QVC Group Inc (QVCGA) 2002 Q3 法說會逐字稿

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 Erickson. Please go ahead, sir.

Hello everybody, welcome.

During this presentation, we may make certain forward-looking statements about business strategies, market potentials, future financial performance, new service and product launches and other matters. These statements involve many risks and uncertainties that could cause 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 including the most recent form 10-Q for additional information about Liberty Media and about the risks and uncertainties related to our business.

With that, we'll get started now. Joining us on the telephone on the line today we have Barb Bennett from Discovery and then, here with us, we also have from Starz Encore, John Sea, Mark Bowman and Bill Meyers. We have Gary Howard and now I'll turn - the COO of Liberty Media.

And now, I'll turn the call over to our President and CEO, Robert Bennett.

Thank you, Mike, thank you all for joining us today.

If you've have a chance to read the, um, press release that we put out, we have had another very strong quarter among our large private businesses, and we would like to spend most of the time today talking about those.

Before we get to that, however, I need to encourage you to read the 10-Q that was filed, that includes our, um, official gap financial statements, the filing is available on the website but the primary purpose of our call is to provide supplemental information, um, regarding the performance of our large nonpublic assets and answer questions that you may have.

In an overall sense, um, looking at some of the instability in the public market prices and in the equity markets and the overall economic climate, um, those things still remain a little uncertain, um, but despite that, I think it's fair to say that our large private assets continued to enjoy rapid growth and value creation.

For example, during the third quarter compared to last year, cash flow doubled with Discovery Communications, while QVC and Starz saw 20% and 9% increases respectively. Top line growth was also very strong with Discovery, QVC and Starz each turning in approximately 13% growth over last year.

Our Japanese businesses also performed well with Jcom and JPC reporting revenue growth of 48% and 42% while cash flow at Jcom more than tripled and JPC cash flow more than doubled. In the broader outlook, we're also starting to see promising improvements in the tone of the advertising market, which has helped the equity value of some of our large public media investments and the strengthening is also apparent at the Discovery networks.

I want to point out another item before we get into the individual results. As you may have noticed, we changed the presentation for our international assets, um, we're now only including our Japanese businesses through Telecom and programming to try to simplify the presentation.

If you have specific questions about those or any of the other nonpublic assets, we would be happy to address them.

That being said, let's look at the highlights of the individual businesses starting with Starz Encore. Um, the Starz Encore business operations continue to perform very well. Revenue and cash flow grew by 12% and 9% respectively.

Since it doesn't carry advertising, Starz revenue is directly driven by increased distribution, um, in that realm, they had another strong quarter. Um, Starz continues to benefit from the rollout of digital cable and continued growth of the DBS businesses.

Total subscription units were up 25% or 27 million units over the prior year. This growth was spread across various product lines and distribution channels, including Starz units were up 10%, Encore units were up 17%, [inaudible] multiplex units were up 33%.

Looking at the different forms of distribution, the DBS units were up 14%, cable units other than AT&T were up 27%, and AT&T units were up 51%. So continued growth in the distribution across all different forms and continued high acceptance of the product by consumers and distributors.

On the expense side, operating costs increased by 14% for the quarter, um, this increase was primarily due to increased marketing support and consumer marketing expenses due to the markets of the Starz product with various MSOs.

In addition, programming expenses increased slightly due to a $3 million write-off, and that was a write-off of development costs, um, for the operations of the Starz original pictures. Given that Starz Encore has ample supply of content through its existing studio contracts, the decision was made that we don't need to make the investment in additional original programming and original movies and, therefore, we wrote off some investment that has already been made.

Looking at the year as a whole, our guidance for 2002, um, we're revising upwards assuming continued expansion of distribution and maintenance of a product mix similar to the first three quarters of 2002. We expect the following for 2002 as a whole. Revenue growth of 10% to 11% to around $960 million. The net revenue growth combined with an upper single digits increase in operating expenses should result in cash flow growth of approximately 17% for the year to about $365 million.

Next is Discovery Communications.

As of the end of September, the various Discovery networks reached a total of $812 million cumulative subscribers in 155 countries.

For the quarter, the company generated top-line growth of 13% to $408 million and cash flow doubled to $78 million on a consolidated basis.

Um, the largest component of that is the Discovery Networks U.S., and those networks now reach a cumulative 475 million subscribers, an increase of 20% over the end of the third quarter in 2001. The Discovery Networks U.S. revenue increased by 22% and cash flow increased by 39% to $93 million for the quarter primarily due to an increase in advertising and affiliate revenues.

The U.S. networks had a very strong quarter for ad revenue growth with an overall increase of 23% over the third quarter of last year.

The increase in ad revenue was driven by a 9% overall increase in combined total day audience delivery as well as increased sellout. All of the networks turned in double-digit ad sales increases in the quarter, including Discovery Channel itself was up 11%, Learning Channel 28%, Animal planet was up 44%; Travel Channel, 37%, and Discovery Health up 77%.

On the affiliate revenue side, whish is about 36% of the mix, that increased 19% year over year due to a 20% increase in aggregate subscribers. That 20% or the 19% revenue growth is a little lower than the 20% increase in distribution because of the more rapid growth of the newer networks, um, which in many cases, were in a free distribution period.

Um, the more established networks continue to see, um, affiliate fee per unit increases, um, somewhat in excess of the inflation rate.

Distribution within the network was spread across all of the various channels, um, looking at Nielson Rating information, Nielson household measurement. Animal Planet was up 9%, to almost 81 million homes, Travel Channel up 14% to 67 1/2 million homes, Discovery Health up 29% to 39 million, um, the Digital Networks Units are now up 84% to about 86 million homes, BBC America was up, is now in over 30 million homes and Discovery Channel, which is effectively fully distributed grow by 2% to 87 million and the Learning Channel, 4% to about 85 million.

Expenses at the division increased by $23 million or 15% due in large part to an increase in sales overhead costs that resulted from the, um, more favorable ad sales results.

The Discoveries International Networks also had an excellent quarter, with revenue increasing by 18% and cash flow tripling to $15 million. The revenue increase resulted from a 66% increase in advertising and a 7% increase in affiliate fees.

The increase in net advertising revenue was driven by a combined 78% increase at Discovery Europe and Home and Leisure Europe where audience delivery increased by 35% and 23% respectively. The increase in affiliate revenue was driven by subscriber growth of 26%.

Subscribers, once again, grew at a faster rate than revenue, as much as the subscriber growth at these networks, at networks that are currently in a free period or have lower-subscription fee rates, also affiliate revenue growth was negatively reflected by currency devaluations in Latin America.

Operating expenses increased by 5% primarily due to increased by bad debt reserves resulting from the continued instability in Latin America.

Um, if you look at the international group as a whole, nearly half of them are now generating positive operating cash flow and they have an overall reach of 240 million cumulative subscribers, which is a 26% increase over last year.

The next segment is the international ventures division, which includes the businesses in the BBC joint venture as well as Discoveries investments in Germany, and Japan which are included at Discovery's attributed ownership level of 50%. Revenue with the division decreased by 8% for the quarter due to a decrease in programming sales offset by a 12% increase affiliate sales.

The cash flow deficit also had a slight improvement due to aggressive cost containment efforts. The international venture now has nearly 95 million subs, an increase of 18% over the prior period.

The last group in Discovery is the consumer products group. This group experienced a revenue decline of 39% during the quarter, um, this shortfall was offset by reduced costs of goods sold as well as strenuous cost-containment efforts, resulting in a 9% improvement in the cash flow deficit compared to last year.

The primary business in the consumer products division is the 166 nationwide Discovery Channel stores, um, the consumer products group revenue suffers in the short-term as the company continues to reduce certain inventory items in preparation for a full holiday season under the now more focused retail strategy. The process of implementing the strategy has required the discontention of certain low-margin inventory and the introduction of new higher margin, more targeted inventory.

The improvement in the operating cash flow deficit of $2 million is primarily due, as I said before, to the decrease in the margin contribution to the stores offset by reduced e-commerce and overhead costs.

Looking at our expectations as a whole, DCI as a whole, on the domestic side, we're looking for improvement and upgrading our guidance, um, we're downgrading a little bit on the international division, um, and overall, there is no net change.

Assuming the following assumptions, which are improving domestic advertising sales market, continued weakness in Latin America, specifically Argentina, continued improvement in international distribution ad sales, continued cost control effort and economic as well as -continued economic uncertainty, um, and the potential -- not really knowing exactly what the retail environment is going to be, let me go through for a couple of the key divisions and overall guidance for discovery.

In the domestic U.S. divisions, we expect to see revenue growth of approximately 10% to $1.1 billion and cash flow growth of approximately 15% to $380 million. Um, that is an increase in our guidance, which previously had been revenue growth in the low to mid-single digits and operating cash flow in the mid- to high-single digits.

In the international division, we're expecting the international networks division to increase revenue by approximately 10% to $380 million and to increase cash flow by 125% to 135%. Previously, um, the guidance had been revenue increase in the low to midteens and operating cash flow increased by 125% to 150%.

So, we're lowering the revenue a little bit and reducing the range to the low end of the prior guidance on operating cash flow.

Discovery as a whole, we continue to expect DCIs aggregate attributed revenue to increase, um, in the high-single digits and, um, aggregate attributed cash flow to increase by 40%.

Moving over to QVC, um, if you have been on these calls before, it pretty well goes without saying, QVC had another outstanding quarter with overall top-lying growth of 13% and operating cash flow growth of 20%. The company continues to pay down debt, reducing their June 30 debt balance by half. They now have about $100 million of debt, which combined with a sizable cash balance, puts the company in a net cash position.

I won't go into all the details of their performance, since they're included in Comcast earnings release. Some of the highlights include operating cash flow, break-even for Germany and Japan, a 43% increase in revenue for Germany, a 5% increase in operating cash flow margins for the domestic business from 20.4% to 21.4%, and a 14% increase in operating cash flow of the domestic businesses. Again, another very strong quarter for QVC.

Next is our Japanese businesses. As I mentioned at the beginning, we're going to present our Japanese businesses separately in order to increase the visibility of these assets. They're shown on a 100% U.S. GAP basis as opposed to our attributed share.

You may notice that we make reference to managed subscribers at times in the release in this discussion. Managed subscriber data includes two equity investments that are managed by Jcom. Jcom does not consolidate those entities but does manage them. And revenue and cash flow do not include the results from those businesses. I also should point out that we're using a constant exchange rate for both periods between the yen and the dollar.

Jcom as of the end of the third quarter passes about 5.8 million homes and serves over 1.5 million of those homes with at least one service. Revenue at Jcom increased 48% due to increased distribution of Jcom's broadband services.

Some of the highlights of the distribution growth include a 25% increase in cable subs to 1.4 million, 119% increase in telephony subs to 300,000, a 69% increase in data units to 463,000. Household penetration for the managed systems has increased to 26%, which is up 4 percentage points from last year, and services per household are at 1.4 versus 1.27 last year, an increase of 10%. Cable penetration increased to 24% from 20% last year, and internet penetration currently at 8% increased by 3 percentage points from last year. Telephone penetration is now over 10%.

Jcom's revenue growth and improving margins driven by scale efficiencies helped the company generate $62 million in operating cash flow in the third quarter versus $17 million in the prior year, an increase of $45 million or 260%.

Looking at Jupiter programming, JPCs revenue increased 42% due to a strong subscriber growth and continued success with the Shop Channel, which experienced a 35% increase in revenue. JPC now reaches nearly 33 million aggregate subscribers and owns or invests in 14 individual channels.

As you can see in the release subscriber increases were strong at all of the networks under the JPC umbrella, including a 28% increase in distribution at the Shop Channel, 23% at JPCs movie channel, 19% for the Golf Channel, 33% for Discovery Japan, 31% for our Sports Venture, 41% for Animal Planet.

JPCs operating cash flow increased by 125%, that's about $9 million due to increases in revenue offset by increased programming and general and administrative expenses. Given those results, we continue to be very pleased with the success of these businesses, they're growing at a very rapid rate and are an excellent example of our strategy and the benefits of owning complimentary cable distribution and programming assets in a given market.

A quick look at a couple of our other assets, Court TV, our joint venture with AOL now reaches nearly 75 million Nielson homes, an increase of 13% over the prior year. Q3 was the most watched in the companies 11 year history, ad sales were up 59% for the third quarter, total revenue was up 28% for the quarter, um, and Court's primetime rating for October was up 33% over the last year. We're expecting for the year that their revenue will be up over 20% in 2000 over last year.

Next is Game Show Network, wish is our joint venture with Sony. Their subscribers are up 8% to 47 million, revenues up 49% due to an 85% increase in the affiliate revenue and a 32% increase in ad revenue. The network expects to be in 50 million homes by the end of the year.

This is a work in progress but one that continues to make significant strides.

Next let's look at our balance sheet very quickly and our current liquidity position. We ended the quarter with over $1.9 billion of corporate cash and approximately $6 billion in face amount of corporate debt of which $3.1 billion represents the face amount of our exchangeable debt. The decrease in corporate cash was primarily due to the paydown of some debt, um, as well as interest payments, the completion of the Wink and Open TV acquisitions and the purchase of some Telewest bonds in July.

We also completed a small acquisition in Japan, and I should add we, after the quarter ended, we sold Wink to Open TV putting $100 million back into the bank account.

From a credit point of view, there is no established formulas for how the rating agencies analyze our company; however, um, here are a few that we look at. The fore value of hedged securities is about 2.6 times the face amount of our straight debt.

Our hedged securities excluding the underlying exchangeables are currently in the money by over $5 billion. Unrestricted public assets plus cash covers our straight debt by seven times. And the average life of our long-term fixed corporate debt is 24 years.

I think you put that all together and what you see is a very strong, very liquid balance sheet with a couple billion in cash as well as roughly $5 billion in put value of callers, so we feel like we're in a very good position, vis-a-vis our balance sheet.

Some recent events, just updating some things that we have been working on, the Casema acquisition, we signed a deal with TransTelecom to acquire that a few months ago, we have been working through the regulatory process given our ownership at UPC, it came as no surprise that the antitrust regulators elected to go into a second phase. That phase should take 3 to 4 months.

Under the terms of our contract with FT, um, both of us have the ability to terminate it and we continue to be in conversations with Transtelecom about how to go forward, but we continue to go work on the transaction. I think it's one that ultimately we will be successful with from the antitrust point of view.

Next are the Liberty broadband-related transactions I mentioned earlier in August, we completed the acquisition of control of Open TV, um, for $29 million of cash and about $15 million Liberty shares. That acquisition represents a purchase of 38% of the equity and 85% of the votes. Together with previously-held interests we now own 41% of Open TV and 86% of the votes.

Um, in the same line of work on August 22nd, we completed the acquisition of Wink for approximately $100 million, as I just mentioned on October 4, Open TV purchased Liberty, in effect, returning the money back to our cash balance, and Wink is now wholly on by Open TV. Also in the third quarter, Open TV announced they had agreed to acquired 100% of AT TV through a stock merger that is expected to close later this year or early next year.

Next is the rights offering, we have commenced a rights offering in which existing shareholders received .04 transferable subscription rights for each outstanding share. Each right entitles the holder to purchase one share of Liberty Series A stock for $6. The rights offering is scheduled to expire on December 2nd, assuming full subscription of the offering will raise over $600 million in cash.

In terms of repurchases of shares, um, we purchased no shares during the third quarter as we have discussed in prior calls. We have been reluctant to buy back our shares because of concerns we may have to turn around and reissue those repurchase shares.

Again, going back to our spinoff with AT&T, spin-off from AT&T in conjunction with the ruling requested there, we agreed to issue at least $500 million of equity and the rights offering satisfies that obligation. That completes my comments just for -- to summarize for emphasis in case you didn't hear it already, we're very pleased with the operations of these businesses. They had a very strong quarter across the board.

We also are feeling very comfortable with our liquidity and our balance sheet and continue to be optimistic as well as opportunistic, um in, our outlook for the future with that, I would be happy to take questions.

Thank you, the question-and-answer session will be conducted electronically.

If you would like to ask a question, please do so by pressing a star followed by the one key on your touch-tone telephone.

If you're using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment.

We will proceed in the order you signal us and take as many questions as time permits.

Once again, that's star one to ask a question. If your question has been covered, you can remove yourself from the queue by pressing the pound sign on your phone. We'll pause a moment to assemble our roster.

Our first question is from Gloria Radive with Bear Stearns.

Hi, I have a question related to the AT&T contract. With the Comcast merger, would the terms of the AT&T Encore affiliate agreement be sort of voided, and would the Starz Encore be policed under current Comcast arrangement?

We'll ask John Sea to answer that.

We have two -- right now the, um, the merger consistancies of two separate subs of a new parent. And, therefore, the contracts Applied to the old AT&T still applies as well as the current contract with the Comcast and, so we're hopeful to begin dialogue as soon as the deal is closed with Comcast to continue the negotiations for the litigation that we have filed.

I -- can I just ask is there a way to quantify as an if, if the AT&T subs we understand up through litigation getting the terms that Comcast currently has, is there a way to quantify the impact that would have on the Starz Encore revenues?

We're not in a position to do that. We have two contracts, one with AT&T and one with Comcast. Our view is they both remain in place, and both are valid and binding contracts.

Okay. Thanks.

We'll move on to Doug Mitchelson with Deutsche Banc.

Thank you very much.

Can you give us a sense of your appetite for acquisitions, you know, where do you see the best returns.

Is it going to be, you know, somehow trying to get back into a cable can Germany or doing something with Telewest, is it U.S. cable network acquisitions like Court TV or something with Avendi. Where do you think the best returns from deployment and capital are going to come in terms of the next few years for you?

We're looking at a number of things and part of the way we're structured is, you know, we have -- we look at opportunities in content, we look at opportunities in distribution, we look at opportunities in technology.

We have core positions in each of those, so generally we're trying to find, um, ways that we can add to them in a creative transactions or find businesses that are highly complimentary, so it really could be in any of those.

I think as we have mentioned before, um, to the -- if it should turn out the DirecTV EchoStar transaction is not completed, we would have an interest in looking at DirecTV for example, if that was to be available. Likewise, um, we have a strong position in domestic programming and would be -- would welcome opportunities -- opportunities to expand that business. I can't identify exactly what they might be, um, but, you know, you can imagine a couple of them that are out there, there has been some discussion of Avendi. We don't know what Avendi.

We don't know what they're doing with their entertainment aspects, as well as the ones that you mentioned. So, I think it's going to be a matter what have opportunities arise and then trying to figure out whether or not you can reach a price that will generate the kind of returns we're looking for.

Thank you.

We'll move on to Barry Hines with Sage Asset Management.

Hi, good afternoon.

Two quick questions, um, one is, um, a Discovery U.S. question. The advertising revenue you said was up 23% for the quarter, um, but the compare is against 9/11. I wonder if you compare back to 2000, you know, give us a sense of what the two year compare would look like?

The other question was, um, in Starz, um, when cable systems are offering SVOD, um, are you, um, charging extra to the subscriber for that capability or, um, is that just an additional capabilities to try to increase the take rate and, um, do you have any experience yet, um, in terms of what that does to the take rates either way, when SVOD is available. Thanks.

Barb, can you answer the first question? We don't have those statistics at our fingertips. Don't know if you do. I don't have them at my fingertips, I am trying to get something for a gage.

That would still be a fairly good comparison, even though 9/11 was in the third quarter of last year, it was in the end of third quarter, but you're absolutely right, Barry, in terms of the total ad market was in a decline at that point.

Overall, um, let me see if I can -- I don't have it off the, you know, just off hand in terms of how we were doing in 2000. I would expect that it would be, um, a good increase over 2000. I just don't know what the percentage would be.

That's okay. I can call back and do it offline.

We would be happy to follow up with that.

And the other one?

On the Starz question, John.

Sure.

Um, basically there are a couple of ways for our affiliates to offer SVOD, Starz On Demand, one we would call it a grand transformation, meaning all of the Starz Superpack subscriber would automatically get the On-Demand option, and for that, we just charge a flat license fee increase.

The other way will be optional call where a Starz Superpack household could add on a Starz On Demand option. In that case, we get a percentage of that revenue.

And the third one would be what they call category add-on, which means a consumer pays a gateway essentially for On-Demand whether they're underlying has Starz or HBO or Showtime and for, that we're also charging a flat rate.

And all indications so far that those that have taken, um, Starz On Demand are much more satisfied with the end-of-the-line Starz service as well as the new cable system.

Any sense on how the take rate changes in the market or SVOD are comparable to compare it with a market that is not?

It's really too early to tell. We're still in the various early testing phase. Probably next year would shake out where it's impact.

Right now, we're trying to look at valuation, consumer behavior as well as, um, a very successful on going test on phase I with DirecTV on SVOD, we're the only one on the DBS platform and we're entering the Phase II negotiations with DirecTV, which should be conclusive with this next month or so.

Great, thanks very much.

Our next question comes from David Joyce with Guzman and Company.

Thank you, there any way you can detail what programs you own currently on UPC systems or on Jcom?

Um, not off the top of my head. Jcom carries all of the JPC programming, um, --

Discovery.

Which includes Discovery, so, with respect to Jcom, yes, it carries all the JPC programming and I couldn't tell you what other programming we might be affiliated without doing more research.

UPC carries at least Discovery and in some cases, Animal Planet. Beyond that, we would have to do more work on it. They also carry some of the additional challenge that UPC itself owns.

Okay, thank you.

Our next question comes from Naroj Gusto with Solomon Smith Barney.

Thank you, good afternoon.

I thought earlier, John, when you were referencing the IRS situation with respect to your flexibility or your comfort level and buying back stock, you said the writes offering interview satisfied the share-issuance requirement.

Are you still waiting for, um, some confirmation on that from the IRS or do you guys feel comfortable going forward with respect to share repurchases and then, the second question, um, I guess for John Sea, a philosophical question in terms of, John, your view of how you think, um, the cable operators should pursue the VOD, um, offering in general, and I guess the reason I ask this question is when you think of all the niche content out there and also, um, the different pay content out there, you, HBO, Showtime, the myriad of potential a la cart offers a subscriber would have to choose from is kind of mind-boggling.

It would seem to be complicated to put together tired offers. How do you think that plays out and how do you go about trying to facilitate that and making it happen.

Thanks.

Hi, NAROJ.

I think the answer should be self-evident by the questions that you have asked is that we believe grand transformation is the only way that cable operators can successfully make that transition and that is all of the Starz Superpacks found in the system, um, say after the six months trial, three in the six months trial will get -- will charge an extra for the on-demand.

That means every Starz household will be a Starz On-Demand household, the only simple way and easy way and most beneficial way for a cable operator to get the maximum value without sort of selling a percentage on the percentage. With a pretty complex offering, you know, with high speed data and, um, Telephony.

So we're encouraging cable operators to go the grand transformation route, and we believe eventually over the next five to 10 years, hope all of cable will move towards a cable On-Demand kind of approach, except with a subscription dates, not a transactional base.

That's my view.

And on the rights-offering question, we believe that the rights offering satisfies, um, the -- the IRS question as to buy backs, um, we are requesting clarity on that, um, I would, you know, barring getting some clarity, um, on whether or not, you know, we have to gross up, I would not expect us to be an active buyer, um, for some period of time, maybe six months or so, um, barring some change in the -- the market as a whole or conditions. Um, but that's still to be seen.

Can I ask one follow up for Barb just on the did Discovery networks. Could you give us some sense of where Health and BBC are in terms of profitability trajectory, are they making money yet? Just when they may go cash break even. Thanks.

Yes, Health channel is not profitable. We have high hopes for it, um, and BBC America is, um, -- is not quite yet profitable but will soon be.

Thank you.

We'll move on to Richard Greenfield with Goldman Sachs.

Hi, good afternoon. Two questions.

Just a follow-up on Naroj's question.

With share buybacks starting at some point, hopefully over the next six months, but you're also having desires potentially over U.S. satellites, U.S. programming ads -- adds, where do you see, I know there is no specific leverage multiple you look at, but where do you want your debt and cash ref eel -- level leverage to be over the next few years and secondly, could you just discuss what your plans might be for QVC as we move into February.

Thanks.

Okay, um, you know, we don't -- we don't have a specific target, um, on the debt leverage side. A lot of it depends on what the opportunities are.

Right now, we don't have a tremendous amount of cash flow, um, that comes in and out of our bank account that we can use to service debt, and that's going to tend to serve as a constraint on our desire to incur debt.

Likewise, um, our investment grade rating is important, and we're in regular dialogue with the rating agencies, um, so I would, you know, we have ample liquidity in the balance sheet now, we have ample access to, um, built-in gains in caller positions, I would not expect to see, you know, a meaningful increases in the debt, but again, it depends on the opportunity.

If the opportunity is to acquire something that generates substant -- substantial cash flow, then that would change our view of debt, and it's something we would have to assess at the time, um, so there's not really an easy answer other than a status quo, um, I would not expect a substantial increase in debt. We might go up a little bit, but I wouldn't really see a big increase.

If we find an attractive acquisition that generates cash flow, um, then we would have to look at it, we would look at it differently and we would be sitting down with the agencies and getting a sense of how they would look at it as well.

On the QVC front, um, by your reference to February, I assume you're referring to our, um, potential liquidity event, which, you know, basically under our original deal, um, we have the right this coming February and the following one, um, to initiate a process in which we would have a liquidity outcome, um, basically that gives us the right to start a process, which then commences an appraisal, um, and then following the results of the appraisal Comcast would have a right to A -- Comcast would have a right to acquire our position or we would be able to acquire their position or if neither of us would acquire, we would sell the whole business. We have made no decision as to whether or not we would exercise that. We have this one and the one following left.

After that, our liquidity is reduced so, um, that certainly is going to be a consideration, um, and, you know, I would expect that this is a conversation that we'll be having with Comcast over the coming months, you know, we have been partners in this venture for several years, it's been a very successful enterprise, um, and, you know, we'll, I'm sure, be in conversations to see if, um, you know, if there is an outcome that we both like. And we'll take it from there, um, similar to, you know, as John was saying earlier on the AT&T question about the affiliation agreement, you know, again, we have a good relationship with Comcast.

I don't tonight give the impression, that you know, there is hostility or tension, you know, we have a good relationship. Summer they're a very important -- certainly they're a very important distributor in the U.S. and look forward to have having the conversation over the next couple months.

Just a follow-up.

If you don't validate the free cash flow of QVC, despite the fact it's a great asset and growing tremendously, how do you look at hoping an asset where you don't control the free cash flow, and would it make sense to try to trade it for something where you do handle the cash flow.

Yes, conceptually we would rather have cash flow than not have cash flow, um, you know, like most companies, we would rather own an asset that is generating a direct return to us as well as appreciating than one that is only appreciating.

I don't think they're -- that's any kind of surprising answer, um, but again, it's, you know, it's a conversation I expect we'll have in the coming months.

And we'll move on to Jessica Wright Cohen with Merrill Lynch.

Hi, I have a couple of questions, can you talk about expectations as a goal to make CPMs in line with the forecast network, what are your expectations and also the third quarter advertising for Discover was very strong but does it reflect the 2002 up-front at all or is that in the fourth quarter?

Um, with the first part of the question, um, with the hiring of Joe Abrusei, I'm sorry, from CBS, we're very excited about that.

I think it puts us in a different league from an ad sales point of view, and gives us an individual with tremendous amount of experience and tremendous amount of contacts in the industry that I think can help us, um, sell the story of Discovery as a group of networks with a very broad, um, demographic reach.

And -- and that will help, um, both help on the relationship side and help get CPMs closer to broadcast-types of CPMs. Um, I don't know if you want to add to that, Barb. No, Doug, that says it pretty well. We do hope that one of Joe's, um, you know, primary goals in coming here was to help narrow that broadcast cable gap that exists.

Okay, how big is the gap?

It differs on a network-by-network basis.

On Discovery which would be the biggest, do you have any idea?

I don't have that off the top of my head. Any cable network, you know, has CPMs substantially lower.

Of course. In terms of the up-front market for '02, was that at all in the Q3 numbers?

The '02 upfront numbers will be more reflected in the fourth quarter.

Could you remind us of what your pricing was and sellouts was for the up-front.

The pricing was, um, slightly favorable to prior year, prior year's up front and sellout was substantially increased. I think we sold out, um, I want to say 20 or 30% more.

And the tone of the scatter market in the fourth quarter?

It still seems to be strong. It's holding on.

Okay, and then just a Starz question, the increase of Starz in the third quarter is that launch fees? If it is, what's the going rate these days?

No. It's really marketing support, you know, supporting launch, supporting the marketing efforts of our distributors.

And the last question, Bob, you said before that you might be interested in DirecTV, you didn't say with News Corp. Is that with News Corp or as a stand alone?

We have an interest as a stand alone. Clearly owning that would be a valuable edition to our company, depend on this terms. That being said the last time around, we looked at this in cooperation within the CORP and we're a large news CORP shareholder, so we potentially could have an interest either way.

Okay, thank you.

Our next question comes from Kathy Stiponeous with Prudential Securities.

Hi, thanks, a couple of questions.

Um, with respect to USA, you obviously have a substantial investment in USA Networks, you also have one in Avendi Universal but more substantial in U.S.A. I was wondering with the complexity and the amount of time Barry Diller needs to spend, especially with his role recently expanded, um, how concerned are you about his ability to be able to juggle both jobs or do you foresee this as kind of an interim role that will, you know, be resolved shortly and then, could you also give us the apples-to-apples international numbers for the quarter.

Thanks.

Um, your question is -- your first question is probably better directed at Mr. Diller in terms of his ability to do both.

As an Avendi shareholder, you know, we're quite pleased at his involvement in those assets, um, U.S. media assets are unique and complicated and he has a tremendous amount of experience in that area, and I think can be tremendously helpful to the enterprise.

In terms of our holdings in USAI, um, again, we're very comfortable with Barry's talent and with his experience as an executive and -- and I have no doubt that we will find a way successfully to balance his commitment. Um, so, no, I don't worry about that.

And what was the second question?

Um, the international numbers. You're now just breaking out Jcom.

Could you give us the number the way you used to break it out.

Kathy, we didn't break them out that way this time even internally. We thought just showing Japan was a much more, I guess, useful exercise for people in the press release

Okay, and then just one quick follow-up, um, Bob, you mentioned that you were pretty confident about the regulatory process for Casema.

Given the level of concentration you would have in that market, what makes you so confident and how real do you view the other potential bidders that may or may not be out there. Thanks.

Well, nothing is certain in the world, you know, we have had extensive conversations all right with the antitrust regulators and I guess maybe I should say I'm hopeful we'll be able to, um, find, you know, ways to address their concerns based on what we know about them, I think there is a chance we will be able to and a descent chance.

Again, it's early in the process, so, you know, I guess I -- I can't say I'm extremely confident but I think we're hopeful and I think there is reason to believe we should be able to get through it.

In terms of other bidders, you know, that's -- there's not a lot you can do about it. Um, you know, we -- we have -- we think that, um, given our other businesses there, this is an attractive acquisition to add, um, and, you know, we're willing to go forward and plan to go forward with the transaction, um, you know, barring some change. So, if -- if others, um, are interested in it, then I assume that they will express their interest and we'll have to see where it goes.

Thanks.

Our next question comes from David Goldsmith of Buckingham Research.

Hi, Bob, two questions for you.

One, there has been talk about Court, or AOLs selling their 50% interest in Court. Would you be interested in buying the other 50% or do you think it's better somewhere else and, secondly, am I beginning to detect perhaps a bit of cooling in interest in European cable?

Obviously the German deal isn't going to come out and been much talk about anything other than Casema.

Court TV, you know there, has been rumors that AOL was interested in selling it. I don't think those have been confirmed so there is not a comment I could make. Depending on this price, sure, we're interested. Um, um, but it's -- that's really just speculation because I don't know that they're looking to sell their interest.

In terms of European cable, you know, there may well be opportunity there is still. Casema is the one we're pursuing at the moment.

The German trans, the primary German transaction with Deutsche Telecom, the 6 regions, we're not currently involved with that process.

So it looks like that's going to go in a different direction. Still, the projective in Europe was to acquire an interest in a business, and we did that through UPC, a business that had sufficient scale, um, to be both viable and large in its own right and to give to provide a sort of center of gravity that would allow us, um to make accretive acquisitions beyond that. So, you know, Germany would have been very helpful.

But, again, we're opportunistic in this, we're not compelled to buy things at irrational prices or unacceptable terms.

To the extent we can find things that make sense in the context of what we already have and, um, that have a favorable, um, regulatory structure and -- and industry structure and favorable pricing in terms and financing ability, then we will continue to pursue them, so I think our interest in European capable has not really waned.

It's just that the big German plan we're working on looks like it's, you know, not going to be the opportunity we thought it was going to be, but that doesn't mean we're not interested in expanding what we already have.

Great, anything else available in Europe or something coming up, just my own lack of knowledge.

Well, I mean there are, I think there is a number of, um French companies that probably could be available.

Um, there is capital needed in a couple of other markets where they might be like looking for partnerships or acquisitions. So, there could be things, um, they're not on the scale of Germany because that is the largest market, but there could be other acquisition opportunities out there.

Great. Thanks.

Our next question comes from Paul Kagan with Kagan Capital.

Thanks, hi, guys.

The -- it's been about six months since you did the Open TV acquisition. I wonder if you could tell us your view; um, Liberty broadband venture and what it might accomplish over the years.

Um, all right. It's -- I don't think it's been six months, though.

I think it has. [ Laughter ]

Time flies. We closed it only in August.

Well, that's true.

From when we signed it, you're probably right.

Um, the idea there was that, you know, we still believe that over a period of time, um, the interactive applications will be extremely valuable both to distributors and advertisers.

That the ability to target advertising, um, to specific groups of consumers and to target different ads to different consumers will be increasingly important over the years to advertisers in a world of, um, huge number of channels and fragmentation of audience and just Intermediation of audience through PBRs and other technologies.

So, we still think there is an opportunity on the advertising side, and I also think that over time the interactive applications that consumers are finding useful in the UK and other places, whether that's games or other types of things will be valuable and -- and will be, you know, valuable sources of incremental revenue for distributors.

At the moment, it's not a high priority, um, it's, you know, following broadband data it'svilling VOD, but I think that's a a matter of time. Our strategy here was to try to acquire a sort of core holding, um, which is catch open TV, which has -- which is Open TV, which has distribution and in the market.

Add to that businesses that also have position, have distribution, being [Wemchg] and AC TV, businesses that also have cash so that when you put it all together, if you can reduce the overheads sufficiently and -- and make them more efficient in their operations that you can use the cash on hand to wait a very long time for the market to evolve and the revenue to grow because revenue growth is going to take awhile. It's not going to happen overnight.

So the key is to, you know, have the liquidity to be able to -- to weight it out and to pursue other opportunities. And I think that we're well positioned in that regard. But this is not a, um, a six-month or one-year scheme.

This is a multi-year project that I think will take a few years to really demonstrate, um, what we think is the potential in the marketplace.

Okay, thanks.

Our next question comes from Matthew Hergan with Ginko Partners.

Most interesting pronunciation so far. Yanko Partners.

Two questions. One, would you look at the oversea markets of levels of CDP. I realize you're not going have the numbers on the tip of your finger tips.

What is the gap, you know, CPM wise for advertising and affiliate fees for countries like the UK, Germany or Japan on the Discover Networks, literally 5 or 10 years is probably a narrowing of that gap and secondly, when you look at the developing markets in Europe and united group where they made a big commitment to, you know, for voice, where are you philosophically on IP versus voice and the international markets where you're cranking the gross pretty aggressively.

Can you answer the first question, Barb? You're right, I don't have any of that on my finger tips. In the UK, we're getting 20 cents per sub on an affiliate rate, sub per month basis. And on the Telephony question, I think we still see, you know, going forward if you're looking at upgrading plans and buying equipment, um, that generally you're going to be probably better off waiting for IB telephony to come along because it's more cost-efficient product. That being said in markets where you already did the upgrade and the switches, UPC an example, Jcom, another example, it's a way to be in the business, to gain market share, um, and to do so profitably.

Thank you.

Our final question comes from Gloria Radive from Bear Stearns.

My final question was answered. Easy, huh.

That concludes our question-and-answer session. I'll turn things over to you, Mr. Bennett for closing comments.

My only closing comment is thank you all for joining us today and feel free to call with any other questions. Thank you.

That concludes today's conference. Thank you for your participation.