QVC Group Inc (QVCGA) 2011 Q3 法說會逐字稿

Good day and welcome to the Liberty Media Corporation quarterly earnings conference call. Today's call is being recorded.

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 materials 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 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 note and schedules 1 through 3 can be found at the end of this presentation.

At this time, for opening remarks and introductions, I would like to turn the call over to the President and Chief Executive Officer, Mr. Greg Maffei. Please go ahead sir.

Thank you and good morning to all of you. Thank you for joining us today and for your continued interest in the newly created Liberty Media.

Today, speaking on the call, I'll have the Chrises -- our newly created CFO, Chris Shean, and Starz CEO Chris Albrecht. Also available on the call, I have several other senior Liberty and Starz executives. All of us will be available to answer questions at the end.

Liberty Media was created by the split off which was finally achieved on September 23 of Liberty Capital and Liberty Starz. Liberty Starz has one last quarter of attribution issues around Starz media still affecting the numbers. Going forward, we'll be clean.

Looking at the business, we had strong subscriber growth at Starz. Subs were up over 9%. Encore's subs were up over 3% over last year. We also had strong revenue and adjusted OIBDA results.

We debuted a new series, Boss, on 21 October, to very positive reviews. I think it's a great show, one I enjoy watching and I encourage you to look as well.

What many of you have been waiting for, we finally began repurchasing stock in Liberty Starz. We brought back $51 million worth, or 807,000 shares, through 31 October.

Looking at Liberty Capital, we made a strategic investment in Barnes & Noble through a convertible preferred stock. That stock converts into about a 16.6% common equity stake in Barnes & Noble. It has a 7.75 quarterly dividend. We also took two board seats at Barnes & Noble, and we're excited about things they're doing. So many of you yesterday saw the exciting announcement they made around two new NOOKs, an update to the Color Nook and an update to the lower-end E Ink Reader, both of which garnered very positive reviews.

During the quarter, we also repurchased $169 million, or 2.5 million shares, of Liberty Capital.

Looking at some of our larger constituent investments, Sirius XM posted very strong results driven by excellent operating performance. They ended the quarter with over 21.3 million subscribers. Adjusted EBITDA at Sirius was up 16%, free cash flow was up 22% and they continued to reduce their financial leverage.

We also saw very good results at Live Nation, another of our investee companies. Adjusted operating income at Live Nation increased just about 7%. The concert AOI, adjusted operating income, increased about 35%. Free cash flow was up almost 5%, and we saw some excellent exciting, continued innovation there, high Facebook engagement, a dynamic pricing tool they introduce which is -- looks at the inventory and tries to maximize the value of it for a venue owner, and a joint venture with Groupon, which is a way to, in an attractive fashion, help make sure excess inventory is moved -- all exciting and all very positive at Live Nation.

With that, let me turn it over to Chris Shean to talk in more detail about our financial results.

Thanks Greg.

The results for Starz for the three months ended September 30, 2011 include both the legacy Starz entertainment business as well as the legacy Starz media business as a result of the reattribution that took place on September 30 of last year. So in order to have a better comparison, we've also combined the historical periods so that we have apples-to-apples for this discussion.

Starz LLC's revenue decreased 2% to $389 million for the third quarter. This decrease is primarily due to a decrease in the number of the theatrical films released on home video, a decrease in animation revenue, and no theatrical films released in 2011. That's offset by higher effective rates and increased subscriber counts at the Starz channels.

Adjusted OIBDA increased to $107 million, or 27%.

At quarter end, Liberty Starz had attributed cash of $1.1 billion and attributed debt of only $41 million. From August 1 through October 31, approximately 807,000 shares of L Starz A common stock were repurchased at an average price of $62.85 for total cash consideration of $50.7 million.

Now, with that, we'll have Chris Albrecht comment more deeply on events at Starz.

Good morning.

As Chris mentioned, the Starz business has again performed very well in the third quarter. Looking at Starz Entertainment, in addition to solid revenue and OIBDA results, the flagship Starz channel ended the third quarter at 19 million subscribers, while Encore finished at 32.8 million subscribers. For year-over-year comparisons, Starz subscriptions increased 1.6 million, or 9%, versus third quarter 2010, while Encore's subscriptions were up 3% or 800,000 in comparison to the same period from a year ago.

We realized 71% of this flagship channel growth at consignment rate affiliates, thus boosting our revenue and OIBDA results. However, the growth of our flagship channels during the third quarter of 2011 was tempered by a lack of access to marketing campaigns with certain consignment affiliates as well as a reduction in subscribers from one flat affiliate deal.

With respect to our digital business, the terrific complement of Starz originals programming exclusive first-run movies and our quality film library content continues to draw great interest from current and prospective distributors in the marketplace.

We're very pleased that AT&T U-Verse launched our authenticated Starz Online and Encore Online services on September 30.

On the Netflix issue, as we've said on previous calls, maintaining the premium nature of our brand with appropriate wholesale pricing and packaging is critical to potential online distribution agreements. There were -- these were the primary factors in our decision last quarter to enter renewal discussions with Netflix. When we consider the underlying business we have with our traditional multichannel distributors and studios, we didn't believe it was appropriate for the Starz brand to have our products included in a low-cost service.

The third quarter marks significant progress on the Starz original front with several developments that will impact positively our future original programming slates. Da Vinci's Demons will be the first original series that runs through our new development production and distribution partnership with BBC Worldwide Productions. This is an innovative arrangement that accelerates our ability to meet the ultimate goal of airing annually on Starz approximately 50 hours of original content, yet is structured to mitigate financial risk and reduce total programming cash expended. Da Vinci's Demons is a historical fantasy set in Florence that tells the untold story of Leonardo da Vinci during his wild years in the age of the Renaissance. The story is written by David Goyer, who wrote Batman Begins, The Dark Knight, and the upcoming Man of Steel. Da Vinci's Demons and all subsequent programming produced from BBC -- with the BBC Worldwide partnership will debut exclusively in the United States on Starz. Our worldwide distribution TV group Anchor Bay and Starz digital media will distribute the programming across television, home video, and digital platforms respectively in the US and English-speaking Canada.

Last month, we were also pleased to announce a two-year overall agreement with Spartacus Showrunner Steven DeKnight. Steven is a wonderfully creative writer and his enormous talents will give us even more opportunities to bring premiums there to our channels.

For our current series, Boss, we've aired three episodes. We're three episodes in to the eight-episode first season. We are heartened with the strong buzz and critical acclaim for the series. Interest in Starz affiliate [to sample] the first episode of this series was a record high for the Company, as more than 76 million multichannel households offered the first episode early to current and prospective Starz subscribers, in addition to online availability nationwide. We look for Boss to continue to build an audience, particularly on the On-Demand and online platforms, and we were delighted to renew it for a second season.

We expect increased marketing and amortization costs in the fourth quarter of 2011, as compared to the fourth quarter of 2010. These increased costs are associated with our new original series Boss and are due to the fact that we did not have an original series in the fourth quarter of 2010.

Spartacus returns to Starz on January 27, 2012 with Spartacus Vengeance. The second season will be an epic 10 episodes and there is great interest and enthusiasm around the globe from hard-core and casual fans alike. As you may have read yesterday, we have green-lit a third season with an eye towards a 2013 return.

Magic City makes its Starz debut next. Set in Miami Beach, circa 1959, Magic City is an eight-episode original series from writer-director-producer Mitch Glazer and features a great international cast led by Jeffrey Dean Morgan and Olga Kurylenko. Magic City was showcased for prospective buyers at the recent MidCom Global Content Marketplace event in Cannes. It was well-received, as was the Spartacus franchise, which continues to show global appeal. Starz owns all domestic and international rights to Spartacus and Magic City franchise, including TV, home video and digital.

Over at Starz Media, we've made good progress solidifying the flow of content at Anchor Bay with a consistent pipeline of new home video products from the Weinstein Company, Starz Originals, Anchor Bay Films and other licensed titles such as The Walking Dead from AMC.

Recent highlights at Anchor Bay include Spartacus Guide to the Arena, which is tracking on par in all territories with the highly successful Spartacus Season One, Blood and Sand, which sold through to consumers more than 400,000 units in the US, and also The Walking Dead, which has already sold through more than 500,000 copies to consumers of its Season One.

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

Let's turn to Liberty Capital. Liberty Capital Group's revenue decreased to $151 million in the third quarter and adjusted OIBDA remained flat at $25 million. Liberty Capital Group has attributed cash and public investments of $7.1 billion and attributed debt of $750 million.

From August 1 through October 31, 2.5 million shares of LCAP A common stock were repurchased at an average price of $68.15, for total cash consideration of $168.5 million. Cumulative repurchases since reclassification of the tracking represent 41.3% of the original shares outstanding. The Board recently increased the Liberty Capital repurchase authorization by $500 million. The current authorization stands at $637.8 million.

Now, I'll turn the call back over to Greg to wrap it up.

Thank you, Chris Shean, and thank you Chris Albrecht for the update on your business.

We were pleased with the results of our businesses in what continues to be an uncertain environment for the consumer. Looking forward, our priorities at Liberty Starz are to continue to execute on our original content strategy to differentiate and strengthen Starz and its brand. We look to build and enhance our relationship with our existing and new distributors. We are evaluating opportunities for the cash on Liberty Starz and for more aggressive balance sheet management.

Looking at Liberty Capital, we also are looking to deploy or invest our excess capital in attractive situations. We look to rationalize some of the non-core investments that are on that we hold, and to aggressively manage the balance sheet at Liberty Capital as well.

We appreciate your continued interest in Liberty Media. We look forward to seeing many of you next week at our investor meeting. Stay tuned for more announcements. Thank you for listening. With that, operator, I'd like to open up the call for questions.

(Operator Instructions). Doug Mitchelson, Deutsche Bank.

Thanks so much. Greg, you bought back stock at pretty terrific prices in the quarter average near their lows. I was hoping you could offer your share repurchase philosophy going forward. Was that just a value opportunity, or do you expect more consistent share repurchases looking forward?

Thank you for the complement on our stock. Look, I think we have a case where we try and have a consistent philosophy of return of capital, but we also do on the margin try and be thoughtful about leaning in more aggressively when the prices seem to fluctuate low. So we do not, as a matter of policy, indicate what our plans are in a coming quarter for share repurchase, but I can give you our overall philosophy is to return capital where we have [access] and to lean in more heavily when we see attractive value.

On the [tracking] stock structure now that the LINTA is complete and given your long-term strategy of trying to increase value of these stocks, can you talk a bit about the rationale behind having Starz and LCAPA up tracking stocks going forward or is there a more ideal structure that you would consider?

I think you noted our philosophy is for long-term value and that is certainly what we're targeting. We think the tracking stocks have been useful in illuminating some of the operations that we have while retaining flexibility for us on some tax matters and in terms of potentially changing the composition of businesses. We have no current plans to change our tracking stock structures, but it's also not inconceivable that, in the future, if there was -- we saw a more attractive way to organize the stocks or a more attractive way to utilize capital, we could change the structure.

Thanks very much.

James Ratcliffe, Barclays Capital.

Thanks for taking the question. Two if I could. First of all, can you talk about the prospects for getting the Starz Online content distributed more widely among your existing [sort of] MSO DBS telco distributor base beyond [this big] Dish and Comcast to the other major distributors, and sort of what the gating factors around having that happen are?

Secondly, could you clarify why there was the Starz L capital loan in the quarter given that LCAPA seems to be seeing a lot of cash? Thanks.

Chris, do you want to talk about (multiple speakers)?

Sure. On the online distribution, we try to work with all our distributors to give them the full array of products that we have available, including our online products. Several distributors want them integrated into their own platforms. We also realize the value of having our own platform as we see the consumer being interested in that. As we announced, Starz Online and Encore Online were just launched by AT&T U-Verse, and we look forward to more discussions with our traditional distributors and certainly also look to discuss with them any opportunities that we might have together to get our products to them in packages that are more interesting and advantageous to the consumer.

Chris Shean, do you want to talk about the loan?

Yes. In anticipation of the spin-off, there was some cash balances inside LCAP that we could not access on a near-term basis. As a result, we put in place this short-term loan across the groups.

Great. One follow-up for Chris if I could. Could you just talk a little bit about what sort of response you've gotten from your core distributor partners from walking away from the Netflix transaction, how that's been received?

Yes, I think that would really be a question that you would be better ask them. We made the decision for ourselves. We looked at the overall Starz business. We evaluate any decision with the net long-term benefit to Starz. This was a decision that we were very comfortable with, and it was consistent with things that we've said about how we're handling our business and certainly consistent with how we look at it going forward.

But if I could add one thought there, the actions we took, as Chris has noted, were taken because we believed in the premium nature of our product and how it's best placed in the future. Many of our traditional distributors have embraced that notion fully, and I think actions which we took which were consistent with their distribution philosophy are only going to be well-received and have been commented upon favorably.

Great, thank you.

Richard Greenfield, BTIG?

It's actually Brandon Ross for Rich. A couple of questions. First, you mentioned earlier that some of your distributors were not marketing as effectively as other distributors. Just wondering if you could speak to which ones those are and what the issues are.

I think you've heard recently from one of the major MTBDs that they have realized that they would like to focus or refocus their efforts in the premium category. We certainly agree with that decision and look forward to seeing the mutual benefit of that work going forward.

Also, we -- well, with regard to your question in the marketing campaign, I think I'll stand by that statement as far as -- yes.

With regard to Dish, is the Blockbuster Movie Pass and what they're doing with it permissible under your existing agreement?

Yes, the Blockbuster Movie Pass is really more analogous than authenticated service. You have to be a Dish subscriber in order to have it. So we are -- we have a very strong rights position with regard to our ability to distribute digitally. The Blockbuster Movie Pass is just one of the ways that our distributors are taking advantage of the services that Starz can offer them.

Great, thank you.

Ben Mogil, Stifel Nicolaus.

Sort of following up on the last question, when you guys are looking at sort of the premium category in general, a couple of the MSOs were obviously cautious on the demand trend. Do you think that, as you sort of leave Netflix potentially, that helps out? Do you think this is an issue of an economic issue? I'm sort of curious from a higher-level perspective how you sort of see the issue that the MSOs are talking about and sort of where you -- what's your best sort of game plan within that environment.

I'm not really sure when you say what issues the MSOs are talking about. Could you clarify that?

Sure. So a couple of the MSOs were noting very weak demand or weaker demand for premium channels. So I'm kind of curious. When you look at that and you look at sort of the consumer still under pressure, is your perspective that, as you continue to sort of work more closely with them, that's the best for you in that you will eventually get some more marketing support which has sort of been weak as you noted earlier this year?

Yes, We haven't seen weak demand. We have certainly have seen subscriber growth, and when -- this is really I think and always has been a question of marketing and focus. We certainly see the premium business as a win-win for the distributors and obviously for the premium brand. And they've cemented a lot of product; they pulled through a lot of product through. We think that they are realizing the value of those brands and certainly don't want to turn their backs on a business that's been good to everybody. I hope that answers your question.

Yes, absolutely. Thanks.

Tony Wible, Janney.

I was hoping you could speak to Starz Media and how we should be thinking about the pipeline of product there. Also on that business, what do you guys think about the margin structure? Is that going to be more of a variable off-spin margin business or do you expect to see some scale in that business at some point?

With regards to the first question, there's been some transition in the sense that when Anchor Bay released the Overture title, that was revenue flowing in, whereas with the Weinstein deal, we have a distribution deal with them. Thus, because it's a distribution deal with another company, we're also not in charge of what their theatrical release pattern is and how much marketing support they put behind it. So, there's going to be some variables just in the content flow.

With regard to certain numbers, we also in the last week of September released the Gods of the Arena box set and the Camelot box set, so those -- so third quarter was barely affected by that. But I do think, going forward, this is a variable business and we certainly look to scale it by trying to leverage that platform not just with our own product but with third-party product like we've done with Walking Dead. Anchor Bay also serves a very important strategic function for the Starz channels, providing us with a lot of low-cost theatricals that help us meet our distribution deal requirements. So there's a good strategic and financial reason to have it. It is in areas that are obviously more variable and lower-margin than premium television businesses.

Great, thank you.

[Michael Lima], [Keystone] Investment Management.

It's Rich Bilotti. It's been a long time since (multiple speakers) conference call.

For the first time in over two years or 1.5 years, you had an opportunity to reconstruct your balance sheets to be optimized. That's a huge opportunity. Can you talk about, A, the relative level of leverage you'd like to have on each of the two entities, which I know you've discussed in the past, but then, B, a more sophisticated variation on that, which is how do you compare the efficacy of buying back LCAPA versus buying back Liberty Starz? I know you can't give us the numbers or the thresholds, but talk about the methodology or the philosophy that you used to allocate capital between the levels? So what's the right debt leverage, and how do you calculate the efficacy of buying back stock at the two entities?

Okay. First, on relative level of leverage, I think, for the long term, the right level of leverage at Liberty Capital is effectively 0. It holds basically very little free cash flow generating assets; it holds mostly a portfolio of investments which -- on which we have substantial value but we don't get substantial cash flow. We have a de minimis amount of assets we consolidate and have access to that cash flow. When we look at the overhead of the Company and flexibility, it's going to be virtually 0.

If you think about --

How about Starz?

Starz, I think it's a conservatively -- conservatively, it's a business that you could probably support 3 times leverage. It's a well-capital -- I mean well run subscription business with high free cash flow generation. So at the right time over the longer term, I would say that's the kind balance sheet we could support.

When you look at the share repurchase, it's a little bit of two different decisions. One is a capital allocation issue between investment opportunities externally at Liberty Capital and share repurchase internally. When we see NAVs that are attractive on the value of the Company between our own NAV and what the external marketplace is and we find that the underlying securities are relatively attractively priced, we execute. We've been doing that and bought back at Liberty Capital over 41% of its stock and driven up the NAV by something like over $30 per share. So that's been very effective.

At Liberty Starz, it's a little more complicated only because we've talked about some of the strategic issues that we're looking to get completed over time. Chris mentioned some of those today. I'll reiterate just in case it's not clear -- continue to grow our original programming strategy; continue to improve our relationship with existing distributors; continue to grow our distribution base; resolve on how we're going to [bunt] some of that original programming. Some of these we've done and checked off. For example, (inaudible) clean up Starz Media. [While] we clean that one up, we've set in place a former [the Turbo] project we outlined with the BBC. We've begun original programming with some great efforts and more ahead expected. So we're sort of in a transition process towards what we think is a more certain business there. We began, because we've seen some of that, to dip our toe in on share repurchase with more confidence. It's not a statement about we're going to do going forward, but that's one of the factors that led us to the share repurchase today. I don't know if that's helpful in outlining [some] thoughts.

Yes, one quick follow-up. So essentially is it the comparison between buying Liberty Starz stock versus buying Liberty Capital, since it's all (multiple speakers)?

I should have been more explicit. Those are two separate decisions. They have their own cash which has been attributed to each -- on the margin, there are some liabilities that they share, but those really, given how strongly capitalized each entity is, do not come into play or have not come into play in our thinking about share repurchase. Each is riding on its own tug.

Terrific. Thank you so much.

Martin Pyykkonen, Wedge Partners.

Thanks. Good morning.

A question on the premium versus older library content -- when you listen to the last couple of weeks, the media companies, largely speaking, are kind of having a -- might be in a field day in terms what they're able to license namely to Netflix and what they're getting. Greg, you've mentioned in the past you think it's likely that somebody else from the digital syndication side would recognize a premium value. I think the names are kind of obvious -- Google, Apple, Amazon, etc. Without being name specific, [could you say] what do you think would be best expectations that, if there's going to be a deal of that sort premium from a nontraditional digital syndicator -- I think there's a lot of investor expectations thinking something would happen within a reasonable period. I don't mean next week but within the next several months. Should people be thinking that way or is this a much longer-term solution from your side on their side as you see it?

I'll comment on that and ask Chris to add anything he wishes. Look, I think you will see digital distributors recognize the means of competition and the ways of competition in the marketplace may vary. You've seen some already have different philosophies, and I think they'll begin to segment and differentiate. Some will recognize the value of premium and price accordingly and set up an offering accordingly. That's probably an action or a strategy that we would embrace.

Chris, do you want to add anything?

Yes. I think with regard the first thing you mentioned about other people licensing content, when you look at the list of titles, a lot of the stuff that gets licensed are things that Starz or Encore brands would never license. It's two deep old library products.

With regard to entries into the digital space that might be interested in creating premium tiers, that's really the prerequisite for us, is are there new distributors that are interested in doing business that's consistent with the goals that we've stated? Certainly, there are a lot of conversations going on, and we look at all of them and evaluate the long-term benefit to Starz while also taking into consideration our relationships with our current core distributors and our studio partners. So, it certainly would seem that there is a bright future for new interest in our products, but it's a road that needs to be evaluated on almost a weekly basis and have prudent long-term decision thinking -- you know, decision-making thinking at the forefront.

Okay. Then just one question on the original side, you've obviously done a great job. You've got it sounds like a lot of good scripts and all coming up going into 2013, 50 to 60 hours, four to five series kind of in your plan. Given back of the question you've got a lot of capital structure headroom there, could you -- and are there plans to notably increase that at any time in the near future in terms of the run rates? Because it seems like you do that, do it well and yet have a lot of capital bandwidth, [this will do] all the other things. I'm curious if that's a (multiple speakers) or if that will go up.

No, we think the 50- to 60-hour model, along with our two terrific output deals, Disney and Sony, which are locked in for the next few years at least, are a very good program mix, especially given the strategies that the two other major premium brands have. I think it nestles us in in a very interesting place. I think we're priced very well with the distributors and we're very comfortable with that model going forward.

Should we see some unexpected increased revenue show up? We'll certainly look at how we might best deploy that to get the best return. But right now, we're, I think we're very comfortable with the model that we're working towards and don't have any concrete plans to alter it.

Okay, thanks.

Barton Crockett, Lazard Capital Markets.

Thank you for taking the question. I wanted to ask about the comment about growth in marketing and amortization costs at Starz here in the fourth quarter. Can you give us a little bit more elaboration, I mean what degree of growth? Are you still going to be able to grow EBITDA? So that's my initial question.

The answer to the first part is we didn't have a series in the fourth quarter last year, so we had a series in the fourth quarter this year and obviously we had to market that. But as I just said before, our plans going forward have taken that into consideration. As we look at our programming costs, both on the film side and on the original programming side, we are going to be very comfortable with the four-quarter strategy of having series air along with robust marketing campaigns and still be able to grow the bottom line of the Company hopefully as well as the top line of the Company.

Then switching gears a little bit to capital, Sirius XM has expressed an interest in ramping up share repurchase, but they also made a comment, at least at the Merrill Lynch conference, that they don't want to increase Liberty's control over the company. That raises questions about prospects for some type of agreement, perhaps freezing your voting interest or some other type of unlocking of your Sirius position. I was wondering if you could comment on your openness to those type of arrangements and your interest in doing that and what the timing might be of working an arrangement with Sirius.

We haven't had any discussions with them on that topic.

Is that something that waits until March of 2012 to even begin or --?

They said in the past that when their leverage gets to a reduced enough level, that they were going to consider what to do with their -- to return capital to shareholders, or whether they would seek that. I guess, at that time, we may have that discussion.

Thank you very much.

Thank you all for joining us today, and we look forward to seeing, as we said, many of you next week in New York.

This concludes today's Liberty Media Corporation quarterly earnings conference call. Thank you for attending and have a good day.