Earnings Call Transcript - BATRA Q2 2020

Courtnee Ulrich, Chief Portfolio Officer and Senior Vice President of Investor Relations

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. Actual events or results could differ materially due to a number of risks and uncertainties, including those mentioned in our most recent Forms 10-K and 10-Q filed with the SEC. These forward-looking statements speak only as to the date of this call, and Liberty Media expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statements 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 and adjusted EBITDA. The required definitions and reconciliations for Liberty Media and SiriusXM Schedules 1 and 2 can be found at the end of the earnings press release issued today, which is available on our website.

Gregory Maffei, President and CEO

Good morning, and thank you, Courtnee. Today speaking on the call, we will also have Formula One's Chairman and CEO, Chase Carey; and Liberty's Chief Accounting and Principal Officer and Financial Officer, Brian Wendling. First, I hope you all are healthy and safe and have been enjoying your summer given these challenging circumstances. Second, I'd like to again thank our management teams and employees that have done such an impressive job managing through this COVID-19 crisis. So first, looking at Liberty SiriusXM. We completed the previously announced rights offering that was fully subscribed, generated proceeds of $754 million, and we used that money to fully repay the intergroup loan that Liberty SiriusXM had to the Formula One Group. During that period, we paused our share repurchases as we were prohibited from being in market during the rights offering. We are certainly aware that the discounting remains, and we have ample liquidity at LSXM and expect to take full advantage of the discount opportunity. Our ownership at SiriusXM now stands as of July 28 at 72.9%. SIRI also paused its buybacks in Q2 due to market conditions in the depths of the COVID crisis, but recently expanded their authorization by $2 billion. We remain very focused on getting to 80% at SIRI. Looking at Sirius itself, like our other subscription businesses, Sirius has proved resilient during the crisis. Self-pay net adds, or subscriber adds, were 264,000 and churn was down to 1.6%. During the quarter, we generated over $0.5 billion of free cash flow. We also announced the deal to acquire Stitcher, creating a full-service platform for podcast creators, publishers, and advertisers, and also announced a smaller deal, Simplecast, with podcast management and analytic platform services. SiriusXM continues to provide innovative programming and launching new acts, including the DC BOYS, Bob Marley, Coldplay, Queen, you know how much I enjoy Freddie Mercury, and the Comedian Jim Gaffigan. With strength and visibility into the business, we offered new 2020 guidance at SiriusXM. Turning briefly to the Formula One Group, and we'll hand the call to Chase in a moment. We returned to racing at the beginning of July, and we now have completed 5 races. We're still targeting a 15- to 18-race season, and we continue to move the business forward. We have a new lower cost cap that'll go into effect in 2021. We have new broadcasting and sponsorship deals. The teams and all of our partners have been doing a tremendous job of returning to the track. Yesterday, we had an exciting race in Silverstone, where Red Bull and Max Verstappen had a great strategy that they executed very well to win. So it's exciting racing.

Brian Wendling, Chief Accounting Officer

While we wait for Greg to return, I'll continue on and then hand it over to Chase. Good morning, everyone. At the end of June, we amended the term loan and revolving credit facility at Formula One. The net leverage covenant will not apply until our first testing day for the quarter ending March 31, 2022, providing the business additional flexibility to operate during this uncertain time. Braves Holdings is expected to be out of compliance with certain debt covenants at the end of the quarter. We continue to work with the lenders to obtain waivers and covenant modifications. These discussions are going well, and we are optimistic that we will have a favorable resolution by the end of the month. Liberty SiriusXM Group had attributed cash, restricted cash, and liquid investment of $154 million, excluding $1.8 billion of cash and restricted cash held at SiriusXM. We have $870 million of undrawn margin loan capacity at the parent level. The value of the SiriusXM common stock and Live Nation stock held at Liberty SiriusXM as of Friday's close was $22 billion, which excludes the value of the Live Nation call spread, which is held at Formula One Group, valued at $210 million at quarter end. We have $2.1 million in principal amount of debt against these holdings. Total Liberty SiriusXM Group attributed principal amount of debt is $12.6 billion, which includes $9.4 billion of debt at Liberty SiriusXM. Formula One Group had attributed cash and liquid investments of $1.4 billion, which excludes $324 million of cash at Formula One. Total Formula One Group attributed principal amount of debt was $3.6 billion, which includes the $2.9 billion of debt held directly by Formula One, leaving $733 million at the corporate level. Lastly, for the Braves, we had attributed cash, liquid investments, and restricted cash of $329 million and attributed debt of $718 million. With that, I will turn it over to Chase to talk more about Formula One.

Chase Carey, Chairman and CEO of Formula One

Okay. Thank you, Brian. And I guess I'll keep going and wait for Greg to return at some point. We were thrilled to return to racing with the launch of our 2020 season in Austria, the first weekend in July. It was an exciting race that saw a lot of competition in the mid-field with an action-packed last few laps that earned Lando Norris' first podium finish. In the 5 races so far, we've seen Lewis Hamilton fighting for his seventh world championship. The continued strength and ingenuity of Red Bull, the struggles of Ferrari and emergence in McLaren in racing point as serious contenders. Our data through the first 4 races of the season have produced solid viewership growth across the race weekend, especially in key markets like China and strong growth on our digital platforms, measured in video views, social media interactions, and traffic across the website and app. The drama in the Paddock built this summer as a number of driver changes were announced for 2021. Ferrari decided not to renew 4-time world champion Sebastian Vettel and instead signed Carlos Sainz. His open seat at McLaren went to Daniel Ricciardo, which will make for a strong and entertaining pairing with Lando Norris. Renault decided to fill their vacancy with former Champion Fernando Alonso, and Valtteri Bottas re-signed with Mercedes for 2021. This continued speculation around Sebastian Vettel is ongoing, and more is to come. Just prior to the start of the season, we launched our #WeRaceAsOne initiative to tackle the major issues that we, as a sport and society, are facing. We used our restart to show that we stand united against racism and are doing more to address inequality and diversity in Formula One while also taking a moment to thank people around the world for the fortitude they've shown against the global COVID-19 pandemic. We will be establishing a task force to listen and identify the right initiatives required to increase diversity and inclusion across Formula One, specifically focused on identifying employment and education opportunities and the required actions to effect change.

Gregory Maffei, President and CEO

Thank you, Chase, and thank you, Brian. Given the ongoing pandemic, we have decided that Liberty's Investor Day this year will be virtual and will happen over 2 days because no one, as much as we love Zoom, should have to be in a video call for that long. On Thursday, November 19, we will cover Liberty Media and Liberty TripAdvisor, and on Friday, November 20, we will include Qurate, GCI Liberty, and Liberty Broadband. We'll run from 11:00 AM to 2:00 PM Eastern on both days. More details will be provided on our website, but please mark your calendars. As always, we appreciate your continued interest in Liberty Media. And again, hope you all stay safe and healthy. And with that, operator, I'd like to open the floor for questions.

Benjamin Swinburne, Analyst

Chase, could you discuss your focus on 2020, but I would like to ask you a couple of questions about next season. Regarding sponsorship, can you share your thoughts on how that is shaping up for next year? I'm curious if 2021 could potentially surpass 2019, or if the global recession and corporate spending pressures have impacted that revenue outlook. Additionally, are you considering a later start to the season next year due to the ongoing virus situation and the timelines around vaccination? Is that something you are looking into, or is it too premature? I also have a question for Greg. Greg, you reiterated the discount at Liberty SIRI and the buyback. Did you buy back any shares between June 16 and the filing of the 10-Q? I guess we will see the share count number, as it appears you may not have. I was wondering if that was due to being boxed out or for some other reasons; I'm trying to reconcile your comments regarding the buyback.

Chase Carey, Chairman and CEO of Formula One

Let me start by addressing the second part of your question first, as it sets up the first. We are planning for the 2021 season to align closely with our expectations from earlier this year. However, we acknowledge that we have no better visibility than anyone else regarding the trajectory of the virus moving forward. It’s important to remember that we are about five months into the pandemic, and our season in March is still seven months away. This gives us some time, and discussions surrounding vaccines, treatments, and testing will naturally continue to develop. We also operate in 22 countries, which adds a range of issues to consider. Nonetheless, we are moving ahead with plans for 2021 that resemble what we originally anticipated, probably featuring a race calendar that starts and ends in a similar timeframe to our current schedule. We might adjust the calendar to create a bit more space at the beginning and a busier second half. While these tweaks will add flexibility, they won't result in a major restructuring. As time goes on, we will gain more insights and may make adjustments, but for now, we are planning for races that will have fans attending. We've been in contact with most of our event organizers, and although no one has clear visibility on the situation, we will have numerous sports to observe as they adapt in the coming months. The NBA, NHL, soccer leagues, and football leagues in Europe will be valuable templates for us. Regarding sponsorship, there was a period of quiet in the early stages of the pandemic, roughly the first couple of months, as everyone adjusted to remote work and new engagement methods. However, we feel positive about the traction we’ve gained in recent months, especially concerning renewals. We continue to believe there is significant potential for growth in this area. Prior to the pandemic, we were discussing our progress, acknowledging that while we might not have advanced as far as expected, our outlook remains strong. The interest in sponsorships is encouraging, and we are in advanced discussions that look promising. The interest from new partners is robust as well. Although the overall situation is fluid, we feel confident about reaching our goals in sponsorship and the opportunities ahead.

Gregory Maffei, President and CEO

Okay. Ben, I'm glad to address the other point. We were hindered for most of Q2 due to the rights offering, and we also had our usual blackouts before earnings. Most of this information is disclosed or detailed in the press release. While we just provided that information, I believe you can find it outlined there.

Bryan Kraft, Analyst

I want to ask two questions. First, on Formula One. Working capital usage has been essentially neutral year-to-date. Do you expect that to change at all in the second half based on what you know at this point in time? And related to that, if the season were to be unexpectedly cut shorter than the 15- to 18-race plan, would you be in a position where you'd have to refund fees collected for this season already, for example, those from broadcast rights holders? Just trying to get a sense of what the potential cash need could be relative to the cash that you have on the balance sheet currently. And then my other question is on the strategic front. Greg, if you were to increase your equity stake in iHeart to something closer to the 50% level that has received antitrust approval, what are the reasons that you would be doing it through Liberty Sirius versus SiriusXM and the pros and cons of those two options?

Chase Carey, Chairman and CEO of Formula One

Yes, I think in most cases we're aligning payments more closely with the races. Payments that would have typically been scheduled throughout the race season, which usually starts in March, are now adjusted since the race season has begun in July. While there may still be some impact, the effect of not reaching our targeted races from parties that have paid us would be limited because of our approach to aligning payments with the actual races. Regarding working capital, I don't get too detailed because there are many variables at play, and we've had reduced operations. This probably restricts the amount of working capital we can generate. As we resume business operations in the third and fourth quarters, it will create more working capital. Our revenue is certainly impacted, so our working capital isn't at the levels you'd expect in a typical year. However, with all the variables, we have a sufficient balance sheet. My focus is more on managing our payments and receipts rather than on working capital, which would be more typical given our reduced operations.

Gregory Maffei, President and CEO

Yes. I'd like to just add on Chase's comment before I address iHeart. I mean, obviously, one of the reasons we did the reattribution was to put a bulletproof balance sheet in place at Formula One, and it sets up holdco. I think we've done that. So I echo Chase's points. We're very much focused on getting through 2020 and set ourselves in place that, no matter what happened in 2020, we were prepared to try and get back to normal course, which we're reasonably confident for 2021. Turning briefly to iHeart. There are some issues there that are worth thinking about for the long term, which is Sirius is a faster-growing entity than iHeart. How much do you want to consolidate that? How would you want to account for that? There are a lot of operating synergy potential there. But candidly, given the opportunities we have at SiriusXM, we like iHeart, but we don't feel any rush to do that. We've all noted the discount. We've all noted some of the things that SIRI wants to do about getting to 80. We've noted some of the things that SIRI wants to do about potentially in podcasts. Those haven't been big, and I don't expect they're going to be huge going forward. But the point being there are demands on the cash flow of SIRI and opportunities on the cash flow of SIRI that are interesting. And iHeart is a great management team. We like the business, but clearly, advertising is challenged in this environment, and we want to watch and see what happens.

Bryan Kraft, Analyst

If I could ask one follow-up on that, Greg. The antitrust approval, I've seen that applies to either scenario, whether it would be acquired through Sirius or iHeart up to the 50%. Is that correct?

Chase Carey, Chairman and CEO of Formula One

In terms of race promotion, we are currently in discussions that extend beyond this year. We have had some one-off races inserted, like those in Portugal and Imola. However, for the longer-term arrangements, our calendar is almost finalized. We haven't announced our plans for 2021 yet because our focus has been on 2020, but we are close to finalizing it. A couple of agreements are pending where we have agreed on business terms but still need to finalize payments. There has been no impact from the pandemic on these discussions, which likely started well before the virus. The importance of returning to normalcy and revitalizing the industry seems to be a more prominent topic, as opposed to the negatives. While there is uncertainty surrounding the duration of the virus, there is a general belief that recovery is necessary, and businesses need to resume operations. There is also a pent-up demand for events. The cities we are involved with, which rely heavily on tourism, emphasize the importance of having global exposure. Although our calendar for 2021 is essentially complete, and we are finalizing the agreements, we are not actively pursuing arrangements for 2022 and beyond, though we have had some conversations. The interest from other parties remains steady, but any discussions for races years down the line will mainly revolve around opportunities rather than specific agreements or business terms at this stage. The agreements we have this year are quite unique and varied. We don’t expect any fans at the first race, likely only a very small number. For Mugello, we anticipate a slight increase, but the situation may change for the races later in the schedule. We hope to have fans at as many events as possible, but some governments prefer to make decisions closer to the date. Our agreements differ significantly, with some being long-term partnerships and others one-off deals. There are many moving parts, and some factors are variable. Each location has its own specific circumstances, which has always been the case with our agreements.

James Ratcliffe, Analyst

One for Greg and one for Chase, if I could. Greg, following up on iHeart, there was a call from last November at the Analyst Day, John said something to the effect of, you couldn't really see value in buying things at the moment of evaluations, levels unless there were synergies. And clearly, there will be a lot of synergies if you owned all of iHeart and you could combine it with SiriusXM. Can you talk about what sorts of synergies you could potentially capture owning a minority, non-controlling stake in iHeart? And then for Chase, around some of the broadcast renewals, it sounds like you're pretty happy with what you've gotten in Germany, in Austria, I guess, Russia and I think Scandinavia, as well. As you work to finalize an agreement in Spain, it sounds like adding call sites to Ferrari and Fernando Alonso coming back should be positive for the acts. Can you provide any additional commentary on what you've been hearing from your broadcast partners over the last few months? And how are you viewing the market for sports rights, specifically across some of the most important European markets?

Gregory Maffei, President and CEO

Sure, I'll start. Regarding iHeart, while a minority stake may complicate some synergy issues, I don't think it's impossible to share advertising sales and digital developments. There are definitely ways we can collaborate, even without an acquisition, though it becomes easier with shared ownership, especially if it's 100%. Your point is valid. As John mentioned, valuations have decreased, and the business faces more challenges. We will consider all of this, and our ultimate aim is to achieve full consolidation, whether that takes more time or is not immediately feasible. Right now, we are pausing on all of that.

Chase Carey, Chairman and CEO of Formula One

In terms of the broadcast landscape, our multiyear deals, which started in 2021, influence our current discussions. The pandemic has not had a significant impact on interest in the sport. Major events continue to hold unique value, though this varies by country. Generally, subscription-based services differ from ad-supported platforms. Pay sports services faced challenges during the absence of sports, but as they return, it reaffirms the significance of those events. Overall, the long-term agreements in the broadcast world have minimized the pandemic's effect on our pre-COVID discussions. While there are anxieties about the short-term outlook, there is also confidence due to increased focus on home activities, particularly watching content on screens.

Brian Russo, Analyst

This one's about SiriusXM. Greg, in one of your past Analyst Days, I think you made a case that the TV and film business has challenges because certain technology companies have entered the space and they're spending more on content because they either have alternative ways to monetize or they're not valued on near-term profits. It seems like a similar case could be made for like spoken word content in the audio space. And I'd love to get your view on why this may or may not be a good analogy and what the implications could be for Sirius' content costs?

Gregory Maffei, President and CEO

I believe the analogy is not perfect, but there are aspects worth considering. For instance, Spotify has derived significant benefits from their perceived shifts, especially regarding podcasts. It’s important to note that all players have a foundational level of music content, along with varying amounts of unique offerings. Sirius has a substantial amount of differentiated content, exceeding most competitors, whether it's sports from ESPN or Formula One, or access to NFL and MLB games, alongside business programming from CNBC and comedy. This diverse content is a key reason we can charge a premium and maintain growth with very low churn rates, placing us in a favorable position. As Jim Myers noted, podcasting will play a significant role in our business, contributing a percentage to overall listening that will likely be moderate. We are still in the early stages of podcasting. There are certainly personalities with exclusive deals that attract audiences, but high-value content that hasn't yet joined the podcast realm is expected to enter. Our efforts with Stitcher and Simplecast are aimed at facilitating this transition into podcasting. While the market appears to have reacted positively to others' moves in podcasting, we will see how it unfolds. Unlike the video space, which includes numerous players with diverse monetization strategies, the podcasting landscape has not been heavily influenced by such forces. For now, it remains a less differentiated market, and we already offer a significant amount of unique content. We'll see how this evolves.

John Tinker, Analyst

Could you discuss the attendance at the stores, restaurants, and Battery Park, especially considering some rent deferrals? Also, since you are ahead of schedule with the build-out, I assume you’ll be in the large tower for the all-star game next year. I understand you sold some rental apartments. How do you view the property as part of your portfolio?

Gregory Maffei, President and CEO

I'll address the second part of the question, and then I'll turn it over to Brian to discuss the first part about our status at the Battery. We are focused on making decisions regarding capital use and its valuation. Depending on our current position and the valuation we receive, we might consider liquidating some of the Battery portfolio. Given the current state of real estate, particularly in office and retail sectors, that may not be very likely in the short term. If we manage to fully lease an office space, our outlook could change. Our location is not in a downtown urban area, which is currently more troubled and where uncertainties about the future exist. We might benefit from some de-densification trends. We'll monitor our leasing progress and valuations before making decisions about alternative capital uses. Brian, could you please update us on the rental situation?

Brian Wendling, Chief Accounting Officer

Yes. So with the Battery, as Georgia started to open up, the Battery started to open up. They started with take-out at a limited number of venues. They're almost fully open now. There's in-person dining at quite a few of the venues. They're following various safety protocols to make sure their patrons are safe and everything's clean. The Omni's booking up fairly well, especially those corner rooms that can see into the park, as you might expect, and the Aloft just opened recently. So everything is going pretty well at the Battery.

Jason Bazinet, Analyst

I just had a question for Mr. Carey. In general, investors like you as a manager, and they like the Formula One asset, and they like what you're doing with the asset. But you said since inception that you're very focused on the long term, making decisions on the long-term value creation, not short term. And the debate that's emerged is sort of when the summation of all the decisions that you've been made will sort of manifest themselves in something that's sort of obvious to the buy side in terms of a better EBITDA number, materially better. My question is, based on everything that you know and based on that sort of potential race schedule that you saw in 2021, do you think 2021 could be the year? Or as you sort of add up all of the puts and takes and decisions, does it feel more like a 2022 or 2023 sort of story?

Chase Carey, Chairman and CEO of Formula One

If you look back at the beginning of this year, we believed we were following the course we set three years ago, where we identified 2017 and 2018 as crucial for laying the foundation. We've been transparent about the time it would take to build this foundation, and while there’s an expectation for quick results, we focused on long-term growth during those years. We see 2019 as just the first step, with 2020 and 2021 anticipated to bring further progress. Our trajectory was promising, although we recognized that achieving significant growth would take time. As we go into 2021, we still believe we are on a solid path, regardless of the pandemic's impact. Excluding any unforeseen complications from the virus, we expect 2021 and 2022 to closely align with the growth trajectory we envisioned at the start of this year, with 2019 being a growth year and 2020 significantly building upon that.

Zachary Silver, Analyst

Okay. Great. Two on Formula One. The first is, if you could talk about how F1 TV Pro fits into some of the more recent broadcast renewals, and also whether you see that as an opportunity for some of the pay TV partners to be more of a meaningful distribution partner for that D2C service. And the second is just on the flyaway races that began a little later on. They're obviously more demanding from a logistics perspective. If there are any snags, would you be able to pivot back to some of the circuits closer to home? Is there anything contractually that precludes you from doing that?

Chase Carey, Chairman and CEO of Formula One

Okay. First, there are no limitations on pivoting back to circuits closer to home if we encounter issues with the races we haven't yet announced. We are creating options on all fronts. If something unexpected happens, like a cancellation a week before a race, that could pose challenges, but if we have sufficient time, we are definitely building in contingencies in various directions. Regarding F1 TV Pro, the situation varies by market. The most crucial aspect of F1 TV Pro is to ensure its quality and to expand its access to consumers. We did experience a glitch during the first race, but the system has been functioning well since, and we are making progress with the product. We are exploring partnerships to enhance the experience for traditional television audiences, offering a tailored product for true enthusiasts. This collaboration aims to create shared success between us and our partners. We continue to operate F1 TV Pro as a standalone option against traditional TV but believe that developing it with our partners as a complementary service will provide both short-term and long-term opportunities. The digital aspect of our operations is flourishing, leading to increased viewership and engagement. We are constantly seeking ways to improve and expand our offerings, and these opportunities are becoming a vital part of the sport and its content landscape. Ultimately, our focus is on reaching and engaging with fans effectively.

Kannan Venkateshwar, Analyst

So Greg, one quick one on Sirius for you. With the Stitcher acquisition, I mean, historically, Sirius has been anchored more to the used car market. And the conversion rates have been linked to that. But with the Stitcher acquisition, you now have a brand potentially that can allow Sirius to decouple to some extent from the auto market. Does this really open up opportunities outside the U.S. to a greater extent than has been possible? And is Stitcher potentially an independent brand that can be used in that respect?

Gregory Maffei, President and CEO

Thank you for the question. We have been expanding beyond the car for some time, as seen with the Pandora acquisition. You are right about our efforts to go outside the car and the U.S. with our recent acquisitions. It remains uncertain how much of our content will reach outside the U.S. and its impact. Generally, the U.S. market is more appealing due to the average revenue per user, so we proceed with caution. While we recognize the benefits of scaling internationally, those markets tend to be less desirable for us, partly because of average revenue per user and certain protections under the DMCA. We intend to approach this carefully. Notably, our OEM automotive partners would like us to expand globally as they prefer bundled services across all markets when building vehicles. We will cautiously explore opportunities outside the U.S., as we already have a presence in Canada and Mexico. Historically, Pandora operated in some English-speaking markets beyond the U.S., but we will proceed with caution in that regard.

Chase Carey, Chairman and CEO of Formula One

I just want to assure that we appreciate your interest and participation. This concludes our earnings call. Thank you for joining. We look forward to speaking with you again soon.

Operator, Operator

Ladies and gentlemen, this does conclude today's call. Thank you for your participation. You may now disconnect.