QVC Group Inc (QVCGA) 2004 Q2 法說會逐字稿

Good day, everyone, and welcome to the Liberty Media Corp. conference call. Today's call is being recorded. During this presentation, we may make 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, and could cause actual results to differ materially from such statements, including, without limiting, possible changes in market acceptance of new products or services; competitive issues; regulatory issues; and continued access to capital on terms acceptable to Liberty Media. Please refer to the public filed documents of Liberty Media Corp., including the most recent Form 10-Q, for additional information about Liberty Media, about the risks and uncertainties related to Liberty Media's business.

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

Thank you. Hello, everyone. Thank you for joining us today. On the call, we also have Bill Costello, who is QVC's COO, CFO, and the President of their International Operations; and Barb Bennett, who is Discovery's Executive Vice President and CFO; and joining me in the room are a number of Liberty representatives, as well as Bob Clasen, who is Starz! Encore President, Bill Myers, the Starz! Encore CFO, and Mark Bauman, Starz! Encore Interim CEO.

Looking at our performance and our activities, I think it is fair to say that the second-quarter of 2004 was a very good quarter for Liberty. We had very good operating performance from our largest businesses. We made significant progress in our efforts to simplify our structure; and we made further progress in our ongoing efforts to improve our capital structure.

Let's start by looking at the financial results for the quarter. For the three months ended June 30th, 2004, consolidated revenue was $1.8 billion, and consolidated operating cash flow was almost $400 million. Because of the QVC acquisition that was completed last year, those numbers aren't really very comparable to the second-quarter results of 2003. So looking at the numbers on a combined basis, which includes 100 percent of all of our subsidiaries and our equity basis affiliates, that's a lot more comparable on a year-to-year basis -- revenue on a combined basis was 2.5 billion, which was an 18 percent increase over the same quarter of last year; and operating cash flow was 582 million, a 29 percent increase over last year.

This growth was driven primarily by revenue and operating cash flow growth at our InterActive Group, where revenue and OCF grew 18 and 29 percent, respectively, and by a very strong performance at Discovery. At the Networks Group, revenue increased 15 percent, and OCF increased 9 percent as a result of good growth at Discovery; and then the OCF was offset by the expected decline at Starz! Encore, associated with increasing their programming costs. If you exclude the Starz! Encore results, the Network Group grew revenue by 18 percent, and OCF by 32 percent.

On a combined basis, we generated solid double-digit gains for the quarter and year-to-date. We think these are extremely good growth rates for our operating groups on a stand-alone basis, and for the Company as a whole, particularly in comparison to other large media companies.

Now let's turn to our individual operating businesses, starting with QVC. QVC, as you can see, had another very strong quarter and exceeded our expectations. Revenue grew 17 percent and OCF grew by 27 percent compared to second quarter of last year. QVC's domestic business increased their revenue by 8 percent, and domestic OCF by 13 percent. And the international business generated topline growth of 50 percent and OCF growth of almost 150 percent.

Growth of the domestic business was the result of increased sales per FTE, increased gross margins and higher operating margin. The international business saw OCF growth of 99 percent in the UK, 232 percent in Germany, and 95 percent in Japan. These gains were driven by subscriber increases, favorable foreign currency trends, and significant operating margin improvements.

Between higher sales per FTE in the U.S. and realizing the benefits of scale at our international operations, QVC is really hitting on all cylinders, and we have raised our full-year OCF guidance to growth in the mid to high teens. I should point out this is the second consecutive quarter that we have raised OCF guidance for QVC.

In closing, I also just note on QVC that QVC Germany and QVC Japan both had their highest sales day ever in June of this year.

Moving next to Starz! Encore, revenue was up 6 percent due to growth in subscription units, and as we expected, OCF declined compared to last year. However, we are quite encouraged by the subscriber additions during the second quarter. During the quarter, Starz! Encore added 950,000 Starz! customers, which is an 8 percent increase and the best quarter since 1998, and the second-best quarter ever in terms of Starz! subscriber growth. Just by way of comparison, according to information reported by Kagan, that 950,000 new Starz! customers is more net customer additions than HBO has had in the past 6 quarters prior to the second-quarter; we haven't seen the second-quarter numbers yet. But by Kagan estimates, that's more than their past 6 quarters combined, and more than the past 4 years combined for Showtime, and the best quarter for any flagship premium network in over 6 years. So just a very strong -- obviously, very strong growth for Starz! in the quarter. In addition, we added 1.5 million new Encore subs. And then all combined, with the new Thematic Multiplex subs added during the quarter, Starz! Encore added almost 10 million new subscription units since March of this year, which is a 6 percent increase.

We are also excited about Starz! Encore's launch of Starz! Ticket on Real Networks. This is an IP-based service that allows subscribers to either download or view their movies over the Internet. Following successful VOD and SVOD launches with our distribution partners, this is another example of driving additional new revenue streams from the rights that we secured for our studio -- out of our new studio output agreements, which are driving the cost up compared to last year. And it's still quite early -- very early -- in the process, but we are encouraged by the customer response so far.

Our Starz! Encore guidance remains unchanged. We are expecting revenue to be between 940 and 965 million and OCF should be somewhere between 185 and 210 million.

Moving over to Discovery. Discovery's performance also exceeded our expectations in many ways. It was a very strong quarter. They generated consolidated revenue and OCF growth of 20 percent and 30 percent, respectively, with growth coming from both the domestic and the international operations. The domestic networks grew revenue by 20 percent, and OCF by 19 percent. Add revenue growth remains brisk at 16 percent domestically; however, affiliate revenue was an even bigger driving this quarter, as a substantial number of subscribers to the emerging Discovery Networks, which include what have been referred to in the past as the additional networks, became paying subscribers during the quarter.

Net affiliate revenue growth is also driven by lower amortization of launch support costs as contract renewals and extensions extend the lives for launch support costs. So you might have noted in the release that amortization costs were 6 million lower this year than in the same quarter of last year.

The Discovery international networks increased their revenue by 24 percent and their OCF by 55 percent. These increases were driven by growth in both advertising and affiliate revenue, as well as favorable foreign currency exchange rates. We are leaving our guidance unchanged, which is for DCI consolidated, as a group, revenue growth in the high teens, and OCF of approximately 30 percent.

In summary, I think you can see why we are quite pleased with the operating results for our groups and with the core operating businesses within those groups. I think you would be hard-pressed to find other large media companies reporting this kind of growth.

We also had a productive quarter at the corporate office. We completed the spinoff of our international business this quarter. The spinoff gives investors the opportunity to invest closer to those international distribution and content businesses, as well as making Liberty Media an easier and simpler Company to understand and follow. We repurchased 120 million shares of our stock from Comcast, reducing our outstanding shares by about 4 percent. We like this transaction because we are able to use non-strategic and non-cash assets for which we were getting no credit, as well as some cash to repurchase a big block of shares at a discount to their underlying value and to the market price.

And finally, consistent with our debt reduction plan, we paid down another 150 million of debt in the second quarter. That brings our total so far to a little over 2.6 out of our total 4.5 billion debt reduction program. In addition, we have entered into total return swaps for an additional 400 million of the debt. So after we take that in, we will have about another 450 to go this year to meet our $1 billion target in debt reduction for 2004.

So, after all these activities, where do we stand? I think we believe that we made moves that benefit our equity holders while maintaining a very strong credit position, with our debt almost entirely covered by cash on hand and a value of our other non-strategic public assets and derivatives. At June 30th, our total cash and our non-strategic public portfolio was about 11.5 billion at market compared to total debt at face of 11.8 billion. Pro forma for the cash that we used in the Comcast transaction, total cash and non-strategic public assets was still about $11 billion.

In addition, we expect to generate OCF this year on a consolidated basis of about $1.5 billion. And that makes us feel pretty comfortable about our liquidity and our debt position. If you just look at it and assume that we put even 2 times -- if we levered that 1.5 conservatively at 2 times, then it can support roughly 3 billion of debt -- that leaves 8.8 billion of debt covered by the 11 billion of cash and non-strategic assets, and that doesn't even count the 12.5 billion of News and IAC stock -- if you include those at the end of June, we had about 22 billion of asset coverage for 8 billion of debt if you assume that 3 of it is against the operating cash flow. So I think it's clear -- we consider this to be extremely solid coverage and a very comfortable debt position.

Finally, I would like to proactively address a couple of topics that people have been calling about, so I'm sure they will come up in the course of the Q&A. First is our bond operating. As many of you know or probably all of you know, S&P changed their credit outlook on us to negative after we announced the Comcast transaction. For the reasons that I just described, we are very comfortable with our credit position and with our ability to service our debt. We view our credit rating as a valuable corporate asset, and we will continue to work with the agencies to get them as comfortable as we are with our credit position. We will continue to try to find the right balance between addressing the discount in our stock and taking advantage of opportunities for transactions that are clearly accretive to the equity holders on the one hand, but trying to do that in a way that is consistent with our desire to maintain a strong credit position on the other.

Next in the wake of Cox's decision to go private, there has been a lot of speculation regarding their 25 percent interest in Discovery. As we have stated on a number of occasions, we would be happy to own more of Discovery, and that point of view has not changed. At this point, though, we have received no indication from Comcast that their proposed transaction will create an opportunity for us to increase our stake. They have advised us that their deal is fully financed, and that they have no obligation or need to sell their interest at the time. But if they change their mind in the future, we expect that they will contact us. In the meantime, we will continue to work with our strong management team there and with our partners at Cox and Newhouse to make Discovery just as valuable as we possibly can.

So in conclusion, we are very pleased with our performance in the second quarter, and with the progress that we have made against the goals that we laid out at our investor conference in May. We demonstrated continued internal growth at rates higher than our peers. QVC continues its strong growth; Starz! Encore is showing positive subscriber growth; and Discovery continues to grow both domestically and international, and to overall expand their global presence. We fine-tuned our capital structure with a combination of debt and equity repurchases. And we further simplified our Company by separating out the international business and spinning that off as LMI. We continue to focus on these three areas and also to look for and analyze acquisitions that will complement our existing businesses and further our operating group strategies.

With that, I will conclude the formal part of the presentation, and now open it up to your questions.

(OPERATOR INSTRUCTIONS). Niraj Gupta, Smith Barney.

Just a couple of questions. I guess the first question was how much -- we talked about the Starz! growth being pretty strong in terms of units. I'm just curious if Mark or someone else could just break out how much of Starz! growth is being driven by bulk rate deals, where you're not participating in the incremental growth, per se, in the units.

And the second question was, the revenue growth at Discovery, obviously, is quite strong in the quarter. And at the same time, however, the operating leverage at the domestic business was less than it has been in prior quarter. I know there was some investment spending going on in the quarter. Could maybe Barb talk a little bit about how the outlook for expenditures going forward is going to be in the back half of the year and into 2005?

On the Starz! Encore question, I think the great majority of it is unit growth and Dob would be more specific.

That's right. These are paying customers that if there are some in bulk deals, it is de minimus.

Yes, we don't have that many flat rate deals left. Almost all of them are unit deals at this point.

But you would expect going forward to benefit in the way of higher revenues from the units that you've just recently added?

That's correct.

Absolutely.

And your second question was on Discovery?

Yes.

What did you mean by operating leverage, Niraj, that revenue was up 20, or --

And OCF was up 19 (multiple speakers) --

Okay.

Yes, the margin itself, Niraj, was 40 percent.

Sure.

And so that was flat from last year -- a year ago. And so we are continuing on a trend of increasing our margins. As you know, we have got an investment in programming. And we have got marketing spend to support that programming. And that's all you are seeing.

And Barb, I guess, where are we in terms of that investment cycle? Because usually, 20 percent revenue growth will turn into higher margin expansion.

Yes, the -- it is an ongoing investment, Niraj. It is the $3 billion over 5 years is really rather a rolling investment. So we are right on track with it.

Can I ask another question? Should we expect margins to be higher as we look out over the next 18 to 24 months than they are currently?

Yes, you can.

Richard Bilotti, Morgan Stanley.

In your 10-Q, you provide a breakdown of the derivative instruments and the embedded gains and so forth. Can you discuss 2 things? There wasn't a huge amount of change. It was about a $400 million gross change in the derivative contracts. One, were there any material close-outs of contracts? And two, what is the valuation methodology applied? Is it Black Scholes or is it intrinsic value? And how frequently is the book value restated? Is it at the end of each quarter, or at the end of each fiscal year, that you have got to go out and test and value those contracts?

Those contracts are valued on basically a Black Scholes method -- sort of -- from the approximating a market price as opposed to just their intrinsic value, and that gets done quarterly.

Every quarter, yes.

Every quarter. And was there anything material in this quarter that led to the $400 million growth change, or is that principally a Black Scholes market re-valuation?

Changes in the market --

Yes, we had one phone, call it, rolloff, and then the rest would be market.

Doug Mitchelson, Deutsche Bank.

Questions for each of the Bennetts -- for Barb, can you just comment generally on the state of the network ad market, maybe confirm both your performance during the upfront, but also, what your view on the scatter market, generally, which seems to be a bit stagnant right now?

And then for Dob, you indicated another $1 billion to hit your target; I know you love to tip your hand. Can you give us any suggestions as to where you might look as a source for funds for that?

The upfront market for us is very strong. We were well into double digits, close to 20 percent, roughly 20 percent, on the broadcast upfront. Scatter, you are right, it did slow down for a little while, Richard -- excuse me, Doug. However, we are starting to see life again. I think what was seeing also is as NBC puts their inventory to work for the Olympics, we are just seeing what happens with the market from there. So that is part of the reason you are seeing some of the quietness. (multiple speakers)

When you said almost 20 percent in the upfront, was that CPMs or a combination of -- is that really a price per spot?

That's volume.

Volume -- okay.

And CPMS were up single -- up high singles, low double digit on CPMs, depending on the network.

Right.

Does that answer your question?

Your question for me was -- say it again.

So in terms of -- I think you indicated there was another $1 billion of debt to pay down to hit your target for the year?

No, our target for the year is a billion, of which we have got -- we have either paid down or have in-house about 550 million. So we have got 150 that we have actually paid, we have got 400 that is sitting there that we can pay down at any moment. So we have got about another 450 that we have got to go get by the rest of the years. And so from a cash point of view, we are sitting on about 1.8 billion of cash now. So we have easily enough to complete the requirements for this year.

That leads to my question, then, to as you are becoming more of an operating company, it seems to me that you are hitting free cash flow positive here, which is an important metric; you look at the cash-flow statement, you look at operating cash flow less CapEx -- is that something you might consider giving guidance on for '05 as you become more of an operating company?

Sure. That's something we can look at. We are cash flow positive on a free-cash-flow basis. So sure -- I don't have it prepared today, but we can do that in the future.

Richard Greenfield, Fulcrum Equity.

Two questions -- one, when I look at Starz! Encore's, it says in your filing that your units were up 10 percent in the first half of '04 versus the first half of '03. Your revenue growth was about 5 percent in the first quarter. I am just trying to understand what is happening on the pricing side on the Starz! Encore?

And then the second question -- just, Dob, you made a comment about your credit rating -- and does that mean that for the near-term, that you don't plan on purchasing more of your stock post the Comcast deal as you work with the rating agencies? Thanks.

The answer on the rate issue is that -- remember, we are settling 14 channels and many of the fanatic channels are at much lower price points then Starz!, the flagship. So overall, that would be the driver why there wouldn't be an equal relationship.

That answer the question?

Essentially the price -- I mean, you are shifting from -- the mix is shifting towards the cheaper networks from the more expensive networks.

But it has been doing that for a while.

There are just a whole bunch more of them.

That's what I am getting at.

So if you were holding the price -- if you add a Starz! customer, you already have, in most cases, an Encore and/or Multiplex customer. So those tend to be growing numerically at a much higher rate.

But you are not offering greater discounts year-over-year to drive the subscription growth?

Effectively, no.

That's what I was hitting at. (multiple speakers)

You will also start seeing that as customers move from that analog base to that digital base, they are going from being one Encore customer to being an Encore customer plus all the themes. And that is why you are seeing that bigger growth in the somatic units at this point in time. Does that answer it?

That's perfect.

Okay. On the other question, no, we continue to work with the agencies, and I would not say that that rules out additional repurchases while we talk to them. It's an ongoing process that we have with them. And if other opportunities arise that we think are attractive or from time to time, we may buy something. So it does not rule it out, in my opinion.

Matthew Harrigan, Janco Partners.

Great quarter, first of all. You spun off one leg of the triad with international, and clearly, you've contemplated some transactions if the opportunity arises with Discovery. As far as InterActive goes, is there anything that you would look at strategically, either with QVC being so robust internationally, to accelerate the move, and (indiscernible) markets, and maybe some other markets? Or maybe even doing some asset swaps with your friends over at InterActive Corp.?

I am not sure with respect to InterActive that there's opportunities, really, for swaps. I mean, they have got a business in Germany, we have got a business in Germany; the QVC businesses are doing quite a bit better than the HSM business. In Japan, we are both doing extremely well. So I'm not sure that really creates opportunities for swaps. We continue to assess individual markets in terms of their attractiveness for entry. And a couple of the UGC markets may, over time, make sense. But we have not made plans to launch in any of those additional markets at this point. Bill, I don't know if you want to add to that?

No, I think that's correct.

Tom Wolzien, Sanford Bernstein.

Good afternoon, for Dob. Dob, you all have invested in current (ph), the broadband over powerlines entity. I wonder if you could describe to the extent that you can -- where you see that investment going down the line, and what type of capital requirements it may require?

We don't have a heck of a lot of visibility on that. It depends entirely on how quickly they deploy, and in what markets, and in what structures. And that's still to be determined. They are still proving out the technology and proving out the model in the markets where they have launched, on sort of a trial basis. I think it is premature to really project. There is a lot of different ways it could go and what kind of arrangements you have with the power company, whether it is a partnership with them or whether they are putting up the capital or whether we are putting up the capital. There is really too many variables, I think, at this point to know. So I can't give you a very good answer on that, Tom.

Willy Brackins (ph), Panasonic.

I noted earlier that you did not use (technical difficulty) of the operation results for OnCommand. Can you speak to that a little bit? And can you tell us exactly what is the relationship between Liberty Media and OnCommand?

Well, at the moment, we on 100 percent of OnCommand. And it's revenue and OCF were about flat in the second quarter over last year. I think we did describe it a little bit in the press release.

Okay. Think you.

Kathy Styponias, Prudential Equity Growth.

Hi, actually, it's Prudential Equity Group. Dob, this question is for you. If you take a look at what Rupert Murdoch did with BSkyB, in the UK, and setting aside DVRs for a second, interactivity was certainly something that helped him to succeed in that market. And I was just wondering if you could talk about -- if he decides to follow suit with more interactive television here in the U.S., which of your assets might be well positioned, if you can particularly talk about OpenTV and QVC and what might happen there?

Well, OpenTV, I think, is positioned, from a competitive response point of view. OpenTV does provide the middleware for EchoStar, and is trying to be a provider to the domestic cable industry. So I think if you have one of the satellite operators moving aggressively into interactivity, that certainly, I think, will force a competitive response. And OpenTV would like to be a provider to those providing that competitive response. So I think that potentially creates opportunities. But they will have to negotiate with individual companies or with the cable industry to really be a part of that response. But I think that is an opportunity -- a distinct opportunity for OpenTV.

For QVC, you know, it presents potential interactivity in the way of pushing the button and buying, you know, one touch ordering, which they use, in the UK, which, Bill, I don't know if you have the numbers at your fingertips. I think it may tend to drive buy rates a little bit, but not necessarily a huge driver. We are testing that in a couple of markets now with Charter to see how well that works and see what that does in terms of driving sales.

Another Company is Ascent, which is providing a variety of transportation and production services. So there could be an upside for them. Game Show Network is intended to be an interactive channel. And so it is a participating game channel. So while we don't today have a robust interactive platform, should that develop more actively on either the satellite or the cable providers, that will create opportunities for them to make it easier for customers -- for viewers -- to participate on a one screen interactivity versus what they are currently doing on two screens. So that is a few examples of areas that we think will benefit directly.

Barbara (ph) Schiffman, Credit Suisse First Boston.

Good afternoon. A couple of things -- one is after InterActive reported and the stock went down, Diller (ph) said he would think about privatizing. If you were to actually do that, what would be your move? Would you guys go along with the privatization, or would you be a seller?

And then, perhaps more importantly, bondholders are sort of waiting for you to say what your commitment to investment-grade ratings are. Not just the balance sheet. It's obviously critical to the way paper trades and to what you said in the past. So could you just make a statement of how important your investment-grade ratings are and what you do to keep them?

On the IAC question, I don't really have an answer. We own 20 percent. If they go private, our stake would go up substantially as a result of that. I don't anticipate that we would sell in that kind of transaction. But it's so far, it has been something that has been said, but it's not necessarily something that we are actively working on from our point of view. If that were to happen, we will have to look at it at the time and see what the proposal is and decided what to do. We are quite comfortable with our IAC stake. My general view is I think the market overreacted to the news, which I thought was basically a decent quarter and maybe somewhat lower than street expectations, but still not a bad quarter, and pretty good growth. So my general perception is that the market has overreacted. So we certainly wouldn't be selling anything like these kind of prices -- at least not for Liberty.

On the investment-grade ratings -- I think what I have said is that we consider it to be a valuable asset. And that we will continue to work with the agencies to get them comfortable with the things that we are doing. But just like any asset is not -- it does not have infinite value, and it could well be that at some point, we won't be able to convince the agencies, or we will disagree, and maybe we will agree to disagree. But it is something that we value, and something that we are working towards maintaining. But I can't tell you that we will maintain it at any price, and I don't think that any management team could responsibly tell you that.

Just a quick follow-up -- in November, when you talked about your debt reduction program of being 4.5 billion, since then, obviously, you have bought back some stock. Are you actually raising that number of total debt reduction, or are you just keeping it the same?

We have not raised the debt reduction number. We have got 4.5 billion planned that's out there -- which we are meeting our targets on and hitting as we said we would. We have another debt maturity, in fact, coming in 2007. So if you look at it over that, it's a bigger plan if you add another year; so we are not planning to increase it to adjust in any way for the equity that we have repurchased.

(OPERATOR INSTRUCTIONS). Andy Baker, Cafe Financial.

Most of my questions have been answered, so I will just ask, in terms of your debt reduction, have you disclosed which bonds you have actually retired? Is it the July 29 8.5's?

We have not disclosed.

Jessica Reif Cohen, Merrill Lynch.

Thanks. I have a couple of questions. First on Discovery -- it seems like you've (indiscernible) the revenue, it just looks like you are turning a corner. Could you comment on the outlook for affiliate fees over the next one to two years? I guess I will do one question at a time.

Okay. Do you want to address that, Barb?

Sure. As you know, we have long-term contracts with all of our affiliates, and in those contracts, we have rate increases -- we have rate cards. And those rate cards go out for many years. Our contracts don't begin to expire until the beginning of '07. So we are still in the rate card that we put into place back in 1996. The increases you are seeing are not only from the distribution gains that we are getting, but also from some of the newer networks that have been in their free preview phase coming off of free preview. We do not book revenue while an NMSO or a subscriber is in its free preview. So when it comes off of free preview, which can be, depending on the network, can be anywhere from one year to a couple of years, it's an added bump between distribution and the revenue that it generates.

Okay, just switching gears to QVC -- the sales per FTE is domestically -- actually it was gigantic this quarter. So, Bill, could you just talk about what drove that, and what further upside do you think you can get from here?

For the upside, from 17 percent growth?

No, I am saying the sales per FTE were up 8.4 percent (multiple speakers)

Well, we don't consider that gigantic. In fact, that is kind of what we hoped to achieve -- 8 to 10 percent, as we go forward. Because subs were basically flat -- in fact, they were down a tad. So that was right in line with what -- you know, we are happy, obviously, with the results from the second quarter, as you can imagine. But the international division was really the story. And I guess I want to point out that the international results were just phenomenal. But March, in fact, more than half of the revenue growth came from foreign currency exchange rates and an increased number of subs. And I am glad you gave me the opportunity to point this out.

I think the real story for the international division was the increase in the cash flow margin, which went from 9.6 to 15.9. And we have been able to raise our product gross margin to those that were experienced in the U.S.; and also, we are starting to reap the benefits of improved execution, particularly in Germany, with the opening of the new distribution center. And then also, we have leveraged our fixed costs over a larger base. But that kind of growth in your margin from 9.6 to 15.9 really has a huge impact on your EBITDA percent. And I think that we are going to be able to sustain the 15.9, and perhaps improve it a tad as we go on with increased volume. But the real reason for the phenomenal results is because we are coming into our own on terms of the EBITDA margin.

And I only mention this because I know all of you are aware that there was a company in the news which did not meet its 25 to 30 percent revenue increase projections last week, and it indicated that it was an anomaly because of market conditions, and it would be back on track in the future. What I want to tell you today is exactly the opposite. Although we did increase -- although we did have a second quarter revenue increase of 17 percent and operating cash flow of 27, don't expect these numbers to continue on a long-term basis. I mean the international division had a terrific quarter, but the exchange rate factor, along with increased subs had a lot to do with it.

So I want to repeat the guidance we gave at the May Liberty Media analyst meeting, and which we stated that our 5-year growth calls for a compound annual consolidated increase of 10 to 12 percent. I mean we had a great second quarter -- and quite frankly, I think the rest of the year will be fine. But the subs -- being that we are a new market, particularly in Japan, the sub rate increase will decline as we go forward, and who is to know what will happen with the exchange rates. So as terrific as the quarter is, let's keep that in mind when we are extrapolating our numbers into the future, and when we analyze next year's results.

Dob, I have a couple of questions for you. Would you comment on Liberty's intention to vote for the News Corp.'s re-incorporation?

I don't know that we have formulated an intent. I would assume we are planning to vote for it, but we haven't got a proxy yet to vote.

And is there any potential that you guys can buy National Geographic, whether it is tied to this or not?

I have no idea whether we will be able to do that. There is certainly -- there is nothing -- if we were to vote, it is not tied to any other transaction. So we will vote our shares the way we think it is appropriate to vote our shares.

And then one final question -- could you just review, Dob, Court TV -- the put call option, and the timing with Time Warner?

Yes. That, I believe, comes up in '07 -- '06 or '07?

I think it is '06. (multiple speakers)

'06, which I think is the early part of '06 -- January of '06, that's early. And basically, we have a put, and Time Warner has a call at an appraised fair market value.

Doug Calendria (ph), Bear Stearns.

Dob, just wanted to clarify a comment you made on debt reduction. You said 150 was repurchased of debt in the quarter, and then you made a comment about 400 million is just sitting there waiting? I guess I interpret that -- you have got another 850 million to repurchase?

It's (indiscernible) how you are looking at it. From a use of cash point of view, yes, it's about 800 and change to go. From getting it out of the market -- we have already got 400 of that out of the market, and sitting there, and it's available for us to pay down at any moment.

So, you repurchased the debt, the debt is out of the market, you just haven't paid the cash for it yet?

Correct. It's not on our balance sheet yet. It is sitting in a total return swap, or one or more total return swaps at brokerage houses.

And that will settle this quarter, or that settles -- (multiple speakers) sometime this year?

It will settle whenever we elect to bring it in and pay it off.

Jay Jayant, Lehman Brothers.

My question is on the hypothetical on Discovery -- can you explain the right of first refusal process there? I understand, actually, advanced Newhouse actually has the first right?

Yes -- if -- the way that are contract works -- if Cox is interested in selling their shares, they have to offer it first to Newhouse. And then if Newhouse doesn't want to buy it, it comes to us. Or, I think we can split it.

Okay, thank you.

Is that about right, Barb?

Yes. It is a first right of refusal for each of the shareholders.

But it goes to Newhouse first?

Yes.

Spencer Wayne, JP Morgan.

Two quick questions -- going back to -- on QVC domestic, the 8.4 percent increase in sales per FTE -- does that include the dot-com piece? And then secondly on Starz! Encore, the $8 million onetime benefit -- was that booked in the revenue line, or I guess as a contra expense?

The QVC domestic numbers do include the dot-com business, which is about -- I think it's about 15 or 16 percent of total sales. Any the other question -- it was an offset to an expense. Yes.

David Gibson, McCory (ph) Securities.

Two questions. Firstly, why was 5 million in the (indiscernible) transferred to LMI, and what's the motivation behind such a small position? And secondly, in the last conference call, I think Mr. Malone made a comment that there was some interest in swapping assets between News Corp. and Liberty Media. I wondered if that was still the case?

On the first question, it was really just part of the capital and liquidity structure for LMI, so we moved over those 5 million shares that were already hedged and have collars on them. So they are principally a source of liquidity for LMI. On the larger question of might we use some of our News stock in transaction with News Corp.? Yes, it's possible. That's one of the possibilities that could happen with that over time if they had assets that made sense for us to own and trade some of our stock for, that's certainly something we could do.

(OPERATOR INSTRUCTIONS). Bishop Cheen, Wachovia.

Gentleman, I joined it a little late, so forgive me if you have already answered this. Your dialogue with the ratings agencies -- at this point, S&P seems to have you on their negative. Can you give us any color on where that's going? You were so successful in November in explaining your long-term vision to Moody's. How is that going with S&P?

Well, you know, it's an ongoing conversation. Obviously, they've revised our outlook to negative. And I guess that means they want to watch and see what we do for a while. We continue to be in dialogue with them, which we are, really, all the time, in terms of trying to keep all of the agencies up to date with our strategies and with our point of view on what we're doing with the Company on both an operating and a capital structure point of view. So I would describe it as part of the ongoing dialogue that we have maintained with them at all times.

And is the biggest convincer for them to see you move forward on the '04, '2005 cumulative $2 billion reduction plan?

I am sure that is part of it; and we hit our target for '03, and we are well on the way to completing our target for 2004. I'm sure that's a part of it. I think the things that they have mentioned specifically, though, were more to do with us buying back shares, and moving some of the assets out into the LMI spinoff. So looking -- a group of assets that leave the pool of assets that were available for the bondholders. So that is something that they observed -- that combined with the share repurchase, they just decided they needed to look at it for awhile.

Any sense on how long "awhile" is?

I don't know that there is a specific time period. I think it is negative outlook until they decide -- whether it is a triggering event or the passage of time without a triggering event moves it one way or the other.

Adam Spielman, PPM America.

Just a follow-up -- I understand the issue with -- I think I understand, at least, your decision with the share repurchase, how you have to look at that. Could you comment a little bit on the issue of spinning off assets? Is that something that -- are there additional sizable assets that you're currently considering spinning off? And how do you think about that from both the equity holder and debt holder perspective when you look at a transaction?

I think, in general, in all the transactions we've looked at, we're trying to strike the right balance between the bondholders and the equity, and that is sometimes a moving target. We have in the past described that -- we had considered or given some thought to spinning off some of our programming assets. We are -- we have been saying for awhile that we are trying to address what we think are some issues with our overall structure in terms of simplification, and trying to eliminate some of the complexity, as well as trying to deal with short-term maturity issues, which is what the debt reduction plan is really geared at, was to put in place a plan to deal with the maturities associated with the QVC acquisition, and trying to find what is the right balance going forward. And that is something that is really under continuous discussion. We don't have any current plan to announce today, but as we said in the past, we continue to sort of kick it around and try to figure out -- is there a more efficient way to hold these assets from a shareholder point of view that is consistent with being comfortable with our credit position?

Elizabeth Kadel (ph), UBS.

Hi, I apologize if you touched on this already, but can you briefly discussed the reason for the decline in the other non-strategic public holdings from the March quarter?

In the non-strategic public holdings?

Yes.

A Lot of that was the shares that we moved over -- not the News Corp. shares -- hold on a second -- phone collars expired. (multiple speakers) and just changes in the market value.

Okay, and, I'm sorry -- what was the first thing?

Some Sprint collars that we had expired -- we liquidated them.

Bob Jaffee (ph), Charter Oak Partners.

Could you review or renew why you retain the complete public portfolio? In other words, is there not some portion that could possibly be used for exchanging Liberty shares for that, and/or spinning out? In other words, why is 100 percent of it still retained?

Well, you have to kind of look at it over time. Because the 100 percent that's retained now is smaller than the 100 percent a year ago. We did liquidate a number of our non-strategic financial assets, and over time, I expect that those will be liquidated, monetized, or in one way or another, converted into cash. So it is really part of our longer-term planning associated with our credit position and associated with satisfying the debt obligation, as well as some shorter term tax inefficiencies and so forth. And so to the extent that we could find tax efficient ways to convert those shares into liquidity or other things of value to it, that is something that is a constant quest for us.

And we have no further questions at this time. I will turn the call back over to Mr. Bennett.

Okay. Well, thank you, all, very much for joining us today. I hope you all agree, again, as I said at the beginning, it was a very strong quarter. We are quite pleased with it. I guess with the caveat that Bill has put out there, we are quite satisfied with the performance, and look forward to talking to you next quarter. Thanks.

That does conclude today's conference call. I would like to thank everyone for their participation. You may now disconnect.