QVC Group Inc (QVCGA) 2003 Q4 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 differ materially from such statements including without limitation possible changes in market acceptance of new products or services, competitive issues, regulatory issues and continued access to capital on terms acceptable to Liberty. Please refer to the publicly filed documents of Liberty Media Corporation including the most recent form 10-K for additional information about the Liberty Media Corporation and for additional information about the risks and uncertainties related to Liberty Media's business.

Also, we would like to point out that the webcast slide show that will accompany today's conference call will be presenter controlled and will advance the viewer through the slides automatically. Now 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, sir.

Thank you very much. Good morning, everyone. Thank you for joining us today. I would like to welcome you to our 2003 year-end conference call and webcast. Joining me today on the call are John Malone, Liberty's Chairman, Bill Costello, QVC's COO, CFO and President of their International Division, Mark Bauman, President of Starz Encore and Bill Myers the CFO of Starz Encore and Barb Bennett, the SEP and CFO of Discovery Communications. All of us will be available to answer questions at the end of the formal presentation.

This is an exciting day for Liberty and for our shareholders. I recognize that this morning's announcement about the spinoff might overshadow some of our financial results, however, we had such a strong year with most of our businesses, I would like to begin the call by spending a few minutes discussing these results. I'll start with the consolidated results in our 10-K. Liberty Media reported today revenue of 4 billion for the year compared to 2.1 billion in 2002. The increase is due to the inclusion of QVC as a consolidated subsidiary beginning in September of 2003. Inclusion of QVC's results for the final four months of the year also helped increase our operating cash flow to 800 million for 2003.

For the year, Liberty Media reported a net loss of 1.2 billion due in large part to 1.4 billion impairment charge taken in the fourth quarter. Approximately 90% of that impairment charge relates to goodwill and purchase accounting amounts that were allocated to Starz Encore as a result of AT&T's 1988 pressure of TCI. Since that time, lower projected revenue and cash flow has reduced the overall value of the business. Next I would like to spend a few minutes talking about the results of our individual businesses. But first let me summarize what we've been doing with our internal organization.

Over the last several months, we have restructured our businesses internally into three operating groups. These operating groups consist of the interactive group, the networks group, and the international group. In addition to assigning each of our businesses to their respective groups we've restructured our management team with individuals devoted and dedicated to each group. We believe that this realignment will increase our focus on the operating businesses. This will facilitate improved oversight of the businesses and better cooperation among them. It also should make the company simpler and more understandable for investors.

Consistent with this organizational change, we've begun to report our operating results in the same fashion beginning with the 10-K that we filed today. The combined results for each of our operating groups were very impressive in 2003. On a combined basis, using 100% results for each of our consolidated and equity method affiliates, combined operating cash flow increased year-over-year by 27% at the interactive group, 26% at the networks group, 89% at the international group and 44% in total including corporate and other. As you can see, these are very solid growth rates for such large businesses. And we hope that our new 10-K disclosure of the group information is helpful for investors trying to focus on our operating activities.

The operating group growth was of course largely driven by very strong results at our large private businesses as well as at UGC. Among our five large private businesses and UGC combined revenue growth was 16% and combined operating cash flow growth was 40%. We are also proud of the fact that all of our large private businesses exceeded their most recent operating cash flow guidance for the year and I think it is worth noting that we raised guidance throughout the year on virtually all of the businesses with the exception of Starz Encore, where it was lowered. First at QVC. QVC had a very strong second half of the year. The fourth quarter revenue growth was 14% and operating cash flow growth was 21%.

For the year QVC increased revenue to 4.9 billion or 12%, and for the first time in its history QVC's operating cash flow exceeded the billion dollar mark representing an 18% increase. We expect both revenue and operating cash flow to grow at least in the high single digits for 2004. Starz Encore last year had a well documented challenging year, for the quarter revenue was up slightly, about 3%, and operating cash flow was down about 3%. For the year, revenue decreased 4% and operating cash flow decreased by 1%. While overall revenue described, it is important to note that revenue from non Comcast customers increased by 8% last year.

Starz is beginning to see positive subscriber trends at its Starz service. In the legacy Comcast systems we're seeing subscriber growth. And at the legacy AT&T systems, we're now beginning to see a slow down in subscriber losses. On a net basis, these trends translate into almost a breakeven for all of Comcast in recent months. We've seen a substantial change in our relationship with Comcast as a result of our new agreement. The objective behind the new affiliation agreement with Comcast was to make Starz Encore an integral part of Comcast premium offering.

At year end, Starz on demand was in 40% of Comcast total basic households and each of Starz HD and Starz Kids was in 32% of the basic households. Also at year end local marketing campaigns were under way at systems covering approximately 50% of Comcast subscriber base, with a significant national campaign kicking off today. It will still take some time before the results of these campaigns show up in the numbers. However, we remain optimistic given the positive momentum since the end of last year's third quarter. In 2004, we are estimating revenue of between $940 and $965 million and operating cash flow between 185 and $210 million. Next is Discovery.

Discovery had yet another fantastic year with revenue approaching the $2 billion mark and operating cash flow topping 500 million for 34% increase over last year. During the fourth quarter, Discovery's operating cash flow growth was only 7% because of increased program investment and marketing costs, principally at the domestic networks. This additional investment is expected to help ratings and drive future benefit and ad revenue growth in 2004. Discovery's consolidated guidance for 2004 shows revenue growth in the high teens and operating cash flow growth in the high 20s percent. Looking at Japan, our businesses there both J-COM and JPC had very strong results in 2003.

J-COM revenue and operating cash flow increased 32% and more than 100% respectively. Excluding the effects of currency, increases were 23% and 88% respectively. J-COM finished the year with 2.7 million RGUs an increase of 19% over last year including video subscribers were up 7%, internet subscribers up 26% and voice subscribers up 59%. Homes receiving service increased 10% to 1.8 million. Approximately 41% of J-COM's customers subscribe to more than one service which translates to approximately 721,000 homes with multiple services. The triple play service option of video, voice and data has steadily increased to almost 14% of J-COM's homes, compared to less than 9% last year.

At JPC revenue increased 50% and operating cash flow increased 69%. If you exclude the effect of currency, increases were 39%, and 58% respectively. JPC's revenue increase was primarily due to an additional 98 million of revenue generated at the Shop channel as well as increases in both subscription fees and ad revenue at JPC's other channels. Revenue growth at JPC's other channels was 32% last year. In 2004 we expect J-COM to increase revenue by the low teens and operating cash flow by the high teens. JPC should increase revenue in the mid teens and operating cash flow by between 25-30%.

Now, looking at Liberty's balance sheet, we finished the year with very substantial liquidity. At year-end, we reported 3.6 billion of cash on hand and 9.6 billion of value in our nonstrategic public and derivative portfolio. We also paid down 2.5 billion of debt in the fourth quarter as planned under our debt reduction program. For the remaining debt we have 5.6 billion of scheduled maturities due in the next nine years. This amount is more than offset by our expected proceeds from caller expirations over the same period of time.

That leaves 1.5 billion of straight debt coming due in 2029 and 2030 that we will service out of cash on hand and cash flow from our operating businesses. We also have 1.8 billion of exchangeable debt that can be put to us in 2008, although that is practically in the money. And we have another 2.8 billion of exchangeable debt that is very long-term, also maturing between 2029 and 2031. All of these exchangeables have securities underlying the obligation and over the 20-plus years to maturity require only modest annual appreciation and the underlying stocks for those exchangeables to be in the money.

So we feel very comfortable with our debt structure as a result of the public securities and derivatives that, in our mind, are matched up with future debt maturities. In addition we had about a billion and a half in operating cash flow from wholly owned subsidiaries in 2003. As most of you have seen this morning, we announced our intention to spin off to shareholders Liberty Media International. That company will house our international businesses, including our interest in UGC, J-COM, JPC, Puerto Rico, and the rest of our Latin America businesses. We expect to effect the spinoff through a tax-free pro-rata distribution of shares to shareholders. Accordingly, holders of our shares will receive shares of the new Liberty Media International which we plan to list on NASDAQ.

Liberty today has a great group of high growth businesses each with strong entrepreneurial management teams and each with the ability to generate substantial free cash flow now and in the future. For some time, it has been clear that the full value of this group of high growth and valuable businesses is not being reflected in our stock price. This discount adversely affects our ability to grow our businesses, so after much consideration, and weighing of other alternative, our board of directors has determined that spinning off to our shareholders our international business is the best way to allow investors the opportunity to invest more directly in these businesses and to highlight the value of the underlying businesses.

If the spinoff is more appropriately valued, as we expect, Liberty Media International will have an equity currency in addition to borrowing capacity to help finance growth and acquisitions. This also creates a pure play vehicle in which investors can participate. So that when we're done, Liberty shareholders will have two businesses and two securities that are more simple and are easier to follow. Now let's take a little closer look at Liberty Media International. LMI will have a significant broadband presence in Europe, Japan and Latin America. Additionally, we have existing and new content opportunities in all the same markets where we have distribution.

All of JPC's channels are carried by J-COM as well as others throughout Japan. All of Promer's channels are carried by Cablevisión as well as others throughout Latin America. LMI, through UGC, also has content interest in Europe with opportunities for many more. Liberty's Chairman John Malone will be the CEO of LMI in addition to his Chairman duties here at Liberty. And we anticipate naming the rest of the executive team in the near future. LMI will be the largest cable company outside of the United States and one of the largest in the world based on the number of subscribers.

LMI subsidiaries and equity method affiliates have more than 10 million video subscribers. 1.7 million high speed data customers and 1.4 million voice customers for a total of 13.5 million RGUs in almost 20 countries. LMI operates broadband networks that are substantially upgraded, particularly in Western Europe, Japan, and Chile. In addition to being the largest cable company outside the U.S., LMI will also be the largest cable system operator based on the number of subscribers in nine of the countries in which it operates. LMI is also a large provider of paid television programming networks.

LMI's content operations at present are principally concentrated in Japan and Latin America where we're the largest distributor of multi-channel programming in those markets. We also believe that LMI's European footprint should provide a unique opportunity to expand the existing content business of UGC. New channels combined with UPC TV's existing channels should help drive increases in video penetration as well as the development of a more robust digital offering. LMI's primary strategic focus will be continuing rollout of services over its broadband infrastructure where the triple play continues to be a significant growth driver. We will continue to develop existing businesses while focusing on incremental digital and voice over IP opportunities. We will expand LMI's distribution footprint through acquisitions and strategic alliances.

We believe there are significant opportunities to fill in and to add to our footprint in both Europe, for example, Nous(ph), and in Japan, pointing to our recent investment in Mediatti. We also see market rationalization opportunities in Latin America where we are restructuring our Argentine cable business and seeking approval to merge our Chilean cable business with UGC's VTR. Another focus will be generating content opportunities and growth for our content businesses by leveraging our sizable distribution footprint. In addition, there are significant opportunities to benefit from joint purchasing of capital and services, shared technology specifications and development, and a common and global content strategy.

From a liquidity point of view, LMI's balance sheet will benefit from a number of recent events including a planned rights offering for LMI to commence shortly after completion of the spin-off. Those events include first a completion of UGC Europe's restructuring, and subsequent merger with UGC as well as the successful completion of UGC's rights offering. At present, UGC's pro forma net debt leverage is approximately 4.3 times. Last year J-COM successfully completed its own bank financing and has external debt leverage of just over two times. And VTR, UGC's Chilean cable company, successfully refinanced its bank debt last year and our Argentine company, Cablevisión, is currently under going a restructuring of its debt which was approved by creditors on March 2.

As a result we expect that pro forma consolidated LMI net debt will be approximately 3.5 billion, or four times or 2.3 times on a net net basis, assuming no additional borrowings for acquisitions and without taking into account the planned rights offering. So as you can see, LMI is a well capitalized company with substantial resources and strong growth prospects. The remaining Liberty Media assets also share these characteristics. The remaining Liberty Media will be composed of the interactive group and the networks group, as well as corporate and other assets. Looking for a moment at the interactive group, this group holds our interest in QVC, Assent Media, On Command, Open TV, and our stake in Interactive Corp as well as a number of other businesses.

These businesses have outstanding growth possibilities and, on a combined basis, the private assets in the interactive group had revenue of 5.8 billion and operating cash flow of 1.1 billion in 2003, for increases of 10% and 27% respectively over 2002. The interactive group is principally focused on interactive commerce and entertainment. QVC is the dominant television based interactive retailer in the world and IAC is a leading player in Internet and transaction based services. Assent and open TV are leading providers of enabling services for interactive content and applications. We believe the interactive group can leverage their strengths and dominant positions to expand globally in the areas of commerce, gaming, interactive and targeted advertising, and other transaction-based services.

All areas we believe will generate significant growth in an increasingly interactive environment whether over the television or the Internet. Our networks group holds our interest in Starz Encore, in Discovery Communications, Court TV, and GSN, formerly the Game Show Network, and a few others. Our News Corp position is also considered part of this group. On a combined basis the private assets and the networks group had revenue of 3.4 billion and operating cash flow just short of 1 billion representing increases of 10% and 26% respectively. Within the networks group, Discovery is a worldwide leader in nonfiction, documentary-style programming. We would like to make Discovery the dominant player in this category.

Discovery has more than 1 billion worldwide subscribers in some of the world's most respected networks. Discovery currently operates 33 networks in 152 countries through 77 separate feeds in 33 languages. Starz Encore has a strong position in the U.S. premium television market, with very valuable and exclusive studio product including Internet rights in their windows. We like to use the new Comcast affiliation agreement as a launching pad with their other multichannel providers in the U.S. and we are working on ways to exploit the Internet rights in their contracts. With the exception of Starz Encore, all of our large companies within the networks group have content that is relatively easy to export.

We plan to take advantage of this and to increase the pace of global expansion. Finally, we will continue to look for opportunities to lead or participate in additional content consolidation as that occurs. As we continue to increase our operational role in our affiliated companies we are placing emphasis on driving value within each of our groups as well as among the groups. Under the Liberty umbrella and within each group we are taking advantage of the obvious benefits such as shared purchasing, shared infrastructure, as applicable and sharing technology and expertise. We are also exploring ways for the groups to work with each other. Such as taking advantage of the sizable international footprint to launch existing content in new markets.

Some of our interactive businesses have technology and IP that can benefit almost all the companies in the network and international groups. There is also a strong connection between the interactive and networks groups, as television-based inter activity becomes more prevalent. Our networks have excellent opportunities to benefit from interactive advertising, product placement and sales and gaming applications. All areas that are interactive businesses have expertise. There are a number of conversations taking place, now, between the businesses in our interactive groups and our network groups, and also with the businesses in our international group.

We expect these discussions as well as additional ones to continue and to result in mutually beneficial opportunities for these businesses as they work together. This creates benefits for all of the businesses involved and for all of our shareholders. As for the timing of the LMI spin, we plan to file the necessary documents with the SEC by the end of this month and we expect their review to be complete within a couple of months following submission. So assuming no major delays, LMI should be publicly trading sometime this summer. We also plan to spend a large portion of our May investor conference outlining in more detail our plans and strategies for the interactive and for the network groups. So in conclusion, we are extremely pleased with our operating results for 2003.

And we are very optimistic as we look into 2004. We will continue to take steps to improve our disclosures so that you can see the strong growth that we see in our underlying businesses. We believe this has been an overlooked factor at Liberty, even as we have made significant progress toward simplifying the company and increasing the scope of our operations. In addition to robust operating results, we continue to remain a very solid balance sheet and substantial liquidity. The spinoff is expected to be neutral to Liberty's credit position.

When we feel that value is not being recognized, despite our efforts, we will explore alternatives to highlight value including merger, acquisitions or dispositions or, as we announced today, spinoffs. As a result of the spinoff Liberty investors will have two stocks that represent two well capitalized companies with substantial resources. Both companies are positioned very well for future growth. Organic growth as well as growth through M&A activity. Both companies have well defined and understandable strategies to maximize value,and these strategies are being executed by dedicated and motivated management teams. This concludes our prepared remarks, we'd now be happy to take any questions.

Thank you. The question-and-answer session will be conducted electronically today. If you would like to ask a question, please do so by pressing the star key followed by the digit one on your touchtone telephone. If are you using a speakerphone please make sure your mute function it turned off to allow your signal to reach our equipment. Once again that is star one to ask a question. We will take our first question from Bishop Cheen with Wachovia Securities.

Good morning. You covered a lot of ground. I'm going to go to your last remark first. When you say neutral to Liberty's credit position, are you talking in terms of the same leverages that we see today and the same dollar amount? Or how would that differ the way you see it?

Basically the way we look at it, and what I tried to lay out, is that the resources we intend to deploy to repay our existing debt and to service our existing debt are unaffected by these assets. So the maturity schedule that I laid out and our ability and our expected way of meeting those maturities is unchanged by the spinoff. I think the rating agencies, I guess, will put out their points of view today, but we expect that it will be a neutral to our current rating.

So that implies that you have already been in touch with the ratings agencies and this is not going to be a major Monday morning surprise to them?

That's correct. We have been in touch with them on this topic.

Okay. And then have you also been in touch with your strategic partners, such as Cox Communications and Discovery, since Discovery plays such a premiere part of your new platform?

Yeah, we talked to them quite frequently. The Discovery partnership has been a very good one for all of us. And we all work very well together and we have a regular dialogue. I think they understand that should they wish to part with their interest on some basis, we would be happy and eager to discuss with them the opportunity to buy it.

Okay. Thank you.

You're welcome.

Next we move to Gloria Radeff with Bear Stearns.

Good morning. I think you had said in the prepared remarks that John Malone is going to be appointed as CEO of the international assets and I just want to find out what you're saying as far as the commitment by Malone just relative to the remaining assets at Liberty.

Well, John is here so I will let him answer the question. I'll be happy to speak to it.

I've been deeply involved in the international assets really for the last several years. So it is really not a huge change in my focus of my time. I've never sold a share of Liberty since our first spinoff and I think we're up to number four now. So my commitment to Liberty continues. It is the principal place that my family invests its wealth. And we don't intend any change in that. And I'm quite happy that this will allow the market to focus really on the non international assets, while freeing the international company up to be more aggressive in terms of how it uses its balance sheet and potentially how it uses its equity, since most analysts feel that Liberty Consolidated is trading at a very substantial discount to some of its parts. I might also say that as a shareholder of Liberty, this spinoff gives my family the opportunity to diversify and potentially expand its interests in the international assets, which is sort of an international diversification of our family's risk profile globally. So that's one of the interest points. And of course having been around in the cable industry since the late 1960s, the idea of building a large cable enterprise with its associated programming and technology assets, is very appealing to me personally. So I look forward to doing something I've already done for a long period of time. But I don't expect it to substantially impact my involvement with the rest of Liberty.

Okay. Thank you.

Then next we will move to Tom Wolzien with Sanford C. Bernstein.

Thank you and good morning. Could you go through some of the details on the spin, A and B share, I assume, stay basically the same on both sides, and could you explain why the decision to do a spin as opposed to moving the Liberty assets into Ucoma(ph), for example, thanks.

Sure. Let me take that since I'm generally regarded as the structural architect around here. In order to do a tax-free distribution to Liberty shareholders, we basically have to spin off an enterprise that is a five year trader business associated collection of assets. If we were to merge all of our international assets into UGC, A, Liberty would still own those directly not indirectly and B, we would not be able to spin the resulting company off to the shareholders tax free for probably another four to five years, simply because we don't have in UGC a five year trader business that we've owned continuously more than 80% of. So this structure is really dictated by the desire to transfer these assets tax efficiently directly to Liberty shareholders. With respect to capitalization, we will be filing that with the Securities and Exchange Commission shortly. We anticipate a very straight-forward pro-rata distribution, with the ratio of shares intended to give the resulting company a trading price in the 30, $40 range. So we will set the capitalization at that level. We are going to try and make it as simple a capital structure as possible so that we increase transparency and the ability of shareholders and analysts to understand what's in it. You might ask the reason, I might as well deal with it, for the rights offering. We made the commitment on the spinoff that any incremental capital investments that Liberty makes in international from this point till the spinoff will be refunded to Liberty through the rights offering or some other financing technique, post spin, so that the company is not dead in the water between now and the time of the spinoff. And in addition, we contemplate lots of growth opportunity in international, and therefore, a rights offering will provide those shareholders who want to increase their stake in the company such as myself with the opportunity to do so, and hopefully generate a superior capital return there by.

Thank you very much.

You're welcome.

Next we will move to Andy Baker with Cathay Financial.

Thank you and good morning. Just a couple of questions on Discovery. First, do you intend to continue the marketing expenses at the same level they were in 2003? And second, what are your plans for Discovery stores? Has that changed at all? I mean the losses keep on coming in year after year.

Can you address those, Barb? Sure. Andy, we do intend to continue investing in marketing and programming. However on a percentage of revenue, as I mentioned at the beginning of last year, we would see a one year anomaly with the increase investment over 2002. In 2004 we would not expect to see, on a percentage of revenue, it to continue. So what you saw in 2003 should be the extent of the unfavorable variance from year-over-year. As far as the stores. Our stores continue to be a strategic business for this company. With 120 stores and tens of millions of visitors every year, we feel that it is a great opportunity both to touch our consumers as well as to build a business that is continuing on a financial return as well as a strategic return.

Okay. Thanks. And if I can just followup briefly. Your programming budget going forward, where are we at on that in terms of original programming, specifically?

We made an announcement last year that we'll be spending close to $3 billion over five years and we are continuing on that track.

Great. Thanks a lot.

Hey, guy, I would like to elaborate a little bit on Barb's answer from the broader Liberty point of view with respect to the retail stores. One of the things that we are actively engaged in is, through QVC, is the business of television commerce. And one of the areas that we would like to expand QVC and Discovery and others is to develop ways to create programming that is interactive and commerce driven at some of the Discovery channels as well as some other channels. And so having that retail store presence is really part of a larger strategy of investigating and working in the area of TV commerce, not just at QVC and the channels that are dedicated fully to TV commerce, but also at other networks. We think that there is a substantial opportunity to be achieved there, to be pursued there, and that's one example of the businesses working together and I was trying to drive a broader strategy. So I don't think you can look at the retail business at Discovery on a stand alone basis as just kind of an odd man out in their business. It is really part and parcel of their channels and it is also an integral part of a larger commerce strategy at Discovery and at Liberty.

We will move next to Rich Greenfield with Fulcrum.

Hi, just a couple of questions. One relates to LMI and how you think about buying in Ucoma. Basically it is going to be one of the biggest assets of the new LMI and after the rights offering would that be something that you would look to do? And then two, Bob, you spent a considerable amount of time talking about the cross fertilization efforts of the new structure. How is that different in terms of the way the divisions or the individual businesses were working together beforehand? Is this going to be a real big ramp up from what they did before? Thanks.

Yeah, I will take a shot, maybe a little bit at both of them. With respect to UGC, obviously it will be the largest single asset of LMI. LMI will vote over 90% of the votes of UGC and therefore, assets can move tax efficiently up and down that ownership structure. Furthermore, LMI will have preemptive rights on any equity issuance by UGC, which is one of the reasons why it needs a strong balance sheet so that it can take advantage of those preemptive rights. There may be a point in time when for market efficiency, it would be better to have one public security representing that collection of assets than two, we will just have to wait and see how the two stocks trade relative to each other and whether or not strategically it is important to have a place to put assets that don't appropriately fit into UGC, for either regulatory or financial reasons. But certainly in the longrun, we have to contemplate some long-term combination of the business. With respect to the other issue, which is collaboration between the businesses, we contemplate that we will still have a very close working relationship between Liberty's two main line businesses, the networks group and the interactive group. And the international company will have to a large degree common board of board of directors, a lot of co-location, and perhaps no less ease of working together than we have now, since even now, most of our businesses are not wholly-owned and therefore they're collaboration and cooperation has to be mutual and fair and arm's length.

Thanks a lot.

And next we move to Jarrett Hertz with UBS.

Hi, good morning. Just a quick question for you. You mentioned in regards to Liberty International, LMI, the debt to equity ratio, you said there was 3.5 billion debt with the new company. What is that debt to equity ratio once more, please.

That's not a debt to equity. That was a debt to cash flow measure.

Oh, excuse me.

It was 4.3 of debt to cash flow. And then about I think 2, a little over 2 on a net debt basis.

Got it. Thank you.

And as a reminder to our audience, press star one if you have a question or if you find that your question has been answered please press star two to remove yourself from the queue. We will move next to Richard Bilotti with Morgan Stanley.

Good afternoon. A couple of questions on moving cash around between LMI and it's affiliates. First is J-COM, is that free cash flow positive? I know you gave the revenue and EBITDA figures, 429 million of EBITDA is very impressive, but is it generating positive free cash flow? What's the capex budget? How would you fund deficits or move cash out of that? And then also Ucoma has a fairly significant amount of tax attributes. If you can move asset, can you also move the tax attributes back and forth, up and down between LMI and Ucoma.

Well, J-COM should be pretty close to free cash flow positive or free cash flow positive this year and they also have bank facilities available to them. So we do not expect to have to put additional capital into J-COM for its operations. It is possible that there would be acquisitions or other things that might require capital.

Yeah, in addition, Rich, the shareholders have inter-company debt, which allows movement of cash from say an IPO proceeds or something of that nature, or from free cash flow, up to the investors in repayment of the subordinated debt. In addition, the Ucoma ownership structure being, as I said, 90% voting by LMI, allows for the downstreaming of assets and not the tax consolidation of tax loss, but assets could travel down the chain and be liquidated in the subsidiary on a tax sheltered basis by the tax loss carry-forwards in old Ucoma. So there is a fair amount of tax flexibility within the Ucoma structure relative to LMI. But it will not be a consolidating tax return because LMI will only own 55% of the equity in Ucoma while it will own 90% of the votes.

But they can move an asset down into Ucoma, therefore --

They can tax free contribute assets to Ucoma, yes. So one could contemplate a downstreaming of LMI assets into Ucoma for Ucoma equity, and that would be very easily achieved in a tax efficient way.

Terrific. That's exactly what I was looking for. Thank you.

We will move to our next question from Niraj Gupta at Citigroup.

Thank you and good morning. Obviously, with the separation of the international assets there is some increase in transparency with the company on a go-forward basis. One of the thoughts that you guys have articulated in the past is the possibility of also a full spinout of the networks or interactive group or at least it has been something that has been speculated. Could you guys talk as to whether or not you've ruled out for the time being spinning out your networks and interactive, just how you think about that on a go-forward basis. And, John, I was hoping that you could talk maybe a little bit also about what you see as the end game for the networks group, whether or not you think this asset on a stand-alone basis long-term, with the content assets that are there, and a world where obviously companies are getting bigger and bigger, is sufficient to stand on its own or long-term do see a different home for the asset? Thanks.

As Bob mentioned in his soliloquy, the board and the management of the company has been exploring all kinds of structural changes with a view toward increasing shareholder value, creating a currency or better currency for growth and, obviously, avoiding enriching the federal government unnecessarily. In that context, we concluded that at this time the networks group and the interactive group are not quite ready to stand on their own. There is a lot of inner group synergies still between them. And there is a few more cards, I think, that have to be dealt and played out before we could really focus on that and contemplate that separation. With respect to the viability of the networks group, we really see that as a Discovery question. We believe that there is a great opportunity for Discovery to allow and continue to develop into the dominant nonfiction, global programmer. And we think it can do that and can also focus on commerce opportunities, in its verticals. On a global basis. So we do see an opportunity for it to be quite unique. Because after all, what differentiates a channel like Discovery, a set of networks like Discovery, is the fact that their programming is evergreen, it has a long shelf life. They produce and own the vast majority of it. And therefore, they're not beholding to third parties. They generate the bulk of their revenue from advertising today and we think when we supplement that with merchandising revenue streams and some of their targeted vertical networks, a greater dependency will be on advertising and merchandising relative to affiliate fees, and that will reduce the exposure that they have to the consolidation of distributors. So I think with respect to the Discovery question, or the nonfiction, interactive part of the business, I think it is quite feasible to think that a nonfiction enterprise, as dominant in its field as Discovery, can continue to expand its dominance and be effectively perpetual and institutional in its ambitions. With respect to the rest of the businesses, the rest of the network businesses, I think it is a question of how they evolve. Clearly, Liberty's investment in things like E-entertainment and Court TV, have a limited life expectancy as Liberty assets since Liberty's co-investors have certain takeout rights with respect to those, which we would expect will probably be exercised over the next several years. We think that the interactive business of game show networks could potentially be a core asset of our interactive group, as it explores not only additional merchandising activities but also interactive games, of all sorts and descriptions. We believe that a big differentiator between cable and satellite will be real-time interactivity, including interactive advertising and merchandising. And that's an area that we think will have legs, because it is both technologically based and scale based and global. So that part of the business, we see, as perpetual. Starz Encore we believe has got to prove itself. The value that it has stepped up and paid for in terms of video on demand rights, Internet rights, or what is now the biggest movie package in the subscription pay category in the U.S. So it has to deliver on the investment that it has made in all of these rights. And it may well have some combination of some sort in its future but we believe it also can grow rapidly as the technologies of distribution change and people become increasingly interested in video on demand and particularly in subscription video on demand. So we contemplate that Starz could, in fact, evolve a part of its business to look like a net flix type of service offering over time. It clearly is already getting a big boost from video on demand and from high def. So the jury is a little out, I would say, on Starz in terms of its long-term future. And who it should or would combine with, if it was going to combine with somebody. As you know, we tried to merge it with Showtime 10 or 12 years ago and it took the Justice Department 2.5 years to give us approval, and by then everybody was no longer interested in putting them together. So we are always open to combinations that enhance value, and right now I think Starz has got to prove itself operationally before a combination of it with anything else would make sense.

John, can I ask one followup real quickly?

Sure.

You're talking about, which is really helpful, your thoughts on the individual assets, does that change necessarily the thought that ultimately this could be -- I guess you can look at the assets one by one or you can look at them in the aggregate and say these all belong together and there is somebody else ultimately that would better be that was better suited in the aggregate with somebody else.

Right, well, keep in mind that the thing we want to avoid, we evolved Liberty, as you know, as a collection of programming assets, mostly, and some technology assets, that ended up being converted into very valuable equity positions in other people's companies. Okay? Generally with very low tax bases. And generally with no control. A great investment portfolio, but no synergies and typically a sum of the parts discount inherent in holding assets that way as well as potentially a tax discount on liquidation. So we've got to structure the company in such a way that we avoid that double discount phenomenon. If we are going to deliver core for meaningful Liberty assets to a third party, we have to do it in such a way that the shareholders benefit directly and there's no third party holding company discount and there's no tax leakage. That's kind of the way we think about it internally.

That was my question. Thanks.

Next we will move to Michael McCaffrey with Lehman Brothers.

Hi, thanks for the (inaudible). Just a couple of questions. One is, in terms of the future acquisitions on the international side, how are we going to split up the world between LMI and Ucoma? And second is, in terms of the programming international assets, for example, like Discovery and so forth, will they remain at networks or international? I just want to get clarification there. Thank you.

Yes, with respect to rights between the two companies, at the present time, LMI does not have any kind of first refusal or arrangements with UGC. On the other hand, as a 90% voting shareholder and 55% equity holder, we would generally say that an acquisition opportunity in Europe would clearly go to Ucoma if they can afford it and if they want to do it. There may be certain assets that better fit an investment profile than a consolidation and operating profile, which may end up in LMI for some period of time. But we would expect that Ucoma, UGC, would be the primary active force with respect to Europe. In Latin America it will probably be a mixed bag since Ucoma will continue to have VTR in Chile and Liberty will continue to try and restructure its interests in Argentina. Liberty International will also continue to own its satellite position in the Sky Latin America. In Japan, of course, Liberty International, and I would say Asia generally, Liberty International would be the prime mover in that space. Just as a practical matter of where the assets are, where the management teams are, and where the capability is to find opportunities and grow them. Bob, you want to answer --

Yeah, on your question about the networks. We're not including any of the Discovery international networks. We're not including, for example, the QVC International network, it is really the stuff that we own directly as cable operating companies with a directly associated programming company. So JPC, J-COM, UGC, our programming businesses in Latin America but not things that are under Discovery or QVC, I think those are really the two big exceptions.

Thanks.

Next we will move to Robert Routh with Natexis.

Hi, good morning. Two quick questions. First, John, you mentioned that you're always open to combinations that add value and that make sense, and I was wondering in light of that and given the guidance that we're seeing for QVC for '04, whether or not it might make sense to look to do something with HSN and QVC and put them together and try to monopolize the business a little bit and get some synergies there. I was just wondering whether or not you've considered doing that. Also I was wondering if you could comment, is there any type of tax sharing arrangement that you're going to put into place, or is it possible, between Liberty and LMI, or is that something that just because of the way it is structured can't be done? And finally, I'm wondering if you can comment on whether or not you personally look at LMI really as the TCI of the next 10 years where you are kind of go on a land grab and as you acquire more and more distribution you look to use that distribution to acquire content and ultimately create two separate equities, one being the distribution vehicle, or the old Tacoma, and the other one being the more of the content or the old Liberty.

That's three questions. First of all, no company I've ever been involved in has ever contemplated trying to form a monopoly. So never considered putting HSN and QVC together in order to form a monopoly. The synergies of putting them together are meaningful but not huge. I think a combination of those two businesses would only make sense in the context of some broader strategy to create these vertical entertainment/merchandising channels. For instance a fitness channel that sells vitamins and minerals and promotes health items might find its way across all those channels. There are some synergies between them, but I think most of the discussions we've had in regard to that have said that the independence of the merchandising operations is probably more important than the synergies of back room consolidation, if all we're talking about is the domestic video shopping business. With respect to tax treaties, no, LMI will be cut off clean and on a stand-alone basis from Liberty. No opportunity for tax treaties back and forth. No consolidation, nothing of that nature. Could you repeat --

Is LMI the next TCI --

Oh, do I see LMI the next -- oh, absolutely. It is 10 million video subscribers, it was at 13.7 million units and counting, with several large acquisitions on the table, one of which we've disclosed publicly, the Paris Cable system, UGC, several other large potential investment/acquisitions that we're already involved in, absolutely. Absolutely, we would contemplate a large international footprint, the ability to drive not only LMI's content strategy and technological strategy but also coordinate the content strategy with the Liberty networks to drive Discovery deeper in Europe, for instance, in digital niche programming, we already joint ventured Discovery in Japan with the Discovery channel. So absolutely, we see the opportunity to build another TCI, perhaps quite a bit bigger and more diversified, and with kind of an interesting currency situation where you're in Euros and yen, substantially, as a hedge against dollar investing here. So yeah, I don't see any reason why LMI and UGC together can't turn out to be the dominant international cable operator, if they're careful about where they expand and prudent with respect to how far they go on debt leverage. There's a lot of private equity ownership, particularly in Europe, but also elsewhere in the world, that will be looking to come out of those private equity position and LMI and Ucoma, or UGC, are quite logical roll-up opportunities for those private equity investors. So the goal would be to have a robust equity and balance sheet, such that acquisition opportunities can be taken advantage of, but also we have to focus very closely on the core business to make sure it is a robust business we're acquiring and that we're getting synergies between the units as we acquire them. Very much as we did when we built TCI through the '70s and '80s, where incremental rollups always have very good incremental synergies. And I think those of you who are going to call into the UGC call at 11:00, may ask Mike Freeze a little bit about synergies in acquiring things like Nous and other cable properties across Europe, where they do get a pickup, a multiple pickup, of one to two times just through overhead programming, coordination, technological coordination, capital buying, and so on. It has a very good opportunity. Which is why we're excited about it. Why I'm excited. Why I want to do it. Because it looks easy compared to what Bob's got. [ Laughter ]

Okay, great. Thank you very much.

You're welcome.

Next we will move to David Goldsmith with DSG Capital.

Hi. I would like to go back over this LMI and UGC combination. Does it really make any sense to have two public securities out there getting different kinds of values? Wouldn't one actually not support the other one?

Well, we will see. There probably will be substantial arbitrage between the two securities. And maybe the boards of directors of the two companies and the shareholders will see the attractiveness of combining them at some point down the road. That's not something we can do at this time nor can we contemplate it at this time. We have to do what we're doing and it is largely dictated by the complexity of the fact that our collection of assets has no independent valuation and we need to get these assets directly into the hands of our shareholders. But also they're not a one for one duplication of assets. LMI will own Japan and Latin America and our Japanese businesses are very large, almost as large as UGC. So you shouldn't look at it as just one to one. LMI will have significant assets beyond just the UGC assets.

Great. Thanks.

Next we will move to Jim Rice with Hasvenu Capital. Mr. Rice, are you there? Hearing no response we will move on to Matthew Harrigan with Janco partners.

Apart from the evident pack down opportunities you've got in Europe with Nous and with Jupiter would you ever consider, subject to finding the right political partners, going into some of the brick economies where people think there is so much growth over the next 50 year, Brazil,Russia, India, China? I know it would be venturesome, I know you would have to find a local partner, but is that something that you would contemplate under the right circumstance? And then secondly, more prosaically, can you talk about why the D&A went up so much at QVC?

Well, on the first question the answer is yes. On the second question? The second question, why the D&A went up, it is purchase accounting related entirely to our acquisition of QVC. It has nothing to do with their underlying operation.

That's what I thought but I wanted to be sure. Thank you.

Let me go back on it for a second. Not to be too glib here. We have been messing around in China, actually, for a long while. We actually do program one of the national networks in China for several day parts and we have an ad agency in China and of course, indirectly, we're in China through News Corp, which operates a satellite service into China. India, of course, we're in with Discovery pretty heavily. We have tried to play in India in the past, a little bit on distribution, but we're always open to opportunities. We are of course in Brazil through Sky Satellite. So we're always watching those opportunities and if something attractive occurs, the issue is always currency risk, country risk. And to make good returns in the cable industry one needs leverage and it's very risky to use international bank currency debt against domestic cash flows in these less developed countries as we learned in Argentina. It is very easy to have a very successful cable business that gets wiped out because it's cost structure is in dollars rather than in pesos. So with that caveat, yeah, we're always looking at those kind of opportunities.

Next, we will move to Spencer Wayne with J.P. Morgan.

Hi, two questions on the private assets. With respect to QVC and the guidance for '04, there doesn't seem like there is much margin expansion assumption. Is that a function of product mix or some other cost investment? And on Starz, if I recall from the last quarter's 10-Q there was a $60 million option payment related to one of the output deals. Just wanted to know if that got exercised and if that expense was in the fourth quarter numbers or if that was coming into '04? Thanks.

On the last question, that has not yet hit. That would be in the fourth quarter of this year. The fourth quarter?

If it is exercised.

If it is exercised, it will be late this year.

Okay.

And that gets amortized over the extension period. It doesn't all hit in one year, Spencer.

It is three years straight line, right?

Correct.

Okay.

On the QVC question, Bill, can you respond to that?

Yeah, I think the EBITDA yields should be approximately the same as last year. I think in the past we've had some real strong increases on the EBITDA yield but as we go forward we're looking for that improvement to narrow so I don't think there will be a decline in the EBITDA yield per se but most of our EBITDA growth in the future would be directly derived from our top line growth.

Okay. Thank you.

Next we will move to Benjamin Griswold with Nexstar Capital Partners.

Hello and good morning. A quick question on -- could you shed some more light on Cablevisión in Argentina, please, and how this affects it?

Well, Cablevisión will be one of the assets of LMI, our interest in that. We are going through the restructuring process now. The proposal that we made to bond holders was approved by over two-thirds of the bond holders a couple weeks ago. And so that process continues and hopefully that will get cleaned up and finalized over the next few months.

Thank you.

Next we will go to Brian Warner with Performance Capital.

Hi, could you outline for us, now that you're going to have the old Liberty to be new Liberty, is going to have significant free cash flow generation going forward and if you could sort of sketch out a wish list of the types of assets you would like to use your free cash flow for, for us that might be helpful.

Are you talking about for Liberty?

Yeah, for Liberty, I mean where would you like to invest capital going forward?

That's like ox out In Discovery.

We know that. Maybe you could give some other areas.

That would be a good start.

We certainly would not mind contributing capital with our partners to Discovery to allow it to expand its footprint even more robustly than it already is. We would like to look at potential expansion opportunities for QVC in markets that they're not already in. Possibly acquisitions for Discovery, I think you mentioned that, outside of the U.S., just as part of the overall drive to strengthen their already strong position in the nonfiction television business.

There are also some venture capital activities that we are in. You may have read about our involvement in a thing called Current which is a power align high speed data enterprise. We think there may be some interesting opportunities there in high-speed data by satellite, where we have a venture called Wild Blue where if those businesses prove out, they could absorb a substantial amount of capital for growth. We would not be funding them until or unless they have proven to have very attractive investment opportunity, but one never knows on these kinds of things how they're going to turn out.

Just one quick follow-up. Do you think that QVC should shop NBC or Value Vision be available, would pass antitrust muster to buy that asset?

I would expect so. We already got antitrust approval for us to own QVC and a large stake that we hold in HSN. I think the anti-trust regulators tend to look at a market much larger than just the TV shopping market. So I don't think that would be an issue, if that came up and was something we wanted to do.

Thank you.

And next we will move to Mitch Lester with Lester brothers capital.

Good morning, guys. Doc Malone, are you at liberty to talk about what your compensation package will be as CEO of Liberty International? Thank you.

Yeah, I would expect to get some stock options in Liberty International and not to earn a salary there, or any other cash compensation.

Thank you.

We will now take a followup question from Andy Baker at Cathay Financial.

Thank you. Just to clarify, John, you said that you mentioned IPO proceeds. Just wondering in the context of this new separation what the plans might be for going to market with J-COM?

Well our partners in Japan are very interested in creating a public equity security in Japan for J-COM. I think both to give themselves some valuation metrics but also we're kind of supportive of that concept because there are lots of roll-up opportunities in Japan where we could use our Japanese equity to take out minority partners as well as to acquire and expand the footprint of J-COM. So we're exploring it, but no decisions have been made at this time on an IPO in Japan.

Thank you. I'm sorry you said Japanese equity as opposed to a U.S. listed or based security.

I think what has been contemplated is a Japanese equity. As I say, it is not so much to raise capital as it is to give us a currency and a valuation that can be used in Japan, so the thinking at this time is a Japanese equity.

Great. Thanks a lot.

Next we will go to Tuna Amobi with Standard & Poor's Equity Group.

Thank you. Good afternoon. I would like to focus in on goodwill for a second here. I see that you had 9.4 billion reported on the balance sheet out of which, the enterprise level, you had allocated 3.8 billion, so of the $5.6 billion left, I presume that 3.9 of that relates to QVC, so that leaves 1.7 to account for, which is basically what I'm trying to find out the balance of that goodwill on the assumption that the Starz Encore is written down to zero is my presumption at this point. And a quick followup on that, is would the consolidation of UGC, which is imminent, I think that you would have at least two quarters of consolidation before the sustain. The question then becomes in accounting for this transaction, what, if any, goodwill do you hope to carry in the books for that two quarters, and how would you migrate that to the new entity after the spin?

With respect to the first question, Starz Encore's goodwill is not zero. It is still a 1.4 billion remaining after the charge. Also, there is some goodwill in Assent Media Group. I think that the combination of those two come back to your 1.7 number. And could you repeat the second question? I didn't --

The second question is you're looking to effect this transaction by the summer. And my understanding is that you're going to be consolidated in the UGC.

That's correct.

Effective the first quarter of 2004. So I'm just trying to get the link between how you would account for this from a goodwill perspective, if any, that you expect to arise before the spin and how you might account for that after the spin. Well, we're still working through the mechanics of the UGC purchase accounting, I guess. One of the things that we're contemplating is there would be some discontinued operations treatment for the international businesses.

Certainly, by the time the transaction is completed those assets will be separated from the rest of the remaining Liberty entity.

Okay. Thank you very much.

And we have a followup from Gloria Radeff with Bear Stearns.

I have two questions that I hope are quick. One is, I know that you're preventing the nonstrategic public assets as basically financial instruments that offset your debt. Is there anything that Moody's is doing that prevents you from calling that collateralized debt or presenting it in such a way that you can basically put a much smaller net debt number down on your filings and in your financial reports? And then the other question I have is just relative to the discount to the net asset value that your stock has been trading at. The market I think would probably still put a discount on the stock relative to the peers, wherever the peer group is trading, I think just because management access on the different private businesses is more limited than, let's say, like on a Viacom or a Time-Warner or a Disney, and I'm wondering if you have plans to make management more accessible for investors because I think that is something that would also help close the gap.

On your first question, we certainly look at the debt from the point of view of it's essentially offset by the underlying assets, in the case of the exchangeables, by the underlying security, in the case of the others, by the callers that we have, so we think of ourselves effectively as having a billion and a half of debt. That is our point of view. I don't know if the agencies are quite there or not. From an accounting point of view, I don't think that would be considered GAAP. But certainly from a how management approaches the business point of view, that is how we look at it. On the question of more access to the management, I think that is something -- that is a good suggestion and something that we will consider. We certainly are planning to have some of them present and presenting at our conference in May. And that is a good suggestion that we may well work on as the year progresses.

Okay. Thanks.

Our next question comes from David Gibson with McCleary Securities.

Yes, Mr. Malone, I just wanted to clarify regarding your position of moving News Corp stock from preferred to voting and what you seek to gain from that move of effectively shifting about 20% of your investment to averting stock?

Well, the first thing we gained was Rupert's attention.

Was that a problem before?

Not really, no. We felt it was a good spread. We had an opportunity to do it cost and tax efficient basis. And we suspect that that stock will ultimately have a higher pheromone value to News Corp than the non-voting stock. So in any kind of a transaction involving News Corp, we think that that particular equity will have a greater psychic value, as well as greater financial value, than the nonvoting stock. But we're very happy with News Corp, very supportive of News Corp, and always have been. So we get along very well with News Corp. We think Rupert can certainly count on us as a strong supporter of himself and his family.

What sort of transaction could you allude to there regards what might be possible with News Corp?

Well any acquisition by News Corp of any asset that Liberty has, or any acquisition by Liberty of any asset that News Corp has, could be contemplated using that as a currency. And it would have, we think, greater value than the nonvoting stock in such a transaction. There are assets that News Corp has that Liberty finds very attractive and wouldn't mind owning directly. And perhaps there are assets that Liberty has that News Corp would find quite attractive over time. There is nothing contemplated right now. But one can never tell.

Thank you.

I think we have time for one last question, please.

Okay. And that question will come from Michael Kupinski with A.G. Edwards.

Thank you for taking the question. On the QVC revenue guidance can you provide a segment break down for domestic UK, Germany and so forth and can I assume that domestic revenue guidance in the mid single digit range for roughly, probably 5 or 6%, is that what you're looking for? And then finally, with the guidance of margins to be roughly flat, could I assume that the domestic margins are going to be down this year?

We did not break out the guidance between domestic and international. So that is sort of for the group as a whole. To the extent that international has been growing more quickly, than you can assume that would be a little higher than the average but domestic is by far the biggest part of it. That really drives the number. But we do not give specific guidance.

But in terms of the -- then the margins on the domestic side, would you be able to comment on that?

I think Bill commented earlier that the margins are --

Flat for the whole entire group, yeah.

I think for the entire group they should be consistent with last year but we will pick up some on international because of the higher volume, but being that the international in terms of the sales are still only 20% of the total, I think on a consolidated basis, will be more or less consistent. Maybe a tenth or two different.

Okay. Thank you.

All right. Thank you all very much. We appreciate you listening and paying attention for so long. If you have more questions, we have an Investor Relations group that would be happy to respond to you. Thank you very much. Bye.

And that does conclude's today's conference. Again thank you for your participation.