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Liberty Broadband Corp.  (NASDAQ:LBRDA) (NASDAQ:LBRDK)
Q3 2019 Earnings Call
Nov. 11, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the GCI Liberty 2019 Third Quarter Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded today, November 11, 2019.

I would now like to turn the conference over to Courtnee Chun, Chief Portfolio Officer and Senior Vice President of Investor Relations. Please go ahead, ma'am.

Courtnee Chun -- Chief Portfolio Officer and Senior Vice President of Investor Relations

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 margins. Information regarding the comparable GAAP metrics along with required definitions and reconciliations, including preliminary note 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 turn the call over to Liberty's President and CEO, Greg Maffei.

Gregory B. Maffei -- President and Chief Executive Officer

Thank you, Courtnee. And good afternoon to all of you on the line. Today, speaking on the call, we will have GCI Liberty's Principal Financial Officer, Brian Wendling; and GCI's CFO, Pete Pounds. Also during Q&A, we will be available to answer questions if there are any related to Liberty Broadband.

So starting with GCI Liberty, and GCI's third quarter had a series of solid results. Revenue and adjusted OIBDA grew and the team began to see benefits of the strategic changes they've made to focus on driving value in the core Alaska business. Continued to move customers up the stack to higher bandwidth data products and improve their wireless, cable modem, and video offerings.

Business data revenue grew in part driven by higher sales to schools and libraries and healthcare customers. And the 5G build out that we are under way with Ericsson and Anchorage is moving with expected completion of mid-2020.

Looking now at LendingTree and the third quarter results there, they experienced record levels of revenue, variable marketing margin and adjusted EBITDA. The mortgage business continued to gain momentum and return to growth, and the insurance business continues to move forward in a good fashion. The diversification of the portfolio has allowed the team to weather segment challenges, while continuing to invest in improving the marketing machine and leading to increased guidance for the year.

Over to Liberty Broadband, Charter had strong third quarter results. Continued to grow revenue and customer relationships of the team improves their consumer experience. They are now offering minimum speeds of 200 Meg and 60% of the footprint, and they launched advanced in-home Wi-Fi in Austin and will begin rolling out in additional markets in the fourth quarter.

We ended the quarter with all of 800,000 Spectrum Mobile lines. EBITDA growth and declining capital intensity led to 124% growth in cable free cash flow, to decrease capex guidance for the year to below $7 billion, and they expect the capex to continue to decline in 2020. In addition, they repurchased $3 billion of shares in the quarter.

With that let me turn it over to Brian to discuss the financials in more detail.

Brian J. Wendling -- Senior Vice President, Principal Financial Officer and Controller of Liberty Media Corporation

Thanks, Greg. At quarter end, GCI Liberty had consolidated cash and cash equivalents of $410 million, which includes $82 million of cash that's held directly at the GCI level. The value of the public equity securities at GCI Liberty as of today's close was $8.7 billion, which includes our $2.5 billion interest in Charter, $5 billion interest in Liberty Broadband, and a $1.2 billion interest in LendingTree.

At quarter-end, GCI Liberty had total principal amount of debt of $3 billion, which includes a $900 million margin loan outstanding against its Liberty Broadband shares, the Charter exchangeable debentures, and $1.6 billion of debt including financing leases and -- finance leases and tower obligations at GCI.

GCI's leverage, as defined in its credit agreement was 6x at quarter end compared to a maximum allowable leverage of 6.5x. As discussed in previous quarters, GCI exceeded the incurrence-based maximum leverage threshold in the terms of the senior notes. Therefore it was unable to access additional funding under the revolving portion of the senior credit facility.

As noted in the 10-Q, GCI now has the ability to access additional funding under the revolving portion of the senior credit facility, so long as GCI is in compliance with the senior credit facility covenants after giving effect to any additional borrowing.

Based on the current leverage of 6x, GCI has the ability to access $67 million under the revolver. With our cash on hand at quarter end and availability under the revolver in the -- in the Broadband margin loan, we are very comfortable with our liquidity position. Now, I'll turn it over to Pete.

Peter Pounds -- Senior Vice President, Chief Financial Officer, Secretary and Treasurer

Thanks, Brian . Starting with our five band 5G upgrade, in the second quarter, we announced our partnership with Ericsson to build the first 5G network in Alaska. That network is currently being built, and the capex for this year is included in our 2019 guidance. We expect the Anchorage build to be completed in mid-2020.

In the meantime, customers are already starting to see improvements as each new site gets turned on. On to an update of the Alaska state economy, the oil and tourism industries are going well in 2019. However, we are still facing challenges in the economy as protracted state government debates around permanent fund dividends and large budget cuts have reduced confidence in the state economy. Overall, jobs in Anchorage are up 400 from the prior year as of the end of September, a small but helpful gain.

With regard to the outstanding RHC matters, we continue to pursue open appeals with the FCC, but don't have any color at this time, on the timing or resolution of those appeals. Third quarter operating results were strong as we began to see the benefits of product enhancements and operating efficiency initiatives. Revenue for the quarter increased 3% on a year-over-year basis, due to increases in consumer, data, and wireless.

Adjusted OIBDA was up 5% on a year-over-year basis due to improvements in both revenue and SG&A expenses. Last quarter, we noted that we were able to roll out a number of product changes after being unable to do that for quite some time during the billing system conversion. New launches include enhancement to our prepaid wireless, postpaid wireless, video and cable modem products. Those changes were significant in driving the revenue improvements in the quarter. We also mentioned efficiencies on the expense side that we made during the second quarter in order to narrow our focus toward the core Alaska business. Those changes also led to the significant expense reductions in the third quarter.

Consumer. Consumer revenue was up 5% with increases in data and wireless being partially offset by declines in video and voice. The Wireless growth was driven by lapping the 2018 billing conversion, where we credited one month of service for many of our customer accounts as we moved them from billing in arrears to billing in advance.

The data growth was due to higher ARPUs, as our customers increasingly upgraded to our premium packages. This quarter, we also added a net 500 new consumer data customers and we're pleased with the sequential increase. Business, business revenues were flat for the quarter. We continue to see declines in the video business, but we are seeing gains in the data business due to up sales in our Health Care business. These gains in data were partially offset by the closure of the lower 48 time and materials business last quarter, and the ongoing headwind of the RHC customer that was denied funding earlier this year.

Finally, capex. For the year, we have invested $97 million in capital expenditures. Expenditures were primarily for wireless network improvements, fiber and hybrid fiber coax improvements. We expect to spend approximately $140 million in capex in 2019. Q4 capex is generally elevated as we push to complete projects before the ground freezes at the end of the year.

Now, I'll turn it over to Greg.

Gregory B. Maffei -- President and Chief Executive Officer

Thank you for that, Pete. We are, as been noted several times today, we have our Investor Meeting next week. We look forward to seeing many of you there. There is a link to register for that on our homepage. We appreciate your continued interest in GCI Liberty. And with that operator, I'd like to open up for questions.

Questions and Answers:

Operator

Wonderful. Thank you, sir. [Operator Instructions] First, we will hear from James Ratcliffe with Evercore ISI.

James Ratcliffe -- Evercore ISI -- Analyst

Great, thanks for taking the question. Three, if I could. First of all, Pete, on the GCI side. If you decide at some point for the appeal fail on the RHC customer where a funding has been canceled. How much OpEx is associated with providing that service to that customer? And so how much benefit could you see on that?

Secondly, Greg, this is I guess the second call in a row that you've actually sort of mentioned the operating performance of Tree. In the past, you've seemed to regarded that more as a potential monetization source, should we read anything into that about your views on that stake? And third, you've seen the -- both the Liberty Broadband and by proxy [Indecipherable] GCI Liberty spreads versus Charter move out pretty substantially in the last month or six weeks. Any thoughts on what might be driving that? Thanks.

Gregory B. Maffei -- President and Chief Executive Officer

Pete, you want to go first.

Peter Pounds -- Senior Vice President, Chief Financial Officer, Secretary and Treasurer

Sure. So first on the question of OpEx savings potentially due to the customer that did not get funded for RHC. Really the significant cost there is the massive capital expenditure to build the network and secondarily, it is to maintain that network. That is a network that will stay in place. There is no earth stations or microwave towers that will be turned down as a part of that. And so I would not expect to see meaningful reduction of SG&A if those circuits were turned down.

Gregory B. Maffei -- President and Chief Executive Officer

And as far as the operating, talking about the operating performance of Tree, I think it's somewhat the reality that Tree not only because it's now inside a smaller entity, GCI Liberty, but also more importantly it's grown so much in value. I think we discussed it at the bottom when we inherited in the '09 recession. I think our stake was worth $17 million. Now, it's well, well, well over $1 billion, credit to the team there.

So its importance both because of their own efforts and where it sits are more noticeable. They're going to be at our Investor Day. We certainly have no plans to use it as a source of capital. We're happy being a major shareholder at Tree and enjoying the benefits.

And as far as the spread between Charter and GCI Liberty and -- like I really don't know why that has moved out so much. I think it probably relates to just the pace at which Charter has been buying back stock relative to the modest toe dips that we've done, either with selling puts or buying stock, which have been far more modest in the efforts, a little bit like the situation but not quite as much as the situation at Sirius and Liberty Sirius where the share repurchases of Sirius have been more aggressive than our Liberty Sirius repurchases. But I don't have any great insights.

James Ratcliffe -- Evercore ISI -- Analyst

Great, thank you.

Operator

All right. And moving on, we'll hear a question from Zack Silver with B. Riley FBR.

Zack Silver -- B. Riley FBR -- Analyst

Okay, great. Thanks for taking the question. First one for Pete. Over the summer, you mentioned that the FCC had announced some changes to the RHC reforms. You said that it was too early to tell directionally what impact that would have. I'm curious, if three months later if you have any idea how that's going to break for you guys?

Tina Pidgeon -- General Counsel, Chief Compliance Officer, and Senior Vice President, Governmental Affairs

Hi, this is Tina Pidgeon, GCI's General Counsel. It is still early to tell. There is a process that has to be undertaken by the Universal Service Administrative Company. The idea of setting rates at a median is one that we're looking very closely at but really that data has to be collected and it involves some additional decisions that have to be made and the details before I think anyone would know what the outcome of that new process is going to be.

Zack Silver -- B. Riley FBR -- Analyst

Great. Thank you, Tina. And then for Greg, I hate to ask two questions on repurchase in the same day. But on GCI it's been, I guess since May that buybacks have been pause there, I'm just curious as to what's driving that and how should we think about buybacks going forward?

Gregory B. Maffei -- President and Chief Executive Officer

Certainly, we will look at buybacks, and as the prior caller noted there is a spread there between the value, what we think GCI's worth and the underlying Charter etc. I think that pause has been somewhat related to that where our financing sits at GCI, and the fact that we've been restricted from some of the access to some of those flows in our lines. We've had, we did some refinancings, which stabilized the situation, but didn't necessarily give us access to the incremental lines and free cash flow being generated. So we're being probably cautious on that front even with the discounts there. This is one where that opportunity probably is going to exist for a little while. So we'll see how we -- how we'll be able to take advantage of it in the future.

Zack Silver -- B. Riley FBR -- Analyst

Got it. Thank you very much.

Operator

And next question will come from Michael Rollins with Citi.

Michael Rollins -- Citi -- Analyst

Hi, good afternoon. Two questions, first, could you describe that there are opportunities for GCI and Charter to leverage each other ways for technology purchasing power as well as marketing best practices and then second, in the quarter itself for GCI did the increase in the USF factor for pass-through charges have any impact on the revenues across the segments? Thanks.

Gregory B. Maffei -- President and Chief Executive Officer

So I'll take a cut at the first one, and any one from GCI would like to add, please do. I think there has been an ongoing dialog about when GCI probably more with GCI had issues of where they're headed or what technologies they want to utilize, they've been trying to leverage expertise at Charter and experience because in many cases given Charter scale, they have either done more work on it or they may have done earlier work on it and that dialogue has gone on in several topics. I expect that's going to continue.

On the other hand, Charter while they're friendly they, it's not clear why they would extend or have the ability to extend discounts on purchasing or something like that. They don't have a common ownership. They have some common parentage, and they are not commonly owned in the same way, right? So that's more of a friendly relationship. I think one than a contractual or a ownership relationship, which generates those kind of benefits, but I don't know if anybody from GCI would like to comment further.

Peter Pounds -- Senior Vice President, Chief Financial Officer, Secretary and Treasurer

No, nothing further on that one, Greg. I would note on the question on the USF contribution factor changes, those happen typically on a quarterly basis and none of that would have risen to the level of any changes of note on the publicly filed information.

Michael Rollins -- Citi -- Analyst

Thank you.

Operator

Our next question will come from Matthew Harrigan with Benchmark.

Matthew Harrigan -- Benchmark -- Analyst

Thank you. Three questions, one you are unique, I guess among the US MSOs and being integral to the 5G build, Ericsson in Anchorage. Have you drawn any surprises from that in terms of the applicability, the cable policy for 5G and smaller cells. I mean that's actually an area where you could be a structure I guess to a number of other people.

Secondly, on the seasonality, last year, your revenues were up in Q4, but your expenses were up significantly more. Would that apply this year as well or is there just some noise in the numbers. And then I guess, thirdly for Greg, with all the political mess in the US, are you getting increasingly nervous in possible risk to telecom regulation over a longer period of time? Thank you.

Ronald Duncan -- Chief Executive Officer of GCI Holdings

Well this is Ron Duncan. And I guess, I'll take the first piece on 5G and will let Greg back me up on the politics. We're early in the process to really be able to demonstrate the benefits of combining the 5G wireless network with the extensive hybrid fiber coax plant that we have. We'll know a lot more about how well that actually works by the first half of next year, but clearly our vision is to leverage the small cells of 5G with the extensive Spectrum Holdings that we have and the virtually unlimited backhaul that we're able to deploy throughout our communities, all the way down to the subscriber residents level.

So we see a real synergy there in marrying the two on the production front. We also believe there are important synergies in tying those products together from a consumer perspective, but in terms of whether we're ready to teach that class, I'd say we have to see how it plays out in the first half of next year.

Pete, did you want to deal with seasonality?

Peter Pounds -- Senior Vice President, Chief Financial Officer, Secretary and Treasurer

Yeah, on seasonality, I would say that historically we've been very seasonal on the revenues but that has declined fairly significantly over the last few years. So the revenue side, I wouldn't expect much seasonality there. The expenses you do see a little bit of seasonality in expenses with Q4 and Q1 being a little bit heavier on expenses than Q2 and Q3. Q4 last year probably had a little more of the one-time or unusual stuff than normal, but we're not giving guidance on what those numbers are other than to note that you are correct, there is some seasonal higher numbers in expenses in the fourth quarter there.

Gregory B. Maffei -- President and Chief Executive Officer

Matt, I'll comment first but rather than discussing the politics, I'll comment on -- I mentioned a minute ago that in many cases Charter has done more work on a topic just because of their scale. This is a case where because of the 5G installation I think there's a lot that certainly we at Liberty can learn and perhaps they can learn at Charter as well. And so obviously, we watch what's happening with 5G with great interest and having a installation on our own will be a very powerful learning zone.

On the politics, there's always risk around politics, that's just the way it is. I'm not sure how many actionable items we have because of that, but we certainly watch the -- all of them with interest in general, who would have guessed that the -- in a time when the DoJ was more of a problem -- or was less of a problem and the SEC was more. We've now got it reversed, so who knows where this will all go.

Matthew Harrigan -- Benchmark -- Analyst

Thanks, Greg, Ron, Pete.

Operator

And we will move on to our final question from TD Securities. We have Bentley Cross.

Bentley Cross -- TD Securities Equity Research -- Analyst

Hi, quick question for Greg on Liberty Broadband. Just thoughts as we look out forward to the exploration of the advanced new house proxy. Is there anything to be done there or should the buybacks take care of themselves so that your ownership issue and that 25% threshold is a non-issue all together.

Gregory B. Maffei -- President and Chief Executive Officer

Yeah, I don't know if it's a non-issue. I would point there are probably three ways it gets solved. One is some sort of a renewal of that proxy, certainly good relations between particularly John Malone, and the new houses and commonality there. Secondly, as you rightly know note, Charter continues to repurchase and that alone may drive us over the 25%. And third, we've in the past used relatively efficient ways to increase our ownership and not take massive amounts of economic cluster with callers of the like that could drive us over the 25% on our own. So I can't say there is no risk, but it's not one that keeps me up at night by any means.

Bentley Cross -- TD Securities Equity Research -- Analyst

Thank you.

Gregory B. Maffei -- President and Chief Executive Officer

Thank you. So thank you to all of the listeners and questioners. And as we said, we hope to see many of you next week in New York, and if not, we'll speak again next quarter, if not beforehand. Thank you very much, operator.

Operator

[Operator Closing Remarks]

Duration: 24 minutes

Call participants:

Courtnee Chun -- Chief Portfolio Officer and Senior Vice President of Investor Relations

Gregory B. Maffei -- President and Chief Executive Officer

Brian J. Wendling -- Senior Vice President, Principal Financial Officer and Controller of Liberty Media Corporation

Peter Pounds -- Senior Vice President, Chief Financial Officer, Secretary and Treasurer

James Ratcliffe -- Evercore ISI -- Analyst

Zack Silver -- B. Riley FBR -- Analyst

Tina Pidgeon -- General Counsel, Chief Compliance Officer, and Senior Vice President, Governmental Affairs

Michael Rollins -- Citi -- Analyst

Matthew Harrigan -- Benchmark -- Analyst

Ronald Duncan -- Chief Executive Officer of GCI Holdings

Bentley Cross -- TD Securities Equity Research -- Analyst

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