QVC Group Inc (QVCGA) 2001 Q4 法說會逐字稿

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Good day, everyone and welcome to the Liberty Media Corporation conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to the Vice President of Investor Relations, Mr. Mike . Please go ahead, sir.

Hello everybody, and thank you for joining.

During this presentation, we may make certain forward-looking statements about business strategies, market potential, future financial performance, new service and product launches and other matters. These statements involve many risks and uncertainties that could cause the actual results to differ materially from such statements, including without limitation, possible changes in market acceptance of new products or services, competitive issues, regulatory issues and continued access to capital on terms acceptable to Liberty.

Please refer to the publicly filed documents of Liberty Media Corporation including most recent form 10K filed by Liberty for additional information about Liberty and about the risks and uncertainties related to Liberty's business.

Also joining us on the call today we have Gary Howard, Liberty Media's Executive Vice President and COO. We have from Discovery and from And with that, I'm going to turn it over now to Bob Bennett, Liberty's President and Chief Executive Officer.

Thank you, Mike. And thank you once again for such a very fine rendition of the forward-looking statements. Thank you all very much for joining us today. We appreciate you taking the time out of your afternoon. I'd like to use the time and use the call today to go over our earnings, to a certain extent, for 2001 and particularly how our private businesses did. Also to provide some new guidance for 2002. Then to go over some current and recent developments. And then at the end to answer your questions. Let me start with a brief discussion of some of the GAAP results that were recorded in our 10(k). We filed that on Monday. You may have noticed we recorded a $6.2 billion net loss for the year. That loss is principally the result of 6.5 billion in write-downs that we've taken on several of our publicly traded investments effectively lowering them to the current market prices.

These charges are included in two separate lines on our income statement depending on whether the investments are accounted for under the equity method or under the cost method of accounting. Write-downs related to equity method investments are included in our share of losses of affiliates line in our consolidated statement. These charges total 2.4 billion during the year, which is primarily composed of a 1.8 billion charge on our interest in Telewest. Write downs of cost method investments total 4.1 billion, and are included in non-temporary declines in the fair value of investments in our consolidated statement. These charges are primarily composed of a 2.1 billion write-down on our investment in AOL time Warner, and a 900 million write-down of our investment in News Corp. A full discussion of the accounting treatment for these investments, and all of our accounting policies, is provided in the 10K.

Let's look now at the large private assets, which I think did extremely well, and continue to show very solid operating results, despite the unfavorable economic climate. Just in brief, Discovery Communications was able to report a 95 percent increase in cash flow during the year. Star's Encore cash flow increased 33 percent, and QVC increased their cash flow 17 percent during the year. Top line growth was also strong, with Discovery, Star's, and QVC turning in growth of 6 percent, 18 percent, and 11 percent respectively.

Let's start by looking at Star's Encore. They had another very solid quarter and year, with top line growth of 17 percent for the fourth quarter, compared to the fourth quarter of the prior year, and 18 percent revenue growth year-over-year. Cash flow growth was 42 percent in the quarter, and 33 percent for the year. I should note this cash flow growth exceeded our earlier guidance of 20 to 25 percent growth. Star's continues to benefit from the roll-out of digital cable, and continued growth of DBS. Total subscription units were up 30 percent over the year-end 2000. Star's has distribution deals for all of the major cable and satellite distributors, and that continues to drive their top line growth.

The subscriber growth is spread across all of their product lines, and their distribution channels. Aggregate Encore thematic multiplex distribution grew by 38 percent. Cable distribution, other than AT&T, grew by 68 percent. And DBS distribution grew by 26 percent. Operating costs increased by 8 percent for the quarter and 10 percent for the year. The increases for both the quarter and the year were primarily due to increased programming expenses related to the airing of higher quality films. As you probably recall, the pricing of our programming contracts varies with the box office success of the movies, and we had a number of hits last year.

In terms of guidance for 2002, assuming mid-teens growth in total subscription units in 2002, we expect that that distribution growth will translate into revenue growth of around 10 percent. And then based on that revenue growth combined with single digit increase in operating expenses we expect cash flow growth to be in the mid teens next year.

Looking at discovery, in -- at the end of the year, at the end of 2001 the Discovery Communications networks reached nearly 675 million subscribers in over 150 countries. For the year the company managed top line growth of 6 percent to 1.9 billion and cash flow growth of 95 percent to 375 million, which is pretty much in line with our earlier guidance.

As you may have noticed in the press release we have changed the presentation of Discovery's results. We've organized a presentation along business units instead of the developed assets versus developing assets. The motivation for this was two fold. First the new presentation corresponds to how the Discovery management looks at their businesses and secondly, the majority of the developing businesses either have achieved or will achieve cash flow break even to positive and therefore developed status. So we thought that this presentation better reflects the operations of the business and is more consistent with how the businesses are managed.

So let's start by looking at Discovery's domestic networks. That includes what used to be the developed domestic networks and the developing domestic networks and the online activities. The domestic networks experienced a 7 percent quarter over quarter, you know, fourth quarter 2001 compared to fourth quarter 2000 a 7 percent decrease in revenue and revenue was essentially flat year-over-year. Despite the revenue weakness the domestic division was able to grow cash flow by 69 percent over the fourth quarter of 2000 and 59 percent for the year due to significant cost control efforts.

Affiliate revenue increased 16 percent in the quarter and 12 percent year-over-year while advertising revenue decreased 12 percent for the quarter and 1 percent for the year. If you exclude online advertising, the domestic network ad sales were down 9 percent in the quarter and were flat year to year.

The increase in affiliate revenue is due to a 25 percent increase in aggregate distribution. The domestic division networks now reach over 415 million subscribers versus 326 million in 2000, an increase of nearly 90 million subscribers.

Advertising revenues were down at Discovery Channel but they were up at the other domestic networks. The decrease in ad revenues at the Discovery Channel was due to the decreases in CPM's and sellout. I think that's well known. And partially offset by an increase in audience delivery. Ad sales increases at the other domestic networks were due primarily to increased ratings and audience delivery offset by small decreases in CPM's. Expenses at the division were down by 33 percent or $85 million in the quarter and 17 percent year to year due to cost control measures. Among them, investments in online initiatives decreased 84 percent for the quarter and 80 percent for the year. And SG&A expenses decreased 28 percent in the quarter and 8 percent over the year. The overall cash flow growth was 69 percent quarter to quarter and 59 percent year-over-year despite the flat to lower revenues. We think that's a very significant achievement in the current advertising market. The domestic networks continue to show very strong distribution growth across all of the different networks.

Discovery Channel was up 7 percent to over 85 million homes. Learning Channel is up 8 percent to nearly 83 million. Animal Planet up 16 percent to over 76 million. Travel Channel up 24 percent to 61 million. The Health Channel, Discovery Health up 54 percent to 29 million. Just, you know, we continue to do very well at gaining subscribers. Moving over to the international division, these include the businesses that were formally included in the developed and developing international assets. The international division had an outstanding quarter and year with top line growth at 24 percent in the quarter and 20 percent in the year. The division was cash flow positive for the year with 26 million in cash flow, an improvement of 29 million over last year's 3 million deficit. Cash flow for the quarter was up 175 percent. And we expect the international division to experience strong revenue and rapid cash flow growth.

Within the international division, Discovery Europe had a particularly good year with cash flow more than tripling to 25 million from 7 million in a prior year due to a 16 percent increase in revenue combined with a slight decrease in expenses. Other notable results within the division, Discovery Latin America revenue was up 10 percent quarter to quarter and 9 percent year-over-year. But cash flow was down about 20 percent due to bad debt reserves related to the difficult economic environment in Argentina in particular. Home and Leisure improved from a cash flow deficit of 4 million last year to a cash flow positive of a million. Animal Planet, U.K. approached break-even and Discovery Asia generated 7 million of positive cash flow in 2001 from break-even in 2000 on a 61 percent increase in revenue. The international division is now distributed to nearly 190 million subscribers, an increase of over 35 million subscribers, compared to the end of 2000, the year 2000.

The next category is international ventures, which includes the businesses in the BBC joint venture, as well as Discovery's investment in Germany and Japan, which are included at Discovery's attributed ownership level of 50 percent. The division experienced strong top line growth of 29 percent in the quarter, and 32 percent year-over-year, which translated into improvements in the cash flow deficit from 14 million to 10 million in the quarter, and from 47 million to 43 million year-to-year. This division has more than 80 million subscribers worldwide, an increase of 61 percent over 2000.

The last group is the consumer products group, which includes the retail operations and other consumer products, such as home video, e-commerce, and educational products. This division had a rough quarter, and a rough year, due to the slowdown in the economy, combined with the effects of repositioning efforts at some of the stores -- or at all of the stores. Revenue decreased 20 percent in the quarter, but it did increase 7 percent for the year. For the quarter, cash flow decreased by 25 million to a deficit of 4 million, and the annual deficit increased by 21 million.

Next, I'd like to just spend a minute on the prospective accounting change. In November, something called the EITF, which is the Emerging Issues Task Force of the Financial Accounting Standards Board, published Issue 019, which changes the treatment of certain expenses by requiring that they be netted against revenues. This change is effective on January 1 of 2002. EITF 019 has no effect on Discovery's net loss; however, it does require reclassifications between operating expenses, launch amortization, which we have historically classified below the cash flow line, and revenue. The most significant reporting impact will be that launch support amortization, which has historically been classified below cash flow, and disclosed as such, will now be reflected as an offset to revenue, thereby reducing Discovery's consolidated attributed revenue and attributed cash flow.

Our press release that we put out provides a table showing the effect of the new rules, as if it had been effect in 2000 and in 2001. Looking just at 2001, giving effect to the new rules, Discovery revenue would have been $1.6 billion, compared to the billion nine that we reported in operating cash flow would be 243 compared to the 375 million that we reported. I think it's very important to note that while this affects the reported numbers it will have absolutely no effect on how we operate the business or how we value the business. We've always viewed launch support as an investment in businesses and to the extent that we think future investments in businesses make sense we'll continue to do so. However you know the accounting rules view otherwise and so we're required to report it this way. It has no effect on cash generally because the cash payments have already been made and we will endeavor in future calls and press releases to provide information on the amount of launch support so that you can see for yourself the amount that is being deducted from revenue.

Looking at 2002 guidance for Discovery giving effect to the new accounting rules and using the comparison to the pro forma 2001 numbers giving effect, you know, in both cases, Discovery consolidated we expect attributed revenue to increase by approximately 10 percent and cash flow to increase by 40 percent. The domestic networks division we expect to see revenue and cash flow growth both in the low single digits. The international networks division we expect revenue to grow in the low to mid teens and cash flow by around 150 percent so a substantial jump there.

Turning next to QVC, again the broken record. QVC operating results continue to be very strong and very impressive. For the quarter and the year QVC generated top line growth of 12 percent and 11 percent respectively. Cash flow growth for the quarter and the year were both 17 percent. If you exclude the results of their new business in Japan, cash flow increased by 19 percent for the year. QVC's German operations had a very strong quarter with top line growth of 63 percent and they reached near break even in the fourth quarter and is expected to be cash flow positive in 2002. QVC expects revenue growth in the low double digits in 2002 and cash flow growth in the low to mid teens excluding the results in Japan.

Looking next at our international businesses, as you can see in the release we've also changed the presentation of our activities in the international group. We'll now begin showing the results for the businesses by geographic region as opposed to developed and developing assets since this presentation more closely represents how management reviews the performance of the individual businesses. On a combined attributive basis, revenue of our privately held assets increased 5 percent in the quarter and 11 percent year-over-year. We had relatively flat operating expenses in the fourth quarter resulting in cash flow growth of 38 percent. For the year, cash flow grew by 17 percent. Looking at the individual areas, in Japan, our businesses, and remain the key drivers to the significant improvement in growth in our international assets. Combined, these assets saw 34 percent revenue growth in the quarter or for the year, and 19 percent in the quarter. Fourth quarter cash flow improved by 12 million from a deficit of 8 million to positive cash flow of 4 million. For the year, the cash flow deficit improved by 94 percent to a deficit of 2 million. That's a $30 million improvement.

revenue is up 29 percent quarter over quarter and 40 percent year-over-year. The revenue growth was driven by a 50 percent increase in cable subscribers to million. One hundred and 27 percent increase in telephony units to 166,000. One hundred and 39 percent increase in Internet units to 378,000 and a 67 percent increase in RGU's to 1.9 million. Because of the revenue growth, we saw an 80 percent reduction in cash flow deficit for the year to 5 million. And was cash flow positive to the tune of 2 million in the fourth quarter. , our programming company had a revenue increase of 3 percent in the quarter and 26 percent year-over-year. Our share of their cash flow increased 2 million during the quarter to cash flow 3 million and increased by 8 million in the year from a deficit of 5 million to a positive cash flow of 3 million.

The networks now reach nearly 25 million subscribers and it either owns or invests in 14 individual channels. Again, we're very pleased with the performance of our Japanese businesses in 2001. And we expect that both of these businesses will be cash flow positive in 2002. In Latin America, the revenue was essentially flat during the year and declined by 3 percent in the fourth quarter. Cash flow for the quarter was flat and it was down slightly for the full year. We expect the economic environment in Argentina to have a negative impact on this region's results during 2002 due to the peso devaluation and the prolonged recession. In addition, there are current government restrictions that limit the ability for businesses to collect receivables and to make payments to vendors and debt holders. So it's -- the situation in Argentina is somewhat murky and unclear at the moment.

The other category is Europe and Other. These businesses increased revenue slightly during the quarter and the year, while cash flow decreased by 3 million for the quarter to break even, and by 7 percent -- or 78 percent -- for the year. The decrease in cash flow was due primarily to restructuring charges, bad debt write-offs, and increased programming costs in the division.

Let me just -- we've got a couple other assets that are not of the same scale as these, but I'd like to talk about them briefly. First is Court TV. Court TV now reaches over 68 million households, which is a 31 percent increase over last year. They were the third fastest growing network in the U.S. in terms of Nielsen subscriber growth. Their ad sales were up 41 percent during 2001, so that's a substantial deviation from what the rest of the industry was seeing, to actually have ad sales up 41 percent during the year. In January, Court TV had its highest rated and most watched month in history, and their estimated 2002 universe is currently 70 million subscribers. That business continues to do very well. The other is Game Show Network, where subscribers increased by 40 percent to 44 million, and revenue increased by 18 percent, principally due to an increase in affiliate revenue.

That completes the look at the individual businesses. Now, let's look at Liberty itself, and our balance sheet, and our current liquidity position. We ended the quarter with about 2.7 billion of corporate cash, and 6.5 billion of corporate debt, for a net debt of about 3.8 billion, which was an increase of approximately 250 million from the end of September of 2001. The increase in the net corporate debt was primarily due to the completion of the tender offer for UPC's bonds in early November, offset by 161 million of proceeds received from the expiration of one of our in the money PCS callers. During the quarter, we also redeemed the assent bonds and repaid other short term debt, which resulted in a decrease to both our cash and our debt balances.

For the benefit of the bondholders among the audience, let me go through a few of the current credit metrics that we like to look at. The floor value of our hedged securities, excluding the exchangeable securities, over the straight debt, is currently -- or as of the end of the year -- is just about 2.6 times. Our hedged securities including shares underlining are currently in the money by about $5.4 billion compared to 3.2 billion at the end of September. Our unrestricted public assets plus cash covers our straight debt by over eight times and the average life of our long term fixed corporate debt outstanding is more than 24 years. So again I think we are in a very strong credit position. We have very substantial liquidity and very substantial coverage of our debt. I think we are one of very few companies who can essentially pick up the phone and pay off all of our debt at least one of the few with our credit rating who have the ability to do that so readily.

Let me just talk about a couple of recent events. I think everyone is familiar with the status of our German cable purchases. That transaction is effectively terminated. At the end of February we received notice from Germany's Federal Cartel office that it was denying our plan to purchase the cable systems and other businesses from and from . We did not appeal that decision and as a result we expect that the transactions will be terminated in very short order. Looking at that, we made it very clear from the beginning both to our investors and also to the German regulators that in order for that business to be successful we needed four things. We needed to have the ability to consolidate the level three and the level four business so that we had a critical mass of end customers that we could reach otherwise it made no sense to invest in the plant. We need to -- needed to be able to convert the model from a transport business to a retail business so that we had a direct customer relationship. We needed to have the ability to own content and we naturally expected that we would have the ability to control our own business plan. The issues that were raised effected by the Cartel office would have potentially interfered with all four of those in that there were concerns about the consolidation, concerned about our ownership of content and a desire that we invest more aggressively in telephony than we were willing to and when you put those all together we concluded that that was not a business and those were not circumstances under which we were willing to pursue the business and therefore we did not appeal their decision.

The next point was the closing of the UGC transaction. On January 30th we closed our transaction with UGC. As a result of that we received about 281 million shares, which combined with our previous holdings provided us with a 72 percent economic interest and 94 percent voting interest subject to a voting agreement that we have with the founders. And then through open market purchases, we have subsequently increased our interest to approximately 74 percent. Prior to the completion of the transaction, IDT the for the 1.375 billion of UGC bonds that were outstanding. Immediately prior to the transaction, UGC acquired all of our ownership interest and debt interest in IDT and approximately 750 million principle amount of the notes. UGC paid 449 million by the assumption of 305 million of debt that we owed and the remainder was credited against the cash contribution that we were required to make in the transaction.

In addition, we loaned one of our affiliates loaned United 100 million, which it used to purchase additional interest in IDT United. So those notes owned by either IDT United or UGC represent about 98 percent of the outstanding notes. We also announced the U.S.A. transaction, which we expect to close in the second quarter of this year. Following the completion of that transaction, we will own about 3 percent of and will retain our approximately 20 percent in U.S.A. Interactive. Last year we announced the transaction to sell Telemundo to General Electric. We expect that that sale will occur sometime this month. And upon completion of the transaction, we will receive about $675 million worth of G.E. stock. Then finally, during the first quarter, we took advantage of the decline in the market to monetize a portion of our -- in the money value of two of our AOL callers that cover 36 million shares. We did this by selling at about $40 a share.

The on our hedges were about $45 a share. In those transactions, we generated cash proceeds of about $500 million. The maturity dates and the number of shares of the match the terms of our existing callers. So what we've done in effect is that we have the 500 million in cash. We have downside exposure in the AOL shares from about 24 or $25. And we have upside in them up to the call price. We did that because we felt that the stock had bottomed out and that there was, you know, over the coming months, more upside than downside. And we wanted to capitalize on the downside protection that we had, convert that into cash, and also to participate in the upside in AOL.

That concludes my formal comments on our results and our activities. And I'd be happy to take your questions at this point.

Thank you, sir.

Today's question-and-answer session will be conducted electronically. If you'd like to single for a question, please press star one on your touch-tone phone. Once again, that's star one to signal for a question.

And we'll take our first question from with .

Hi, good afternoon. Could you just give us a little bit more color on the accounting adjustment? How come this was booked before? And we haven't seen other companies make a similar adjustment for cable networks so far this year. And just wanted to get a little bit more information on it. Could you also then touch upon the UK and what your plans may be there, following up on Germany being terminated? Thanks.

Yes, the accounting adjustment is not effective January 1 of 2002, so it's not something that would have showed up in anybody's year-end accounts. It affects Discovery, but it principally affects things like advertising commissions an launch support, so I don't know the extent to which it may affect some of the other media companies. Certainly it will affect them a bit in the advertising commissions. I think Discovery has been somewhat more aggressive than others in paying launch support in order to grow their business and to create new channels. So it could be that it's less material to some of the other companies. But it's a new rule that toes into effect this year, and so it would not have shown up last year, or on anybody's year-end financials.

But from a standpoint of EBITDA it is effectively reducing EBITDA by $130 million this year?

It will in -- yes, well, pro forma last year, if you apply the rules that are in effect this year to last year's numbers, it lowered EBITDA by 132 million. Didn't change by one iota the operating performance of the business, but did change the way that we are required to report it going forward.

And then UK?

That's kind of a broad question. Can you be more specific?

There's obviously been a tremendous amount of rumors in the marketplace surrounding NTL and Telewest, and what you may seek to do following the termination of Germany. And I was just hoping for a little bit more color, given the amount of the questions.

Yes, well, we already own an interest in Telewest, and I think we have said numerous times in the past that there's a substantial amount of industrial logic if you can find a way to combine NTL and Telewest. To this point we have not been able to do that, you know, among other things because of, you know, we had been unwilling to just swap equities because of what the resulting capital structure would look like. I believe NTL has announced that they are, you know, working on a restructuring of their balance sheet. We have had some conversations with them about that. I can't really say much more than that. It's an extraordinarily complicated company, an extraordinarily complicated balance sheet and you know I can't comment on what the outcome might be because I don't know what it'll be.

With respect to Telewest, Telewest has, you know, adequate liquidity for at least the next 12 to 16 months. You know they are assessing their business plan trying to figure out where there might be opportunities to cut costs and reduce capital and you know figure out what that means. I think you know based on the way the bonds and the stock are trading the market seems to be expecting some sort of restructuring but that determination has not been made.

Thanks a lot.

Our next question comes from with Salomon Smith Barney.

Thank you. Hi . , I guess just following up on the question with respect to the accounting change with respect to Discovery. I guess the first question is clearly 2001 was a pretty aggressive year of Discovery going out and securing additional distribution and it just strikes me that I mean you say it doesn't change the way you run your business and I understand that but I guess to the extent that you look at '02 and '03, can you guys give us some sense at how the launch support, you know, may tail off as these networks get more and more mature and the need to pay five or $10 per sub to get distribution becomes less of an issue. Like I said another way, I guess I'm confused at why the cash flow growth would only be you know low single digits for Discovery domestic to the extent the launch support presumably is falling off quite a bit in '02 or maybe that's the wrong presumption to begin with. That's question number one. Thanks.

In '01 the launch support number was 165.

Right.

You know based on sort of current launch commitments it's I believe more like 100 to 110 next year and then 50 or 60 the year after that so it does begin to tail off.

Right. So with that kind of assumption, right, if you go from 165. And I guess the press release says 123, so I'm, at least I thought at the support amortization adjustment is 123 in the 2001 adjustment. But ...

Yeah. Hold on a second. Let me make sure I've got, I'm giving you the right information. Yeah, it is. I'm sorry, it is 123.

OK. So I guess the point is if you look out two years, it should be a significant -- I mean, if you look at '03, it clearly will be a significant -- you should get a significant improvement in your cash flow on, you know, this new reporting basis just from the way the launch support works its way down from 120 plus to 50 to 60 over two years. Right?

Yes. I mean, over time, it goes away.

Sure.

And to the extent that it falls off, that will tend to increase the reported EBITDA.

Right.

And the growth rate?

So your growth rate just went up.

There we go.

Could we talk a little bit about retail? How much of the retail or the Discovery consumer product numbers is just a function of September 11th happening and the business actually going in the right direction versus a continuation of cash flow losses at retain that seem to have gone on for many years now?

Greg, can you address that? Greg?

Greg?

OK.

Hello?

Greg?

Yes. Can you hear me?

Yeah. Good afternoon.

OK. I've been on -- I guess they put me on mute for some reason. I was trying to answer your launch support question, too.

Oh, well you can start with launch support and then you can answer retail.

Well, Bob did a good job answering the launch, the launch support.

Right.

Obviously, we have, we have spent, we have indeed spent hundreds of millions of dollars primarily on Travel Channel, Animal Planet, Discovery Health and our digital services on launch support. There hasn't been a dollar spent at all on Learning Channel or Discovery Channel and there's no affect to their bottom line operating profit. But that money is pretty much already spent. We are, you know, we will actually have a cash spending of launch support of about $110 million in 2002 as Bob mentioned. That will go down to 60 million in 2003 and continue to go down through 2006, 2007 to the 15 to $20 million range.

Right.

The amortization will continue to hit our P&L and will continue to be a negative to our revenue for as long as the terms of our agreements exist. And in the case of Animal Planet, for instance, that goes through 2007. For Travel Channel, that's goes through 2009. But as Bob mentioned earlier, we considered this an investment and in 2007, when we have to renegotiate our deals for Animal Planet, you know, we will hopefully. And we believe we will have a very, very strong service in 85 million homes. And we'll be able to drive strong affiliate revenues at that point in time. And so that's what this really represents.

does that mean on a P&L basis, you're going to show a lower EBITDA than you would actually generate on a cash basis, because of the amortization?

Well, that's right, yes, the actual cash out the door will be substantially less than the actual amortization for the balance . Yes.

Right, for several years, right.

Yes, that's correct. As far as the stores go, 2001 was a year where we did have the effect of the very tough economy, and September 11th, and all of those things. We also, as I think you're aware, , we talked about it before, had a very major change in how we're doing business in the retail area. We are completely revamping our stores, completely revamping our merchandise, we're taking our SKUs down from 8,000 to 2,000. But much higher priced merchandise, higher price points, higher quality price points. A much cleaner look to the stores. And so, the actual financial performance in 2001 is really a combination of the bad economy, and the effort and expense it took to make those changes; 2002 is a year in which the stores are starting fresh with basically a new kind of retail design, and look. And we are very optimistic about how it will pan out.

Are they off to a good start in the first quarter?

The stores that we have completely revamped are showing substantially higher revenues and margins than the stores that are currently in the process of being converted. By Father's Day we should have a really, really good test. And certainly by the fourth quarter and the holiday season, we should be ready to go. And you know, if these changes do what we think they will do, then we'll be very, very happy. If they don't, we'll go back to the drawing board.

OK, great. And just one question on your hedge positions. In your press release, if you look at the comment regarding, or the line item, with respect to the AOL put-spread, it says a $36 weighted average, you know, lower put, you know, slash share price of 36. And in the 10K I thought it said $28. Does that tie in, in any way, shape, or form to the monetization that you talked about? Or am I missing something here?

, this is .

Hey, .

Yes, it does. It's directly related to the $40 put that we sold after 2001.

OK, thanks, . Thanks, guys.

OK, thanks.

Our next question comes from with J.P. Morgan.

Good afternoon. Couple of questions. What is the full impact in 2002 of issue IO-19, or the accounting change? In other words, you know, how much -- when you take into account sales commissions and you take into account the amortization for the program launch support, what's the full number you would expect to have in 2002?

In 2002 we will be amortizing roughly $130 million of launch support and as far as commissions on advertising sales we're looking in the range of another $100 million.

Great. Thanks. And also as you sort of look at the first quarter do you guys have any comments in terms of just guidance for the first quarter, how we should think about it?

We've really only provided guidance for the year.

OK. And then lastly, just your comments on what you're seeing in the ad market at Discovery in your other channels. Are you seeing an upturn like some of the other operators have said?

Do you want hit that ?

Yeah. I think it's fair to say we're seeing a leveling off. You know every quarter of last year seemed to get a bit worse than the quarter before it in terms of the marketplace. That seems to have leveled off in the first quarter. You know we're about to head into our up front. We've had some preliminary meetings with some of the major ad agencies, kind of pre-upfront meetings. Those meetings at least have left our ad sales folks and our management feelings pretty good about how the upfront will go but it really is a little early to tell to be honest right now how the full year will end up. You know we're hopeful that we'll see a nice up tick in the third and fourth quarter. We're prepared -- you know, we're prepared if we have to batten down the hatches.

Great. Thank you very much.

Our next question comes from with Prudential Securities.

Hi, a couple of questions. First with respect to your guidance on Discovery domestic in terms of low single digit revenue growth, does that -- what kind of assumptions are you making with respect to your advertising revenues or the ad market? Is that -- are you anticipating a down ad market for the full year or is that flat, i.e. down? Do you think it'd be down in the first half and then up in the second? And then also on stars and your guidance there, are there -- what assumptions if any are being made with respect to your ability to pass through costs -- certain costs to AT&T and/or the rate card that AT&T's currently paying? And then finally for you with respect to NTL follow on into the U.K. actually comments, what are your thoughts on the U.K. cable industry especially as it relates to data given that it looks like BT is about the get a lot more aggressive in dropping broadband connection prices? Thanks.

On the Discovery guidance, I the assumption is that the market stays, you know, around how it is. It maybe gets a little better, a little worse. But it's hard to know precisely. So I think we're just assuming sort of continuing weakness but not necessarily much worse or much better. But we will see growth, you know, out of ...

Affiliate.

... out of affiliate revenues and some of the channels ought to continue to be able to grow advertising just because their growing their distribution so quickly. On Starz Encore, there is no affect of pass through of programming costs in that. And we have assumed our current deals with AT&T and with Comcast. On the U.K. question, you know, I think we, you know, as we look at the market as a whole, we think it is still an attractive market in which the incremental economics suggest that it ought to be, you know, a good business. There may be a little pressure on rates, on in the high speed business, but so far, we're doing very well in that business and it's something that, you know, in pretty much all of the markets there's proven customer demand for. So we expect that that will continue to do well.

Just one quick follow-up. With respect to Starz Encore, does that mean that you're not assuming any pass through of cost to AT&T?

That's correct.

Thank you.

And next we'll go to with .

Yes. Good afternoon. A few questions. First, after looking at your k, I noticed that a lot of your agreements with a lot of your international affiliates seem to either expire or come up for a call in April of this month. Specifically the Telewest affiliation agreement with NTL, the expiration of the shareholder agreement with Microsoft and you guys on Jupiter and your situation with Cablevision. I was wondering if you expand on exactly what's going on and what you guys intend to do in all these different situations?

Let me try to go through them individually. With respect to Telewest and NTL, you're talking about their programming contracts?

Yes.

I mean, those, I think, get renegotiated in the ordinary course. I'm not sure, you know, what the exact status is, but there are always some expiring, you know, with someone. So I would expect that those will be renegotiated in the ordinary course. With respect to Cablevision in Argentina, ...

Yeah, with the economic environment down there, I don't think you're going to see any calls be exercised by anybody. So, I think status quo and try to fix the situation.

OK. And with respect to the shareholder agreement between yourselves, and Microsoft on Jupiter?

Yeah. I don't think that triggers any particular exit rights, it just -- simply the shareholder's agreement expires. And we're in the process of talking about a new one.

OK, great. And in terms of share buybacks, can you tell us what you have remaining under existing authorization, and how many you have bought back since you re-upped it? I think it was two years ago.

Yes, I don't know exactly how many. We have not bought any material number recently in the last few quarters. I don't recall exactly what the authorization is, other than it's ample. I think it's something like 10 or 20 percent of our outstanding shares. It's a very large number. So we have as much available as we can imagine doing. The buyback concept, as I've said in prior calls, we are constantly monitoring our own trading price relative to our own liquidity, and other investment opportunities over the past several quarters. We've been looking at the opportunity for significant investments in foreign markets and in other things. And so, we have not felt like it was appropriate, or the best use of our liquidity at that time to buy back shares. But that is something that we monitor on a regular basis.

OK, great. And one final question. You said you have 2.7 billion in cash at the end of the year. What would that number go up to if you included cash related to the exercise of all the various options that you have outstanding?

The employee options?

Yes.

They're all under water, so I'm not sure how meaningful it is, but I think that's about $900 million roughly.

OK, great. Thank you very much.

Those are effectively all at $14.70, so at the current moment anyway, there's no great risk of exercise.

And our next question comes from with Bear Stearns.

Hi, I've a couple questions. One on Discovery. I'm just trying to back into the -- since you've restated domestic and international, that developing is now in developed. Can you back out developing for me from the 2001 numbers, and just tell me what the developed cash flow growth was?

And I have a follow-up.

For the domestic networks?

Yes.

OK, backing out everything other than Discovery and Learning Channel for domestic networks, you would see about an $80 million loss -- operating loss -- for all of the developing networks. That would include Animal Planet, Travel, Health, Showcase, our digital services, and our Internet support.

OK.

Oh, I believe Animal Planet and Travel actually were in the developed area. So everything other than those would total around $100 million of operating loss.

OK. And then a bigger question just talking about trying to -- trying to build out some kind of a cable distribution strategy in Europe. If you wind up coming up empty on anything you're doing now is there any interest given that there might be some domestic distress cable assets? Is there any interest in coming back to the U.S.?

It's -- you know, we are pursuing the European strategy because we sensed that it was a unique opportunity that there was a combination of large distribution assets available in a depressed market that we could acquire, you know, on reasonable terms. To the extent that, you know, that doesn't come true either because the terms prove not to be reasonable or because the assets prove not to be available then, you know, we are a never opportunistic company and you know to the extent that the conditions arise here, it's something that we would like at. You know we're trying to find opportunities to put our capital and our, you know, the accumulated knowledge and expertise that we have to work so it's not anything that we're studying intensively at the moment but if one set of opportunities, you know, doesn't pan out and another one arises that's something we've looked at.

OK. Thanks.

Next we'll go to with .

Good afternoon. Looking forward to the completion of AT&T broadband and Comcast, I assume that there must be some differences in the -- in the deals for both discovery as well as stars encore between the two above and beyond the AT&T pass through issues. How would you characterize what the impact of the pushing of these two companies together will have on affiliate payments as well as the pass through?

It's a little bit hard to estimate because we don't know exactly how they're going to put the businesses together and the actual structure does have an effect and we're a little bit hedged. You know one way is probably beneficial to stars encore and has a I think relatively small effect on Discovery. The other way might be beneficial to Discovery and not negative but not beneficial to stars encore. So until we really understand, you know, how they're -- how the companies are going to come together it's hard to estimate the impact but for stars encore they have a contract with both entities, you know, and they'll either both remain in tact or you know I believe the AT&T contract from any event continue to cover the AT&T subscribers.

Is there any chance the AT&T contracts will be moved across to also cover the Comcast subscribers?

Well not at the same rate. To the extent that they acquire, that AT&T acquires subscribers, there are incremental payments to Starz Encore.

OK. Thanks, .

And just a reminder, star one if you'd like to signal for a question. Next we'll take a question from with Interest Capital. Mr. , your line is open. We'll go to of Merrill Lynch.

I was wondering if you could give us a little more detail on your Japanese cable operations? How many of those subs do you -- well, I'm looking at the numbers here. How many subs are attributable to Liberty? And what is actually -- what are you getting in fees on a monthly basis there? When I look at it, I think you said one point ...

One point 4 million.

... 4 million. How many, though, are actually yours if I could ...

Yeah. I mean, I don't have the exact number, but I would say that the -- you know, those are the affiliated subscribers. We have 100 percent ownership, let's say attributed ownership of probably around 70 percent.

OK. And what type of monthly fees are you getting on those subscribers?

Those end up being sort of 45 to $50 a month.

OK. And what type of margins would that business have, say, in two, three years from now? Is it looking like, is it looking more and more like the United States?

Well it ought to have similar operating margin characteristics. You know, the the are comparable, the expenses ought to be the same. The difference is the capital is quite a bit lower because of the high density and because of the aerial plant and also the very low cost of .

Right.

So from a, from a, from a return on equity standpoint, they might well be better. From an operating point of view, they might look about the same.

OK. It looks like to me, I mean, your interest costs on these subs must be very, very low. Is it like 1 percent or something?

Yeah. We have -- the debt that we've incurred there is very inexpensive. You know, sort of one, 2 percent.

OK. Thank you.

You're welcome.

And next, we'll go to with Interest Capital.

Hi, thanks.

A quick follow-up on the, on the stock repurchase. What kind of tax implications do you have on a lot of the public holdings? And why doesn't it make sense to sort of take advantage of the that looks to be in place by selling some of the public assets and buying your stock or, you know, the private assets at what looks to be quite a discount?

Well, as I said before, we're, you know, we, you know, are constantly reviewing the trading price of our stock relative to what we think is the value of the assets relative to our liquidity position, our debt position and the alternative investment opportunities. And you know, at the end of the day you make a conclusion based on those. Our tax position in asset differs, but it's fair to say that generally speaking we have low tax bases in the large liquid assets. And so it would be quite inefficient to sell and take the money and buy back stock. Because the taxes would offset the discount.

OK, thanks.

And we have a question from with .

When you look at the other continental cable properties that might be up for sale, given further stress conditions, particularly in Germany. I won't name the operator, but would you expect to encounter the same structural impediments as far as not being able to roll up level three and level four, and the condition of the plant? Or are there some other people who have just evolved to a different condition where you might be able to put a partial or a majority equity position as part of a re-capitalization?

Well, in Germany the level three, level four separation is unique to Germany, so if there are -- other businesses on the Continent don't have that.

Right.

It's not something that -- I think the rules are going to be the same nationwide, whether the German government or the regulators would become more flexible over time is subject to -- is to be seen. I don't know. But I would expect we would encounter similar problems. The problems might be smaller if we were buying a smaller company, as opposed to the acquisition that we had on the table was effective to 60 percent of the subscriber universe. So just the sheer size of that created some of the issues. On the other hand, the sheer size of it was part of the attraction. You know, the opportunity to get that big a footprint in one transaction was part of the appeal. And made that more interesting to us, than individual regions.

If became available, would you be subject to the same concerns about the condition of the plant, and just the economics of trying to do IP right out of the box? Or is that something that you really can't address at this point?

Well, I think it's speculative to refer just to . I mean, in general I think the plant condition is generally uniform. has spent money upgrading it. Whereas the regions we were buying were not upgraded. But again, I don't want to make speculation on an individual company.

Great. Thank you.

There are no more questions in the queue at this time, so I'll turn the call back over to our panel for any additional or closing remarks.

OK, I have no closing remarks, other than thank you all very much for joining us today.

Good-bye.

END