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Liberty Broadband Corp.  (NASDAQ:LBRDA) (NASDAQ:LBRDK)
Q4 2019 Earnings Call
Feb. 26, 2020, 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 Q4 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded, February 26.

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, Courtnee.

Courtnee Chun -- Chief portfolio Officer and Senior Vice President, 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 Form 10-K filed with the SEC.

These forward-looking statements speak only as of 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 statements 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 turn the call over to Liberty's President and CEO, Greg Maffei.

Greg Maffei -- Chief Executive Officer

Thank you, Courtnee, and good afternoon to all of you out there on the call. Today speaking on the call, besides myself, we'll have GCI Liberty's Chief Accounting Officer, Brian Wendling; GCI's CFO, Pete Pounds. During the Q&A, we will be available to answer questions also related to Liberty Broadband.

So, starting first with GCI Liberty. As Ron noted in the release, we had a solid operational quarter. There were pluses and minuses on the regulatory front, but overall, it resulted in a benefit in the fourth quarter of $4 million, as Brian will discuss further in a moment. For the full year, despite a challenging business environment, there were stable consumer revenue as there were gains in data from sub growth and consumers moving up the stack, which offset losses in video and voice. We also generated expense savings from operational efficiencies and a focus on the core Alaska business. GCI continues to work on the Anchorage 5G buildup, which we expect will be completed later this year.

Turning to LendingTree, which reported its Q4 results yesterday. They added over 3.6 million users to My LendingTree during 2019, bringing the total number of customers to 14.3 million. LendingTree continues to diversify its business effectively. Insurance is now the largest business and grew 37% pro forma versus Q4 last year. The home and consumer segments also grew double digits over the prior year. Yesterday, as I noted on the earnings call, LendingTree issued 2020 guidance for another year of double-digit revenue and adjusted EBITDA growth.

Turning over to Liberty Broadband. It was a great year for Charter. They created over 1.1 million new customer relationships and net added over 1.4 million Internet customers. They added over 900,000 mobile lines and plan to begin offering 5G in Q1. For the full year, cable adjusted EBITDA grew 6.6% despite it being a non-political advertising year and cable free cash flow grew by over 100%. We expect the cable EBITDA growth will, combined with declining capital intensity and a disciplined capital deployment strategy, will continue to drive continued strong free cash flow, particularly on a per share basis. We do expect cable capex intensity in 2020 to continue to decline from the 15% in 2019.

So, with that let me turn it over to Brian to further discuss the financials.

Brian J. Wendling -- Senior Vice President, Principal Financial Officer and Controller

Thank you, Greg. At quarter end, GCI Liberty had consolidated cash and cash equivalents of $570 million, which includes $61 million of cash at GCI. Value of the public equity securities at GCI Liberty as of today's close was $9.4 billion, which includes our $2.8 billion interest in Charter, $5.7 billion interest in Liberty Broadband and $1 billion interest in LendingTree. At quarter-end, GCI Liberty had principal amount of debt of $3.2 billion, which includes a $1.3 billion margin loan outstanding against its Liberty Broadband shares, the Charter exchangeable debentures and $1.4 billion of debt including finance leases and tower obligations at GCI.

In the fourth quarter, GCI Liberty increased borrowings under the Liberty Broadband margin loan by $400 million. Proceeds were used to repay a portion of the GCI senior credit facility and for general corporate purposes. GCI's leverage at quarter-end is defined in its credit agreement was 5.1 times compared to a maximum allowable leverage of 6.5 times. Note that the above amounts exclude the indemnification obligation and preferred stock, which are separately identified in the cash and debt table ones on the release.

Our 10-K is filed later. You will notice that GCI's remedying a material weakness in its internal controls over financial reporting. Material weakness resulted from an aggregation of issues identified in IT general controls of our access to various systems as well as issues in the design and operation of business process controls. While our control issues persist, we are working toward remediation and are implementing various activities to strengthen the control environment going forward, putting process redesign, enhanced training and personnel development. We know that the issues were not an external bridge, and did not result in any material misstatements in our reported financial results.

Before I hand it over to Pete, there are two significant Rural Health Care events that impacted GCI's results in the fourth quarter that I'd like to walk through. First, in December of 2019, GCI became aware of compliance issues on certain active and expired RHC contracts. Because of these issues, we have accrued the loss of approximately $17 million to SG&A in the fourth quarter. We continue to work with the FCC to resolve this issue, and you can find much more disclosure around this in our 10-K.

Separately, on February 19th of 2020, the FCC issued an order, which granted one of GCI's RHC customer's appeal to reverse its previous funding denials, which had resulted in a loss of approximately $21 million that we recognized in the first quarter of 2019. This new FCC order led to the reversal in the fourth quarter of $21 million previously recognized loss. We will evaluate in the first quarter of 2020 to determine what amount of revenue related to this contract for the last nine months of 2019 and going forward into 2020 we can recognize. GCI has continued to provide service for all periods, and this would be taken into account in our analysis. At this point, we would expect to recognize all of the majority of this revenue, barring new information from the FCC. The loss accrual and reversal together resulted in a net $4 million benefit to GCI's adjusted OIBDA in the fourth quarter and a $17 million negative for the full year.

With that, I'll turn it over to Pete to talk about GCI's operating results in more detail.

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

Thank you, Brian. Revenue was down in the full year 2019 as compared to 2018, primarily due to reductions in consumer video and voice, as well as business wireless and video revenues. When comparing the fourth quarter results, 2019 Q4 revenue was down 1%, primarily based on reduced business video revenue from a lack of political advertising revenue in a non-election year.

Adjusted OIBDA was down $10 million or 4% for the year. Excluding the RHC matters Brian noted, it would have increased $7 million or 3%. For the fourth quarter we showed strong adjusted OIBDA year-over-year growth of $13 million or 21%. Adjusted OIBDA would have been up $9 million or 15% even without the benefit of the RHC matters Brian discussed. This adjusted OIBDA improvement is mostly due to our focus on cost efficiencies.

Moving on to consumer. We're just starting to see signs of life in the Alaskan economy after a few years of flat cable modem subscribers. We finally had two great quarters in a row of sequential cable modem subscriber growth. In the fourth quarter, we grew 2,400 data subscribers and continued to move customers up the product stack, which helped us reach a 5% and 6% growth rate in consumer data revenue on a quarterly and annual basis respectively. Consumer wireless revenue was up slightly due to increased handset sales. We continue to make our Anchorage 5-band 5G upgrades, which we expect to complete this summer.

On the business side, revenue was down slightly in the fourth quarter and full year with losses in wireless, voice and video, offsetting good performance in business data. The decline in wireless was due to lower backhaul and roaming revenue. The video losses were due to non-election year advertising revenue declines. On the data side, revenue increased in the fourth quarter due to additional services provided to our healthcare and education customers and was flat for the full year as the loss of revenue from the previously mentioned RHC customer offset these additional services.

For the year, we invested approximately $133 million in capital expenditures. Expenditures were primarily through our improvements to our wireless, fiber and coax networks. We expect to spend a similar amount in 2020.

I'll now hand the call back over to Greg.

Greg Maffei -- Chief Executive Officer

Thank you, Brian, and thank you, Pete. We have scheduled our 2020 Investor meeting for Thursday, November 19th in New York. So please mark your calendars. As always, we appreciate your continued interest in GCI Liberty and we look forward to chatting with you next quarter if not before.

And with that, operator, I'd like to open up for questions.

Questions and Answers:

Operator

[Operator Remarks] Our first question comes from Michael Rollins, Citi.

Michael Rollins -- Citi -- Analyst

Hi, thanks for taking the questions. Curious if you could discuss at the GCI level, what's the most appropriate target leverage ratio should be for the Company and the capacity you would have to either increase investments or repurchase stock, or consider other uses for the capital?

Greg Maffei -- Chief Executive Officer

Pete will take that. Laura, why don't talk about where we are in terms of leverage, both in the constraints we currently have at the GCI level, given covenants?

Laura Baldi -- Vice President and Assistant Treasurer

Sure.

Greg Maffei -- Chief Executive Officer

This is Laura Baldi, our Treasurer.

Laura Baldi -- Vice President and Assistant Treasurer

So, GCI operates under both the credit agreement and some public filings. With respect to the credit agreements, we are at roughly a 5.1 times total leverage ratio using that metric. On the bond covenants, we are approximately 5.5 times versus a 6 times covenant. Obviously, we've seen some fluctuations in it -- excuse me, seen some fluctuations in the leverage covenants due to the write-offs and then the reversals of the RHC issues, and we are working toward reducing those covenants, I mean, the calculations over time. Please note that the RHC issues that were effective in first quarter '19 will begin to anniversary off this quarter, the first quarter, sorry. And that will improve these calculations going forward.

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

Thank you, Laura. And I think to note what is the right level given the fluctuations potentially in our regulatory matters. We have been conservative against what this might be and we're probably at the levels and we're trying to build a little cushion, particularly at various times, we had incurrence issues. We're out of that now, but want to make sure that we don't have those issues and the regulatory fluctuations that made that harder.

Michael Rollins -- Citi -- Analyst

And just an operating question, in Alaska, do you find that there is a greater sensitivity to natural resource pricing, for example, like the oil market, whether it's on the business side or the consumer side of the cable business? Just curious how to think about some of those sensitivities over time?

Greg Maffei -- Chief Executive Officer

Well, if I understand your question correctly, you're basically asking how much of the price of oil drive business activity in Alaska. And I think there are people on it from the GCI side, you could certainly be more articulate. But the answer is quite a lot and particularly with some lag on what projects get started, what things get built out and what -- particularly in areas like the Northern slope, what people do, very much tied to where they think, where oil has been, where oil will be. I don't know, Peter, if Ron, you want to comment further?

Ronald Duncan -- Chief Executive Officer and Co-Founder

This is Ron. I'll just add, there is a substantial damper between current fluctuating oil prices in the climate in Alaska. Most oil revenue in Alaska comes to us by being recycled by the state government. So low oil prices have an impact on state budget deficits that really aren't reflected immediately in the economy. And the companies that are investing on the north slope are using a very long-term horizon, which unlikely to be influenced by short-term perturbations in growth -- per barrel price of oil. Obviously, if it stays down where it is, that has a long-term impact and this is a three or six-month cycle, we won't see much results from it.

Michael Rollins -- Citi -- Analyst

Thank you.

Operator

Next up, we'll hear from James Ratcliffe, Evercore ISI.

James Ratcliffe -- Evercore ISI -- Analyst

Hi, thanks for taking the question. Two if I could. There is a comment in the release that there's an impairment loss of $167 million related to wireless licenses and can you just talk about what drove that reassessment about long-term wireless revenue? And secondly, on Liberty Broadband side, the new house proxies coming up next May. It looks, though, like if I'm doing the math right that you should be pretty close to, if not over 25% by then, anyway, at least for the GCI Liberty Health. But if you could just any thoughts on how you plan to approach that? Thanks.

Greg Maffei -- Chief Executive Officer

Sure, James, I'll take the second question first and let -- we'll divvy among who is -- I think it's going to be Brian who's going to answer on the wireless question. But on the Liberty Broadband question, I think you rightly note that proxy will expire. I think there are several potential remedies to ensure that we don't have regulatory issues around the Investment Act of 1940. Potential remedies could first be extending the proxy. I don't know whether the new house is still want us involved, but my guess is they do. Given that they have been largely holding their percentage constant and selling into the marketplace, having things that would cause us to be either sellers or less involved, but probably not be a plus for them. And more importantly, I think, John Malone, in particular, in the new house family has had a partnership for 30 years, that's been very successful. And this is -- this Charter investment has worked out well for both parties. So, I suspect they might be willing to extend, but we have not really talked about that.

Secondly, as you rightly note, the Charter continues to buy back stock and could very well depending on the rate of their repurchases, we could very well end up over 25% on our own. When you combine the money that we have and the vote that come across from GCI Liberty to Liberty Broadband. And lastly, there are things we could certainly do including buying more stock in Charter directly. We intended to put our purchases of the Liberty Broadband because it trades at a discount, but we could do things that you've seen us do for example as we did at LendingTree [Phonetic], use a relatively collared purchase that was financed that would not cause us to have a massive outlay of capital would give us some upside in the stock and some downside protection both and get us over the 25% hurdle. So, while it's certainly something we pay attention to, I think we have a lot of ways to solve any regulatory issues related to this that may arise.

Brian J. Wendling -- Senior Vice President, Principal Financial Officer and Controller

And then on the wireless impairment question, as required by GAAP at the end of each year, you're required to look at all your various non-amortizing intangibles. So, it's a standard process that we went through. We won't disclose. We're going through too many of the details on the various variables that drive that valuation, but there was increased uncertainty related to certain customers that flow through the valuation process, which resulted in the impairment.

James Ratcliffe -- Evercore ISI -- Analyst

Great, thank you.

Operator

Our next question today will be from Zack Silver, B Riley, FBR.

Zack Silver -- B Riley, FBR -- Analyst

Okay, great. Thanks for taking the question. I know that there are a lot of moving pieces on the RHC, both the plus and the minus you guys disclosed today, but wondering if you could sort of directionally give us a sense of how that may impact OIBDA in 2020?

Greg Maffei -- Chief Executive Officer

I think you would expect all else being equal, that we should be receiving positive impacts of that. The contracts that were suspect, we took the $17 million reserve on. There is a potential we could end up with a larger reserve on that, but I think we're comfortable we had the right reserve based on the facts and circumstances we know. You've seen that we reversed the '21. There is more, roughly $3 million a quarter that we were undertaking that is sitting -- stored on our balance sheet for three quarters worth. So, there is $9 million more that is sitting there in dispense. The variables around that are what reimbursed rate we get from the FCC that we were to get the same reimbursement rate that we received in the '17 revenues, we would recognize all of that money.

So on the margin, today, you have to think that we are more likely than not to receive revenue rather than -- receive revenue off the balance sheet from those FCC issues rather than we're not incurring new issues. I don't know if anyone else, Brian, Ron or Pete wants to add to my answer there.

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

Well summarized.

Zack Silver -- B Riley, FBR -- Analyst

Yeah, that's helpful. And then more of a higher level one, just given the T-Mobile/Sprint decision recently, big horizontal merger, I would love to hear your take on, Greg or Ron, or whoever, implications for M&A, large scale M&A at Charter, does this precedent with this decision open the door for things that you may have not thought would have been possible before?

Greg Maffei -- Chief Executive Officer

Ron, do you want to add any comments?

Ronald Duncan -- Chief Executive Officer and Co-Founder

I think that was more targeted toward the Charter level, but T-Mobile deal is clearly good for GCI. T-Mobile is our largest roaming partner and we get a lot of benefit from them. We will have access to additional spectrum that comes to us through their merger with Sprint, which we will be able to deploy in Alaska and it also will have a near-term revenue frac to replace some of the roaming revenues that we were getting from Sprint. So from GCI perspective, it's a big world.

Zack Silver -- B Riley, FBR -- Analyst

Interesting.

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

Looking at the larger issues about what it might mean for Charter, I think on the margin, it was probably a slight negative not enormous just because you have a stronger competitor, but on the other hand, it may have meant that Alaska is less competitive environment, it may be an opportunity for Charter. So you weigh all those two pieces, hard to know for certain. What does it say about what are some other implications without claiming to have complete presence by any means. The fact of the states would be back is probably a positive for imagining other large-scale deals. The fact that people were very interested in seeing 5G rolled out and what that might mean about other combinations and it willingness to overlook potential detriments in the deal or potential problems with the deal in pursuit of enabling 5G that might portend things that we can do otherwise. But I'm not sure it's a massive impact one way or another. We'll see. Does a stronger T-Mo -- is a stronger T-Mo real threat? I think that's the biggest issue.

Zack Silver -- B Riley, FBR -- Analyst

Yeah. It makes sense. Thank you, guys.

Operator

Next up, we'll hear from John Melo, SunTrust.

Mike Kerrane -- SunTrust -- Analyst

Hey, this is Mike Kerrane from SunTrust. Most of my questions have been asked and answered, but I just wanted to ask you if I could get more color on the $400 million of additional margin loans. I mean, what's the -- if you could remind me if like what's the rate that you get on those margin loans, and what I'm just trying to figure out is whether it makes sense to pay down more debt with those types of loans, whether it's revolver or the [Indecipherable]?

Laura Baldi -- Vice President and Assistant Treasurer

Hi, it's Laura Baldi again. We pay a spread of LIBOR plus 185 [Phonetic] on the margins from this and we can use to partially repay back LLC facility, which is [Technical Issues].

Brian J. Wendling -- Senior Vice President, Principal Financial Officer and Controller

We did that and the presence of this is in part to some regulatory reasons.

Mike Kerrane -- SunTrust -- Analyst

Understood. Thanks for the answer.

Operator

And our final question today comes from Matthew Harrigan, Benchmark.

Matthew Harrigan -- Benchmark -- Analyst

Thank you. Apologies for asking the same slightly indelicate question as last quarter, but you still have to cope with the still fairly hefty discounts on LBRDA and GLIBA. You can't get a better ruling from IRS anymore. Is there anything in lawsuit [Phonetic], given all the uncertainty that would make it desirable to collapse the Russian ball structure this year, particularly as the Alaska asset has shown clearly better performance, although I imagine you probably couldn't even necessarily complete a regulatory review before if there was a change in lawsuit?

Greg Maffei -- Chief Executive Officer

That -- we clearly, obviously, have no plan or intent on that, but we have certainly read that others have suggested it and some of the logic for that might be just reducing overhead, taking advantage of various discounts, consolidating some of our holdings in one spot. That would obviously be subject to some issues around tax, some issues around probably investment company. I do now believe -- and the way you are certainly suggesting that, I don't believe or which way to be surprised that there would be significant FCC or DOJ type issues, antitrust. I think most of the issues would be largely around IRS and SEC to work through.

Matthew Harrigan -- Benchmark -- Analyst

Thanks, Greg.

Greg Maffei -- Chief Executive Officer

Thank you very much to everyone who was on the call. Thank you to our friends up in Anchorage for their comments. Thank you to everyone here in Colorado and as I said, we look forward to speaking with you all again next quarter if not sooner.

Operator

[Operator Closing Remarks]

Duration: 26 minutes

Call participants:

Courtnee Chun -- Chief portfolio Officer and Senior Vice President, Investor Relations

Greg Maffei -- Chief Executive Officer

Brian J. Wendling -- Senior Vice President, Principal Financial Officer and Controller

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

Michael Rollins -- Citi -- Analyst

Laura Baldi -- Vice President and Assistant Treasurer

Ronald Duncan -- Chief Executive Officer and Co-Founder

James Ratcliffe -- Evercore ISI -- Analyst

Zack Silver -- B Riley, FBR -- Analyst

Mike Kerrane -- SunTrust -- Analyst

Matthew Harrigan -- Benchmark -- Analyst

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