBR, Inc., Research Division - Associate [2]

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First one for Greg. Clearly, many of us have been thinking about the potential to combine GCI Liberty and Liberty Broadband. And if you were to combine the 2 entities, how would you think about valuing GCI in that transaction? And then additionally, when you're thinking about the full NAV at GLIB. A, are you baking in the Liberty Broadband NAV discount as well?

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Gregory B. Maffei, Qurate Retail, Inc. - Chairman [3]

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Thank you for the questions, Zack. We obviously look at our portfolio from time to time and consider appropriate combinations. We have no plan or intent to merge Liberty Broadband and GCI Liberty at this time and nothing to announce. Anytime we do look at that kind of combination, we would obviously try and look at their NAVs and expect that the independent members of the Board who are responsible to that set of shareholders would come up with a fair estimate of what they think they are and recognize both market values and underlying values and try and come to a fair decision. But as I said, we have nothing to announce today.

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Zachary Alan Silver, B. Riley FBR, Inc., Research Division - Associate [4]

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And then maybe one for Pete. I think that the economy in Alaska has shown signs of improvement, and yet the -- some of the subscriber metrics were a bit soft in the quarter. So is this really just that there's kind of a lag in the Alaskan economy improving? Or is there anything else going on, a competitor or potentially something else that we're not thinking about?

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Peter J. Pounds, GCI, LLC - Senior VP, CFO, Secretary, Treasurer & Director [5]

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Yes, Zack, I think probably a decent chunk of that would have been just the transition between the billing systems and some of that cleanup that happened there in the first quarter. So I would say most of that was really minor sub count cleanup between systems. I would note that it's not unexpected to see slight delays between improvements in the overall economy and maybe some of the pickup of sub counts though.

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Operator [6]

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Our next question will come from James Ratcliffe with Evercore.

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James Maxwell Ratcliffe, Evercore ISI Institutional Equities, Research Division - MD & Senior Analyst [7]

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Two if I could, one for Pete and one for Greg. And again, sorry, Mark. For Pete for the -- Pete, for the $12 million sort of run rate on the denied appeal RHC revenue, is there material cost associated with that? Or is that sort of a $3 million roughly quarterly hit to EBITDA? And secondly, Greg, coming back to GLIB. A and Liberty Broadband, just procedurally, how would that process be considered? Would it be purely just the directors who are not on both boards involved in that? Or would you and John have any sort of role in that process?

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Peter J. Pounds, GCI, LLC - Senior VP, CFO, Secretary, Treasurer & Director [8]

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All right. I guess I'll take the first one there. So James, as far as are there material costs, the answer is yes. However, they are mostly fixed costs. So it's a very expensive network to build, and the recovery of those costs will not be forthcoming. But don't look at this as an opportunity where we'll be shedding significant variable costs as a result of this.

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Gregory B. Maffei, Qurate Retail, Inc. - Chairman [9]

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James, haven't thought too much about the process, as I said, because we really have no plan or intent on any of that. But I would expect that any transaction that would occur would be primarily driven by the nonindependent directors of the -- or, excuse me, the independent directors, the nonoverlapping directors of the 2 companies. I'm sure they might have asked management their opinion on facts and circumstances, but I expect they would have their own independent financial advisers and own independent counsel to ensure that there was no questions about whether they were unduly influenced.

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Operator [10]

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Our next question will come from Matthew Harrigan with Buckingham Research Group.

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Matthew Joseph Harrigan, The Buckingham Research Group Incorporated - Analyst [11]

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Clearly, you could recover some of the discount or close the discount if everything was just rolled together, Charter, Liberty Broadband and GCI, particularly if the Sprint/T-Mobile deal gets nixed in Washington, which is what people seem to think. Your position could have even more economic value to someone outside of Charter. I know that there are reciprocal blocking rights and strategic things that you and Charter command. But how do you feel about your position and relative value positioning for M&A and maximizing the value of your position if you do get some people hunting around because they're trying to -- say, Masayoshi Son is looking for another solution for Sprint?

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Gregory B. Maffei, Qurate Retail, Inc. - Chairman [12]

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Well, thank you, Matthew. I think Charter's results were strong. We feel Charter's well positioned not only on the current book of business, but on the potential for its network and the potential to add incremental products down the network, including wireless, both through carriage on our network but the MVNO relationship we have. If a buyer shows up -- and there are buyers, I think you're right -- who might find us to have a strategic value, we'll look at the opportunities that they offer us at the time. And we'll consider the potential the network has on its own and the potential the business has on its own weighed against any potential offers.

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Matthew Joseph Harrigan, The Buckingham Research Group Incorporated - Analyst [13]

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Is there any sunset on the blocking rights that you and Charter would have on moving that -- that position? Or is that something you can't comment on?

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Gregory B. Maffei, Qurate Retail, Inc. - Chairman [14]

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I'm sorry, I'm not sure exactly what blocking rights you refer to.

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Matthew Joseph Harrigan, The Buckingham Research Group Incorporated - Analyst [15]

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In terms of if you wanted to sell your 20% roughly economic stake in Charter to an outside party, my understanding is that Charter would be able to block that just as you'd be able to block any moves that you thought were undesirable by Charter. Is there any sort of...

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Gregory B. Maffei, Qurate Retail, Inc. - Chairman [16]

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No, I think we can -- I think if we could -- there may be certain rights that we have that might go away in a sale, but I believe we're allowed to -- we'd be able to sell our position. And I don't think we have any blocking rights other than we do vote 25% of the stock, and I think our economic interest is almost up to somewhere between 22% and 23%. So we're a substantial shareholder and hopefully with some voice.

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Operator [17]

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Our last question will come from Bentley Cross with TD Securities.

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Bentley Cross, TD Securities Equity Research - Associate [18]

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Greg, I wanted to ask a question that follows on with the last one, and it's a question I know you've been asked time and time again. But just wondering your overall thoughts on potential consolidation within the cable space.

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Gregory B. Maffei, Qurate Retail, Inc. - Chairman [19]

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I think it's a -- it's largely a good thing. It adds a lot of economic value. There are synergies around costs. There are synergies around not only costs on the content side but cost on the operating side, cost on the purchasing side. So I think it's -- some of it adds economic value and adds streamlines for the benefit of consumers and shareholders alike. That having been said, there isn't that much left to buy as a practical matter, right? You've got Comcast with 20 -- mid-20s on broadband -- high 20s on broadband and low 20s on video, us at 16 on video and 25 of broadband. And then there's a substantial drop to people who have maybe 4 and -- $3 million and $4 million -- 3 and 4 million subs. So there is potential for some more modest consolidation. Cox is a very attractive business, but I don't think the Cox family, the Kennedys and Alex Taylor, they don't -- I haven't seen them putting up for sale signs. So we -- I think Charter would be very interested in any consolidation that could occur, but it's not obvious where that's going to happen.

Thank you very much to the listening audience. Operator, I believe we're done. We hope -- look forward to talking with any of you again at conferences in the near term or, if not, the call next quarter. Thank you very much.

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Operator [20]

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Thank you. That does conclude today's conference. Thank you all for your participation. You may now disconnect.