Formula One Group
Q3 2012 Earnings Call Transcript

Published: 6 Nov 2012

[Operator:]

Good day, everyone, and welcome to the Liberty Media Corporation Quarterly Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the conference over to Courtnee Ulrich, Vice President of Investor Relations. Please go ahead.

[Courtnee Ulrich:]

Good morning. This call includes certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements about business strategies, market potential, future financial performance, new service and product launches, the pending separation from Starz and other matters that are not historical facts. These forward-looking statements involve many risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements, including, without limitation, possible changes in market acceptance of new products or services, competitive issues, regulatory issues and our ability to satisfy the conditions of the Starz separation. These forward-looking statements speak only as of the date of this call, and Liberty Media expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein to reflect any change in Liberty Media'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. The required definitions and reconciliations, preliminary notes and schedules 1 through 3 can be found at the end of this presentation. And with that, I'd like to introduce Liberty Media's President and CEO, Greg Maffei.

[Gregory B. Maffei:]

Good morning, and thank you, and thank you all out there for joining us. Today, speaking on the call, we will have, besides myself, Liberty's CFO, Chris Shean; and Starz CEO, Chris Albrecht. And onto the highlights. At Starz, we had another strong quarter of subscriber growth. We successfully raised $500 million in 5% 7-year senior unsecured bonds. According to our underwriter, this is the lowest yield ever for a first-time issuer in a high-yield market. And we filed the Form 10 with the SEC regarding the separation of Starz, LLC and Liberty Media. We're still targeting to complete this by year end. At SiriusXM, we increased our stake in the quarter to 49.2% based on the Sirius shares that were outstanding as of 10/25. Our stake is now worth $9.1 billion based on yesterday's close. We have stated our intention to go 50% if our application for de jure control is approved by the SEC. I would note only one petition to deny was filed by one individual at the SEC, and we're pleased that the comment period is now closed. More broadly, we continue to be very pleased with the strong results that Sirius -- that they reported last week, subscribers at 23.4 million. They raised their guidance for the third time this year. Revenue was up 14%, adjusted EBITDA was up 24% and we will be heavily involved in choosing the next CEO at Sirius to continue the success there. Barnes & Noble and Microsoft completed their strategic investment in NOOK Media. And we were pleased with the delivery of the new devices at Barnes & Noble, the NOOK HD and the NOOK HD+, which started last week. Order volume is very strong. And Live Nation posted another quarter of solid results yesterday and continue to make significant progress in the social and mobile areas. With that, I'll turn it over to Chris Shean to talk about our financial results.

[Christopher W. Shean:]

Thanks, Greg. Liberty Media's revenue increased 3% in the quarter to $555 million, while adjusted OIBDA increased 6% to $137 million in the third quarter. Starz, LLC's revenue increased 3% to $400 million and OIBDA increased 1% to $108 million in the quarter. Now quickly looking at liquidity. At quarter end, Liberty had cash and liquid investments of $1.2 billion and debt of $541 million. And with that, we'll have Chris Albrecht comment on Starz.

[Chris Albrecht:]

Thank you, Chris, and good morning. For those who didn't join us at last month's Liberty investor event in New York, let me reiterate how excited we are about the upcoming spinoff. We believe that as an independent company, we're in a strong position to capitalize on opportunities and potential alliances in the marketplace. Now as to our third quarter financial performance, we're pleased to hit new records of 20.8 million Starz subscribers and 34.3 million Encore subscribers. Each channel was up 100,000 from last quarter, despite the third quarter typically being a slow one for the premium category in terms of sequential subscriber growth. The combined 55.1 million subscriber benchmark remains an industry high for a pair of flagship premium channels. Revenue from Starz channels for the third quarter remained relatively flat as compared to the corresponding prior year period, as an $8 million increase due to higher effective rates for the Starz Channels services was offset by a $9 million decrease. This decrease was due primarily to the nonrenewal of the Netflix agreement, which was partially offset by growth in the average number of subscriptions for our Starz and Encore channels. Revenue from Starz Distribution increased $13 million or 21% compared to the corresponding period last year. The growth was primarily attributable to strong home video performance for Spartacus

[Gregory B. Maffei:]

Thank you. We are excited about the progress we made during the quarter and what's coming ahead. We have -- are excited about the potential separation -- or the separation, which we expect to occur prior to year end. And we look forward to speaking with you again next quarter. But first, let's handle a few questions. Operator?

[Operator:]

[Operator Instructions] And we'll take our first question from Doug Mitchelson from Deutsche Bank.

[Douglas D. Mitchelson:]

A couple of questions. First, just with the relationship between Liberty and SIRI, who's leading the process for the search for new CEO at SIRI and what would you guys look for in that new CEO? And around that as well, any comment around the process and timing that SIRI might institute a share repurchase would be helpful. That's the first area of questions.

[Gregory B. Maffei:]

So there is a committee of the board comprised of 3 members, of which I am the Chairman of that committee. And we're just beginning undertaking the search, including hiring a search firm and the like, but I think there's a deep management team to sustain the success of SiriusXM. We're both looking at internal and external candidates for the CEO job. As far as the timing of any share repurchase, I think the board will surely have on its agenda for the coming meeting return of capital, but there's no plans that have been announced or agreed to by the board.

[Douglas D. Mitchelson:]

Any sort of timing on CEO that you can give us? Is it sort of a 1-month, 3-month, 5-month process?

[Gregory B. Maffei:]

I think, for the caliber of the person you're talking about, unlikely to be a 1-month process. I would hope it would be 6 or less.

[Douglas D. Mitchelson:]

Okay, fair enough. And then on the comments around Starz Distribution and lower pricing, is there any further comments you can make around that? Can you give us a sense of percent of distribution that's locked in the next couple of years? Anything that will help us try to model revenue going forward would be appreciated.

[Gregory B. Maffei:]

Yes, I can't comment on the specifics of any deal, but I think in our last call, we talked about 19% of our business that's up for renewal in the next year. And with the agreements that I discussed, we have taken care of the vast majority of that.

[Douglas D. Mitchelson:]

And so should we start thinking about sort of that impact of the increases from older contracts plus the impact of new contracts just sort of nets out and we should look at revenue growth tied to subscriber growth? Is that a fair way to look at it?

[Chris Albrecht:]

Revenue growth ties to subscriber growth. Well, we have flat -- we have some fixed rate deals that have some built-in increases, and we have consignment deals. So depending on where the growth comes from depends on the effect of the revenue. But aside from the fact that I can't forecast the future, that's the best that I can do with any discussions of how our subscriber business might progress. Like I said, we feel good about our strong programming lineup and our ability to grow our services.

[Operator:]

And we'll go next to Ben Swinburne with Morgan Stanley.

[Benjamin Swinburne:]

Just a quick update on the tax side, Greg. I think you mentioned at the analyst day that there's some capital loss carryforwards at Starz and just want to see if they were still there, if those plan to utilize before the Liberty spin. And for Chris Albrecht, here's at least one vote for a third season of Boss. You can put that in the ledger. I was curious on your visibility on the cost side. Sony, as you mentioned, has had one of their better years this year and I think you benefited at Starz over the last several years from a smaller slate at Disney and Sony since there is some relationship between box office and your cost structure on the output side. How does that -- what does that tell you about sort of the 2013 expense outlook for Starz? Do we expect to see costs go up now that Sony has had a successful year and Disney seems to be sort of stabilizing their slate?

[Chris Albrecht:]

Yes, no, go ahead, Greg. I'm sorry.

[Gregory B. Maffei:]

The tax losses related -- some of those are related to the Starz Media transaction, a partnership we did. We expect to liberate those and utilize them at Liberty Media prior to the completion of the Starz spin or spin away from Starz because there are no capital gains items at Starz to shield. So it's more logical to use them to shield gains that we have embedded at Liberty Media. And I expect that will be done prior to the completion of the spend, therefore prior to year end.

[Chris Albrecht:]

Yes, with regard to the Sony costs, I can't provide any numbers on what our movie costs will be. We are transitioning into what's an extension period from a previous Sony deal. And as I stated before, we'd look to help fund some of our originals growth from some savings there, but, of course, given there's a 2013 release that hits us in 2014, so depending on whether you're talking about a slate or whether you're talking -- the release slate or whether you're talking about the movies that come to Starz, the timing of that is consistently being changed by the studio. And aside from the fact that I can't give you those numbers, it's also very difficult to predict.

[Operator:]

And we'll hear next from James Ratcliffe from Barclays.

[James M. Ratcliffe:]

To follow up on the Starz contracts, was there any of that impact in 3Q? And also, just for accounting purposes, is this going to be handled straight line with the new contracts or actually on a cash basis? And I guess second on, Chris, on your programming deals, one asset you have is the blocking rights on digital, in particular between your first and second window. What are your thoughts about prospects to monetize that or your willingness to waive some of those restrictions in exchange for better deals?

[Chris Albrecht:]

I'm sorry, could you repeat the second part of the question?

[James M. Ratcliffe:]

The -- your monetization of the rights you have to essentially block distribution of some of the movie content between the first and second window you have.

[Chris Albrecht:]

Okay, well, there is no impact in Q3 is the answer to the first part of your question. With regard to -- I mean, I can't comment on the specifics of the negotiations of our deals with the studios. We are in discussions with our studio partners all the time and are certainly interested in exploring the opportunity to extend our deals with them. In those conversations, all sorts of things come up, price, rights, you can imagine.

[Operator:]

And we will go next to John Tinker with Maxim.

[John Tinker:]

Two quick questions. One, could you just discuss a little more how you think the relationship between Barnes & Noble and Microsoft might emerge other than just putting money in? And is there any -- do you have any view still on the timing of the spinoff for the NOOK? And then secondly, could you just -- everyone talks about the buybacks of companies that you're invested in. Could you just talk a little more about Liberty and how you see your capital structure going forward, given you mentioned you'd like to have $4.5 billion of liquid assets?

[Chris Albrecht:]

So on Microsoft and B&N, I think that's an expanding partnership and certainly, Barnes & Noble aims to make it an expanding partnership, growing the bookstore around the world and expanding it on the Windows platform. That's the nascent days, but I think there's a lot of upside to both parties. And I think the initiatives that Barnes & Noble is likely to have in education and in the eBook area are going to be very appealing for Microsoft. That's something they want to get closer to over time. That's certainly Barnes & Noble's goal, and I believe that will be Microsoft's goal as well. As far as buybacks at Liberty parent, Liberty Media, frankly, it's going to be a little more opportunistic going forward will be my guess. We'll be in a mode where while we do have quite a lot of liquidity, we will have no cash flow generating asset. We've had even through this period Starz, which has been generating cash to us. We will be basically holding a series of stakes, which, while we have significant influence in many cases like Sirius, like Live Nation or Barnes & Noble, we don't actually get access to their cash flows without dividends or the like or share repurchase. So I suspect it'll be more opportunistic and we'll look at that and we'll look at how we trade on a discount to sum of the parts. We've had discounts as wide as, I don't know, 35% or something and our discount has tightened over the last years. It varies, but it has generally tightened, and we'll see what happens once we get the Starz spin done, how that discount goes, but my guess is it'll tighten further, which will make us at least be thoughtful about share repurchase, if not slower.

[Operator:]

And we'll hear next from Tom Eagan with Canaccord Capital.

[Thomas W. Eagan:]

Could you give us some detail on the economics of the deal with the BBC? For example, how much again are we going to be -- what the -- how much of the funds are we going to be getting from the BBC? What portion of the spending is going to be on your balance sheet? And then I have a follow-up.

[Chris Albrecht:]

It's not a fund with the BBC, but it really depends on the programming mix. I mean, right now, we're trying to maximize our original programming spend, while at the same time help grow our distribution businesses, so we're trying to find the balance between our investment in worldwide rights against the opportunity to have partners who help offset the cost of the program in exchange for them holding on to those rights. So in the dialogue or in the script that I laid out before, I think we have a balance of those different choices. And going forward, I would expect us to maintain a balance. But it's difficult to predict how many more projects or how soon with the BBC will see them come to fruition.

[Douglas D. Mitchelson:]

Right. I guess -- I thought I remember that they're going to be funding or sourcing about 50% of the cost of a new series.

[Chris Albrecht:]

Yes, that's also based on the cost of the series.

[Thomas W. Eagan:]

Right. Okay. And then secondly, could you give us a sense of what the margin profile at Starz might be post spin? I know that you've added some executives over the past couple of weeks. Is there any reason to think that the Starz margin should be materially different than what it is right now?

[Chris Albrecht:]

Well, first, on the execs piece, we haven't added any execs. We've replaced some execs, and we're very mindful of what our overhead is on a day-to-day, week-to-week, month-to-month basis. So -- and with regard to the margins, I don't think that I can comment on that, other than to say that we are looking forward to a growth business for Starz. But I don't think -- I think we can say there's no substantive incremental costs being added that are going to change the margin. It will be the direction of the business driving it. The separation itself will not add significant cost.

[Operator:]

And we'll hear next from Barton Crockett with Lazard Capital Markets.

[Barton E. Crockett:]

I wanted to probe a little bit more on these new deals that you struck. Have we set a benchmark that could result in the remaining 81% of distribution contracts coming down in price somewhat closer to what this 19% where that's been negotiated over some number of years?

[Chris Albrecht:]

Bart, I don't know how to answer a question like that. Every deal is different. We are a value product by our distributors, and we look for this spin to give us an opportunity to help navigate our business with a little bit more flexibility than we've had in the past, and I think that will aid us in our decisions moving forward. But it's not -- certainly, we don't have the ability to predict what distributors will or will not make -- may request of us. As I said, these deals that we've had that we've just completed take care of most of the outstanding deals that we needed to get done in the near future. So certainly, there isn't anything that I can foresee from where I sit right now.

[Barton E. Crockett:]

Okay. And then a question about the numbers. In the income statement you guys provided us, there's a $1,281,000,000 share on earnings of affiliates. I was wondering if you could kind of update us, since that's as big number, what that was about.

[Christopher W. Shean:]

Yes, this is Chris. What that is, is we do equity accounting on our Sirius investment. They removed a valuation allowance on their NOLs and recognized a big tax benefit. And that is us pulling our share of that through the P&L. Likewise, there's a big movement in deferred taxes that solely relates or principally relates to that equity pickup.

[Barton E. Crockett:]

But it's all noncash.

[Christopher W. Shean:]

Correct.

[Gregory B. Maffei:]

It's reminiscent of when we took the big gain on News Corp. with the DIRECTV. It's kind of being one of these flow-through deals.

[Operator:]

And we'll hear next from Tony Wible with Janney.

[Anthony Wible:]

I was wondering if you guys could go into whether or not there's any restrictions on any kind of mergers or opportunities you guys see with Starz post spin? And I guess playing off of Barton's question, are there any specific host-favored nation clauses in existing agreements that would cause the new, I guess, rate card to carry over to another deal?

[Gregory B. Maffei:]

Well, this is Greg, I'll comment. We don't anticipate there's anything in our structures that would prohibit us from pursuing partnerships or other kinds of opportunities post the spin. Whereas consequently, we don't comment on the terms of any individual deals, of MSN or other clauses.

[Operator:]

And we'll hear next from Matthew Harrigan with Wunderlich Securities.

[Matthew J. Harrigan:]

Firstly, you've shown a lot of sensitivity on price on the Liberty Interactive call and your discussion just now on buying in the Liberty Media shares. I think it's fairly evident that you're going to run a serious stock price a lot if you have the scale of buybacks to extract your full incremental capital investment. Is this another mechanism for doing that? Is it possible you could do a dividend instead? Or is there some other way to do that? And then secondly, I guess, for Chris, when you look at Incursion and Vlad that sort of appeals to the adolescent and all of us but also seems marvelously marketable for international markets as far as the economics go. If you're able to do something more significant internationally, could you possibly get to even more than 50 hours of original programming or maybe do it a little bit faster without having a cash bleed along the way?

[Gregory B. Maffei:]

Well, this is Greg, and I'll comment on the first one. I think we've been discussing for several months that a dividend is certainly a potential method of return of capital for all the benefit of our shareholders in Sirius, and I think that's on the table and something that we and the Sirius board will look at hard.

[Chris Albrecht:]

On the programming side, certainly, with regard to most of what we have developed and are putting into production, we look for them to be big tent-pole-type series that could have great international appeal, and our ability to monetize that will definitely affect our ability to continue to invest in programming. We think that the 50-hour number is a good one from a mix of our theatricals and originals and also, our ability to market them effectively with our distribution partners. But certainly, if there is an opportunity to grow either more quickly or with more critical mass, we'll certainly take a look at that.

[Matthew J. Harrigan:]

I can't resist asking this, even though I know it doesn't make too much difference in your stock price. Is Boss actually a little hamstrung internationally because there's such a New York collar [ph] component to it or does it not really matter?

[Chris Albrecht:]

Well, Boss is owned and distributed by Lionsgate, so we don't have the rights to that. You better question -- ask for them.

[Operator:]

And ladies and gentlemen, this does conclude today's Liberty Media Corporation Quarterly Earnings Conference Call. Thank you for your participation.

[Gregory B. Maffei:]

Thank you all for joining, and we look forward to speaking to you next quarter.