Liberty Media Corp (LLYVA) 2013 Q2 法說會逐字稿

Good day, everyone, and welcome to the Liberty Media Corporation's second quarter earnings conference call. Today's call is being recorded. At this time for opening remarks and the introductions I would like to turn the call over to Courtney Ulrich, VP Investor Relations. Please go ahead.

Good morning.

Before we begin, we would 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 financial guidance, business strategies, market potential, future financial performance, new service and product launches 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 continued access to capital on terms acceptable to Liberty Media.

These forward-looking statements speak only as of the date of this call. 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 note and schedules 1 through 3 can be found at the end of this presentation.

Now I would like to introduce Liberty's President and CEO, Greg Maffei.

Thank you Courtney. Good morning to all of you. Today speaking on the call besides myself we'll have our CFO, Chris Shean.

On to some of the highlights, beginning with SiriusXM. Sirius had outstanding second-quarter results, setting records in many categories. Subscribers increased to over 25 million. Revenues were up 12% and due to some fine operating leverage adjusted EBITDA was up 19%. Notably they repurchased close to $1.3 billion worth of shares in the quarter, since the beginning of the year, rather, with a big up-tick in Q2 over Q1. Our ownership in SiriusXM is now over 53%.

Turning to Charter, which reported solid operating results this morning, it was gratifying to see some of the improved customer trends across all of their primary service unit categories. Residential PSUs were up 38,000. Commercial PSUs were up 16,000. They increased their triple play percentage. We're beginning to see strong revenue growth in video, internet, and commercial, and fine traction with some of their all-digital and improved customer service levels that are resonating with customers. Tom and his team are doing an excellent job.

At Live Nation they continue to execute on their festival expansion. RDO became the official sponsor on livenation.com and the official streaming music sponsor at Live Nation's 2013 Country Music Festivals. This kicked off in July with the Faster Horses Music Festival and continues with Watershed later this summer. I'm sure you'll all be attending. Equally hot was EDM space, Electronic Dance Music, and they're partnering with bands and brands such as Insomniac. We have a great strong concert season. Beyonce, Mrs. Carter, Pink, Jay Z, and Justin Timberlake. So, a fine operating quarter for many of those businesses.

Now turning to Liberty Media the parent, I want to comment about share repurchases. Liberty Media has entered into an arrangement, which if completed, as of July 31 would have resulted in a cash payment of approximately $380 million as a part of the transaction for the repurchase of series A shares. I won't provide incremental details on this until and unless the transaction is completed, which is expected to occur before the end of the year. The transaction is subject to certain conditions and the cash payment amount is variable and may change to a degree. The arrangement does not impact our current share repurchase authorization, which still stands at $327 million.

So with that, let me turn it over to Chris to talk about some of our financial results in more detail.

Thanks, Greg.

Given our ownership of over 58% of Sirius, as I'd mentioned in Q1, their results are now consolidated with Liberty's financial statements. The combination of consolidating Sirius and the presentation of Starz and Disc Ops has made our P&L and year-over-year changes a little bit confusing and hard to follow. We encourage you to go directly to SiriusXM's separate financial statements, which are on their website and in publicly filed documents to do your analysis on our investment in Sirius. At quarter-end, Liberty had cash and liquid investments of $937 million, and principal amount of debt of $4.2 billion, which includes the debt balances of Sirius and the margin limits that we entered into as part of the charter communications investment.

And we'll turn it back to Greg.

So over all, I think it was a great quarter. Hard to find too many faults, other than we had a mistake on the front page of our earnings release because the Braves are actually now 13.5 games in first place. Over all, we're very pleased with the quarter. We want to thank you for your continued interest in Liberty.

With that, operator, I'd like to open it up for questions.

(Operator Instructions)

Barton Crockett, Lazard Capital Markets.

Great, thank you for taking the question. I wanted to make sure I understood what you were saying about the $380 million repurchase. Are you saying that Liberty is going to now start participating in SiriusXM share repurchase? And they can buy back the Sirius shares that you guys own? That's point one.

So you want me to answer them now or when you finish delivering the questions? I'll answer it now.

There's a follow-up that will depend on how you answer. I'm not sure I understood -- (multiple speakers)

I was not commenting on our participation in SiriusXM's repurchases, and I'm not going to comment on our participation. Other than to say up until July, for a variety of reasons, we were prohibited effectively from participating in their share repurchase. We will not and have not disclosed whether we intend to participate in the future. And obviously, you will have to look back at the end of whatever period and see if we did participate. Obviously we have not participated to date, as of the date of this reporting.

The point I was commenting on was our own share repurchases, and an arrangement we have entered into to repurchase our own shares in which approximately $380 million, as of today, would have been the cash portion of that transaction.

Okay, great. Thanks for clarifying that. On a separate point here, could you talk about your appetite for additional investments in the cable sector? Obviously you've made a big investment in Charter. You've had a lot of discussion about consolidation in the industry. When you look at the pool of capital and Liberty Media -- and maybe other pools that you might be able to marshal to your side, like Liberty Ventures, to what degree are you interested in putting some of the capital that you can tap in venues like that into buying stakes in other cable companies?

Well, I think it's unlikely that we would participate in buying stakes in other cable companies, other than in helping Charter execute on any plans that it has. I first want to make note that we were very excited about the Charter business plan, as we've talked about before, for a variety of reasons. We thought that they had lagged in investment and lagged in attacking some of the opportunities around Triple Play and around increased internet penetrations and that Tom Rutledge and his excellent management team were uniquely qualified to go after that opportunity. And that opportunity, beginning of itself, was an attractive business plan, combined with the NOLs that they had, all of those made the stand-alone business plan very interesting.

We still believe that, and we think this morning's results indicate some of the progress on that path. We also thought there was optionality around other kinds of consolidation. But our investment was not conditioned around that optionality, that only was a further incentive. So I think that remains the case today. There's a lot of speculation about M&A. Some of that may come to pass, it may not. Even if it doesn't, we're very excited about Charter's prospects and its ability to continue to grow its revenue and its EBITDA over the next several years, much faster than the industry and provide very attractive rates of return.

Okay, great. I will leave it there. Thank you.

Jeff Wlodarczak, Pivotal Research Group.

Couple on Siri. Greg, I wanted to get your thoughts on Sirius' leverage targets. Should they be higher, given what appears to still be a very attractive debt financing environment? Also is there anything you can see for Sirius on the M&A front that would strengthen the Company in your view? And I have one follow-up. Thanks.

So on debt leverage targets, I think we've talked about numbers like 3.5. I'll acknowledge there's probably some ambiguity about whether that's been a 3.5 gross or a 3.5 net target. They obviously are below both those numbers. But I think you are seeing that they are aggressively increasing their leverage through things like the share buyback program. Also, there is probably some need to retain flexibility, because as Jim Meyer has commented on, there are possibilities for M&A. We have expressed interest, for example, in the Telematics area. I think that's an area that the Company had a very interesting foothold in, and has a uniquely qualified position given its relationship with the OEMs, its trusted status with the OEMs to expand its Telematics business. And an acquisition might help that expansion.

And then one follow-up, unrelated to Sirius. It's big picture. When you think about you or your portfolio of Companies making acquisitions, how important is it to have your target Company's Management supporting a deal?

I think it's critical. Hard for us to imagine forcing an acquisition on one of our portfolio of Companies without the full support. I'd like to think --

I'm sorry, I was actually -- I'm sorry for the confusing question. I was thinking about a portfolio Company making an acquisition of another Company and that Company's Management being on board. How important is that?

Look, I think, people have asked about friendly, unfriendly. There are all degrees in this. What starts out one way may end up another way. I don't think we're making a hard statement about where our future lies. I think we're saying ultimately you need to reach some kind of consensus.

Fair enough. Thanks.

Vijay Jayant, International Strategy and Investment Group.

It's David Joyce for Vijay. We were wondering if you could discuss the potential range of sources of liquidity for permanent financing for your Charter investment. We know it's early days, but what sort of structures do you think might make cable M&A opportunities attractive for all parties involved?

I'll start with the first. Frankly the sources of potential capital for anything Liberty wishes to invest in, cable or otherwise, are many. We have some units that we have influence over that have the ability to dividend capital to us. We have shares in things that we think are strategic that we could still reduce our interest in but hold a majority position, like Sirius. We have shares in both debt and equity instruments, which we have deemed non-strategic at various times that could be liquidated.

We have the opportunity, there is no permanent debt, really, at Liberty Media. We consolidate some debt for accounting purposes but it's all non-recourse to Liberty Media. Other than the investment or the margin debt we have, one could imagine terming that out with all sorts of instruments, straight debt, convertible debt, exchangeable debt. And frankly you could imagine even if we found something attractive enough, equity raises. Given our nature it's probably more likely to be something like a rights offering. But all those potentials are on the table.

Incrementally, we have sister companies and friendly pockets, like Liberty Ventures, that was mentioned earlier, that if the right structure and obviously would have to be attractive for Ventures as well. If the right structure could be arranged, one could imagine something like that being source of financing. So all of those are potentials and I'm sure I have forgotten a few others, but there are many. As far as M&A and the structure I don't have a -- it's horses for courses. I don't have a template. But I think in general we're very enthused about the relatively low rates even today of the debt markets. Our preference would probably be to maintain high levels of leverage in cable, at least in the short term.

We would not want to expose the Company or investment to huge reinvestment risk. But in many of these cases being able to extend out -- mature out these maturities rather, and have significant debt pay downs over the next three, four years, we think means that you can take initially high rates of leverage and have comfort that you will bring that down to a much more modest level over the several years.

Great. Thank you very much.

Matthew Harrigan, Wunderlich Securities.

First I would like to congratulate you on the Braves being unscathed in the Biogenesis scandal. First question, your Chairman has commented on the up side on over the top and monetizing it. I think everyone realizes the high-speed margins are a lot higher than video, but you've got a decent bucket of gross margin dollars on video. Could you flesh out the thinking on that? In some instances it feels like it's additive. In some instances, I guess it's alternative to the traditional subscription bouquet.

Well, I think first, one of the things that appealed to us about the opportunity at Charter that Tom Rutledge and his team are pursuing is, their belief that there is still an opportunity in video. That there is an opportunity which they are aggressively acting on, and beginning to see some traction on. And increasing from basic to expanded basic and higher tiers and increasing their RPUs and, in fact, not forgoing the video opportunity, no dropping that opportunity. We have confidence in their territory they're going to have ability to gain traction increasingly on the video opportunity.

They are also -- trying to paraphrase John, our Chairman, I think there is a risk in a world where you have increasingly large amounts of video streamed and you are not charging on a per-bit basis, that your costs are rising faster than your revenues or carriage. In the United States we have taken, to some degree, higher speeds as a proxy for consumption of bits. And they are not absolutely correlated. There's basis width between the two. And over the long term, it would seem like a fairer system for all, is something which recognizes the amount of bits being consumed. And if video moves or other products move, that consume many bits, to the internet, you have some recognition of that with charges which reflect the consumption.

Thanks, Greg.

John Tinker of Maxim Group.

One company you didn't comment on, Barnes & Noble, and you obviously have tremendously strong portfolio of performance this quarter with everything you've owned up, except for Barnes & Noble which I notice you reduced slightly from $266 million to $275 million. Can you talk about that a little, given change of the CEO moving on and the Nook unfortunately not working? How do you see that playing out or options as to how it might play out?

Sure. First, I don't think it was a slight of Barnes & Noble. Just to remember, the perspective on Liberty, our position in Sirius is $12 billion-ish. Our position in Charter is $3.6 billion or $3.7 billion. Our position in Live is $850 million. Our position in Barnes & Nobles is $266 million. That is not a change in our perspective. That's why it changes math around where a relationship between our preferred and the underlying common price. It was down slightly even though it is up for the year, was down slightly for the quarter.

First, let's look at Liberty's position. It's a $204 million investment of costs, in which we have a 7.75% dividend on the preferred. I feel very comfortable about our downside risk. Now looking at how the business will perform on our up side, I think that since we made the investment, the retail businesses have outperformed most expectations. College remains strong. And the Nook has been a very tough and volatile space, largely related to the industry where people like Amazon have taken big charges which are deemed to be investments for them, and people like Microsoft have taken big charges on any number, $900 million charge for Surface. It's a very aggressive space.

I think we're molting the strategy there to recognize that space, and that others may be helpful partners in driving the hardware side. I'm optimistic about the prospects for Barnes & Noble, and molting its business to recognize its strength with the Nook service, it's e-book service and many of the opportunities around that. But probably de-emphasizing its hardware manufacturing and hardware contracting capabilities.

Would you be -- if they did go private would you be as comfortable on owning a private position? Or at Liberty, do you feel it's more appropriate to own public positions?

I think we own plenty of private positions, but I'm not going to speculate on the relative merits of them being private or public.

Thanks.

Doug Mitchelson, Deutsche Bank.

Couple questions. You have talked in the past about the difficulty in finding new investment ideas. Now you've allocated a healthy amount of the excess capital to Charter. I'm just curious if there's a little bit -- when it rains, it pours. You found Charter. Is there other deals now that are starting to percolate? Or is the environment still difficult to find good ideas?

Oh, I think we've seen some opportunities probably outside the United States, which are in distressed areas that we're looking at more closely just given the nature of what's happened in some of those geographies and those economies. But I don't think it's necessarily particularly easier in the US right now.

I know it gets a bit esoteric, but it seems like the tax considerations for Liberty Media really evolved over the last few years to the point where, I think there's not a lot of NOLs left to trigger, and you have pretty big gains, especially in your bigger equity stakes. And so when we think about liquidity for Liberty, I know you talked about a little bit, should we really be thinking less about you selling stock and more about levering [up] stock, like did you to pull in funds to buy Charter?

We are always sensitive to after-tax returns. The reality is with a blended federal and corporate capital gains rate of approaching 40%, there's many reasons why to think about ways other than a straight sale, particularly when you have big gains. And that's why you've seen us over time do things like Section 355s or Reverse Morris Trusts, or other variations on that exchangeables to try and come up with a better after-tax return. So I don't think any of this is new.

Yes, but I guess I asked the question poorly, but I was trying to get to that point, which is did you feel there was an opportunity to create incremental value by taking advantage of some of those things at Liberty, given the gains that you have and a lot of these stock prices? Or are there potential NOLs or other losses?

There always is some opportunity to go do that and create another Company. We've talked about some of the constraints. One of them would be, what is the critical mass size needed for Liberty? Two, where are those businesses in their lifecycle and how do we feel about the timing on that? And three, candidly, at various times we've had massively large discounts to NAV, upwards of 30%. And with -- that's been easy money to lean in and buy the stock of Liberty, do share repurchase, and then subsequently complete a spin somewhere down the road. That's not as obvious today. We are -- thank you shareholders, closer to near NAV. So we've got to drive value in other ways, probably than just a pure repurchase and spend.

last follow-up for you since you mentioned it. With Liberty ex-Siri, do you still have the critical mass that you would desire?

I think that's a relative question. There's no absolute to that. We'll see how all the other assets perform.

Right. Thank you very much.

Martin Pyykkonen, with Wedge Partners.

One on Live Nation, one follow-up on Barnes & Noble. On Live Nation, I'm wondering, you've commented on this before, but at this point that stock is up somewhat with the market. Obviously the M&E Group performing well, but it's still over 2x below multiples if you just compare it to Siri, but it's also got an EBITDA margin that's 10x below Siri in terms of relative comparison. I'm curious, you sounded positive on the things going on. They are doing a better job at Festivals. Is this something that looks more attractive where you can go up to 35% on Live Nation with no further Board approval? Trying to get a read for sentiment. And on Barnes & Noble -- go ahead.

We probably are way too open and transparent about our intentions, but I don't think we're going tell you if we are going buy more today. Let's recognize, the stock is up 60%-plus this year. Some of it is fundamentals, and some of it is the removal of the overhang of the CTS lawsuit. They are performing well. The stock price probably didn't reflect that when we were buying at $10.59 back in December. I'm not saying it's correctly or fully valued but it's more clearly more correctly valued today than it was in December. Results are not up 60%-plus. But the overhang is limited. We had confidence that they would make this progress and we had confidence that they would win the CTS lawsuit, and so far that's been gratifying that the business has performed and made us look right.

Okay, thanks. Then on Barnes & Noble, outside of the Nook, which I think you have been pretty clear is a tough investment, in terms of who the competitors are. Purely on the physical side, is there more interest in potentially upping the stake there? And what percentage of the Barnes & Noble retail store fronts, outside of the college stores, just the traditional retail, are up for renewal? That you might, if you were interested, be able to rationalize over the next couple of years? It seems pretty obvious some of those are fairly empty or could be rationalized pretty aggressively, if you could get a bigger stake at the right price. Just curious your thoughts on that.

As I recall, we're limited to 20% for some period. I think we're at 16.666% on a converted basis now. So there's really not that much room. There are various times when the stock was lower, frankly, when it might have been attractive to increase our stake, with hindsight. And at various times and for various reasons we've been held because there's transactions pending, various investments. We've seen the Microsoft investment, the Pearson investment, other along the way that have probably prohibited us from making incremental investments. The challenge of being an insider is that sometimes you know more, and other times you're prevented from exercising your knowledge.

As far as the stores, Len and Mitch and that team on retail are incredibly savvy about their real-estate strategy. I think we have very attractive leases. I think there are renewals that come up over the next several years that are attractive in terms of potentially resizing, and that's a process that happens in retail all the time. And these guys are as good as it gets in right sizing and setting the appropriate structure for a different world, where there's probably fewer DVDs, some less physical goods, other kinds of structures that occur inside the physical store.

Thank you.

And that does conclude today's teleconference. We would like to thank everyone for their participation today.

Thank you.