QVC Group Inc. (QVCAQ) Earnings Call Transcript & Summary

Okay. Quick disclosures. Please note that all important disclosures, including personal holdings disclosures and Morgan Stanley disclosures, appear on the Morgan Stanley public website at www.morganstanley.com/researchdisclosures or at the registration desk. I'm Ben Swinburne, Morgan Stanley's media analyst, and I'm really happy to welcome back to our conference Greg Maffei, who is the President and CEO of Liberty Media. I'm going to just run through all of these: GCI, Liberty, Liberty Broadband, he's Executive Chairman of Qurate Retail, Chairman and CEO of Liberty Trip. He's also Chairman of the Board at Live Nation, SiriusXM and TripAdvisor and a Director of Charter and Zillow. I think almost all of those companies have been at this conference. So you'll take questions on all of them. So...

We're a full-service Morgan Stanley organization.

Yes. Thank you. The sell-side full employment act. Well, Greg, thanks for being here. I appreciate you coming on what I know is a kind of a loud week. So thanks for coming.

It is, it is. Yes.

Maybe we can start out. When you look across all of TMT, where are you focused thematically? And where is Liberty looking to put money to work either in terms of existing investments or sort of new opportunities?

Well, there are probably 2 places where we have either scale or natural advantages in the portfolio, which would be around music, audio, in general; and probably around live events, particularly in sports and concerts. So those are 2 areas where we would seem to have advantages to deploy capital. And they're 2 areas we like.

One of the things that obviously has come up a lot at this conference, given what's happened with the market and macro, is just the volatility and risk around coronavirus. You guys -- you're overseeing and involved with lots of companies. When you look at your portfolio, where do you think you're most insulated? How should we be thinking about the business impact from what we've seen? And what are you guys doing to try to manage it?

Well, I'm not sure how you manage it in a way. I think you -- I believe, and you take the risk that you're going to go through a cycle here, and I don't think it's going to be -- I think it's going to be shorter rather than longer, and you try and batten down the hatches until that's done. You've certainly seen things like travel be hurt. We've seen, certainly, the stock market take down live events companies. But that's not necessarily what's happened with the business. I think we continue to sell out concerts. Harry Styles opened up 5 shows and sold out in a matter of hours. That's an October show. People are still buying tickets for concert events. And I don't think there's yet been a public reaction to at least purchasing. There's some risks in our business. Like Formula One, we did have to -- not our choice, the Chinese government told the Chinese promoter not to hold the event in April. But so far, we're still on a go-ahead basis in Formula One, with the next 3 races are -- the beginning of the season in Australia, then Bahrain and then Vietnam. And all -- today, are all systems go.

Anything on the supply chain front with companies like SiriusXM, Pandora or anything on the Braves front with live events?

We are not experiencing supply problems at the Braves. We are experiencing some at things like QVC and Zulily, far more -- particularly Zulily, which had a longer supply chain and had a lot of Chinese-made goods. But we're sort of getting -- working past that. Most of our other businesses, whether it be a Charter or a SiriusXM, supply issues are not really issues.

Got it. Okay. Why don't we start then in terms of talking about the companies on Formula One? So you guys reported last week, it's been, I think, 3-or-so years since you've made the acquisition. Give us a sort of state of the state for that business in terms of what you guys are trying to accomplish. What's the state of the organization and sort of the strategy sitting here in early 2020?

Well, I think Chase and team have done a great job there, turning around the -- a business which had no social digital media presence, had no -- had sort of flat to down audiences, both on television and on live events, all have been growing, growing sponsorship. So I think that's probably grown at less of a rate than we would hope, but I still think there's a lot of opportunity there. Growing the number of races, there's a lot of demand by promoters for -- to bring Formula One. I think we have 40 locations around the world which have reached out to us for Formula One races. Now we're both limited by how many races we can have, what tracks or what situations or cities are workable and who's got the money. So there's not 40 venues ahead of us, but that shows there's interest. We have increased both attendance at races, and we've increased viewership on a like-for-like basis. So I think all the signs are very positive. Built a team there, Chase has built a great team. I think things are going well.

So then we're all waiting for the Concorde agreement or the team agreements to be finalized. You touched on that last week. I know there's not a lot probably to add new there. But what do you guys -- are you able to use this year, which is the last year of the existing -- are you able to kind of fine-tune and test some of the things that you're going to put in place as we move into '21 and beyond?

Well, the Concorde agreement is a relationship with the teams, and that really has several elements. And some of those key elements have already been completed, the ones that we did in conjunction with the FIA, both starting with the fact that there's a cap on spending, something that had been discussed for years and years and years that Bernie Ecclestone and Max Mosley couldn't get done, Chase and team, with the help of the FIA and Jean Todt, have gotten done. We've changed the -- how the cars will look for the '21 season to create more on-track parity and a less drag off the back of the car, a lot more overtaking. So there are a whole bunch of parts of the Concorde agreement that really relate to our relationship with the regulator, the FIA, that are complete. The part that you rightly point out that's still not yet signed is how the splits will be with the teams. We've had a proposal in front of them. We think we have largely agreement. There's always rumblings. That's the nature of Formula One. But I'm confident, in the next several months, that will get done.

Where do you think you can take the race calendar to over time? And are there opportunities to maybe even make that more financially attractive on an average race basis over time?

So by the terms of our deal with the FIA, we could go to 25 races. I think that would be problematic to do in any short-term time frame. There are a lot of human factors around what the drivers are willing to do, what the teams are willing to do logistically. So that's not been our path. We've gone from up to 22 races. I think there's both an opportunity to improve the monetization of those races from promoters over time. But in addition to improve the monetization at the races, hospitality, other kinds of things that don't occur as well as they could that are race-related and race-tied that I think we have opportunity on.

You guys sound particularly excited about Miami, which is a race that's been sort of in the works for some time. What is it about that race? I think Chase maybe described it as a tentpole event. What are the attributes of that race that we should be excited about? And financially, I believe there's been some press reports that it might be more of a rev share model. So how should we think about the economics of that race?

Look, we have a powerful business with 3 big revenue streams: some kind of a broadcast stream, sponsorship stream and promoter stream, how much we get paid for actually bringing the race. And there are tensions between all three. If we put everything on free television, we could probably grow our sponsorship revenue more quickly because you're showing more eyeballs for sponsors. Conversely, if we put everything on a pay platform, we would probably dramatically increase our broadcast revenues but threaten our sponsorship revenue. Bringing it in places like Miami where you have a real ability to both make it a centerpiece for, as Chase said, a tentpole for not only the United States but really for South America because Miami truly is, in many ways, the capital of South America, certainly for the kind of audiences we want to attract. We think there's an enormous opportunity to both increase exposure, increase demand and our -- potentially our broadcast revenue in the United States, increase what we will get in sponsorship. Our high-end sponsors, Rolex, Heineken, they care very much about exposing it to the broadest and right audiences, and Miami has a great chance to do well both.

How would you assess the popularity of the sport here in the States now? And how is the Drive to Survive factor impacted that?

I think the popularity in the United States is growing with a lot more headroom. We are the fastest-growing sport on social media of any scale, admittedly from a low base. A large part of that's been driven in the United States. And things like Drive To Survive have been tremendous in broadening the audience. A number of people who have come up to me and said, "I knew nothing about Formula One and I watched it." Particularly -- actually, demographics that we wouldn't normally get, whether it be younger people or women who were not necessarily originally Formula One fans, Drive to Survive has been a great asset in growing that audience.

You guys have, I believe, a whole bunch of European television deals up at the end of this year. A lot of them were done right after you bought the company. So maybe you could just talk about the position you're in today as you go into those negotiations, I think maybe even France may have been recently extended, relative to where you were in kind of late -- I think it was '17 when you last were at these tables.

Yes, I think -- look, we always have a rolling set of both promoter deals to recut and broadcast deals to recut and sponsorship deals to recut. We're not really dependent on any one single deal. There are some that are larger than others. We are in the midst of doing, for example, Germany, and I'm optimistic about how that's going to turn out. I think in general, our leverage has gone up with promoters because there's increased interest in the sport. But candidly, the thing that drives us to get the best broadcast deals besides interest in the sport, besides competitiveness is competition. The more broadcasters you have bidding, the more there's a sense of urgency, the more you can play the potential cut, one against the other. That's the best attribute possible. I'm very confident about where we stand on those. But longer term, one of the best upsides in the biz, frankly, is the entry of new, perhaps larger digital players who may enter the sport and bid for the sport. And that would be only a positive in us -- for us. And I think that's one of the upsides we have.

Greg, where is your head at now and Chase thinking about the digital rights? Because you guys have built this over-the-top product, those are valuable rights, you can go alone and continue to distribute that on your own or potentially partner and maybe sell those back. How are you thinking about that -- those trade-offs as you're going through these?

Look, I think this is a -- the digital rights are valuable, and there's something that's largely additive. I don't think just on a [ okay ] basis of saying F1 Pro or one of our F1 TV that we own is going to be at a massive revenue stream. It's probably more likely to be an additive for truly dedicated fans or potentially a way to tie our fans more closely. Some of the challenges around that are so much of the races were already shown on air. When you only have 21 or 22 races, there's not that much content that we're holding back compared to other sports. A great example is WWE. They've got maybe half or more that are not available on any other broadcast platforms and are only available through their own over-the-top platform. We don't have enough content to do that. We have a bunch of shoulder program, and we have a bunch of camera angles, we have a bunch of archives. That's for truly dedicated fans. But there are also things we can do for more general fans which may not be paid but maybe tying them and building fan interest.

And just to wrap up on the primary revenue streams. You mentioned advertising and sponsorship. Maybe -- it's grown nicely, maybe a little slower than we originally thought. But where is the organization today? Do you guys have a lot of inventory that you could sell on top of what you've already done? Is there a big opportunity to keep growing that business from here?

The traditional way it was sold was paint, which was basically eyeballs on the track. We just talked about building out things like F1 TV. One of the things that is clearly part of what we can do is offer things like digital presences and others that grow other ways to tie. And other things we can do is activations on track. So when you go to sponsors, it's not just we're going to show your sign on track, it's you're going to get these digital presence, you're going to get these physical presence, you're going to get these kind of opportunities, even down to things like Hot Laps, which is allowing your high-end sponsors to get a turn around the track in a race-type car. All of those are making a much broader sponsorship pitch than just you're going to have 20 feet at this corner.

Makes sense. And just lastly on the Liberty-Formula One tracker. There's been a lot of discussion about the live stake in that tracker. Whether that's optimal or not is substantial as a percentage of the overall equity. What do you -- how do you think about rationalizing or optimizing that? And what's kind of the time frame that's realistic?

I think it's candidly somewhat difficult because of its scale and the high value it has. And it maybe more naturally belongs over with the LSXMA side. But given the discount that LSXMA trades at compared to the underlying SXM, I think it's hard to imagine, for example, paying to move it across and issuing LSXMA stock that would be counter to, I think, shareholder value and not on anybody's interest. So while I'm sympathetic for people who say I want a pure Formula One play, I think you should think more broadly about -- we're pretty bullish on live. We're pretty bullish on Formula One. We've had a good track record with both. They both are around live events. I think there could be some synergies down the road over time. It's not to say they're on, as I said, synergies also on the music side, but it's a valuable asset.

What about a fourth tracker spinning out live into Liberty Live or something?

Complicated. You really need to have another asset in there that's beyond just the stake in live. So you really would want to have something. And I -- we'd be unlikely to want to put anything there that wasn't ultimately beneficial and more tied to live, so putting some orthogonal third other kind of asset in there seems to go counter to the idea of trying to get a pure story because you pollute that one even more.

Okay. Well, there's one more tracker. So I figure I'd take a shot at it.

We have tracker-palooza.

Okay. So let's pivot to Liberty Sirius. We had Sirius here earlier this week. Business has been doing really well. You guys bought back, I think, between November and January, something like $50 million worth of Liberty SIRI K and A shares. You have about $500 million of cash on the balance sheet there. And the discount is, whatever, 25% to 30%, depending on how you calculate it. So why not put that money to work faster?

We are. We are putting it to work. Not only do we have that capacity of cash, we have $140 million, $150 million a year of dividends that come out of SIRI. That's our share. We have incremental borrowing capacity. So we are definitely putting that to work. We keep saying, if you want to give us a $5 billion or $6 billion discount, missed our market on the underlying SIRI shares, we're going to take advantage of it. I'd also note, as we talked about on our Investor Day, we have an effect because we've issued a convert into the underlying SIRI that actually sits at FWONK. We have some exposure at FWON to the growth of Liberty SIRI, and we are taking advantage of that. Same way with FWON, we're buying in some of those LSXMA shares and taking advantage of that discount and protecting ourselves against a potential rise in LSXMA.

We spent a lot of years at this conference and others talking about Pandora and SiriusXM and the value of these businesses. Greg, sort of 18 months after closing that acquisition, what's your view on sort of the growth outlook for the Pandora business inside of Sirius?

Well, I think you have to measure it in a couple of ways. First, we've totally cauterized the issuance of the stock that we did in the Pandora acquisition and bought it all back. It's substantially below, we took advantage of a depressed price and bought it all back, probably sub-$6 on an SXM basis. The business was profitable last year. In fact, it would have been able to add substantially to the earnings because our ability to define cost synergies was enormous. We probably didn't add as much of the earnings as we like because we've reinvested a bunch of it in growth. The most disappointing part -- our digital monetization of the business that they have has been excellent. We are the largest digital audio ad player in the world. Because of Pandora, it added a new revenue capability to ourselves that we didn't have at SXM. So that creates a lot of other opportunities for the future. The most negative part is the decline in MAUs, monthly active users. How that -- and we're going to attack that and see how we want to take it, slow that or change that trajectory. That is a somewhat of a war zone where people are fighting for subscribers, and we have to think about that. But it's a profitable business today and one that I think brings us a lot of capabilities. So we're very happy with where Pandora's going.

There's been a lot of money put to work. Spotify, in particular, was here this morning on the podcast front. You guys have been in talk for a long time. Howard Stern is, to some extent, the king of talk radio. How are you thinking about...

King of all media, just ask him.

How are you thinking about the podcast business model when you think about SiriusXM and Pandora or more broadly?

Look, I think there are -- the podcast model is evolving, and there are a lot of pieces here. First, how many podcasts are going to be truly unique and dedicated to one subscription service. Either because they have their own or they're part of some larger subscription model remains to be seen. Spotify had done a couple of high-profile acquisitions of things like Bill Simmons. I think they're going to be the new ESPN, maybe. It remains to be seen. Most podcasts are going to want the largest exposure possible, so they will not be exclusive. That will be interesting to bet how that works. Then there's the part about podcast monetization in ads, which has been mostly poor. There's been some attractive things about authors reading in the -- ads within their podcast that's attractive but doesn't scale. There's very little protections that high-quality advertisers want about where their ads are going. A lot of the same issues that go on around with being on Facebook ads or Google ads. Same things happen in podcast, way less developed. As I mentioned a minute ago, we are the largest digital audio ad seller in the world. I think there's a real capability for us. There's a whole issue around the platform side who hosts, tools, monetization, ad monetization, that are really underdeveloped. So I think we'll see how this all plays. I'm probably less convinced that there are -- there's the Howard Stern equivalent that this is the -- these podcast content that's going to change the world. I think that it's going to be much more likely it's a long tail, lots of audio content of various forms and trying to organize them, provide search, provide guide, provide hosting, provide monetization. I think that could actually be a more interesting opportunity.

That's interesting. We have iHeart on stage later today, on this stage. You guys have an investment there in iHeartMedia. I believe you filed a request with the DOJ to increase your stake. Can you just talk about that investment, that business, and sort of how you're thinking about broadcast radio?

So we own 5 -- just under 5%, 4.8% or something. At the time we made the investment, we agreed with the DOJ. We would -- if we ever want to increase it, we would go for approval. We have done that to provide flexibility and have some intent potentially to do that. What they are doing at iHeart is very strong relative to the rest of the industry. I do think, over time, we'll see what the terminal value of all of it is and what our ability, frankly, with products like Pandora to move terrestrial radio customers to our service is interesting, our ability to target, our ability to do different things. They obviously have their own digital initiatives at iHeart and have done well with them. They also have done a lot around podcast. Some degree around the monetization side but a lot around the front side about some of those exclusives, we'll see how much traffic that drives. But they are -- I have a lot of respect for Bob and Rich. I think they are very capable within the space that has currently a big bump around political and the like, but unclear how long, where the growth in that long term is. And I -- as a shareholder, I'm not anti that, but we watch that and think about how that's going to play out.

Does this make -- is this a more valuable business if it was somehow tied to either SiriusXM or Live Nation or something? Is this grand audio...

All the audio business is more valuable if tied to SiriusXM. We'll see.

I don't know. Maybe. Maybe not. Okay. Let's shift gears quickly. I want to ask you about Qurate, which reported last week stock sold off after earnings. What do you think caused the market reaction? Or what's your outlook on that business for this year and beyond?

Look, they're in a -- they've got some headwinds over the coming years or so about declining video subs that impacts them and just generally a difficult e-commerce market. They have some great strengths, including high free cash flow and continued loyal customer base. I think the market may have reacted -- overreacted, in our judgment. Despite those headwinds, for 2020, we both expect higher free cash flow conversion but absolutely higher free cash flow -- operating free cash flow out of the business. So I think we're optimistic that it's undervalued. We are. We have not been buying back stock, which has caused some consternation. I think we're building some cash, looking at alternatives for shareholder value and expect to see us make some moves in 2020, hopefully, to show that.

Great. Let me ask you on Liberty Broadband and Charter. And then if there are questions for Greg in the audience, please wave -- raise your hand and wait for a mic. We had Super Tuesday yesterday. Obviously, there's always focus on the regulatory side of the cable business. But we, at the same time, have lived through a Title II regime in the past. As someone who's heavily invested in Charter and close to the cable business, what do -- how do you think about the risks around a Democratic administration for the cable business?

I think we are providing a lot of broadband at attractive prices to a lot of Americans. Obviously, the biggest risks around our business arguably as we move from a less video-tied business to a more broadband-tied business are probably some threat around new technologies. 5G has been discussed. I don't think that's a near-term threat. And secondly, regulation. I also think that's probably not realistically a threat. But obviously, having less radical, less democratic socialist candidate is probably a plus in terms of reducing that risk.

Okay. I've got more questions for you, let me just see if there's anything in the audience for you. Yes, over here, if you can just wait for a mic. Any comment on the Astros scandal while we're waiting for the microphone?

I went down to spring training, and they didn't bring my tin can, so I can't really hear about the banging behind them.

I think they got it.

I didn't get a lot of laughs.

The big Braves fan, big Astros fan.

We were very disappointed that when Rob Manfred, the commissioner, was announcing all the -- what the remedies would be and everything that went on, he actually did it in North Port, which is just south of Sarasota, our spring training facility. And the whole thing was done with the Braves background, somehow implying we were involved. We just happen to be the setting. We had nothing to do with the scandal. Yes?

You had mentioned WWE earlier. There's been a lot of management changes there. I'm curious your perspective on how they should best move forward. They're exploring strategic alternatives on the...

Management changes?

At WWE.

WWE, yes.

Yes. I'm curious if you think that there's an opportunity there for investors and they're exploring alternatives on their OTT service, maybe doing something with ESPN+. Curious how you see that playing out.

I don't -- I've seen they have the management changes. I know they've had some issues about how much is OTT in broadcast, but I really am not articulate enough to comment. It's an impressive business, what Vince has built. Other than that, it's really hard for me to make a specific recommendation, sorry.

Yes, right over here in the middle. Still do want your views on every stock, whether you're involved or not.

I don't want to piss -- have you guys met Vince? You don't want to piss him off. He's a pretty big guy still.

You've been pretty clear on your view of where the sort of traditional linear video world is going and its battle in the over-the-top world and content cost and everything. Do you see any analogies as you look at the audio world in terms of perhaps one skilled player or 2 skilled players really crowding out everyone else, particularly as we look at maybe linear radio and things like that going away?

So it's a great question. I mean the market is very different in a lot of ways, right? You have 3 big guys who give you access to everything. So there's not the same -- so far, hasn't been the same case where people have spent the way they've been able to spend on video, 10 million-plus per hour kinds of things. Even these podcasts, some people may have spent -- our friends at Spotify may have spent a lot of money to buy some of these things. But the cost per hour to make a podcast is far less. And the long tail suggests there's more diversity. Now maybe there's going to arise something that's got to be must-see, must-have -- must-hear, rather, content. But that really hasn't been other than the music. There's been the diversity. The closest thing around from us have, frankly, was ours in Howard that became probably the highest profile, whether that [ arises ]. I do think it's -- I talked about -- just the trends are it's under utilized, the explosion devices opening up more doors, more places for you to hear, explosion of kinds of content, and frankly, the cost of that content and the ability to increase monetization, all the trends are right. The other thing that's reality is that the -- you've got Google, Apple, all, playing, but not really in this part of it. They really haven't concentrated, they seem much more focused on spending in video. Thank God. I don't want to be against guys with those deep pockets. And the biggest players in audio really are in the distribution side, Spotify and ourselves. We actually have the biggest -- we are the largest by market value, enterprise value, equity value and by earnings. So I like being in a space where we are relatively more resourced rather than a space where we're going to get overwhelmed. So could it all happen? Sure. Nothing is perfect, but I feel better about our position and our resources in this space and the trends in this space compared to the video side.

Greg, when you look around your -- all the trackers, all your investments given the market correction in the last couple of weeks, what's the most oversold, interesting of the lot?

I won't -- I don't know well enough. But if you look -- just look at the vulnerability of Live Nation, which is relatively low, concerts get rescheduled, people are still buying them. But even if it goes -- it seems overwrought. I guess the worst could be you lose a festival or 2 because those are probably harder to reschedule. But their reliance with many, many tens of thousands of events is fairly low on any one. It strikes me that, that perhaps is a market overreaction.

Okay. Well, I know we're out of time. Greg, thanks for coming back.

Thank you very much for having me.