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Edited Transcript of FWONA earnings conference call or presentation 8-Aug-18 4:15pm GMT

Q2 2018 Liberty Media Corp Earnings Call

ENGLEWOOD Sep 15, 2018 (Thomson StreetEvents) -- Edited Transcript of Liberty Media Corp earnings conference call or presentation Wednesday, August 8, 2018 at 4:15:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Charles Carey

Formula One Group - CEO

* Courtnee Alice Chun

Liberty Media Corporation - IR

* Gregory B. Maffei

Liberty Media Corporation - President, CEO & Director

* Mark David Carleton

Liberty Media Corporation - CFO

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Conference Call Participants

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* Amy Yong

Macquarie Research - Analyst

* Benjamin Daniel Swinburne

Morgan Stanley, Research Division - MD

* Bryan D. Kraft

Deutsche Bank AG, Research Division - Senior Analyst

* Bryan Daniel Goldberg

BofA Merrill Lynch, Research Division - Research Analyst

* James Maxwell Ratcliffe

Evercore ISI Institutional Equities, Research Division - MD & Senior Analyst

* Jason B Bazinet

Citigroup Inc, Research Division - MD and U.S. Cable and Satellite Analyst

* Jeffrey Duncan Wlodarczak

Pivotal Research Group LLC - CEO & Senior Media and Communications Analyst

* John Philip Tinker

G. Research, LLC - Senior Research Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Liberty Media Corporation 2018 Second Quarter Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded today, August 8.

I would now like to turn the conference over to Courtnee Chun, Senior Vice President of Investor Relations. Please go ahead.

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Courtnee Alice Chun, Liberty Media Corporation - IR [2]

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Thank you. Before we begin, we'd like to remind everyone that this call includes certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements about business strategies; market potential; new service and product launches; discussions involving iHeartCommunications; plans for the Battery Atlanta; matters relating to Formula One, including digital initiative, new races, new cost structures, potential governance changes, sponsorship opportunities and distribution renewals and other matters that are not historical facts.

These forward-looking statements involve many risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements, including, without limitation, possible changes in market acceptance of new product or services, the ability of our businesses to attract and retain customers, competitive issues, regulatory issues and the availability of 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 of Liberty Media and adjusted EBITDA of SiriusXM. The required definitions and reconciliations, Schedules 1 through 3, can be found at the end of the earnings press release issued today, which is available on our website.

This call also may include certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding Liberty TripAdvisor Holdings. These forward-looking statements involve many risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. These forward-looking statements speak only as of the date of this call, and Liberty TripAdvisor Holdings 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 TripAdvisor Holdings' expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

Now I'd like to turn the call over to Greg Maffei, Liberty's President and CEO.

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Gregory B. Maffei, Liberty Media Corporation - President, CEO & Director [3]

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Thank you, Courtnee. Good morning or good afternoon to some of you on the East Coast today. Speaking on the call besides myself, we'll have Liberty's CFO, Mark Carleton; and Formula One's Chairman and CEO, Chase Carey. During the Q&A, we'll also be available to answer questions related to Liberty TripAdvisor.

So starting with Liberty SiriusXM. We did continue our repurchases of the stock and bought an additional $161 million for a total purchase of $261 million through July 31. We effectively bought those SiriusXM shares at a $4.69 look-through price over the period to year-to-date.

Regarding iHeartCommunications, some of you may note, we pulled our initial offer after reviewing the results in the projected balance sheet, which were below expectations and negatively impacted our estimate to value. We do continue to own $660 million in aggregate principal amount of iHeart bonds.

Looking at SiriusXM itself and had outstanding second quarter results. Revenue was up 6% to $1.4 billion. I think there's lots of good news in the quarter, 2 standouts: self-pay net adds of 483,000 and churn down to 1.6%. Liberty Media ownership, as of July 23, stood at 70.5%.

Turning to Formula One Group. A great 2018 season with more exciting outcomes, varied podium finishers, increased overtaking, more drama and still the same glamour.

In sponsorship, we signed a new technology provider and global sponsor in Amazon Web Services. We renewed key global sponsorships in multiyear agreements. We also extended the Belgian Grand Prix at Spa. I would take a word of caution as some of our more perspicacious analysts have noted, quarterly results will vary due to rev rec, timing of races, number of races and the nature of the business. We remain very positive about the long-term direction that we're headed in the right path.

Live Nation had another fantastic quarter. Revenue was up 7% for the quarter. All divisions continue to deliver double-digit operating income and AOI growth, particularly a strong year for amphitheaters on track to grow by 3 million fans for the full year.

Turning to Braves. In second place in the NL East after an exciting victory last night. In our second year at SunTrust Park, ticket sales have increased over 2% versus our inaugural season, which is fairly unusual, including 13 sellouts and a new record attendance for SunTrust Park.

There are several exciting developments at the related real estate development, the Battery. thyssenkrupp, a multinational powerhouse with over $41 billion in revenue will build its elevator business' North American headquarters and innovation center complex at the Battery. This will bring 900 jobs to 3 facilities on a nearly 5-acre site. We are progressing with the sale of our residential development and have identified the potential buyer. We'll provide more details once that transaction closes, but we forecast an expected IRR on that transaction of 22%.

Based on current sales, we are projecting the Battery will have 3 of the top-10 grossing restaurants in the Atlanta area by year-end. We also announced the planned development of an Aloft Hotel this morning. Final announcement -- we -- that final announcement completes our development plans at the Battery.

Over at Liberty TripAdvisor, I'm looking at the underlying results for Trip. Trip had a fantastic quarter, full stop. The third straight quarter of hotel adjusted EBITDA improvement even with significant marketing reductions. In my view, the initial market reaction on these quarterly results was just wrong. Seems the stock has been coming around, but I still think they're missing the larger story.

Trip is executing very well. It's optimizing its SEM marketing mix in hotels. It has improved its product offering. It is growing its advertising and sponsored listing, which is a highly profitable incremental business. And it's increasing its bookable supply for nonhotel offerings and is a leader in that space.

Consolidated revenue was up 2%. Adjusted EBITDA was up 8%. And net income was up 19%. Mobile accounted for nearly 50% of hotel shoppers, and mobile revenue per hotel shopper again grew double digits and reached a new all-time high. With these solid results, we now expect to deliver year-over-year consolidated adjusted EBITDA growth in both operating segments in 2018.

Notably, user reviews and opinions also grew significantly, up 24% year-over-year, and have reached a staggering 661 million as of June 30. Fun fact of the day to amuse your friends, the single most reviewed item with over 138,000 reviews is the Sagrada Família in Barcelona. Be sure to check out my review. It's #114,782.

With that, I'll turn it over to Mark for some financial results.

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Mark David Carleton, Liberty Media Corporation - CFO [4]

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Thank you, Greg, and for your review as well. At the quarter-end, Liberty SiriusXM Group had attributed cash and liquid investments of $110 million, excluding $64 million of cash held at SiriusXM. The value of the SiriusXM common stock held at Liberty SiriusXM as of August 7 was $22 billion, and we have $850 million in debt against these holdings. We paid down $300 million in margin loans during the quarter.

Formula One Group had attributed cash and liquid investments of $109 million, excluding $89 million of cash at Formula One, at F1. Formula One Group has attributed public market securities with a market value of approximately $4 billion as of August 7 and including the intergroup interest in the Braves Group and our stake in Live Nation. We have $2.1 billion of attributed debt, excluding the debt at F1.

Debt decreased $354 million during the quarter as we paid an extraordinary additional distribution of $229 million on the exchangeable bonds due to AT&T's purchase of Time Warner. And Formula One paid -- repaid $125 million of their operating debt. Braves Group had attributed cash and liquid investments of $113 million.

At quarter-end, Liberty SiriusXM group had an attributed principal amount of debt of $7.4 billion, which includes $6.5 billion of debt at SiriusXM. Formula One Group had an attributed principal amount of debt of $5 billion, which includes $3 billion of debt at F1, and Braves Group had an attributed principal amount of debt of $629 million.

F1's total net debt to covenant OIBDA ratio, as defined in their credit facilities, was approximately 7.3x as of June 30 as compared to a maximum allowable leverage ratio of 8.75x. We communicated a target total net leverage ratio for Formula One of 5 to 6x bank covenant OIBDA, and please note that these leverage ratios are for the Formula One business specifically and not the Formula One Group overall.

And with that, I'll turn it over to Chase Carey to talk about Formula One.

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Charles Carey, Formula One Group - CEO [5]

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Thank you, Mark. We're just past the halfway point of our 2018 season as we head in a number of...

(technical difficulty)

All right. Hopefully, we're back.

I guess, what I was saying, we're heading into our summer break a little over halfway into the season with our last race, the Hungarian Grand Prix, being the 12th race in our 21-race season. It's been a successful season on the track, as Greg said, with competition at the top among both drivers and teams as well as a number of exciting and dramatic races.

We're also encouraged by the momentum in fan engagement as we begin to turn around the declining trends in the sport during the past 5 to 6 years. 44% of our avid fans are more interested in the 2018 season than they were in 2017 versus only 7% a year ago. 66% of fans believe F1 has improved versus 2 years ago, while just 15% say it's worse, and 67% of fans say F1 is in good hands with Liberty while 10% disagree.

Live attendance in aggregate is up 4% year-on-year at the 10 tracks where we raced last year. And attendance at the 2 tracks we did not have in 2017, which were France and Germany, was well in excess of expectations. In Germany, the promoter even had to build new grandstands to meet demands. As importantly, fan reaction to our enhancements, like fan zones, merchandising, track tours, hot laps, paddock and Paddock Club changes and more, has been great.

We're also encouraged by our momentum in television viewing. Race day viewership year-on-year is down 4%. However, that is largely due to our move from free to pay television in Italy. Excluding Italy, our television viewership is up 3% year-on-year, and our Saturday viewership for qualifying is up even more. We're especially pleased with our performance in our 2 key growth markets, the U.S. and China, where viewing figures are showing particularly strong uplifts.

Fans have reacted positively to our enhancements in cameras, sound, graphics and other elements in our broadcast, and we have more to come. 69% of our fans say F1 TV coverage has improved, while just 13% say it's worse.

And our digital engagement continues to-date to be an area of dynamic growth. Year-to-date, our interactions during race week are up 60%, and our video views are up 110%. And we're still in the early stages of upgrading and expanding our digital platforms and TV.

We continue to move forward with an array of initiatives on the Motor Sports side of our business to improve competition, action and unpredictability. We've introduced some recent regulation changes for next season, and we'll introduce a larger list of supporting regulation changes in the coming weeks to further improve the sport.

Most importantly, we continue to move forward with the broader set of changes to cost structures, revenue distribution, regulations and governance, the so-called Concorde Agreement. We've made good progress with the teams and agree on the goals and objectives and now need to work through the details to find the right compromises as we finalize these agreements in the coming months for the 2021 season.

On the commercial side of our business, we will finalize our 2019 calendar, which we expect to look a lot like our 2018 calendar, in the next few weeks as we successfully finish off renewal agreements. We're already turning our energies to the 2020 calendar, and we're particularly excited about a number of opportunities to add new events to the 2020 calendar that we believe would really capture fans' imagination and be widely supported.

In fact, we're actively discussing opportunities on 4 continents. A potential race in Miami is one of those. We initially targeted the Miami race for late 2019, which we knew was tight, particularly for a street race where we have to navigate many local issues. It is much more important to make the race great than to push it a year earlier, so we decided the prudent choice was to focus on 2020. The support and enthusiasm in Miami is great, and we look forward to a special event there.

On the television side of our business, we're also successfully completing our renewals for next year's -- next year in a number of midsized yet important territories at rates that meet or exceed our targets. These agreements include both free and pay platforms, and we're now also addressing digital opportunities with a number of our traditional broadcast partners. For example, opportunities for television partners to distribute our over-the-top package.

It is still early days for our OTT product, which we launched on web platforms in May and intend to launch on mobile and other devices in the coming months. Our goal for this season is to improve the technology and content of the platform to enable a full commercial launch next season. We will continue to improve the OTT product over the next few seasons with expanded video, data, archival and other content. While it is still early, we're encouraged by initial anecdotal fan reaction and excited about the future about this important part of our long-term strategy.

The third major pillar in our commercial area is sponsorships, and with our new place -- new team in place almost a year, we're building great momentum here. Challenge one was to renew and expand relationships with existing sponsors, and we've done that successfully. So the key to success is to bring in new sponsors in the many untapped categories for us and to create a wider, deeper relationship with them. Sponsors today are looking for more bespoke plans and want to achieve a real connection with our fans and sport, not just a billboard.

We're creating the capability to offer this tailored relationship with expanded capabilities like fan festivals, e-sports, digital offerings, regional live capabilities and unique integrations with the sport. We're excited about the interest from potential sponsors based in new categories and from new regions around the world. Potential sponsors are excited by our story and where we're taking the sport.

Our recent agreement with Amazon Web Services was an important deal in the tech space, through which we'll build further tech relationships. The AWS agreement is an example of our ability to establish a relationship with Amazon as both a marketing partner and as a partner bringing us world-class services in the critical digital space. AWS provides us significant revenues and first-class services for our growth. Overall, no group in F1 is busier than our sponsorship group, and we believe they're on track to achieve our 2020 goals.

There's a long list of other active initiatives to expand and grow the Formula One franchise, from fantasy gaming to Twitter live shows, hospitality to our recently announced MIT business conferences. 2017 and 2018 have largely been investment years, where we're building the foundation for the future by improving the sport on the track and for the teams in the sport, reengaging fans at both live events and on traditional and digital platforms, building an organization that can tell our story and deliver the right opportunities to commercial partners across the board, and to develop the geographic and brand expansions for Formula One. We believe we're on track to do so.

Now I'll turn the call back to Greg. Thanks.

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Gregory B. Maffei, Liberty Media Corporation - President, CEO & Director [6]

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Well, that -- let me thank Chase and Mark and remind you all that we have, again -- some of you may already know, we'll be holding our annual investor meeting on November 14 in New York. As we get closer to that day, please refer to our website for additional information.

As always, we appreciate your continued interest in Liberty Media. And with that, operator, I'd like to open the line for calls.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll go first to Jeff Wlodarczak with Pivotal Research Group.

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Jeffrey Duncan Wlodarczak, Pivotal Research Group LLC - CEO & Senior Media and Communications Analyst [2]

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I had 2 on F1. On your second quarter F1 results, you're relatively high-fee Russian race last year was in April, and this year, it was pushed into September. So you effectively replaced that race for comp purposes in the second quarter with the French race, which I assume is a far lower fee. How much of your 2Q revenue and EBITDA results were simply that specific sort of timing comp issue? And I assume that's going to reverse in the third quarter? And then I had a follow-up.

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Charles Carey, Formula One Group - CEO [3]

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Yes. I guess, -- and we don't get into specific race fees, but in general, flyaway races are higher than the European races, and I'd say the biggest variant is the -- in the quarter is the race calendar. I guess, the other factor in the quarter is because we amortized across last year -- I think we had 8 races in both years through June, but last year, it's 8 of 20 and, this year, it's 8 of 21. So I think the calendar factors are the primary issue.

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Jeffrey Duncan Wlodarczak, Pivotal Research Group LLC - CEO & Senior Media and Communications Analyst [4]

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And then Chase, if you could talk about your level of optimism about getting a new Concorde Agreement, at least as it relates to getting a deal for the engine in place relatively soon.

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Charles Carey, Formula One Group - CEO [5]

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Actually, I feel good about the discussions. I mean, the devil is always in the details, and I -- we have details to work through. But I think there are -- people agree with the goals. People agree with the direction and they think -- the overall points of what we're trying to achieve and the vision for the sport. So we just need -- I think -- obviously [jealous], but we need to find the right compromises as you get into the details. Nobody is going to get everything they want, but I think everybody recognizes that. So I -- you're not done till you're done, but I feel good about the discussions and good about where we're going and good about the engagement with the teams.

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Gregory B. Maffei, Liberty Media Corporation - President, CEO & Director [6]

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Jeff, if I can add something on that. I think Chase and his team, Sean and Ross, have done a great job of turning the dynamic at Formula One, which was usually fairly short term and often fairly what's in it for me in the short term into a more general recognition to build the health of the sport to the benefit of all. And I think that is going to play through on the Concorde Agreement, where the spirit of compromise is likely to occur and be to the benefit of all in to the sport, and first of all and foremost, to fans. So...

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Operator [7]

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We'll go next to Vijay Jayant with Evercore ISI.

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James Maxwell Ratcliffe, Evercore ISI Institutional Equities, Research Division - MD & Senior Analyst [8]

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It's James Ratcliffe for Vijay. Two if I could, one on Liberty Sirius and one on Formula One. On Liberty Sirius, what's the thinking around the future of that iHeart debt position, given that it seems like a deal is not on the table at this point? And how's that affect liquidity for -- and potential buybacks going forward? And secondly, on F1. Chase, if you can give us any more color about the OTT launch, what you've learned, what's gone well, what hasn't, consumer response, or any color around subtrends, that would be helpful.

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Gregory B. Maffei, Liberty Media Corporation - President, CEO & Director [9]

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So on iHeart first. We remain watchful. I think they're going through their process, and while results there have been somewhat disappointing, we do see the potential for interesting partnerships or more. And we certainly recognize that we have an interesting position, which I don't expect to grow right now, and it's self-sustaining, we're actually in the money against our cost. And I don't think it will impact our ability to repurchase shares. We previously went, as you know, and did that exchangeable against a series stock to raise capital, and we're still spending that $400 million authorized. So I think it's a stand-alone, self-sustained element. It has a strategic potential, but it's one that we're going to be judicious about and only execute if we can come up with the right transaction.

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Charles Carey, Formula One Group - CEO [10]

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And I guess, on the OTT, I think our focus really, I'm not sure we've learned, I mean, what's gone right and wrong probably not unexpectedly. We've had some of the issues a lot of people do, some in building up tech stack to support it and that -- whether that led to the product not launching initially where we targeted and some bugs we have to work out of it. I think probably, we certainly expected and recognized that's a part of the reality. And this year is much more about getting the product to where we want to, both from a content and tech. Now the content won't be -- I don't -- I mean, the content is probably an 18-month build, so we'll add content features this offseason and probably add content features next offseason. But I think it's really, at this point, about getting the platform right from a technology and content perspective and then really commercially launching it. Maybe once you're -- when you're launching it mid-season, it really takes away a lot of the abilities to market and push it in the right way. So I think our sort of in phase is this year's priority is get the product to where we want it to at this point in time to really give it a proper commercial launch next season. I think in the positive -- and I'd call it probably more anecdotal at this point because our focus is really more on getting the platform right, is -- there's very positive fan reaction in some of the specifics. The demographics behind it are great in terms of age, spread and interest from various regions. We're not obviously in all countries, but I think we're encouraged by the interest. We're encouraged by the enthusiasm for the product -- the use of the product. Those using the product are -- the time they're spending on it, the adjusted time we've had it in the market -- it only went in, in Barcelona -- it's up multiples. So the usage of it, the demographics, the ability to tap into the young market, I think, all are encouraging to us, particularly since we're still in the process of -- we probably have worked through most of the significant technological -- the bugs but not all. And we still have some content components to add to it. But I think we feel good about where we're going, and this is a product, for us, the right thing was to, again, make sure we do it in a logical way and more important to get it right than to do it fast. And so I think, for us, this year is about getting the product to the place we want it to be at this stage of its life and then give it a proper commercial launch into next season.

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Operator [11]

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We'll go next to Amy Yong with Macquarie.

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Amy Yong, Macquarie Research - Analyst [12]

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I guess, one for Liberty SiriusXM and also one for F1. Liberty SiriusXM, Greg, now that the iHeart transaction has taken a pause, can you talk about how you plan to close the LSXMA spread and maybe the optimal use of leverage for SiriusXM? And then Chase, on F1, I know you prefer shorter-term broadcast agreements. I think you've done ESPN, CCTV. Any big negotiations coming up? And then I guess, with Miami and Vietnam getting pushed out, does this also push some of the leverage that you have out as well?

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Gregory B. Maffei, Liberty Media Corporation - President, CEO & Director [13]

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So Amy, we talked about some of the reasons why, in the past, the spread has existed. We're trying to take advantage of that to the benefit of the SiriusXM shareholders by doing share repurchase at that level using the proceeds we raised from the convertible exchange -- the exchange [border.] And we will continue to pursue that strategy. There's probably some limitation how much leverage we could put at the tracking stock level. It does have the benefit of the dividends from Sirius. Our share is roughly $140 million, so it's not nothing. But there's a limit to how much leverage we can put at that. So -- but we'll consider that, and we always have other means to surprise people and eliminate the discount [as perhaps much] we did on [glip]. As far as the Sirius leverage, their leverage has been coming down a little because they frankly had so much cash flow and the stock has run through their grid at various times. But I think they're still targeting around a 3 to 3.5x leverage, and they're probably at the low end of that right now.

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Charles Carey, Formula One Group - CEO [14]

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And on Formula One, the television agreements. I mean, the calendar issue is really one -- I mean, right now, we're largely done with our renewal. We got a contract with our renewals, which would be for 2019. And so anything happening in the calendar doesn't affect that. And where we -- what we'd be moving to at this point -- and we actually feel real good. I think we can actually see in the agreements some of the success we're having in the sport, and the momentum in the sport, we're starting to see in the agreements as we move forward. And -- but we'd be moving to focus on renewals or agreement that would start with the 2020 season, so to the degree races are moving to the 2020 season, it's actually matching up with anybody we'd engage with. We have some important renewals next year, probably bigger renewals in 2020. We always have some in every year, but we do have some important ones next year and, again, probably bigger ones the year after. I think doing them short has served us well because, again, I think the sport today is in a much better place than it was a year ago or even 6 months ago as we went into the season, and I think you can see that, when we engage, whether it's broadcasters, sponsors, there's an excitement about what they think is the direction of the sport.

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Operator [15]

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We'll go next to Bryan Goldberg with Bank of America Merrill Lynch.

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Bryan Daniel Goldberg, BofA Merrill Lynch, Research Division - Research Analyst [16]

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I've got one on the Amazon deal and then another one on the race calendar expansion efforts. First, on Amazon. I'm just -- I want to clarify, on the economic impact of this relationship to F1 from a P&L standpoint, is this solely going to show up as sponsorship revenue? Or is there a change in cost at F1 we should be thinking about given the services that they'll be providing you? And I just want to verify this deal kicks in beginning third quarter of 2018.

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Charles Carey, Formula One Group - CEO [17]

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Yes, kicks in second half of this year. And it is -- and I guess, there are 2 components to it. It is sponsorship components, recognized leg sponsorship. And they're -- and we're getting tech services from them. And they're services we need to build that -- the digital capabilities. And I guess, just like other costs we incur in building out the digital platforms, those cost to be recognize. I mean, it's [included] in the net revenue positive deal to us, but the services are important, and obviously, the sponsorship relationship is important. But each shall be recognized for what it is. And in terms of -- what was the calendar question?

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Bryan Daniel Goldberg, BofA Merrill Lynch, Research Division - Research Analyst [18]

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Yes. As you guys have been hard at work looking at new venues for the tour and also renewing with existing venues, and I was just curious, we've read some press round Miami, what that relationship might look like. And then you just sort of think about expanding the calendar in general, how would you characterize F1's appetite for entering into risk-sharing arrangements with local promoters as opposed to fixed-fee agreements? What are the puts and takes as you see them from this lever in the model?

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Charles Carey, Formula One Group - CEO [19]

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I think every -- realistically, every race is unique, and I think each one we'd look at both on the specific terms -- and I think, people don't realize these events frequently have a lot more moving parts than just to fee their hospitality component, sponsorship components, title and relationship components, other components around it. But (inaudible) look at each on the merits and what is it -- what are the direct economic benefits and certainties. And we're not afraid of risk. If we believe it's an upside to the risk. So we obviously can afford that. I think we value -- we like having our promoters have skin in the game, so I think it's important to have them be -- have that skin in the game to stand behind it. But if we think there are opportunities that have upside both within the event itself as well as upside to us on a much broader level, we'd evaluate it on the merits. And if the returns justify the risks -- I don't think we're going to return our model upside down, but if the returns justify the risks, I think we'd look at it. I think we'd look at that conservatively, so we'd want to be comfortable. And again, I think we're not looking to transform our model, but we'd look at each one in their own based on the unique characteristics of that event.

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Operator [20]

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We'll go next to Bryan Kraft with Deutsche Bank.

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Bryan D. Kraft, Deutsche Bank AG, Research Division - Senior Analyst [21]

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Chase, at the beginning of this year, you had talked about 2018 being an investment year with '19 and '20 being growth years. Now we're about 2/3 of the way or almost 2/3 of the way through 2018. Are you on track with your plans to begin realizing that growth potential -- the growth potential of the business in '19? And I realize that you imagine the business for long-term growth rather than margin. But as you get beyond, say, 2020, do you think that the revenue growth will lead to natural operating leverage in the business as you do grow revenue? Or do you think it's more of a stable business margin -- stable margin business going forward but with a better top line growth?

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Charles Carey, Formula One Group - CEO [22]

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The -- I mean first, I actually think -- I feel we are on plan. I think we feel actually pretty good about where we are and some of that -- I mean, that's both financial as well as in reality confidence in the sport. I mean, so it's not -- you can't just -- we're not just looking at the numbers. I think it's also the confidence in the quality of the sport, fan engagement with the sport, so I gave some of the stats on that. But yes, I think we're actually -- I feel pretty good about where we are in terms of the goals we set out and the objectives we have set out to achieve that. In terms of leverage, I think it's a -- we're a fairly unique business. I'm not sure -- I mean, our biggest cost is up -- is the contract cost. I mean, by a large margin, the payment to the teams is not something -- obviously, we'll have a new agreement in 2021. But that's a contract cost, so you can't manage that up or down. That's -- it obviously can change in 2021. It changes per year based on what the contract says, but our operating costs below that are a relatively small percentage of our overall revenue. It doesn't mean we don't pay attention to it. We obviously want to watch every dollar. But we are really a -- in many ways, a revenue center. As we build out some capabilities, there are costs. You build that hospitality. Their costs -- I mean, there are some that are just pure -- revenue goes through to the bottom line. We've got sponsorships. We've got (inaudible) organization. But in someplace like hospitality, there's cost in providing hospitality, and over-the-top, there's a cost to building out the capabilities to drive those. We've added overhead, so I think we're probably through the bulk of putting the organization in place to support it. So I think there's some -- if I look at the cost to grow some, we have fairly significant cost for things like production for the television broadcasts, freight that we provide to move the show around the world. And those things -- maybe freight can move with freight cost, but they should scale as we grow revenue. So there's some places like expanding hospitality, you have some costs associated with it. As we build out digital platforms, there's probably some cost associated with that revenue. There are other costs that will be -- whether it's overhead television productions, freight that would not move at that -- would not have -- there should be leverage on. But in aggregate, those costs realistically are still a relatively small percentage of our aggregate revenue. Our biggest cost is the contract cost to the teams.

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Operator [23]

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We'll go next to Ben Swinburne with Morgan Stanley.

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Benjamin Daniel Swinburne, Morgan Stanley, Research Division - MD [24]

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Chase, a couple questions about your -- some of the comments in your prepared remarks. You mentioned that the 2019 calendar you think will look a lot like '18, so should we assume the same number of races? And then the second thing, as you mentioned, you are, I think, optimistic you can finalize the agreements in the coming months. So I just want to make sure that, is it your expectation or at least your hope that you can finalize sort of the entire Concorde Agreement and not just the engine design but sort of everything before the end of the year? I just wanted to ask for some clarification on those 2.

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Charles Carey, Formula One Group - CEO [25]

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So we haven't announced the '19 calendar, so I guess I'm probably not going to provide more color than I did following the -- on the prepared comment. We will announce, as I said before, the end of the month and the next few weeks, we will clearly put out a preliminary calendar that needs to be approved by the FIA and go through other steps, but it will come out (inaudible). We haven't announced it, so I probably won't go further. In terms of what we're finalizing, that certainly will be -- we are looking to (inaudible) the major components. There'll always be components that are sort of moving, it's not like you're done. I mean particularly, when you get into issues like regulations and -- they're a living, breathing process that will continue to evolve, so you'll have a set of regulations in place, but whenever you put sporting regulations or others -- some change less frequently. You get an engine, obviously, that doesn't change that often. But other regulations will clearly change. And I think with the things we put in place, we'll probably continue to find ways, hopefully, to make whatever we put in place better, but what I'm talking about getting in is more than just the engine regulations. It's talking about a more holistically -- probably not completely, but more -- getting the major components in place. And now not going to put out a specific deadline for it. I mean, one of the challenges of bringing it to a completion is it doesn't -- I mean, the actual, obviously, affect many of these things is 2021. So there isn't a natural deadline deal. Usually your -- made easier by having a deadline you have to get it done by. So I think we all -- I think we and the teams all recognize and know it would be good for us to lock -- to get these things stabilized so we can all plan for the future, so I think there's a shared objective to get it done, but there isn't a sort of external forcing mechanism in the short term, but I think our goal is to move this forward and try to get it done in the coming months, as I said.

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Benjamin Daniel Swinburne, Morgan Stanley, Research Division - MD [26]

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Great. And then just a -- maybe a broader follow-up. I would imagine that you guys have relatively good visibility into the top line of this business. It's underpinned by some nice long-term contracts. I know there's moving pieces, but externally, we're dealing with the quarterly accounting, which as Greg mentioned, is challenging to extrapolate. When you look at the back half of the year or you look at this year, do you guys expect revenue to grow for Formula One? Because it's down first half. I know it's an investment year, but anything that you could provide us would be helpful.

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Charles Carey, Formula One Group - CEO [27]

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Yes. I mean, I guess, I go back to the things I said. I mean, in a quarter -- yes, I think in particular, within a year, what races fall where and, to some degree, when you change the number of overall races and how they flow through have impacts. So I'm not going to get into -- project in the second half of the year, but we feel good about where we are, though realistically -- and I've said it before, our focus is where we going to be in 2020, not -- I mean yes, we care about the short term, but at the end of the day, our real objective is we think we can take this business to another place as soon as we think the opportunities there to do it. So it's -- priority one is really about getting this business to where we think it can be. And it doesn't mean we take our eyes off the ball in the short term, but the short-term quarter-to-quarter will move due to the factors we talked about earlier inside it. But this year, we feel good about the momentum in it. There are issues to deal with, whether it's over the top or continuing to engage with parties and tell the story and, to some degree again, create the right momentum in a business that probably didn't have that momentum a year ago.

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Operator [28]

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We'll go next to Jason Bazinet with Citi.

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Jason B Bazinet, Citigroup Inc, Research Division - MD and U.S. Cable and Satellite Analyst [29]

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Maybe just a question for Mr. Carey. This is before your time, and it could be wrong because it's based on press reports, but when I look at those team payments, it looks like they were a much smaller percentage of the overall EBITDA than it is today, something in the 40s, then it went to 50s and 60s, and now we're sort of in the 70s range. Is that accurate if I go back 10 years that there's been that sort of steep rise? And then as we go forward, what would you like to see and can you just remind us, I think there's a time when you tried to issue some equity to the racing teams to sort of get everyone on the same page so incentives were aligned. But what -- because the reason I ask you is that's probably the biggest risk to everybody's model because I think everyone agrees that the top line can inflect in '19/'20, and those other costs, as you said, are small, but if -- but the big cost is sort of it's a big one, and it's a big unknown. So any color that you can provide in terms of what you'd like to see?

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Charles Carey, Formula One Group - CEO [30]

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Well, first, your statement on the long-term trend going back is accurate. I mean, I think, actually, if you go back into the early 2000s -- and I'm doing it off the top of my head, so somebody ought to check it. I think the percentage was, I don't know, 25% or 30%. And today, it's more in the high 60s, sort of closer to that -- maybe I think you're right, closer to 70. But first for '19 to '20, it's locked in. So realistically, it is what it is through '19 and '20. To the degree -- what the revenue distribution is both amongst the teams and between us and the teams is what is part of those longer-term discussions for 2021. But that's the first year we did there. Since those discussions, we're having the teams -- again, I'm not going to, I guess -- I think those are discussions at this point we're best having with the teams in private, and then when we get to the place that when we finalize that, we'd be happy to discuss where we're at and what we think the opportunity is under that revised structure. But since those are live discussions with the teams, I'm not going to probably comment a lot on that. I think those are best still had in a private room between us and the teams.

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Operator [31]

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We'll go to our last question to John Tinker with Gabelli.

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John Philip Tinker, G. Research, LLC - Senior Research Analyst [32]

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Just to switch gears on Atlanta Braves, which had a very solid EBITDA number. The team's generally valued on revenue. So how do you sort of look at the team when you think about how to valuate?

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Gregory B. Maffei, Liberty Media Corporation - President, CEO & Director [33]

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Well, I would say, in general, we look at some of the metrics that people talk about, the third-party valuations. You're right. Teams are often not valued in EBITDA partly because many baseball teams do not make significant, if any, money. We're in the blessed position of actually having a profitable team, partly based on a team well run, partly based on some of the other things we've done around things like the Battery. And we'll see how that all plays out. I don't think there's an obvious answer, John, in how to do it because they don't -- we're a relatively rare item, obviously, the only publicly traded team with an unusual structure and incremental asset in the Battery, so it's a little hard to look at apples and oranges.

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John Philip Tinker, G. Research, LLC - Senior Research Analyst [34]

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Could you just -- given the new developments you've had with thyssenkrupp and now on Aloft, so how much land has been developed? And how much is left to develop?

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Gregory B. Maffei, Liberty Media Corporation - President, CEO & Director [35]

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We are -- everything that we can we have blocked and set out either been done or we've announced a plan. Unfortunately, there's not an infinite supply of this stuff up there, a pretty valuable location.

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John Philip Tinker, G. Research, LLC - Senior Research Analyst [36]

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And the IRR of 22% that you are targeting for the sale of the residential properties, is that something you think crosses over the rest of the Battery development? Or is that your sort of most successful part so far?

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Gregory B. Maffei, Liberty Media Corporation - President, CEO & Director [37]

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We'll see. But clearly, if you just look at the market, residential is probably hotter than something like retail, for example. The nature of the deal we cut and the nature of how it works, we're unlikely to get that kind of a return on the hotel portion. But those will be 2 that would be probably at the lesser end and residential at the higher end, but there are others. I think the office market is pretty good. There will be a range.

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Operator [38]

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And that concludes today's conference call.

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Gregory B. Maffei, Liberty Media Corporation - President, CEO & Director [39]

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Thank you, operator. Yes, I think we're done with today. Thanks for everyone for joining us. And hopefully, we'll talk to you next quarter, if not before.

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Charles Carey, Formula One Group - CEO [40]

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Thanks a lot, everybody.

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Operator [41]

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And that concludes today's conference call. Thank you for your participation. You may now disconnect.