Liberty Broadband - Q2 2024

Executive Summary

• Q2 2024 was stable at the consolidated level: revenue rose slightly to $246M (+0.4% YoY), while diluted EPS fell to $1.36 due to lower other income and a smaller equity pickup; Adjusted OIBDA declined to $80M as higher operating costs weighed on margins.
• GCI revenue was flat at $246M; Consumer flat and Business up 1%, but operating income fell to $30M and Adjusted OIBDA to $86M as distribution and SG&A costs increased; operating margin compressed 90bps YoY and Adjusted OIBDA margin fell 260bps YoY.
• Balance sheet actions are a key positive: in July, LBRD issued $860M of 3.125% 2054 exchangeables, repaid $540M under the Charter margin loan (maturity extended to 2027), and repurchased $300M of 2053 exchangeables—management expects “substantial interest savings” and is prioritizing debt reduction.
• Estimate comparison unavailable: S&P Global consensus retrieval failed (daily limit exceeded), so we cannot quantify beats/misses versus Wall Street for Q2 2024; management commentary indicates Charter’s competitive environment (ACP expiration) but improving broadband trends exiting Q2.

What Went Well and What Went Wrong

What Went Well

• Balance sheet de-risking: Extended Charter margin loan maturity to June 30, 2027 and executed $860M exchangeable offering to reduce margin loan borrowings; management expects substantial interest savings from these actions.
• Charter exposure maintained at 26% fully diluted while monetizing shares: $74M proceeds from 270K Charter shares sold to Charter from May–July; fair value of Charter investment rose to $13.7B at Q2-end and was cited at ~$16.2B as of Aug 1/share price reference on Q2 call.
• GCI Business data growth supported stability: Business data revenue +3% YoY; overall GCI revenue flat despite wireless declines, demonstrating resilience in core data services.

What Went Wrong

• Margin compression at GCI: Operating income down $2M YoY to $30M; Adjusted OIBDA down $6M YoY to $86M; operating margin fell 90bps and Adjusted OIBDA margin down 260bps due to higher distribution costs to healthcare customers and higher labor/professional fees.
• Lower consolidated operating profit and other income: Liberty Broadband operating income dipped to $21M (vs $23M), with realized/unrealized losses on financial instruments at -$17M (vs +$40M prior year), driving EPS down to $1.36 (vs $1.71).
• Consumer KPIs mixed: Cable modem subs fell 1% YoY to 158,000 and wireless lines were flat; ACP expiration cited as a driver of sub pressures across the sector via Charter trends commentary.

Transcript

Operator (participant)

Welcome to the Liberty Broadband 2024 Q2 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 one on your telephone keypad. As a reminder, this conference is being recorded today, August 8, 2024. I would now like to turn the call over to Clare Adams, Senior Manager in Investor Relations. Please go ahead.

Clare Adams (Senior Manager in Investor Relations)

Good morning. 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 Form 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 statement 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'll discuss certain non-GAAP financial measures for Liberty Broadband, including adjusted OIBDA.

Information regarding the comparable GAAP metrics, along with the required definitions and reconciliations, including preliminary note and schedules one and two, 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 introduce Greg Maffei, Liberty's President and CEO.

Greg Maffei (President and CEO)

Thank you, Clare, and good morning to all our listeners. Today, speaking on the call, we will have Liberty Broadband's Chief Accounting and Principal Financial Officer, Brian Wendling, Ron Duncan, CEO of GCI, and Peter Pounds, CFO of GCI, will also be available to answer questions. During Q&A, we will answer questions, if there are any, related to Liberty TripAdvisor. Beginning first with Liberty Broadband. In July, we issued $860 million of the 3 1/8 charter exchangeables. We used the proceeds from that offering to repay $540 million under our charter margin loan and repurchased $300 million of our existing 3 1/8 exchangeables. We've also extended the margin loan maturity to 2027, and our 2026 debt maturities are now spread through 2028.

As a result of these actions, we expect substantial interest savings. We resumed our sales at Liberty Broadband into Charter's buyback in June. With the proceeds, we will continue to take a prudent approach about retiring debt, and that is our current focus. We will also evaluate those LBRD buybacks as cash bills from Charter share repurchases. Charter, looking at Charter, the underlying company, they had well-received strong results in the quarter against a competitive backdrop and the expiration of the ACP program. They reported a net subscriber loss of 149,000 broadband subs, but the majority of those were due to ACP, and the broadband trends did improve throughout the quarter, with the lowest net loss in June. Charter reported solid EBITDA growth of 2.6% versus the prior year and a 100 basis point margin improvement.

Management did a great job of expense management, working with the growing realization impacts of that in the second quarter. They continue to manage the cost structure without sacrificing growth. Mobile achieved its profitability for the first time, an important milestone that reinforces the value of the mobile offering. Charter reported 557 mobile line net additions. The Anytime Upgrade program is driving ARPU as customers increasingly chose Unlimited Plus plan. The phone buyout program for multi-line households to move more easily to Spectrum Mobile is also being very effective. We expect continued EBITDA growth to the back half of the year. We will see the ACP impact mostly in the third quarter and some in the fourth, but believe Charter is managing that transaction effectively.

The cost initiatives continue to support the highest, highest margins to date, and we do expect to see political spending ramp through the year. We also expect to see continued strong mobile performance. Charter reduced leverage during the quarter to 4.32x, and Charter expects to continue to move closer to the middle of the target of the 4x-4.5x leverage range throughout the year. Turning now to Liberty TripAdvisor. We continue to evaluate strategic alternatives with TripAdvisor special committee, and we will not be able to comment further until or unless the definitive documents are executed or discussions terminate. Looking at TripAdvisor itself, during the quarter, it felt continued pressure on hotel meta in brand TripAdvisor from both SEO and SEM structural challenges with weaker demand and increased competition.

However, positive early results from strategy work launched last year are beginning to take hold. We've seen a growing share of app users and direct channel activity where there's more monetization opportunity available. Members using Trip's planning tool have a 15x higher ARPU than the platform-wide average. The strategy is designed to drive mix shift over time from legacy offerings to focus on member value, a differentiated app experience, and engaging product features. For example, AI-powered review summaries and hotel booking directly into the app and user upgrades are much more effective and better monetization opportunities for us... Looking at the other businesses within Trip, Viator, and TheFork both increased their contribution rather, to the profit mix. Viator saw a doubling of active bookers who log into the app, which led to higher conversion, better repeat rates, and GBV growth.

So with that, I'll turn it over to Brian to discuss the financials.

Brian Wendling (CAO and Principal Financial Officer)

Thank you, Greg. At quarter end, Liberty Broadband had consolidated cash and cash equivalents of $73 million, which includes $47 million of cash at GCI. The value of our Charter investment, based on our shares held as of August 1st, and Charter share price as of yesterday's close, was $16.2 billion. And at quarter end, Liberty Broadband had a total principal amount of debt of $3.7 billion, including the debt at GCI. Note that this excludes the preferred stock. Looking quickly at GCI, revenue is up a million over the prior year, driven by continued strength in data sales, particularly to our rural healthcare and school customers, partially offset by declines in wireless and other revenue. Adjusted OIBDA decreased $6 million due to higher operating costs, as well as increased SG&A expense from labor-related costs and increased professional service fees.

Over the last year, adjusted for the reclassification from GCI business, GCI Consumer saw a decline of 1,000 revenue-generating wireless subs. Cable modem subscribers declined by 2,500, mostly driven by the expiration of the ACP program. During the quarter, GCI distributed $150 million to Liberty Broadband, funded with cash on hand and drawing under its revolver. These proceeds were used to pay down the Charter margin loan and were therefore net net neutral to Liberty Broadband. At quarter end, GCI's leverage was at 3.2x, with sufficient cushion in relation to the 6.5x maximum net leverage covenant threshold stipulated in the credit facility. And we had $347 million of undrawn capacity under the GCI revolver, net of letters of credit.

With that, I'll turn the call back over to Greg.

Greg Maffei (President and CEO)

Thanks, Brian. Our Annual Investor Day will be Thursday, November fourteenth, in New York. Note we moved to a new location. See you at the Jazz at Lincoln Center. Save the date. Additional details will be forthcoming soon. We hope to see many of you there. With that operator, I'll open the line for questions.

Operator (participant)

Thank you. At this time, we'll be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first questions come from the line of Barton Crockett with Rosenblatt Securities. Please proceed with your questions.

Barton Crockett (Managing Director and Senior Research Analyst)

Okay, thank you for taking my questions. There were a couple of things I was kind of interested in, to see if we could address them here. One is, I'm curious about the wireless business at GCI and then perhaps a longer-term thought for Charter. So my question is this: to what degree is GCI, you know, really focused on subsidizing kind of device purchases? Just update us on that as we go into what may be a bigger kind of upgrade cycle with the AI presence on the iPhone 16.

You know, and also, if you have any thoughts about what you expect there in terms of the size of that cycle for GCI, and then, you know, for Charter, and I guess over to Greg. Just more broadly, I mean, obviously, Charter's not doing the device subsidies, you know, at the level that the major wireless carriers are today. But, you know, one could imagine over time, as the Charter and the cable peers get bigger in wireless, that they will want to, you know, compete in more kind of toe-to-toe on that basis. And I was just wondering, you know, Greg, if you agree that that's going to be the general direction, and if so, you know, any thoughts about how the road there might progress?

Slowly, quickly, any steps that could kind of transition you, transition you over there.

Greg Maffei (President and CEO)

Thanks, Barton. Ron, do you want to take the GCI wireless part of that?

Ron Duncan (CEO)

Sure, I can do that. And obviously, Barton, as you know, GCI is a mobile network operator, not an MVNO like Charter, so we have a different cost structure. We've got a much higher gross margin and EBITDA percentage because we own the network. We're not paying somebody else for it. And we've also got a much higher market share at this point than Charter does. We're probably 40% of the Alaska mobile market overall, and it's one of our two core businesses, along with... For consumer businesses, along with consumer data. As such, we pretty much have to match or at least be competitive with the majors, and our principal competitor is AT&T. Verizon is not a material player in the market up there. So we pretty much have to match AT&T device subsidies in order to avoid losing subs to them when there's a refresh cycle.

In the last couple of years, we've extended the device subsidies from 2-year contracts to 3-year contracts. That's given us a little lower turnover and a little more stability. We're evaluating right now, but we think that if there's an accelerated device cycle this fall as a result of AI features, particularly in the Apple phones, it may be an opportunity to grab some more share. We've got a better network in Anchorage and in most of Alaska than AT&T does. People choose us for that reason, and we're trying to figure out whether enhancing device subsidies a little bit would allow us to gain more share. If we weren't relatively competitive with AT&T, we'd keep the low margin or the low-cost portion of the customer base, but we wouldn't be able to maintain the 40% statewide market share. Greg, back to you.

Greg Maffei (President and CEO)

.Thanks, Ron. So I think, as you rightly note, Charter has not had to offer the kind of subsidies for handsets that many other competitors in the mobile space have. I think that's largely because of the attractive pricing of the Spectrum+ offering, particularly obviously the year free line, but even post that, the relative savings of being a Charter subscriber and having Spectrum+ for your mobile as well, is very attractive compared to the alternative. So I don't see Charter, you can't predict how the market will go entirely, but I don't see Charter offering or needing to offer the kind of subsidies that other people have because of the attractiveness of the combined offering.

Barton Crockett (Managing Director and Senior Research Analyst)

Okay, thank you.

Operator (participant)

Thank you. Our next questions come from the line of Ben Swinburne with Morgan Stanley. Please proceed with your questions.

Ben Swinburne (Head of U.S. Media Research)

Greg, I wanted to get your thoughts just generally on some of the action we're seeing competitively in telecom in the U.S., particularly T-Mobile's acquisition of, or JV, I guess I should say, with Lumos and MetroNet, and how that impacts sort of your perspective on Charter, both when we think about kind of private and public market multiples, which obviously are pretty far apart right now. And then just competitively, whether, you know, you think the level of fiber and converged competition is something that is gonna be potentially a headwind for Charter over time. Thanks so much.

Greg Maffei (President and CEO)

Yeah. Thanks for the question, Ben. I think the actions of T-Mobile and really of many of the mobile players, talking about offering, fiber, increased fiber activity, is a validation of the need for, fixed lines, and that mobile alone is a less attractive proposition. And the combined offering that, Charter has with its broadband network and its MVNO relationship is very attractive. You know, when you look at these things that they're doing, they're mostly kind of around the edges. They're not big time entrants, and in general, we've seen less activity in fiber, build-outs, whether it's because, you know, the easy pickings are done or because some of the players who were more levered players have slowed down or just competitive with the markets. We've not seen big upticks.

What we are seeing, though, is interest from those players of being a broadband, of having a broadband, fixed line. So I think it's a validation of Charter's strategy to be, first and foremost, a fixed line provider and then off that MVNO, which is very attractive. And it's a much more nibble around the edges for people like T-Mo with the JV that they're doing.

Ben Swinburne (Head of U.S. Media Research)

Makes sense. And I just had one follow-up to Ron, since he mentioned it. I was gonna ask anyway. What's your view on sort of the AI phone cycles? That's another big debate. Do you think this is something consumers are gonna be eager to acquire, or are you taking sort of the opposite, that maybe the market's a little ahead of itself on optimism here?

Ron Duncan (CEO)

I think there's probably more optimism than is merited, but we're expecting a bigger than usual upgrade cycle this time around, in part because there really haven't been that many earthshaking changes to the iOS app in the last several cycles, so the difference between a 12 and a 15 wasn't all that significant, and we've definitely seen reduced upgrades. As I said, we've seen our average cycle, our average turnover on a customer go from two years to something close to three years. I think there's enough buzz around the AI that regardless of how good the product really is, more people will try it this time. Whether it's a 50% increase over last time, I don't know. We're, we're trying to assess that and prepare for how much inventory.

I definitely think that even if it's not real, the buzz will create more consumer interest and more people may try it.

Ben Swinburne (Head of U.S. Media Research)

Last time being the 5G upgrade cycle that you're referring to?

Ron Duncan (CEO)

Yeah.

Ben Swinburne (Head of U.S. Media Research)

Yeah. Got it. Thanks a lot.

Operator (participant)

Thank you. Our final questions will come from the line of Alex Nordhagen with Balyasny Asset Management. Please proceed with your questions.

Alex Nordhagen (Senior Analyst)

Great. Thank you very much for taking my question today. I have a question specifically regarding Liberty TripAdvisor, and that's with respect to the Series A preferred stock. Is the current expectation that this instrument will simply just remain outstanding past the end of March next year and accrue its dividend at a, at the penalty rate of 12% versus the current 8%? Thank you.

Greg Maffei (President and CEO)

Yeah, I think we're as we've said, we're in discussions with Tripadvisor and with Certares about transactions that might arise. So it's... I can't comment on whether that will be the result. Like, all I can tell you is that there are active discussions between Certares, Tripadvisor and ourselves.

Alex Nordhagen (Senior Analyst)

Okay, great. Thank you. Just to follow up, if I may, would you like share the opinion somehow that the Liberty TripAdvisor kind of holding structure of the Trip shares weighs on Tripadvisor stock?

Greg Maffei (President and CEO)

I would, I think at this point, the potential issues around Liberty TripAdvisor are probably a cloud on the Tripadvisor stock. That's probably a fair statement, yes.

Alex Nordhagen (Senior Analyst)

All right. Thanks very much, Greg. Appreciate it.

Greg Maffei (President and CEO)

Thank you. Thank you to our listening audience for your interest in Liberty Broadband and Liberty TripAdvisor. We hope to speak with you next quarter, if not sooner.

Operator (participant)

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.