Liberty Broadband Corp (LBRDK) 2016 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Liberty Media Corporation third-quarter earnings call.

(Operator Instructions)

As a reminder, this conference is being recorded Tuesday, November 8, 2016. I would now like to turn the conference over to Courtnee Chun, Senior Vice President of Investor Relations. Please go ahead.

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, including statements about business strategies; market potential; new service and product launches; the proposed acquisition of Formula One, including the anticipated timing for closing the acquisition; the future performance of Live Nation; stock repurchases; the construction of the new ballpark for the Atlanta Braves and the associated mixed use development; 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, satisfaction of conditions to the proposed acquisition of Formula One, possible changes in market acceptance of new products or services, the ability of our businesses to attract and retain customers, competitive issues, regulatory issues, and market conditions conducive to buybacks. 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, schedules 1 and 2, can be found at the end of the earnings press release issued today, which is available on our website.

This call also may include certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding Liberty Broadband. 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. 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 Broadband's expectations with regard thereto, or any change in events, conditions or circumstances on which any such statement is based. Now I'd like to introduce Greg Maffei, Liberty's President and CEO.

Thank you, Courtnee. Good morning to all of you. Today speaking on the call we will also have Liberty's CFO in his inaugural debut, Mark Carleton, and during the Q&A will be available to answer questions related to Liberty Broadband as well as Liberty Media.

First, looking at Liberty Media overall, I'd note one more time our composite NAV discounts persist. They're weighted a little heavily towards LSXM. They are certainly wider than we would have anticipated. But, of course, that can create opportunity and I expect at some point we will take advantage of that.

As you likely know, our big news for the quarter was our investment in and pending acquisition of Formula One. We were very excited to announce this deal back in September. Our initial investment was for 18.7% and that closed concurrent with the announcement. We also completed a 0.4% follow-on investment on October 27. So, we currently own 19.1% of the fully diluted Delta Topco parent and plan to close the acquisition for the balance in early 2017.

As I hope you know, F1 is an iconic global motor sports business and this was a unique opportunity to own a global sports franchise of which there are very few. We see a tremendous opportunity in this business to improve performance on the operating side and the financial side in all segments whether it be venues, broadcast, or sponsorship, as opportunity to grow revenue and also develop new lines of revenue especially around digital and merchandise. Chase Carey has joined already as Chairman and is diving into the business. We think he's a perfect fit.

On to the operational highlights, at our consolidated Sirius XM, which had another outstanding quarter, increasing subscribers to approximately 31 million. Third-quarter revenue was $1.3 billion, up 9%, a quarterly record high, and adjusted EBITDA grew 10% to $492 million.

During the quarter the Company announced its intention to institute a regular quarterly dividend, which will cum to $200 million, roughly, annually, and increased the share buyback authorization by another $2 billion. As of October 25, Liberty's ownership in Sirius XM stood at 65.5%.

Live Nation had a record third quarter. Revenue up 21%, operating income up 25%, and adjusted operating income, AOI, up 14%. During the quarter the Company refined its debt profile, lowering the cost of its debt and extending maturities. As we look ahead there are lots of exciting indicators through October, concert ticket sales pacing 14% ahead, contracted sponsorship and advertising net revenue up 12%, and a pipeline for 2017 looks very promising.

Turning to the Braves, they finished the second half of the season with a very strong performance after a very slow start. Post the all-star break we recorded a 37 and 35 record and won 20 of our final 30 games. The offense ranked fifth overall in the National League post the all-star break. We named Brian Snitker as manager for the 2017 and we're excited to have him back based on his performance in the back half of this year.

We continue to make progress at SunTrust Park and the related Battery Atlanta real estate development. We recently announced details for the residential portion, Home at the Battery Atlanta, with pre-leasing beginning December 2016. We also announced additional restaurant and retail partnerships, including a long-term agreement with Mizuno, as the official baseball gear partner for the Braves.

Turning briefly over to Liberty Broadband, Charter reported excellent results. Total revenue was up 7.4% with double-digit growth in Internet, SMB and advertising, obviously in part due to politics. Net income was $189 million and adjusted EBITDA was $3.6 billion, up 14.5% versus the pro forma 2015, and up 15.1% excluding transition costs incurred in the quarter. We saw strong subscriber growth in broadband and video. Charter also initiated a share buyback.

And with that let me turn it over to Mark to talk about our financial results in a little more detail.

All right. Thanks, Greg. Given our 65%-plus ownership at Sirius XM and control, its results are consolidated in with ours. To look at their results and look at their publicly traded documents you can go right to their website and see those.

At quarter end Liberty Sirius XM Group had attributed cash and liquid investments of about $611 million, of which $572 million is held directly at Sirius XM. Excluding that Sirius XM amount, the Group had cash and liquid investments of $39 million. The Liberty Braves Group had attributed cash and liquid investments of $109 million. And the Liberty Media Group itself had attributed cash and liquid investments of $220 million.

At 9/30 the Liberty Sirius XM Group had an attributed principal amount of debt of $6.4 billion, of which $6.2 billion is directly at Sirius XM. The Liberty Braves Group had attributed principal amount of debt of $220 million. And the Liberty Media Group itself had attributed principal amount of debt of just less than $1.5 billion.

In the third quarter the Liberty Media Group tracking stock incurred around $15 million of SG&A expense, including stock comp which excludes amounts allocated to Liberty Sirius XM and to the Liberty Braves tracking stocks. For the quarter about $14 million of the SG&A expense, including stock comp, was allocated to Liberty Sirius XM Group, and less than $1 million was allocated to the Liberty Braves Group.

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

Thank you, Mark. To our listening audience, we appreciate your continued interest in Liberty Media. We are excited and expect to see many of you on Thursday at our investor meeting in New York. If you haven't registered yet, you risk the wrath of Courtnee, but please do so by using the link on our home page.

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

Jeff Wlodarczak with Pivotal.

Good morning, guys. I wanted to focus on F1. Greg, I was hoping you could comment on the potential for you all to create an F1 OTT product. At least to me it seems like something that could generate very attractive financial upside. Is that something you could roll out fairly quickly in the context of your F1 broadcast current rights? And then I've got a follow-up.

Thanks, Jeff. I think we're also very excited about the idea to try and utilize the massive amounts of video feed and data that we have in a premium type product. And given the global nature and extremely dedicated fan base we have, it would seem like an OTT product is something that makes a lot of sense for them and us.

We do have some things to work through on rights. I don't think they're impenetrable, but they're things to be worked through. And we also just need to work out relations with the teams and how we handle it all. So, there's not only some work on the product side, but there is some licensing work, but I don't think it's insurmountable.

How exactly the form of any product may take or what we may do I'm not yet sure. We're still in early days. But I agree, there's a lot of potential.

Thanks. And then, more broadly at this point, is it reasonable to assume at F1 that perhaps you may have to take a step back financially before two steps forward as you're investing? Or can you accelerate financial growth while you're investing?

I think we're still trying to get a handle on that exactly. I don't anticipate massive reduction in operating performance. There are some positives coming in including incremental broadcast revenue, in some cases.

But I do think we will be making some investments. Part of it's in management, part of it's in areas like the OTT product that you just mentioned. I don't think those are going to be massively dilutive but I do think we will be making investments.

Thanks, Greg.

Your next question comes from the line of Bryan Kraft with Deutsche Bank.

Hi. Good morning. Greg, if I understand it correctly, the Braves is the only active trader business within Liberty Media right now. My question is, do you need to have an ATB within Liberty Media, and what are the implications of not having one? What does that limit you from doing? When would Sirius and Formula One become ATBs? Thank you.

Thanks, Bryan. I think that's right. The Braves are the only ATB -- though it's not actually quite true because if you look at the Braves, within the Braves, the minor league teams, quote, are ATBs themselves. But the Braves organization, I would say, holds the only ATBs at the moment.

The ongoing impact of that today is zero. We have an ATB. We're fine. We've learned at Liberty you can never have enough ATBs.

We try to warehouse them because it creates flexibility around structuring. What does it mean in terms of when does Sirius XM become an ATB? We'd need to get to 80% of vote and value for five years, though there are some extenuating circumstances about how you got there and in what time frames that maybe could mean that Sirius could be accelerated more quickly given the history we have with it. But the Formula One is a long way away.

Okay. Great. Thank you.

Your next question comes from the line of Barton Crockett with FBR.

Okay, great. A couple of questions, if I could. First on the arrangements with third parties for the Formula One investment. Could you just give me the rationale for that? Is this mainly a way to help the owners of Formula One get cash quicker without having to be subject to a lock-up? Or is there some idea that by using these third parties that you might get people who would be longer-term investors potentially than the core holders of Formula One?

I think there are a couple of thoughts there. One is, yes, the CVC Group, the legacy owners, have been in it for a long time. We did give them some cash and they made the bet that the continued ownership stake that they hold would grow under the management of Chase and Liberty. They've gotten some of that bounce already but I think they see more upside.

They're talking about potentially selling something like one-third of what they have left, which will leave them still with about half of what they had when we started being involved. We'll see how those exact numbers shake out.

Importantly, one of the groups that's being discussed as an investor to take some of their stake, minority of their stake, is the teams themselves. And we would consider that quite a positive in terms of anchoring our relationship and aligning our interest with the teams.

I also think everybody's interested in getting long-term shareholders who are potentially additive to the business but certainly expect to be in for the long positive ride that we are anticipating. So, I think CVC and we are aligned on that.

Okay. All right. And then if I could switch gears a little bit on the Liberty Sirius tracking stock, you guys for a while have called out the discount there. I'm just curious why haven't you pursued ways to do share repurchase there? And in that vein, now that you're getting a share of a dividend from Sirius, could that provide some liquidity for a start of a share repurchase at Liberty Sirius?

I think we've noted in the past that probably the largest single factor for why there is the discontinuity between the two stocks is the relatively larger buyback against the something like $7.5 billion equity value against the $2 billion run rate buyback at Sirius versus the 13%-ish NAV, 11.5% market cap of the LSXM stock. And we have relatively less fire power. With the dividend we'll have more.

But we've hoped that it would close of its own accord. We've hoped that people would arb it for us. But it may come the day when we do that work ourselves. But I don't think we have yet sufficient fire power to really make it happen, so we're going to pick our moment when it makes the most sense.

Okay. I'll leave it there. Thank you.

Your next question is from the line of Vijay Jayant with Evercore ISI.

Greg, first, on Charter, your ownership is split across two tickers and two different corporate entities. Does it make sense to consolidate that ownership into a single entity? And if so, what are the pluses and minuses? And how would that possibly happen, if you had to walk through that process? And I have a follow-up.

Thanks, Vijay. Would it make sense? Absolutely. Is it simple? No. It would involve some hurdles and hoops that I think we think about ways to do but they're not without -- there are costs or lack of opportunities or flexibilities that we may lose by doing that.

So, we weigh those various outcomes and we think about which path we'll ultimately take. We don't have one obviously to announce today. Would life be easier if they were all in one place? I look back, if there were not four Liberty or five Liberty companies life would be easier. But sometimes you do what you can and there are other tradeoffs and benefits to having them split up and having it in different places. So, we carry on.

Then on Sirius itself, obviously I think this is the only Liberty entity that has a recurring dividend. Is there a philosophical change there? Why 1% dividend yield? What's the plan to make that like a market dividend yield going forward? Obviously you would be a key beneficiary at Liberty Sirius to close the discount with the proceeds. So, just talk about philosophically dividend prospects at Sirius, if you could. Thanks.

I would say, in general, philosophically Liberty believes dividends are not the most attractive way to return capital to shareholders. It's a forced sale of ownership rather than a voluntary one, unlike a buyback. It has tax consequences, unlike a voluntary one like a buyback. Those tax consequences, I will acknowledge, are somewhat mitigated by Liberty given or DRD exclusion, but retail holders and many holders. Some would be non-taxable, but others would be fully taxable. That's probably less than ideal for them.

So we have been, in general, less enthused about dividends. It's not the case that we've never had dividends. Witness, we already paid a one-time special dividend here at Sirius XM. And I believe we've had other dividends. But I've outlined, as I said a minute ago, the reasons why in general we're not for them.

I think here the thought was in some quarters that high free cash flow perhaps attract a different segment of investors who would not come to the stock for other reasons because there wasn't a dividend. So, we started with a relatively modest dividend, as you noted, 1%. But it's not unusual when dividends are initiated that they're at that lower end, and given the growth vehicle here. And nor did we want to deter from the rather large buyback in percentage terms that we are still executing upon.

So, weighed all that and came out with a dividend which we hope will attract some investors. There's been some positive feedback. But I don't see it as a fundamental change in philosophy at Liberty.

Great. Thanks so much.

Your next question comes from the line of Ben Swinburne with Morgan Stanley.

Thanks. Good morning. I want to come back to Formula One, maybe for Mark. At this point with the margin low, and I think closing next couple of days, is the financing all in place to close the second piece of the transaction? And any thoughts on permanent financing for the margin loan piece? I assume that's not something you're going to keep in perpetuity.

I think the financing is all in place right now. We obviously, as we do with all of our companies, look at financing alternatives and different ways to be more efficient at our financing and more efficient and focused with our leverage. But everything is in place now to do what we need to do. And we'll keep our eye on the markets and what's happening. And when the time comes, certainly when we get to closing this transaction, we'll be able to have a lot more direct involvement in that financing and what we do with it. But we're paying attention.

Okay. Good. And then just on tax, the tax position of Formula One as it gets folded into Liberty, very free cash flow generative business. I noted there were some tax losses in your proxy filing. What do you expect, if any, leakage in terms of upstreaming cash flow out of Formula One to the parent over time? Should we be assuming that's tax free? Are we looking at a UK tax rate? Any helpful thoughts would be helpful.

I'm going to turn it over to Albert and let him answer.

With respect to Formula One, we retain their tax NOLs and position with respect to taxability in the UK. As we noted earlier, there are some changes anticipated in the UK tax rates with respect to the utilization of losses and interest deductions. So, that will have a modest increase in the UK taxes. We were able to set up the acquisition structure such that we do not believe there is any incremental tax on the repatriation of earnings back to the US, though. So, we've actually been able to replicate their structure.

Okay. Great. And then, lastly, just the FIA, could you just maybe spend a minute on the relationship between the FIA and Formula One, and whether you -- I'm assuming you do -- but just any color on the approval of FIA for this transaction. I think the deal closing is subject to their approval.

You're correct, it is subject to their approval. Chase Carey and I have met with the FIA, in particular Jean Todt, the head of the FIA, several times and had good conversations with him. We are proceeding forward with the necessary processes they have for change of control. And I have every reason to believe we'll have a favorable outcome.

Good. Thank you.

Your next question comes from the line of Tom Eagan with Telsey.

Great. Thanks a lot. First on cable, Greg, with all the live OTT video offerings coming out, whether it's Google or DirecTV Now, how competitive do you think they can be as a real substitute for primary offering from TV operator? And then I have a follow-up. Thanks.

I think it remains to be seen. You're seeing some traction on these but mostly subsetted. My understanding is, for example, the DirecTV Now one doesn't have broadcast packages in it, so, by definition that's going to reduce some segment of the market that doesn't like it.

They're clearly priced competitively in the sense that it doesn't appear that there's much margin in the video content cost versus what they're charging for these folks. Maybe they're achieving some other strategic goal out of it but they're not necessarily achieving an attractive video offering price or video offering opportunity for themselves. But we don't yet see wholesale substitution for the video package offered by cable operators and the like.

Right. And then, separately, on Liberty Media, with the investment in F1 what does that mean regarding the Live Nation investment? Does that still fit in the current vehicle? And are there operational synergies between F1 and Live Nation? Thanks.

I think there are. I'll handle the second part first. I think there are places where Live Nation can be helpful to Formula One. There are some involvements already.

For example, Live Nation has helped organize concerts around some of the racing events. Live Nation has helped with some of the general venue and set-up and event processes and event ticketing and the like -- for example, in Singapore. And there are places that I think they can be positive for each other but particularly where Live Nation can help Formula One.

F1 and Live Nation are not in the same business. I think that stake is important but obviously the stake in Live Nation is smaller than the stake in F1. We'll see what the eventual size of our F1 business will be. We'll see where the right place for that is.

We're very excited about Live Nation. The numbers they've produced were great. The numbers looking ahead look good. And we think there's a lot of strategic things we can do across the Liberty family with Live Nation. So, it's certainly something we appreciate.

Great. Thank you.

Your next question comes from the line of Kannan Venkateshwar with Barclays.

When we look at the Liberty portfolio right now there's a number of content and distribution companies across the structure. Is there any advantage structurally or strategically to collapse this maybe into one holding company, especially in the context of AT&T, Time Warner, Comcast, NBC, and so on and so forth?

Thanks for the question. We weigh, as I mentioned, I think, earlier, there's always some benefits to keeping things together in terms of ease of operating, but there are also difficulties and challenges around incentivizing management teams, attracting shareholder groups that are most focused on one thing or another. So, we don't have any current plans or intent for that. And I think we can find ways to get these groups to work together positively without certainly collapsing our current structure.

Okay. And, secondly, I think you guys also issued a convert referencing Charter. Just want to understand what the thought process there was -- why Charter instead of the other stocks in your portfolio, and you how you guys think about which equity to use with something like that.

Why we -- can you just repeat the first part?

Essentially why Charter stock for the convert instead of other stocks in your portfolio.

Because we had a lot of it and we didn't give up much upside. And it was a big free liquid stock relative to the other choices, so we got good execution. It doesn't speak to our views on Charter. I think we've been pretty positive on Charter. We look at the call spread we gave, we have a lot of upside still in that Charter stock.

All right. Thank you.

Your next question is from the line of Jason Bazinet with Citi.

Thanks. I just had two questions. If I remember correctly, when you created the three tracker stocks under Liberty Media, you cited the reason to split the Braves ownership between the Braves tracker and the Liberty Media tracker because you wanted a source of liquidity at Liberty Media. On the back of the Formula One transaction, is that need still there? That's my first question.

My second one is, when you announced the Formula One transaction I don't remember you guys ever explicitly citing a value of tax assets. We just got that the tax rate would be low and you could repatriate it back to the US. I remember that. But is there an explicit value that we're missing when we think about the value of this asset? Thanks.

First, on liquidity, I would not describe us today compared to where we've been over the last 11 years since I've been here -- about 11 years ago today actually -- as highly liquid. At various times we've been really highly liquid. It's kind of like Gloria Vanderbilt -- never too rich or too thin. More liquidity is probably a good thing. And we think there will be environments going forward in which we may be able to use it and put that liquidity to work.

We've already spoken in the past about our desire as much as possible to find scale opportunities and utilize and build our capital up to invest in those scale opportunities. So I think this is just one more chip in building that pile and helping us do that. And it's a tax-free way to get money out of the Braves that we enjoy.

On the second part, there is no explicit tax assets other than I think we have, as we said, an attractive low tax rate structure, and a full basis in our ability to repatriate capital.

There's some losses but largely the overall rate is quite low given the structure we have.

There's not a significant tax benefit.

Okay. Thank you very much.

Your final question comes from the line of Matthew Harrigan with Wunderlich Securities.

Thank you. Steve Ballmer in the new contract between the Clippers and Fox Sports is really talking up the flexibility for your AR, VR, rich data, social media, et cetera, how difficult that is to accommodate. And he was actually really yearning to have a smart facility like SunTrust Park to move beyond the Staples Center right now. You've got so much going on over at F1, as well. I know they're working with Qualcomm Snapdragon, [slythe], and all that on some of these news toys. How do you feel about how the rights for new technologies and new modes of viewing and experience get divvied up between the teams and the leagues? The ownership structure over at F1 is so complicated. And I guess you probably have some issues with MLB on that, as well. I know it's a fuzzy question but there's just so much potential there.

I don't think we have too much of an issue at F1 where I think we have much clearer title and much clearer paths on rights. Baseball, as you rightly noted, is much more complicated with divisions around the broadcasters, around the teams and around BAM on who has those rights. I think that's more complicated.

But I would also note that baseball, which, in some ways, is the oldest and, perhaps viewed in some circles, as among the most stodgiest of sports, has also been far and away the most advanced in terms of getting an over-the-top product. You have to give full credit to Bob Bowman and the BAM team for what they've done there. And I think he's certainly thinking about what the impact of VR is, what the impact of AR is, and how to enhance that baseball experience.

Thanks, Greg.

Operator, I think we're through for today. Thank you very much to our listening audience. As we said, we hope to see some of you in a couple days in New York. And, if not, hope to speak to you next quarter if not before. Thank you very much.

Thank you. That does conclude today's conference call. You may now disconnect.