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Liberty Broadband Corp. (NASDAQ:LBRD.A) (NASDAQ:LBRDK)
Q1 2021 Earnings Call
May. 07, 2021, 11:15 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Liberty Broadband Q1 Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to Courtnee Chun, Chief Portfolio Officer. Please go ahead.

Courtnee Chun -- Chief Portfolio Officer

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 and results could differ materially due to a number of risks and uncertainties, including those mentioned in our 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 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 OIBDA. Information regarding the comparable GAAP metrics along with required definitions and reconciliations, including preliminary note and schedules one and two, can be found in the earnings press release issued today, which is available on Liberty Broadband's website.

Now I'd like to turn the call over to Liberty's President and CEO, Greg Maffei.

Gregory B Maffei -- President & Chief Executive Officer

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

So turning now to Liberty Broadband. In March, Liberty Broadband began participating in Charter's buyback holding our fully diluted ownership at 26%. Through April, we have received nearly $1 billion of proceeds and we used these proceeds to repurchase 6.1 million LBRDK shares from February through April at an average price per share of $152.30 per share. We view that having meaningful value creation for our shareholders with the LBRD NAV discount running about 19% and allowing us to have a look through purchase price on Charter of about $516 per share. While our quarterly repurchases may fluctuate due to the timing of cash received and etc., we expect that our LBRD repurchases to match or exceed the after tax proceeds we received from sales of Charter shares on an annual basis. I would remind you, in 2021, we expect only 5% to 7% tax leakage on any Charter share sales due to some tax loss carry-forwards.

Looking now at Charter itself, we are approaching the five-year mark of the purchase of Time Warner Cable and Bright House, the EV of Charter has gone up over $100 billion through this period and our total gain in Charter prior to the time in which we began selling into their buyback was nearly $30 billion and we're up over four times on our initial investment. In Q1, at Charter, growth in data usage continue to grow. We added 2 million internet customers over the past year and the average internet-only customer is using 700 gig per month in the first part of the quarter, up nearly 20% year-over-year. And there are sizable cohort of users using more than one terabyte per month. Charter continues to invest in its network to satisfy that demand at a high ROIC.

During the first quarter, residential revenue grew 5.8%, the fastest level of growth in several years and the adjusted EBITDA grew 12.5%, that's up double digits for the third consecutive quarter and margins expanded over 200 basis points year-over-year. Charter's mobile business continues to demonstrate strong growth. Revenues were up 90% year-over-year. We added 300,000 mobile lines, which is especially impressive considering the general low level of sales activity in Q1 as Tom and Chris noted on their call. There are meaningful potential cost savings for customers who choose Charter as a full service and connectivity partner including mobile.

So with that let me turn it over to TripAdvisor and Liberty TripAdvisor, and beginning first at Liberty Trip. At corporate level, we completed the repurchase of 42% of Certares preferred shares for $373 million. We note that 3% of the repurchase was actually completed after the quarter end. We funded that with the net proceeds of a new $330 million Trip exchangeable bond and we delivered $92 million in Trip's stock to Certares. Importantly, Certares waved their put rights under their preferred, eliminating any potential negative overhang on L Trip and giving us a full-year run rate on that security for value creation potential. Certares has been a great partner over the past year. We look forward to their continuing and ongoing involvement and Greg Harris continuity on both the Trip and L Trip Boards.

Now turning to TripAdvisor itself. Trip continue to see rise in demand for leisure travel on its platform led by domestic travel, particularly US domestic travel. We believe the US can be a leading indicator for global travel as the vaccine rollout continues worldwide and other countries replicate the success as we have had here. In March, for example, US traffic on the site approached 80% of 2019 levels. Trip continue to exhibit cost discipline in the first quarter, which we believe positions us well for increased operating leverage going forward. We also made good progress on our direct TV offering TripAdvisor Plus. While Plus is still only in beta, it is already savings subscribers an average of more than $300 per booking, much greater than the $99 subscription fee. Trip also opportunistically accessed the bond market in tandem with the ultra-bond offering we did in March and they priced a $345 million convertible note up 37.5% at an attractive 25 bp rate.

So with that, let me turn over to Brian to discuss the financials a little more detail.

Brian J Wendling -- Chief Accounting Officer & Principal Financial Officer

Thank you, Greg. At quarter end, Liberty Broadband had consolidated cash and cash equivalents of $1.2 billion, which includes $51 million of cash at GCI. The value of our Charter investment at Liberty Broadband as of yesterday's close was $39 billion. And at quarter end, Liberty Broadband had a total principal amount of debt of $4.6 billion. GCI's strong results and the $180 million revolver pay down in the current quarter led to meaningful delevering, with leverage as defined in GCI's credit agreement of 3.4 times. GCI has substantial cushion under its maximum leverage covenant of 6.5 times. Liberty Broadband has $300 million of undrawn margin loan capacity and GCI has $422 million of undrawn capacity on its line of credit. Note, the above amounts exclude the indemnification obligation and the preferred stock.

Turning to GCI's results. GCI had a great first quarter. Revenue grew 5% and adjusted OIBDA grew 11% to $96 million, the company's highest ever quarterly adjusted OIBDA driven by demand for data across the consumer and business divisions and lower cost associated with reduced bad debt and healthcare expenses combined with prior cost savings initiatives. Note that Q1 2020 included $9 million of one-time revenue related to services provided in 2019. Adjusting for this one-time prior year benefit, revenue and adjusted OIBDA would have grown by 9% and 24% respectively. Operationally, GCI added over 15,000 consumer revenue generating cable modem subscribers and 6,000 consumer revenue generating wireless subscribers over the last year.

On the Rural HealthCare front, we received $175 million in payments during the quarter related to the funding years ended June 30, 2019 and 2020, which we used to pay down our revolver. We continue to work with the FCC on rates and payments for the funding year ending 06/30/2021. As mentioned last quarter, we received a new FCC order in January that gives rate certainty to Alaska providers for funding years ending June '22 and '23 and we expect to have a shorter period between service delivery and cash collection going forward.

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

Gregory B Maffei -- President & Chief Executive Officer

Thank you, Brian. To listening audience, we appreciate your continued interest in Liberty Broadband and Liberty TripAdvisor. And with that operator, I'd like to open the line for questions please.

Questions and Answers:

Operator

Perfect, thank you. [Operator Instructions] We start with our first question from James Ratcliffe with Evercore ISI. Please go ahead. Your line is open.

James Ratcliffe -- Evercore ISI -- Analyst

Thank you. Two for Ron and Pete on GCI and then Greg one for you on Liberty Trip. On GCI, can you talk about the potential tailwinds from the emergency broadband program? And also more generally, what sort of the potential benefits and risks you see of increased government support for broadband infrastructure?

And Greg, on L Trip, the spread to my math is 35% plus. Anyway to get cash to tackle that spreads? And as that Certares got to say and the recent history with margin loans, it's been like eventful shall we say, but are there other structures or options you use? And how -- just broadly, how much of a priority is that spread for you? Thanks.

Ronald Duncan -- Chief Executive Officer and Co-Founder

Do you want to go in the order they were asked, Greg, or you want to take your --

Gregory B Maffei -- President & Chief Executive Officer

Sure, it sounds great, Ron. If you guys want to take the shot that will be great.

Ronald Duncan -- Chief Executive Officer and Co-Founder

All right. It's sort of a two-part question. The first on the emergency broadband program, which we will add in Alaska a $75 a month credit for any consumer of broadband who has some -- has in some way being impacted by COVID. Ordinarily you would expect a very strong uptick from something like that. We're a participant in the lifeline wire line telephone program and we have a substantial number as customers for that. I'm a little cautious as to how much upside to expect from the broadband program in terms of new subscribers just because we've done so well in the last 15 months with the pandemic and added so many subscribers. Ultimately you hit a limit to how many are out there. I suspect there will be a substantial number who use the program to their benefit, how many new subscribers that adds is hard to say. I will also throw in one caveat to truly substantial growth coming from that program and that's a generalized industry wide modem shortage. The chip problem has led to a shortage of modems. We have some capacity that continue expanding, but we won't get through much more than the third quarter even at current growth rates if we don't get delivery on some of our pending modem orders and that's an industrywide problem.

With respect to the amount of money flowing into the industry under the potential new congressional acts, my concern is there is more money than can be absorbed by industry capacity. There is simply isn't enough fiber, components, cable and workforce available to deploy $100 billion nationwide at the pace that people seem to expect deployments. And I worry about expectations getting out in front of reality. Those amounts really should be delivered, but I think we're a long way from knowing what the actual results are.

Gregory B Maffei -- President & Chief Executive Officer

Ron, thank you. So, on the L Trip discount, as you know, there is relatively limited volume in L Trip and it is fluctuated from being a premium at various times to a discount. And it was made more complicated by the structure we have and the uncertainty around Certares. And if you go back and remember when Liberty Trip was spun away from Liberty Ventures, it actually have that margin loan. We twice restructured it to try and manage our downside, once through a variable forward and once through encouraging a large dividend in Trip, both of which reduced our balances, yet we still ran into trouble in the bottom of the pandemic. So we are cautious in our capital structure. We're very excited about what we put in place because we thought it's relatively bulletproof and we have increased our upside in the potential L Trip after the restructuring with Certares. So after clearing up that capital structure and aligning us with Trip more appropriately, we will look at alternatives on things we can do about cleaning up the discount. But I think a lot of it is going to be educating the market about how that alignment is improved and how we are better positioned going forward with that runway and the uncertainty removed.

James Ratcliffe -- Evercore ISI -- Analyst

Great, thank you.

Operator

Our next question is from Bentley Cross with TD Securities. Your line is open. Please go ahead.

Bentley Cross -- TD Securities -- Analyst

Two, if I may. First for Greg. Charter participated a little bit more aggressively or maybe a lot more aggressively than most in the RDOF program. Wondering your thoughts on kind of what the difference in view was between Charter and the rest of the industry. What allows them to be able to mark us there?

And then secondly, on GCI, 2020 results and then this quarter again seem to be a lot better than what was originally contemplated in the merger docs. Wondering your view on what have been the major puts and takes and what's the upside from here? Thank you.

Gregory B Maffei -- President & Chief Executive Officer

So on RDOF, I think it's really the function of a couple of things. First, I think the Charter management team did shown their ability to operate effectively in many of these rural markets and know how to drive their costs attractively in the terms of their cost to connect, to their cost to service and so their opportunity to go after some of these was attractive. Secondly, the capital structure we have candidly allowed us to be more aggressive because we had flexibility and extend the runway of growth and being rewarded for that as we've got a shareholder base, which has seen our growth and understand that and appreciates it. All of those were very effective. Third, I think they kind of caught some of the RLEC competition napping. I do not think that people thought they would be as aggressive as they were and they were able to attract a crisis, create new subscribers given the incentives provided under the RDOF program. So all of those things I think created an opportunity. Some of that's still in flux. We'll see some of the other RDOF bidders and RDOF nominal winners are being challenged. We'll see how that plays out. There may be more opportunity ahead. And we'll watch the opportunities with the Biden administration's proposed broadband incentives to see if there are more growth opportunities for Charter as we go forward.

Ronald Duncan -- Chief Executive Officer and Co-Founder

I guess the second half of that is mine then. In terms of GCI's improved performance, I think there really are two key components. Most important one long-term is probably be improvement of the situate -- the regulatory situation surrounding the Rural Healthcare environment up here and the fact that we're now able to get paid for the services that we are rendering to our Rural Healthcare customers and that we have a reasonably good degree of rate certainty going forward. That overhangs and the first write-offs that we had taken to accommodate the rate reductions and then the rate recoveries, when they came back in, had a substantial impact on the turnaround between 2019 and 2020. We see that as a stable business going forward with some continued growth. And I feel very strongly that that's a good platform for us that will help to continue to drive the business. The second huge improvement and the turn from '19 through '21, of course, is on the consumer side with the growth in cable modems. And I think we have to be cautious to figure out how much of that is pandemic related. Obviously the pandemic drove a substantially increased demand for data volumes. It also reduced the vacancy rate and thus increased the household formation rate because people weren't being evicted or not being evicted from their apartments and it drove down our bad debt because people are paying for their cable modems. How all of that plays out? Once the stimulus benefits and the stimulus protections phase out is harder to see. So it's difficult for me to call what the post pandemic impact on GCI will be, but we're cautious because hidden beneath the veil of the strong stimulus performance is a week Alaska economy. So I'm a little cautious there. I am bullish about continued growth -- wireless growth going forward. Our 5G network in Alaska is vastly superior to all the other wireless networks up here and that's what's being reflected in the wireless growth. So kind of a mixed bag there.

Gregory B Maffei -- President & Chief Executive Officer

Yeah, if I could add, I think Ron is under selling. While clearly stimulus, improved regulatory -- pandemic demand were all big factors. I think the GCI management team has done a good job of focusing the business expense reductions, exiting some non-core businesses, focus on its broadband strengths and demand. And as Ron did note, the improved wireless offering with the strongest network in Alaska also created to a far better business up there, just a hardened prepare to capitalize on the opportunities.

Bentley Cross -- TD Securities -- Analyst

Thank you for your comments. Thank you.

Operator

Our next question is from Mike Rollins, Citi. Your line is open. Please go ahead.

Mike Rollins -- Citi -- Analyst

Thanks and good morning. Two questions. First, is there an opportunity to revisit the ownership cap discussion with Charter and does the cap being enforced at 26% influence, how you view the structure of Liberty Broadband? And whether or not you just rather own Charter shares directly instead of through Liberty Broadband? And then also just curious, you mentioned 5G, if you could describe if you're seeing any new use cases from your customers in the early days of the 5G network? Thanks.

Gregory B Maffei -- President & Chief Executive Officer

I'll let Ron touch on the 5G in a moment. On the 26% cap, we did have discussions. We're offered some alternative to increase the cap. We looked at those as unattractive relative to repurchasing our own stock at a 19% discount. There is nothing to say. We can't revisit some of those discussions down the road. But at the moment, we like paying a 5% to 7% tax and repurchasing our own stock at 19% discount to Charter. So you ask why one should choose LBRD over Charter, I think that's exactly it, your purchasing at 19% discount to the underlying Charter. And you have the opportunity to see us accrete. As Charter accrete its own share count or decreases its share count or increase its share price hopefully, we have the opportunity to have even more attractively at a more leverage basis with a discounted share repurchase. So we like Charter, we really like LBRD.

Bentley Cross -- TD Securities -- Analyst

And on the 5G, in spite of the industry high, I think it's early to be seeing any material impacts from new use cases. The population of 5G devices relative to the overall wireless population is still less than 10%. I think most of our users are using 5G has faster speed and it has pleasingly faster speed, as much as 10 times faster for some of our users. And that's the selling point today. We're not seeing dramatic new use cases evolve. That doesn't mean that won't happen or won't accelerate as we get a denser population of 5G devices. But in terms of what's driving our sales and what's driving the revenue, it's the speed and the network quality right now.

Mike Rollins -- Citi -- Analyst

Thank you.

Operator

Our last question is from Matthew Harrigan from Benchmark. Please go ahead, your line is open.

Matthew Harrigan -- Benchmark -- Analyst

Thank you. Ron already answered my 5G question, but on the relative buyback effect, Greg made the point in the last call that it gets them using or you're actually increase in the number of Charter shares owned per LBRDA shares as a result of the net effect of the buyback activity, does that disappear when you thought that NOL? I mean, are you still going to have only about very slight tax leakage moving forward for an intermediate period or is that just kind of a short-term thing? And then apart from the very favorable napkin math, is there anything in Washington from a tax vantage point or regulatory vantage point that could motivate you to get something done sooner rather than later. I know everything is pretty nebulous, it is early in the administration, but you and John Malone have always been very savvy on that to say the least.

Gregory B Maffei -- President & Chief Executive Officer

Thank you for the question and the complement. On the tax rate, we think it will temp up marginally in 2022, but it will still be very attractive relative to certainly the current discount. When you do share repurchase, it's always you have two minds. One mind you take advantage of a low price and the second mind to get your own stock up. We for the moment are happy to take advantage of that share price discount and the NAV discount and take advantage of what we know will be a large flow of capital approaching $3 billion a year from Charter. So I look at this is a likely to be a, as you said, a napkin value creator and we like napkin value creators because they're pretty simple to understand, even we can get it. Hopefully, the market will get it too. So we are enthused about continuing to value repurchase at this discounted value. And to the degree it shrinks, well, we can reevaluate and talk about other alternatives, but at the moment, we're going to lean in with all we got. [Speech Overlap] I've no idea what's going to happen to the Biden tax rates, it seems to be all in flux. I do not anticipate that we will have a major impact overall on what we're doing, but there is certainly a lot of fog.

Matthew Harrigan -- Benchmark -- Analyst

Thanks, Greg.

Gregory B Maffei -- President & Chief Executive Officer

Thank you. And with that, operator, I think we're done for today. Thank you again to all of the listeners. Thank you for your interest in the Liberty companies and we hope to speak with you next quarter again, if not sooner.

Operator

[Operator Closing Remarks]

Duration: 25 minutes

Call participants:

Courtnee Chun -- Chief Portfolio Officer

Gregory B Maffei -- President & Chief Executive Officer

Brian J Wendling -- Chief Accounting Officer & Principal Financial Officer

James Ratcliffe -- Evercore ISI -- Analyst

Ronald Duncan -- Chief Executive Officer and Co-Founder

Bentley Cross -- TD Securities -- Analyst

Mike Rollins -- Citi -- Analyst

Matthew Harrigan -- Benchmark -- Analyst

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