QVC Group Inc (QVCGA) 2003 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.

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 actual results to deliver materially from such statements including without limitation possible changes in market acceptance of new product or service, competitive issues, regulatory issues, and the continued access to capital on terms acceptable to Liberty. Please refer to the publicly filed documents of Liberty Media Corporation, including the most recent form 10-Q, for additional information about the Liberty Media corporation and for additional information about the risks and uncertainties related to Liberty Media's business.

At this time for opening remarks and introductions, I would like to turn the call over to the President and Chief Executive Officer, Mr. Robert Bennett. Please go ahead, Mr. Bennett.

Thank you very much. Good morning, everyone. Or good afternoon -- early afternoon for those on the east coast. Thank you for are joining us today. Also either with me here or on the phone are Gary Howard, our Chief Operating Officer, for his -- probably his swan song in terms of quarterly calls. Bill Costello, who among other things is the Chief Operating Officer and Chief Financial Officer of QVC and also the President of the international group, Mark Bauman,and Bill Myers, respectively the President and CFO of Starz Encore, and Barb Bennett, the CFO of Discovery.

The third quarter was an excellent one for Liberty Media. We made substantial process in acquiring operating control of two of our largest affiliated companies. We've simplified the structure by rolling up three small public subsidiaries, and we had very strong operating results, in most cases exceeding our expectations. At our investor conference in May, we described the goal of increasing the scope of our operating activities by acquiring or gaining control of more large operating businesses. When the QVC transactions was completed in September and with the UGC transaction expected to be completed in January, we will have made significant progress in this direction.

As a result of these and our other activities, we now generally think of the company in three baskets of assets. The first basket, which constitutes a little bit over 50% of our enterprise value, is comprised of companies in which we are the controlling or largest shareholder. These include QVC, UGC, Starz Encore, Discovery, our Japanese businesses, along with several other smaller private businesses. All of these are characterized to one degree or another by the substantial growth opportunities, the strength of their management teams, and in their ability now or in the near future to create substantial free cash flow. We will get into more details later, but in the third quarter the big five that I just mentioned on a combined basis enjoyed revenue growth of 16% and operating cash flow growth of 38% over the third quarter of last year.

In addition to their organic growth, they also have opportunities to expand their activities through acquisitions or launches of new services or launches in new markets; and given our ownership position, we have the ability to create additional growth opportunities among them. This is a truly a unique and synergistic group of high growth assets.

The next group, which makes up about a quarter of our enterprise value, holds our two large strategic public holdings, our approximately 20% interest if both IEC Interactive Corps and News Corp. Like the first group, these are high growth businesses with lots of free cash flow, strong entrepreneurial management teams, and very powerful market positions. As I'm sure you saw, News Corporation reported a 31% increase in operating income, and IEC reported a 100% increase in operating income before amortization.

The last group comprised of -- is comprised of the remaining public holdings and we think of principally financial assets. They're essentially liquidity that's waiting to be redeployed into one of the first two groups. They are to a large extent collared or hedged and in some cases underlie standing substantial bonds. Our goal here is to manage that portfolio to create as many -- as much income as we can and also to optimize the after tax value of the securities as well as to manage our liquidity requirements.

Another way to look at the company, and as we are looking at it increasingly from a management point of view, is broken into three segments. One is the international cable operations. Another is the content group containing Discovery, Starz Encore, Court TV, Game Show, and others. And then third, an interactive group containing companies like QVC and Open TV and others. So there is another way to look at our operations and perspectively as we think about managing them in those kind of categories, we may begin reporting them that way as well.

Overall, we are very pleased with the current position of the company. We have successfully converted ourselves into a large operating company. We are enthusiastic about the potential of our core assets, and we're satisfied we have ample liquidity to take advantage of additional acquisition investment opportunities as they arise and also to comfortably satisfy our debt obligations.

Now let's look at the specifics for the third quarter beginning with our transactional activity. First, we closed our acquisition of QVC, and we could not be more pleased with that acquisition. We wanted to get control of QVC for several reasons. First, it is the dominant electronic retailer in the U.S., with very solid growth potential domestically and especially internationally. Second, they have a very strong and a very proven and experienced management team. And finally, QVC provides Liberty with a renewable source of free cash flow that the company has not previously had. As you've seen in our publicly filed documents, QVC had an excellent third quarter.

We also announced that we are acquiring voting control of UnitedGlobalCom. While we had a significant economic stake already, we did not have control. By acquiring the stake held by the founding shareholders, UGC will become a controlled subsidiary of Liberty. We expect this transaction to close in early January.

For some time now, we have discussed our desire to expand our international presence, and with UGC we will control the largest broadband distribution company outside of the U.S. UGC's subsidiary, UGC Europe, is the largest broadband distribution company in Europe, an area where we see substantial expansion opportunities. UGC Europe successfully completed its restructuring during the third quarter and has emerged as a dramatically improved capital structure and a management team free to focus on operations and growth.

On Wednesday, two days ago, UGC announced that they would increase to 10.3 the exchange ratio in their offer to acquire the rest of UGC Europe. They also committed to consummate a short-form merger if they were able to secure at least 90% of the ownership. In connection with the exchanged offer, we have agreed to limit the exercise to our preemptive rights that we hold in UGC, such that pro forma our ownership interest will be a maximum of 55% or 60% in certain limited circumstances. Giving effect to the founders transaction and using the 10.3 exchange ratio, Liberty's economic interest pro forma would go to 54% if we don't exercise our preemptive rights and 55% in most cases if we do, and in any case our voting interest there will exceed 90%. As I'm sure you are aware, UGC also reported strong third quarter results yesterday.

So as hopefully you can tell, we are very pleased with our transactional activity during the quarter, and now let's talk about what I think is an equally impressive financial performance. As always, I would like to encourage you to review the 10-Q that was filed yesterday. The filing is available on our website. Also posted on our website is our supplemental press release which includes all of the financial and statistical information that will be discussed on today's call and a reconciliation of operating cash flow numbers to the operating income numbers from which they were derived.

Looking first at the GAAP financial statements, as you review our financial statements, please remember that while we began consolidating QVC in the third quarter and will begin consolidating UGC next year after the founder's transaction closes, we still have a number of assets that are not consolidated for GAAP reporting purposes such as Discovery, J-COM, JPC, [INAUDIBLE] program, court TV and others.

For the nine months ended September 30th of 2003, Liberty reported $1.9 billion of revenue compared to $1.5 billion in the prior year. The increase is primarily due to the consolidation of QVC's results of operations since September 1st of 2003. We reported operating income of $111 million in the first nine months. Versus $26 million last year. Again, the increase in the operating income was primarily driven by the consolidation of QVC as well as a decrease -- or last year we had an impairment in assets that we did not have this year. The net loss for the period was $291 million versus a loss of $4.6 billion in 2002. The improvement over the prior year is due to the $5.4 billion of nontemporary declines in the fair value of investments in 2002.

Now let's look at the results for the quarter for our most significant private assets starting with QVC. We obviously have very high expectations for QVC and were quite pleased with their performance in the third quarter. They generated a 14% increase in revenue and a 26% increase in operating cash flow for the quarter compared to the third quarter of 2002. Importantly, the domestic business broke out of the trend that we saw in the first two quarters, with a revenue increase of 6% and operating cash flow increase of 14% for the quarter compared to the third quarter of last year. The revenue increase was primarily due to an almost 10% increase in sales volume, and the increase in operating cash flow was due to the increase in sales volume, scale economics and cost control efforts, and we saw the cash -- operating cash flow margin increase by 170 basis points over last year.

The businesses in the UK, Germany and Japan also continued their very high growth rates. These business collectively generated revenue of $252 million in the quarter versus $158 million last year, a 59% increase, and operating cash flow of $28 million for the quarter versus $5 million in the prior period. The company is debt free and had about $625 million in cash at the end of the quarter.

In terms of guidance, our guidance for the year, for the full year for QVC is unchanged. We are expecting revenue to increase in the high single digits and operating cash flow also to -- or operating cash flow to increase in the low double digits.

Next is Starz Encore. In September SEG and Comcast resolved their affiliation agreement dispute by entering into a new long term affiliation agreement. The new agreement resolves all past litigation related to the affiliation agreement and establishes a new cooperative relationship between Starz Encore and our largest distributor, including substantial incentives for Comcast to promote and grow Starz Encore services across the subscriber base. The new agreement is based on a per subscriber revenue model instead of the flat fee model and does not allow any pass through or programming costs. In the long run, we expect that the contractual incentives, subscriber growth, and new services to return Starz Encore to the growth trajectory that we have seen in the past; however, in the near term, we will experience a negative impact on SEG financial results as base line operating cash flow is reset.

Quarter-over-quarter, Starz saw overall subscription units grow by 9%, driven primarily by increases in the multiplex units of 14%, Encore units of 2% and partially offset by a decline in Starz units of 10%. While SEG experienced growth in total subscription units as compared to the prior year, total subscription units have remained relatively flat since March of '03. This trend reflects reduced demand for Starz services as well as subscriber losses and digital packages where the services are often included. We expect the new agreement with Comcast to have a positive effect as opposed to the negative effect that we were seeing in the first part of the year. We expect to have a positive effect on subscriber growth beginning in early 2004 as marketing and promotional efforts take effect.

Our guidance for the year for Starz Encore is unchanged, which is revenue -- we expect a decline if the mid to single digits again as a result of the elimination of the flat rate deal and the now billing under a per unit transaction. And we expect operating cash flow to decline in the mid single digits for the same reason.

Next is Discovery. Despite the fact that comparisons are more difficult in the second half of the year, Discovery turned in another great quarter. DCI was able to grow revenue and operating cash flow by 20% and 49% respectively during the quarter compared of to the third quarter of 2002. The affiliated networks are rapidly closing in on the 1 billion cumulative worldwide subscriber mark.

Looking at the U.S. networks, Discovery networks U.S. revenue increased by 20% and operating cash flow increased by 25%. The rebound in the advertising market combined with solid growth and affiliate revenue has driven the positive results on the top line. The international networks also had a very strong quarter, with revenue growth of 24% and operating cash flow of 75%. Advertising growth across all regions especially Europe combined with strong growth in affiliate revenue and favorable exchange rates has driven the results of the international division.

The consumer products division experienced flat revenue due to a new retailing strategy combined with the closure of some of their unprofitable stores. However, these actions have resulted in an 11% improvement in the operating cash flow deficit.

We are revising upward our guidance for Discovery based on their strong performance in the quarter. On a consolidated basis, we are expecting revenue to grow in the mid teens and operating cash flow to grow in the high 20s. We are expecting the domestic division revenue to grow in the high teens, operating cash flow to grow in the low to mid teens, and the international group we are expecting revenue to grow in the low to mid teens and operating cash flow to grow by about 50%.

Now our Japanese businesses. J-COM and Jupiter Programming also continued to perform very well. Looking first at J-COM. revenue increased by 27% in the quarter compared to the third quarter of 2002 due to increased distribution across all product lines. Among the managed systems, we saw the following increases: there's an 8% in increase in video subscribers, a 65% increase in telephony units, and a 28% increase in data units. J-COM's operating cash flow increased by 79% during the quarter due to the revenue growth combined with increasing margins associated with the company's increased scale. Guidance for J-COM, we are increasing. Excluding the effect of exchange rates, we expect revenue to increase by approximately 20% and operating cash flow to increase by 75-80% over last year.

Jupiter Programming's revenue increased by 35 % in the quarter compared to the third quarter of 2002 due to the continued success of the Shop Channel combined with increases in subscription and advertising revenue and strong subscriber growth at the company's other channels. JPC's operating cash flow increased 40% due to the increases in revenue offset by increased cost of goods sold and other operating and administrative expenses. JPC's guidance, we are revising upward, again excluding the effect of exchange rates. We expect revenue to increase by approximately 35% and operating cash flow to increase in the low 30%.

Now shifting over to our balance sheet and liquidity. We ended the quarter with almost $4 billion of corporate cash and liquid investments and approximately $13.4 billion in face amount of corporate debt of which $4.8 billion represents the face value of our exchangeable debt. The net changes in corporate cash and corporate debt were primarily the result of cash used and debt issued in the QVC transaction.

And that really concludes our -- my prepared comments, and we'd be happy to respond to your questions now.

Thank you, Mr. Bennett. The question-and-answer session will be conducted electronically. If you'd like to ask a question, please press the star key followed by the digit one on your touch tone telephone. If you're joining us on a speaker phone, be sure the mute function is turned off so the signal may reach the equipment. Once again, that is star one if you'd like to ask a question. We will hear first from Doug Mitchelson with Deutsche Banc.

Thank you. Just kind of a big picture question about, you know, now that we have the Starz trend line is more clear, the rest of the operations are doing pretty well, and it seems like the biggest two things holding back your stock is you know the capitalization where you are over capitalized in a way in the shares that Comcast owns and kind of give us your thoughts on those two things. Is there any chance that you can take some of the public liquid assets and buy back that Comcast stake?

Well, as I think you already know the answer to that which is we're not going to tell you precisely what we plan to do. You know, we view ourselves as having substantial liquidity. We also have sun substantial debt and we have some obligations coming due over the next three years, and our desire to make sure that those can be accommodated without difficulty is foremost in our mind and to a certain extent will temper our ability or desire to go out and make really substantial stock purchases. That being said, we're very pleased with the upside in our assets and we think we have a great collection of assets and we -- we at the right time under the right circumstances we may from time to time buy in stock.

Do you think that are you getting the rating agencies more comfortable with how the company is structured and do you think that will increase the flexibility?

We have been involved in a dialogue principally with Moody's for sometime now and that continues. I believe that it is a productive conversation. We don't know exactly how what the outcome will be or when but we can continue to talk. So until we really know the answer there I can't answer with a heck of a lot more certainty. Still, I think the constraint on buying stock isn't necessarily imposed by the agencies so much as you know we look at our own liquidity position and look at the debt obligations that we have. And you know we're going to be conner conservative about making sure that we have the ability to address those.

Fair in enough. Thank you very much.

Our next question will come from Ted Henderson with Stifel Nicholas.

I had the same question on the share buy backs and now taken control on the UGC stub looking like it has been brought back in, there have been recent comments throughout with regard to interest in France. How do you view UCOMA moving pured with the VTR piece? Is that a critical piece or are you viewing a big push into Europe? You know, does UCOMA become more of a European operation moving forward?

They already are substantially a European operation. The size of European operations dwarfs the VTR. VTR is doing well and reporting strong results but the most current opportunities is fair to say is probably if Europe given that their large presence both in western and eastern Europe and we think there should be areas in which they can expand their footprint.

And guess the question was more leading towards when you discussed earlier and I know that you have dismissed the notion of a separate spinoff for Liberty International but was the focus for Liberty moving forward a unique independent European entity or the way UCOMA is structured and et cetera the international holdings are structured no changes to your views on how those are going to be structured moving forward is?

I don't think we necessarily completely given up on the notion of some sort of international security we simply have put it on the shelf for the time being and it could come back at some other time. For the moment, you know, we basically have three pockets of international cable assets. Latin America, Europe and Japan and UBC is principally focused on the European side but continue to see opportunities in Latin America and Japan and we will pursue them as they arise.

Great, thank you.

We'll now hear from Gloria Radeff with Bear Stearns.

Question on Moody's. Could you discuss the impact or the difference in what would happen Moody's actually down graded the debt versus putting the debt on negative outlook without a down grade and wondering through would affect your investment style or what you do with the cash? I think there is a minimal impact to the debt service but if you could talk through that and a quick question on QVC. I think year to date it looks like the numbers are very good and may, you know, I think come in for the full year ahead of guidance. So unless there's something in the fourth quarter that is happening that I'm missing can you talk through you know what the dynamics there could be?

The principal effect a down grade would not have any effect on the great majority of our outstanding debt. It it is has an effect on a billion dollars of the three year notes that the Comcast still holds it has the potential effect on that. Otherwise, all of our debt is already issued and outstanding and there are no ratchet provisions in any of them. There could be some relatively modest implications for posting collateral or something on different types of hedges that we do and that is not material. The larger effect is really access to quantity of money and timing the ability to access that quickly and rapidly and if large amounts and this is the principal effect of a downgrade for us.

And then QVC?

What was the QVC question?

Just it looks like the numbers are trending potentially to maybe beat what the guidance is so if just curious if there is something in the fourth quarter that you know somehow limits the moving into the mid teens growth on OCF for QVC?

Well, it as little early to say and we left the guidance where it is and closed on the transaction in early September and I think we are comfortable leaving it where it is and hopefully do a little better but for the time being given than we haven't owned it that long and given yes the third quarter is looking better the first two were soft and I think we are most comfortable leaving it where it is but there is nothing in particular that makes us think that something bad is going to happen to in interrupt the trajectory. Just that we just closed on the acquisition and don't want to be overly aggressive.

Thank you.

Richard Bilotti with Morgan Stanley has the next question.

Good morning. Two interrelated questions. Or I think they're interrelated. One, historically, Moody's and S&P have primarily emphasized asset coverage and asset quality relative to debt. Now that you're truly an operating company, are they going to move away from that and incorporate other credit ratios or are they still evaluating you on the same basis that they have done so historically? And then from the standpoint of managing assets, once you control UGC they have an enormous number of tax attributes and will they be available the the entire Liberty tax filing group or trapped and only against income generated at UGC?

On the ratings question we are a little bit in the middle which is you know I think part of the process and part of maybe why it is taking so long to reach a resolution. We have a substantial number of operating assets. We have on a pro forma basis substantial operating cash flow. But we also have a whole bunch of noncash flow producing or non consolidated assets so we are a little bit in the middle. It is just a matter of kind of getting from point A to point B or coming up with some sort of hybrid sort of analysis. You know, one way to look at it is if you look at value of sort of the nonstrategic assets relative to the debt and offset those, and then, you know, divide that by the operating cash flow we have very little leverage. But, you know, that is a process of sort of you know of discussion and understanding and trying to come up with an appropriate metric for how to deal with a company that's in between. On your UGC question, for the most part the tax attributes there stay at UGC. We will not tax consolidate UGC. We'll own 55% of the equity so it will not be a tax consolidated entity.

Okay. Thank you.

Brian LaSart with Aetna has the next question.

Hi, good morning. I think it is just these equity guys asking all the debt questions highlights the fact that Moody's is kind of an important event. But an interesting twist on an earlier question I'm sure the agencies wouldn't mind seeing some actual debt paydown and one ability that you have is to use some of your cash to buy back the remaining QVC note at Comcast and that actually demonstrates some debt paydown willingness and also kind of clears up some of the technical issues in your spreads. Can you address that?

We already have paid down some debt. We issued 500 million less to them than was called for so we paid down 500 million of the closing. You know, certainly we have the ability to do that and we have the ability to call that billion that they own any time we want to. So that is a possibility.

Are you currently contemplating that or is that -- are you talking to Comcast about that?

Well, we don't need to talk to Comcast since we can call it so it is simply a matter of making decisions that is what we want to do and we have not made a decision. But it is something we have considered.

I mean because they can money advertise that within the next month so would you make a decision before they have the ability to monetize that?

We can't call it after they monetize it so if we're going to call it we would do it before then.

Okay, thank you.

Tino Moby with Standard & Poor's. Please go ahead.

I'm on the equity side of Standard & Poor's and there has been a lot of debt questions, we're independent of the debt guys. But my question is more on Starz Encore. The press release mentioned that you know this kind of a reduced demand for its services and I guess my question is do you see this as a -- as a long-term you know phenomenon or what is the underlying factors there that making that unit to see the kind of pressure other than the Comcast deal? Is there anything else going on there that the business is seeing which is not obvious to us?

Let me let Mark Bauman answer that question.

Hi, no, I think you hit it on the head. Comcast prior to us renegotiating our deal with them was not inclined to market our services and accordingly we were losing about a hundred thousand subscribers a month on Starz. Interestingly we are continuing to grow on the Encore and thematics because it was positioned in the digital tier and as that grew it was helping drive that. Now that we have redone our deal with them, we have seen tremendous good faith actions out of Comcast here in our market which happens to be a Comcast market we are seeing advertising strong and we have an agreement with them over the next two years to spend an unprecedented amount of money on marketing of the Starz services including Starz On Demand which by the way they are going to include with Starz so in a brand transformation mode they plan on launching Starz On Demand to 10 million basic homes before the end I'm sorry 15 million basic homes before the end of this year and 20 million by the end of 2004. So we think with the renewed relationships with Comcast that is where we were really losing all the stars units. We going to see that turn around and turn into growth especially when combined with Starz On Demand and this will be the largest commitment for Starz On Demand in a brand transformation mode which is what we recommend.

I see. I guess kind of another question on the Japanese content and distribution businesses. Just seems like the growth trends there are -- are faster than what we have seen in the United States. I mean is there anything in that market that is inherently attractive as far as the growth that you have seen in your businesses and do you see that kind of momentum going -- you know, going on in the longer term as you ramp up some of these properties?

Well, I think that there is a lot of things that are attractive about the Japanese market and one of the reasons we're so excited about it. A combination of a very good consumer who is interested in trying these things and is well educated and well informed. A somewhat confused video offering making cable the most compelling of the video alternatives because it has access to all the content where 's there are at least two or three different satellite schemes available and cable is by far the most coherent way to subscribe to video services so we have a high demographic and high are RPUs and overall a very attractive market. At some point the penetrations are continuing to grow and some where along the line those will settle down but it is hard to say exactly where it is going to be. The broadband internet service is a very competitive one and we are competing with NTT and Yahoo who generally are offering lower prices and free periods. We have been able to compete effectively against those because of the bundling with telephony and video and it is going strong and a strong market.

Thanks very much.

You're welcome.

Moving to Robert Routh with Natexis Investment Bank.

A few questions. First I'm wondering if you could comment a little bit there has been speculation that you have an interest in Cox's 26% interest in Discovery. Whether or not there is any truth to that and if so how you would be able to possibly arrange such a transaction in a tax efficient manner? Second wondering if you could comment a little bit on the plans with the 20% equity now that pro forma for the Schneider deal you guys are controlling [INAUDIBLE] and will have the rights once the roll in is complete o do whatever you want with that as well as the other nonstrategic public assets that you hold given that you listed a few of them and some issued convertibles tied to and there are a few such as the Vivendi position and you haven't monetized it in any way and you could if you wanted to and wondering if we are going to see anything like that in the near term. I know a few years back you filed an S-1 to internationally take public Jupiter Titus I'm wondering if you have any intention of possibly doing an IPO for part of your interest in the Japanese cable operations?

That's a lot of questions.

Sorry.

That's all right. Starting with your Discovery question. Cox owns 25%. There is no mechanism which we can trigger some sort of event other than if they chose to sell their right to first refusal. We certainly have an interest in owning their piece if they elect to sell it and it is a matter of price and a matter of them deciding that they want to sell it. There probably would be tax efficient ways of getting there but until you really sit down and have the conversation there is no point really in speculating what those are. So I would say yes we always are interested in owning more of Discovery and if they were to call us up as certainly a conversation we would be happy to have and we in fact have discussed with them from time to time but we don't control you know what circumstance would bring them to that. So that is going to be a matter of time and a matter really of Cox reaching a conclusion that they would rather sell it or rather own something else other than that.

On your SBS question, we have not really determined at this point what role that plays. It seems like there is a logic in owning more content assets in these relatively small language markets where the cost of unique content on a per capita basis is more expensive than in the larger markets so there is a logic in trying to see what sort of affiliations or other arrangements there can be between somebody who is creating content and us as a both creator of content and distributor in those markets so we haven't really figured out exactly where we're going to go with it but it is something that we are studying to try to understand what role it can play to develop content especially for digital offerings in the markets in which we operate.

The other assets as I said before we have a large collection of sort of other financial assets that we view as potential sources of liquidity and may from time to time do different sorts of things with you know collar them, sell them, so calls, puts, whatever. Different sorts of transactions trying to balance our liquidity requirements trying to maximize the return off of those positions. And trying to minimize the tax consequences. Obviously I'm not going to put out a press release if we were planning to sell any of them in advance. So really as a general category they're there to meet our liquidity requirements and to meet investment opportunities as they arise. And I -- it wouldn't make sense for me to be much more specific than that.

Can you give us any sense as to timeline as to how soon since they are noncorr the company is looking to possibly monetize them?

We are not in a rush to monetize them. You know, we look at them them as liquidity and as we need the liquidity if and when we need it and to the extent we need it we will assess the individuals that we have and try to figure out the optimal way to extract that liquidity. It could be from monetizing existing collars or hedges. Could be from borrowing against hedge positions in some way or another. Could be from selling positions so it is really difficult to you know to -- to give much more clarity than that and probably imprudent to give much more clarity than that.

Fair enough.

On the JCOM IPO question that is something that we looked at a couple years ago and the market turned unattractive while we were looking at it and business is much further advanced now than it was then. The markets are some what better than they were then so it is something that we monitor from time to time. We don't have a current plan to do that but it as possibility it is something we would do over the next 12-24 months. If the markets were attractive and felt like we could get a good valuation for it.

Thank you very much.

You're welcome.

We will now take a question from David Smith with Western Assets.

Good morning. I'm just curious on some of the conversation that I've had talking about a couple of the agencies I get the sense there is a fair amount obligation going on between you and the agency about what you need to do in order to maintain your rating and I'm kind of curious you always expressed an interest in maintaining your investment grade rating and at what point do you -- has what they are requesting from you at this point changed over the last three months or the last four months as they put you on watch?

I don't think it would be appropriate for me to describe the nature of the conversations we are having. It is fair to say that we do value the investment grade rating and we think it is an important asset. And you know we hope to maintain it. And the conversations continue. I really can't be more specific about what the nature of the conversations is.

That's fine. Thank you.

You're welcome.

We'll now hear from Matthew Harrigan with Jan Co. Partners.

Two questions. First of all on Discovery you're fortunate relative to the other cable net works if you look at the increase if audience deliveries in subs your basic CPM increases on basis you're almost in line with the cost of inflation or rather in line with inflation and do you think that philosophically apart from delivery and subs that programming costs increases should be about in line with inflation going forward and do you think you can continue to deliver the big increases in ratings and subs worldwide to drive a double digit affiliation fee growth which some other networks probably can't do now? And then secondly any rethink on QVC going into some of the other international markets given that you're getting even more involved with the international cable?

Okay. On Discovery, you know, we -- we are making substantial investments in content and have been very successful in attracting an audience and therefore being able to parlay that into advertising revenue. And you know hopefully we will be able to continue. Obviously, you know, to do that is a function of how good the programming it and what the competition is and we have been very successful with the number of shows and they are doing very well and do well not just in terms of bringing advertising to the show but to the whole network and the whole family of network.

My question was more on the affiliation fee sides.

The affiliation fees are driven by a couple of things and we generally do not have double digit rate increases in the individual networks and what you're seeing driving that is an increase in affiliates particularly outside of the U.S. but also in the U.S. as well as more affiliates paying under the contracts. Barb, I don't know if you want to be more specific than that but on an individual network basis we are not necessarily seeking double digit increases we are getting that through a great growth around the world. What we have got is a combination of several things the increase in subscribership here domestically as well as internationally although Discovery and TLC and Animal Planet are distributed to the U.S. the rest of the networks are still in the growth phases as well as internationally and that combined with there is an initial free preview period and as those come off the free preview the combination of increase in subscribership starting to pay as well as mid single digit increases in the rates.

Great. Thank you. I'm sorry on the QVC international businesses more market's?

The international marks they're in now are doing great and QVC I mean Bill can reply this a more directly but has been looking around and we will try to take advantage of the distribution we in other markets to find opportunities you know where we have enough scale and where the market is large enough to support a network we certainly would we working actively with QVC to try to develop those.

Thank you.

Guzman & Company's David Joyce has the next question.

A a couple questions. First is there anything under the corollary on the UCOMA structure is there anything structurally that would prevent you once consolidated from contributing the international and noninvestment assets to UCOMA and spring spinning that out to the shareholders and the second question could you please provide the operating statistics on JCOM such as RPUs for the different products and the penetration rates?

On your first question, I think it was is there anything that prohibits us from contributing our other assets to UGC and then spinning UGC off?

Yes.

Well, the UG -- the constraints on putting assets in is it has to make sense for UGC and the independent directors would have to think that that is a good thing to do. The constraint on spinning it off is all probability if we did it in a near term would be a taxable spend to the shareholders so taxable to both Liberty and the shareholders and I can't tell you today. Depend on the values exactly the extent of that tax.

Okay.

David, this is Mike. On the RPU question for JCOM they look at it and manage it on a per home basis and not necessarily by the individual services so that's why we do provide in the press release the RPUs on a per home basis.

And how many homes in the network, homes passed and homes upgraded for the various services?

Home passed are around 7-8 million. And they have cable subscribers about 1.5 million. High-speed data of around 600,000. Approaching 500,000.

And of the 7-8 million homes passed are those roughly all upgraded.

Yes, substantially upgraded, yes.

Thank you.

Ross Miller with Merrill Lynch. Please go ahead.

I had a question about priorities in the buckets as you guys look forward to potential opportunities should we be looking at international I should say the three bucket idea, is it international cable is it content, interactive or is it the right price whichever assets come up in one of these three buckets?

No, all three of those buckets are ones in which we think there are opportunities. And but our ability to act on those opportunities is a function of them arising. Looking at it today, you know, we can see a number of potential opportunities on the international cable side. There may be some smaller opportunities on the content side. And on the interactive side we have just acquired QVC. Open TV has been busy in consolidating its acquisitions so we have been fairly active on that front and that will be a function of what else arises. So I think it is fair to say yes it will -- it is going to depend on what comes up and we are interested in driving all three of them and we will look at opportunities in any of them but what we don't control is the timing of the opportunities. So we will have to take them as they come but we are looking for opportunities in all areas.

Can I follow up? We have seen the QVC transaction when you figure the consideration was paid came in a little under five times leverage and UCOMA basically consolidated about six times leverage and as you guys look going forward do you think that future acquisitions may come in less leveraged to keep the rating agencies off your back?

Well, you know, we haven't worked out exactly watt appropriate metric is going to be going toward. I think it is possible that they will be less leveraged but that is a function of what the opportunities are. You know, some businesses could carry more leverage than others and the cable businesses can comfortably carry anywhere between 4-6 times leverage and possibly slightly higher on a temporary basis. The content assets generally carry lower leverage more in the 3-4 times, something like that and the interactive assets are kind of all over the board. QVC could easily carry 3 to 5 times leverage something like Open TV at the moment can't really carry any so really depends on the individual businesses.

Okay, thank you very much.

Moving on to David Goldsmith with Buckingham Research.

Hi. Good morning. I was just really quite curious about what you were thinking in terms of taking QVC and possibly expanding it? Where do you think that they can go other than what they are doing right now? The thing generates about quite a bit of free cash flow and could be used as an acquisition vehicle?

The growth opportunities that we see for QVC are first you know domestically trying to extract you know trying to increase the sales per customer. Also trying to drive the online business which has been growing very quickly and trying to bring more consumers in that way. Outside of the U.S. as you saw the international businesses are growing quickly and we are you know actively working with the management team to try to see if there are other markets where it makes sense. Bill, I don't know if you want to respond more specifically than that?

Again, I think that is right. You know, we are in probably internationally in the three best markets that there are and we don't see much else on the horizon now but we are opportunistic so if someone comes from a country with a lot less subs or satellite distribution it makes sense for us and we will consider it. I think in terms of the next big market obviously it will be China but we think we are three or four years away from there. We started branding there and we have 30 people now working for QVC in China but that is really to get familiar are the market, to establish relationships et cetera but we don't think the market in terms of disposable income and in terms of regulatory protection you snow going to be there at least for another three or four years so until then it is to keep our eye on the ball and exploit the markets that we are currently in.

Okay, thanks.

Moving on to Bishop Jean with Wachovia Securities. Bishop, your line is open. Please go ahead with your question. Hearing in response we move on to Tom Woven with Sanford Bernstein. Hello? We'll move on to Stinter Wang with J.P. Morgan.

Thanks and good morning. I just wanted to walk through the Starz Encore film rights disclosure in the Q. I guess it looks like the film rights payable in 2004 including what is available for exhibition today and what is going to be available in the future aggregates up to something like $682 million and I think the comparable number in '04 is $415 million and does that mean the film expense number will grow by roughly $270 million in 2004?

Not quite. You're looking at a cash number. Which is not a real reflection on how we run those through the P&L on an amortization basis and clearly we disclosed in previous filings a couple months ago that our programming costs would go up 175 to 225 million and we are still comfortable with that disclosure. We pay for our programming kind of up front and then we am it in over a 15-18 month period so it does get spread over a longer period than one calendar year so we are still comfortable with the disclosure for next year.

One followup question regarding Discovery in the U.S., I think before launch support affiliate revenues grew 12% and subs 10% and does that mean a affiliate rate growth is only 2% and is that is that a function of the free viewership period? Thanks.

Barb. Actually, our revenue increased roughly 14% for the quarter where as subscribers grew around 10% and it is largely a function of more of the subs coming off of free.

Thanks.

We will go once again to Bishop Jean with Wachovia Securities.

Hi, can you hear me?

Yes.

Last time we did this we blew up the whole east coast power grid.

So far so good.

So far it just blew up me. Just two questions. One going to international again. QVC. And opportunities. I think JCOM carries some electronic shopping content channels already. Is there some consolidation upside or some more upside for QVC in Japan?

Right now JCOM carries both Shop Channel and QVC. It is -- Shop Channel is slightly more distributed on JCOM than QVC is. And you know that is obviously something hopefully over time we can address. But there are you know we would -- have partners in the QVC relationship in Japan and partners at JCOM in Japan and partners in JPC in Japan and Shop Channel so it is some what more complicated trying to coordinate about but certainly something that we will we be working on in.

Okay. Then move to the balance sheet. Always a fun topic. The deferred tax liability. Keeps growing and being fairly stupid in the area I'm not sure what that means except that this keeps growing. Is that something that you and Moody's have talked about and does it matter that it keeps growing? What are your thoughts about it?

It is really function of the changes in the market value principally of the public securities so to the extent goes up that is good. In the since that it means the market value of our securities has gone up. It is really directly correlated to that.

Okay. So that is not one of the many items that you get to talk with the ratings agencies about, it is not a concern of theirs?

Well, I mean at some level you know the rating agencies do look at the market value of our public securities and probably also look at the after-tax value of the market securities so it is part of the calculation I assume that they are doing. But, from that point of view, if a higher tax is the result of higher value, they would consider that to be a positive.

Right, well, we certainly do like to see your hedge portfolio keep moving north and it has been doing fine. Thank you.

You're welcome.

We'll now hear from Ellen Gibb with CLI Partners.

My question has been answered.

If you find that your question has been answered remove yourself from the queue by pressing the pound key. Move on to Ed [INAUDIBLE] with UBC Prudential.

I wanted to ask regarding the commitment to investment grade ratings it sounds like we're still very committed to the ratings as mentioned in the prior analyst meetings and conference calls and guess the question is, is the commitment there versus share buybacks is there one of the reasons why we haven't seen any share buybacks in the past few months to preserve the financial flexibility and to maintain the ratings?

Yeah, that's part of it. I mean we're -- you know as I said before it is a a matter of our own financial planning and financial conservatism which the rating agencies are also interested in so one of the constraints on our willingness to buy back stock is the extent of other opportunities to grow our businesses as well as the extent of the relatively near- term maturity that we have on some of our debt so that is a constraint and something that the agencies are aware of. Okay, thanks a lot.

Michael Kopinsky with AG Edwards has the next question.

At this time does Starz carry any original programming?

We carry a very limited amount of original programming.

And how important is it for them to maybe boost that up a little bit? Since its competitors seem to be a little more aggressive original programming with some great success? And if Starz plans to accomplish that do you feel that they would need necessarily to acquire a studio to accomplish that or just do deals with the studios?

We like to keep the focus strictly on theatrical offerings and it is a focus for us that has not been for the other two pay providers and HBO has gone the original direction as has Showtime and HBO has nearly as much theatrical product as we have but not a primary focus for them and we think that is an opportunity for us and the theatrical programming is very recognizable and all by The Sopranos and Sex in the City and some of the bigger named products from HBO is recognized that he have a lot of original program that is not hitting the mark and the cost of original programming is significant and we think we are differentiated by staying with the theatrical product.

Thank you.

Hear again from Tom Wolzien with Sanford Bernstein.

I was asking a question regarding Court TV and your -- the contract with Time-Warner the agreement with Time-Warner. Do you have the ability to buy in Court TV to buy out the Time-Warner and perhaps contribute that to Discovery as a way of increasing our position in Discovery without having to take out Cox or Newhouse?

That would have to be a negotiation with Time-Warner. There are extra actually provisions that are a couple years out and nothing that we could trigger now that would force that and if they elected to sell we would be interested in talking to them about buying it but we don't have any means of forcing that to happen.

Thank you.

We'll now hear from Andy Baker with Cafe Financial.

Thank you very much. A couple of questions on the direction of some of the non-cash expenses at your major businesses. I notice at QVC you're maintaining your revenue in OCF guidance but lowered the operating income from low double digits to mid single digits suggesting an increase in noncash expenses there and conversely at Starz maintained revenue in OCF being down you have increased operating income guidance from down mid single digits to up 10% suggesting a decrease in noncash charges. That is question one. And question number two is do you intend to maintain the type of disclosure that Comcast is giving on QVC or continue with what we have today?

On the QVC question a lot of it has to do with purchase accounting and we have increased amortization or noncash flowing through. That is difference between operating cash flow and income and I didn't hear the second part of that.

The level of disclosure. My expectation is we will continue doing what we have been doing as opposed to what Comcast did in the past. That could change over time but that's our current intention.

All right, thank you.

We will now take a question from Hamilton Favor with Atlantic Equities.

I have a question really about QVC. On the domestic side. Basically you're looking at Q1 and Q2 so revenue was 0% to 2% in Q2 and a big jump into Q3 and you talked about volumes in pricing and what was going on there but anything more you can add in terms of you know which categories were stronger or anything you are doing differently between the first half of the year in Q3 which led to the strong pickup there? Thanks.

Bill, can you address that?

Sure, there has been no change in velocity among volumes. I think, you know, the a couple of things is one you know we are just doing a little better executing and two, quite frankly is we are going against a little softer numbers in the last half of '02 than we were in the first half of '02 and the comparison between the two years reflects that also. But in terms of any dramatic changes that one could put his finger on in doing it, it is really a business of details, details, details and you know you're always trying to adjust the mix a little bit but there is nothing specific that happened in the third quarter differently from the first two.

And then no specifically strong categories which have helped you out there?

No, none that would -- that would reflect in the improvement of that sort. I mean the only thing I think the only thing category wise that one could point to this year is the deterioration in computers but I think that reflects what is happening in the industry. Other than that I think we're following normal trends.

Great, thanks very much.

We'll take a question from Pete Poster with Merrill Lynch.

Thank you. Good afternoon. I'd like to chat a little bit about Discovery and your guidance would imply relatively flat EBITDA growth and a slowing sales gains and I was wondering if you could chat a little bit about what would be behind that forecast?

Barb. Yeah, sure. We are being a little cautious going into the fourth quarter although we are seeing some steady and strong scatter prices. As you probably heard from other companies, advertisers are just talking a little longer to go from hold to order to our visibility is just a little behind where we would normally like to see it at this point. So and then as you well know, the -- the retail revenues over 50% of the year's revenues come in the fourth quarter. So again we are just being cautious and there is a possibility we could do better but just being cautious.

Do you have any visibility on first quarter [INAUDIBLE] at this point?

Well, our pricing is still running favorable to the upfront pricing. So the sellouts that -- there is good demand. And we are seeing continued orders. So, in terms of just the orders coming in, we still feel very good about the a d market for going into next year.

Thank you.

John Dudeen with Columbia Management has the next question.

My question is on QVC. The HSN over the past several quarters has grown at roughly two times the rate of QVC and I know it is off a smaller base and they say they are taking market share and I was wondering if you could comment on that? And then the difference between the unit growth and the revenue growth with the average selling price going down is that due to come computers and once your anniversary that with the revenue growth look a little better?

Bill, could you address that.

Sure, I -- you know, with regard to the question of market share, you know, I don't know where that is coming from. Barry has a way of looking at his business versus ours and when comparing QVC versus HSN referring back to what I said previously in terms of year-over-year comparisons and if you look over two years I think the growth rates are very comparable. With regard to the average price point, computers has -- has impacted that some what but really it is what you know what our customers are buying at any particular point in time. We don't focus a specific price point. Sometimes, you know, lower priced item sells better than higher priced so we are constantly testing and determining or gaging what the consumers want and just so happens in the third quarter those price points have been a little bit below where they have been in the past that could change in the fourth and there is no -- there is certainly no strategic direction to bring them lower and no specific direction to try to get them much higher and it is really us responding to the consumers wants.

Actually another question. Just corporate question. If if you look over the last like one and three year periods the stock is significantly underperformed. Over that time period the shares have gone up about 15% and then despite a significant liquidity profile between the cash, the hedges, nonstrategic equity the rating agencies apparently aren't happy and given all the bondholder questions at the beginning of the call the bondholders aren't happy so it looks like nobody is happy with the current structure and could you me your thoughts on that?

That's sort of an open-ended question. You know, I think what we are trying to do is -- is strike a balance. Between the bondholders and the equity holders and trying to find the capital structure that optimizes you know ultimately optimizes the equity. But, you know, that includes taking into consideration the value of the investment grade rating and what it does for us so we are walking our way through that process now of trying to determine what the right balance is and over time I wouldn't be surprised to see us reduce both debt and equity you know use some of our liquidity to buy other assets. Use the liquidity to shrink debt and shrink equity so we are really trying to come up with a balance that will serve all of con constituencies and create more growth opportunities and ultimately make the equity as valuable as we can.

Okay. Right, I guess you know my point is that equity holders don't seem to benefit from all this liquidity and the rating agencies don't give you enough credit for it so you know I -- you know, I think you have to change something.

Well, as I said, we may well use some of that liquidity to shrink debt, may is well shows it to shrink equity and grow and find other opportunity and some where in there we hope to find the right balance that demonstrates to the street that we have a commitment to the equity as we do and a commitment to growth as we do and at the same time maintaining a responsible and appropriate capital structure.

Thank you.

As a reminder, if you like to request a question press star one and we will hear from Michael Kellen with Arnold and Rightschwider.

In the recently completed agreement between UCOMA and UGC Europe Liberty is limited to 55% but after the transaction closes your ownership is about 53.8 and can we assume since you mentioned how attractive a business you will be bringing it up and buying an additional 17 million shares and putting another 130 million or so in the company?

There is no limit on the ownership and we agreed to limit the exercise of our preemptive rights. Prior to this agreement we have the ability to exercise preemptive rights to maintain our current share ownership and what we a greed is that we with limit the exercise to preemptive rights to 55% or again in certain situations 60% and there is nothing that stops us from buying shares from the market or doing other transactions with the company to increase that ownership. And that is going to be you know we will look at that as time goes on. And we will -- we have not yet made a determination as to whether or not we will exercise the preemptive right either and we don't know yet what the price is going to be so see A if the offer is successful and B what the price is will determine whether or not to exercise the preemptive right and if we do it is approximately $100 million that would go into the company. Thank you.

We have no further questions at this time. Mr. Benefit I'll turn the conference back to you for any closing or additional remarks.

Thank you all very much for joining us. Hopefully we answered all the questions but feel free to give us a call if you have more. Thank you very much for joining us today.

That does conclude today's conference. And behalf of Liberty Media and Premier Conferencing, we would like to thank you for your participation.