QVC Group Inc (QVCGA) 2005 Q2 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, news 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 filed by Liberty Media Corporation for additional information about Liberty and for the risks and uncertainties and related to Liberty's business.

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

Thank you very much. Good morning, everyone. Thank you for joining us today. Also on the call with me, either on the phone or here in the office are Bill Costello, from QVC. And from Starz, we have Bob Clasen, the President and CEO, and Bill Myers, the CFO. And from Liberty we have our Chairman and new CEO, John Malone, as well as several other Liberty executives. We will all be available to answer your questions at the conclusion of my prepared remarks. As you may have noticed, we do not have any management representation from DCI on the call today. I'll address that a little bit later.

This morning I'm going to spend a few minutes discussing the second quarter 2005 results for Liberty and our two large private businesses, as well as the DCI results. As you know, our DCI interest was spun off along with Ascent Media to form DHC. I will also touch on some of the balance sheet and liquidity highlights before opening the call up to questions.

Overall, we had another solid quarter of financial results and we're pleased with our continued progress on internal growth, simplifying our structure and enhancing our financial flexibility for growth and expansion of our core assets. As I will discuss in more detail later, we had healthy revenue growth at each of our large private assets and DCI. QVC turned in excellent operating cash flow growth, while Discovery's domestic networks experienced 9% OCF growth despite a challenging ad market. Combined with a subscriber growth trend at Starz, these results represent continued progress towards our internal growth objectives.

In addition to the solid financial results, during the quarter, we completed a tender offer for $1 billion of outstanding debt, effectively completing our debt reduction program. We also completed a $2 billion credit facility at the QVC level, of which $800 million was drawn. And then finally, on July 21st, we completed the distribution of shares in DHC to our shareholders.

Now let's take a look at the financial results. Our operating results in the second quarter were strong. Liberty reported consolidated revenue of 2 billion and operating cash flow of 387 million in the quarter, compared to the second quarter of last year, that was an increase of 12% in revenue and 4% on the OCF line. QVC continued its strong performance with 15% revenue growth in the quarter and 17% growth in operating cash flow, as the business has experienced double-digit revenue and OCF growth in all markets in which we offer service.

Starz revenue grew 8% in the second quarter, primarily driven by subscriber growth of 9%, while its operating cash flow, as expected, declined largely due to higher programming costs. Meanwhile, Discovery's revenue increased 12%, primarily due to domestic affiliate revenue increases and international affiliate and advertising revenue growth. Discovery's OCF rose slightly, as OCF gains at the domestic network were largely offset by the previously announced investment in the lifestyles category in the international markets, as well as additional investment spending in Discovery education.

Now let's take a closer look starting with QVC. QVC had another outstanding quarter, highlighted by revenue in OCF growth of 15% and 17% respectively. Particularly driven by strong growth of the domestic operations. Domestic revenue was up 11% over the second quarter of 2004, driven by increased sales to existing customers, particularly in the areas of apparel and accessories. QVC.com sales increased to almost 18% of the total, while our average selling price increased by 5%. The operating cash flow increased 12% in the quarter, as a result of margin improvements stemming from a shift in product mix from home and jewelry to higher margin, apparel and accessory products.

The international revenue and OCF increased by 24% and 33% respectively, or 20% and 30% if you exclude the favorable foreign currency translation effect. The revenue increase is primarily attributable to greater sales to existing customers, as well as subscriber growth. Strong revenue growth allowed QVC to better leverage its fixed expenses, resulting in 33% operating cash flow growth. QVC's UK, German and Japanese businesses all experienced significant revenue growth and OCF growth, with Japan standing out with revenue and OCF growth of 34% and 60%. QVC Japan also experienced its highest sales day ever with an 8.2 million day on June 19th.

Overall, full-year 2005 guidance is unchanged. With revenue forecast to increase by the low double-digit percent over 2004, and operating cash flow and operating income to increase by the mid-teens.

On May 20th, QVC completed a $2 billion credit facility, which includes an $800 million term loan that was fully drawn at closing. An $800 million term loan that can be drawn at any time before September 30th of '06. And a $400 million revolving credit. This facility carries very attractive interest rates, which are significantly lower than the rates at which we can borrow at the parent company level.

Starz had a good quarter in terms of subscriber and revenue growth versus Q2 of last year, as revenue increased 8% and subscription units grew by 9%. We also signed a new distribution deal with Comcast. As previously noted, the cost of programming increased 26% in the quarter over last year, resulting in a reduction of cash flow versus the same quarter a year ago. However, we're beginning to see a slowdown in the rate of programming cost increases and we expect 2006 increases to be less than 10%. That compares to expected increases of 18 to 21% for 2005 as a whole.

Full-year 2005 guidance of 1 billion to 1.05 billion of revenue and 150 to 170 million of EBITDA is unchanged. However, we do expect at the moment that we're going to be at the low end of that range on the revenue guidance. But we're -- we should be quite comfortable with the OCF guidance.

In July, we announced a new Comcast deal, which provides for carriage of the Encore channels on the Comcast system through 2009, and the Starz channels through 2012. It establishes a guaranteed payment structure for all of our traditional and SVOD services and elimination of certain marketing support payments by Starz. It also provides for the launch of Encore On Demand on the Comcast systems that complement the existing Starz On Demand.

The addition of On Demand has been shown to improve customer satisfaction and reduce churn. We're pleased to have this new agreement with our largest cable affiliate, extending into the next decade. It provides predictability for us and for Comcast and also the opportunity to gain a substantial number of additional viewers for our channels in the Comcast systems.

Moving over to Discovery, DCI consolidated revenue increased by 12%, while operating cash flow grew by 1% over last year. Domestic revenue and OCF grew 8% and 9% respectively. The revenue increase was due to strong growth in affiliate revenue, ratings and audience delivery fell below expectations for the quarter on -- on the Discovery Channel and The Learning Channel. However, DCI met its revenue targets in the upfront and while the overall ad market remains slow and TLC continues to work off inventory, CPM's increased modestly, resulting in flat advertising revenue for the quarter.

Additional network -- or international network revenue grew by 23% or 20% excluding the exchange rate effect, driven by increases in both affiliate and advertising revenue. Subscription units increased by 42% in the quarter, stemming from growth in most markets. This increase outpaced the revenue growth because a disproportionate number -- a disproportionate amount of that growth was in China where the subscribers have free carriage. As expected, OCF fell for the quarter for the international business as Discovery ramped up its previously announced investment in the lifestyles category.

In the commerce, education and other division, revenue increased by 27%, driven primarily by a 6% increase in same-store sales for the 120 Discovery Channel stores, acquisitions in the education area and an increase in the number of schools purchasing Discovery's varied educational offerings. Additional investments in education drove an overall decrease in OCF of about 25% in that category.

For the year, our full-year 2005 guidance is unchanged, with revenue projected to grow by the mid-teens, OCF by the low double digits and operating income by about 10%. However, we expect that the results will be at the low end of the range for both revenue and operating cash flow. Discovery had $2.5 billion of debt outstanding at the end of the quarter.

As I mentioned earlier, on July 21st, we completed the distribution of DHC shares to our shareholders. DHC comprised 100% of Ascent Media and 50% of DCI and it now trades on NASDAQ, under the symbols DISCA and DISCB. DHC expects to file a 10-Q late next week, but will not hold a separate conference call this quarter. Beginning with the third quarter of 2005, DHC will host a conference call separate from Liberty, and the Liberty quarterly conference call will no longer contain reference to DCI or Ascent. In accordance with the wishes of the other shareholders, DCI management will not participate in the DHC quarterly calls, and upon expiration of the current guidance, DHC will stop providing guidance.

Moving over to liquidity, in addition to our strong operating performance, we continue to maintain a -- a very strong capital structure with over 120 billion worth of public holdings, and 10 billion face amount of our debt. As we outlined in our investor conference in May, we think that we have significant financial flexibility to continue to invest in our core assets and to make strategic acquisitions of growing assets.

And then finally, as you all know by now, on Tuesday, I formally advised the Board of Directors of my intention to retire as President and CEO. I stepped down immediately as CEO and was replaced by John Malone in that role. I will remain as President until a successor has been named. This is an entirely personal decision that my wife and I have been complementing for some time now. I've had a great career at Liberty, it's been fun, rewarding, and challenging, but it isn't necessarily the only thing that I want to do in life.

John has asked me to stay on the Liberty Board of Directors, and also to be available to assist him with other special projects from time to time, which I've agreed to do. So, while my role will change, I expect to continue to be involved in the evolution of the Company. I'm enthusiastic as ever about the Company's prospects and opportunities. We have good businesses, lots of liquidity and an energetic and motivated management team that wants to continue to find ways to grow the business and enhance returns to our shareholders.

That concludes our formal remarks today. And we will now turn the call over for your questions.

Thank you, sir. [OPERATOR INSTRUCTIONS] We will take our first question from Philip Olsen with UBS Financial.

Yes, hi, I have two quick questions. First, if you could maybe give an update on the status of your ongoing discussions with News Corporation and kind of what -- or maybe some of the range of options that you are considering that would allow you to -- to maybe bring greater liquidity to that existing stake.

And secondly, I know you've spoke in the past about a desire to deconsolidate the Company in order to create smaller, faster-growing entities that then can consolidate their individual sectors. I want to maybe get a sense of where we are in that process with the DCI spin now completed? And specifically, is there anything in the Liberty bond indentures that would prohibit you from spinning out either the Starz business or spinning out the QVC business in a tax rate transaction? Thank you.

I'll start it off here by saying I'm not the expert on the bond indentures, but it would be my judgement there is bond indentures that would proclude us from spinning anything off. They're basically -- unless we want to spin-off essentially all the assets of the Company. We have a lot of flexibility with respect to the indentures. Dob, is that --?

That's correct. Yes, there's -- other than consolidating all of our substantial assets, there's no -- no contractual restriction on our ability to distribute assets or otherwise part with assets.

With respect to discussions with News Corporation, we continue to be very friendly with News Corporation and have wide-ranging discussions. At this point, we have not been able to identify a large transaction, which would be a win for all three parties, that being the Murdoch family, News Corporation and, of course, Liberty. So, at this juncture, we see ourselves as a long-term strategic shareholder of News Corporation, and in that context, of course what's important to us is that News Corporation perform with respect to shareholder returns as well as can be expected.

The set of assets that News Corp. has in our opinion, are the best set of assets in the media industry. We applaud the recent announced $3.5 billion buyback by News Corp. as a way to enhance shareholder value. We think, actually, News Corp. should contemplate a very substantially larger recapitalization than that. As News Corp. approaches taxability we think that shareholder returns would be greatly enhanced by taking leverage up, not ridiculously, but substantially, in order to improve shareholder returns. And that's kind of the way we're looking at News Corp. right at the present time, which has encouraged News Corp. to accelerate its shareholder internal rate of return by using leveraging and other techniques. We continue to have discussions with them about the structural alternatives, but for the foreseeable future, we think that that's the best course for Liberty.

With respect to other spin-offs, we still think the concept of a focus consolidation of various businesses is appropriate. However, we're going to digest Discovery holdings and see how it does and how we can drive it. Obviously, we've got one under our belt, which is international, which has performed very nicely and satisfied the objectives we had when we spun it off as being a consolidating force in its segment. There's -- there's a work in process with respect to Discovery Holdings, and I think before we would pull the trigger on any other major restructuring of Liberty, we would want to feel comfortable that Discovery Holdings is performing well.

I might also point out that Dob will be President of Discovery Holdings and a Director, and so we're not letting him completely retire here. I think that that addresses the questions.

Yes, I just guess a quick follow up on the News Corp. question. Is it fair to assume, then, that the likelihood of a resolution in 2005 is unlikely?

I think -- I think that's correct. I think it's highly unlikely that you will see any kind of a transaction either announced or completed in 2005 that would materially change the relationship between the two companies, which is now, as I say, quite friendly and supportive.

Then along that line, the friendly, supportive relationship, what would your opinion be if News Corp. renews the existing poison pill?

Well, we can't -- we can't really have anything to do with that at this time. I mean, that's an issue between the Directors of News Corp. and the shareholders of News Corp. If they choose to renew the pill, then they've frozen Rupert and they've frozen us, which is fine with us. If they -- if they obviously decide not to renew the pill, which would surprise me, by the way, then we'll see what happens. But we would clearly intend opportunistically to continue to increase our voting stake in the Company and -- and I suspect so would Rupert.

Thank you very much.

You're welcome.

We will take our next question come Bishop Cheen with Wachovia Securities.

Good morning, doctors, John and Dob. Dob, we will miss you on these calls. Question on QVC --

But not for a few months! [ laughter ]

Question on the QVC bank financing. And it's a spin-off question. Is there anything in that facility that would preclude you from, let's say spinning, off QVC international?

I don't think so. No. Not something we've contemplated.

Okay.

There's not that kind of restrictions. As long as we're complying with the covenants inside of that facility, it has sort of typical bank covenants. As long as we're complying with those, we have substantial flexibility at QVC.

Right, because QVC international certainly has been growing at an outstanding rate.

Yes, it has.

And secondly, a more esoteric question, is there a minimum -- given the current capital structure of 10.3 billion on the gross value of the debt -- and I understand there -- there are stock hedges against that, but given that level of debt obligation, is there a minimum amount of operating cash flow that you think is prudent to keep in Liberty Media? In this platform?

Well, as I've said several times in the past, we're comfortable with our current leverage arrangements between the value of the underlying -- the securities underlying the hedges or underlying the exchangeables and the maturity dates on those. We feel pretty comfortable that with this level of debt we are comfortably levered. I don't know that we have a specific cash flow number in mind, other than one that's in excess of the interest service by a reasonable margin.

Okay. Thank you.

And we'll take our next question from Jessica Reif Cohen with Merrill Lynch.

Hi, two questions. One on News Corp. and one on Discovery. John, it sounds like you're a continued long-term holder of News Corp., but hope for recapitalization. But it just seems like News Corp. has been so debt averse since 1989 or 1990. How comfortable are you that -- I guess that they actually will lever up and do a recapitalization? And is that the best way to optimize shareholder return for Liberty? And then on Discovery, can you comment -- anybody comment on the advertising outlook as we get closer to Q4 and 2006, given the upfront performance and the current ratings?

On the -- on the last question, I think we were satisfied with the upfront, as I think you know, Jessica, we held out inventory, and so we're opening hoping for a stronger scatter market on the back end. But we were basically satisfied with the amount that we sold and that we were able to hold and increase rates a little bit on the CPM side. So, we're basically satisfied with the upfront, and ,we're hoping and expecting that the scatter market over the third and fourth quarter will be stronger.

On News Corp. and leverage, clearly the announcement to buy back 3.5 billion of equity basically would be a use of cash on the balance sheet for them, and therefore, doesn't represent an increase in indebtedness. If you just look at the free cash flow that News Corp. consolidated generates, they could engage in a systematic shrink, without taking leverage up. We're not suggesting that they should go hog wild here and go non-investment grade and so on. We think just a commitment to systematically keep their leverage at a realistic level in order to enhance shareholder returns, without driving their debt costs too high.

Keep in mind, News Corp. is becoming taxable as the U.S. reporting entity and, therefore, a little bit of interest expense. It's better to basically pay the shareholders and capital depreciation than the U.S. Treasury and taxes and I think that over time most shareholders, most institutional shareholders of News Corp., when they study the situation would agree with us that running News Corp. at a 2.5 to 3 times leverage ratio would provide superior shareholder returns, particularly in -- in given the nature of the growth rates within a number of the News Corp. assets, which are substantially more robust than those of other media companies.

When you look at News Corp., essentially Sky is unleveraged, DirecTV is unleveraged and News Corp. is unleveraged, and so I do believe that over time, a process of increasing leverage through both a systematic share buyback out of free cash flow, coupled with an opportunistic increase in leverage from time to time to shrink equity. Not some kind of wholesale recap, but just a systematic process of focusing a little bit more on shareholder returns and a little less on empire building, might be beneficial for all shareholders, including the Murdoch family.

Thank you.

We will take our next question from Michael Savner with Banc of America.

Thank you very much. A couple of questions, John, first on Discovery, are you still looking to pursue a remedy or a way for Cox and Newhouse to participate tax efficiently if they wanted to do so in the near-term? And then as an extension of that, would you if they did not participate, continue to look to do acquisitions at -- not continue, but want to do acquisitions at Discoveries, for example, if the rainbow assets were to become available for sale? And then a second question, John, are you -- do you envision keeping the CEO role at Liberty Media indefinitely or are you committed that upon Dob transitioning out finding somebody else either internally or externally? Thanks.

Okay. That's a lot of questions. Well, first of all with respect to CEO shift and so on, we're talking about trying to recruit a new President for Liberty, not necessarily a CEO. So the answer to that is, I would contemplate remaining in the CEO role for probably at least two years. As a target number. Maybe I can talk Dob into staying as President and then we can save money on recruiters. [laughter] But that is kind of my sense of my role.

I'd like to see the Company go through the transition that it needs to go through of rolling out of what are essentially passive equity positions in other companies and into higher-performing, in some case, strategic or even fully-operational positions in other companies. I think that's a process that -- that Liberty will undertake in a more aggressive way over the next couple of years. We've been working on it, we just haven't shot any elephants yet. But I believe it's very necessary for us to make that transition out of non-strategic equity positions and into strategic growth positions in a tax efficient way. And that's a challenge, but I think we've got some very bright guys working on it, and I think you'll see that transition take place in the early phases.

Once that transition is well underway, then I think my usefulness as CEO will have expired and it will be fine for us to either move up a new person or somebody already within the organization to be the CEO, again. Maybe by then Dob will have traveled enough [laughter] and visited Paris a few more times, so anyway, he will get bored with that. So, yes, I mean think that the Board largely in Liberty has decided that we want to have a growth agenda, and the core of the growth agenda is rotating out of whether essentially dead money equity positions that are -- that are collared or in one way or another for financing, rolling those into long-term growth equity states and that's the challenge.

The other question related to Cox and Newhouse, our attitude toward Discovery, we have always and from day one in the structuring of this deal, wanted to put ourselves in a position where Cox and Newhouse could merge in and they would never, obviously, do that in an entity controlled by Liberty, because they would essentially be yielding control to Liberty and they didn't want to do that. We're hopeful that with the passage of time and after certain timing issues that are tax-driven expire, that we will have a vehicle that Cox and Newhouse will find it appropriate to combine with.

With respect to Discovery and Discovery growing and putting capital in Discovery, we have always been enthusiastic about growing Discovery. I might say that even during this kind of rough spot, when they're under a ratings challenge, largely because of, in my opinion, personnel changes which changed a little bit of programming format and so on, which, by the way, we expect them to get back on track by the end of the year. Despite that, they're still making guidance and it's a testimony to the robustness of the business.

The strength of their diversity of being not just domestic but international, where a couple of programming faux pas in the U.S. don't adversely affect the revenue stream internationally, and also a testimony to the two strings of income, where their affiliate fee revenue continues to grow very nicely as a fly wheel as it were to carry them through weaknesses in the short run in some ratings due to, in the case of The Learning Channel, the fact that they had a hit program, Trading Spaces, which everybody in the media will then copy and diluted the power in the ratings with that particular show. In the case of Discovery, in my judgment, anyway, a shift a little bit too much in the direction of gear head programming from their more traditional documentary prospects, both of which are aggressively being addressed now by the management team at Discovery.

So, a very, very powerful company with a fabulous brand globally, great global distribution, and we certainly -- this is not a DHC call -- but we certainly, I think Dob and I both are enthusiastic about Discovery having a growth agenda, not a strength agenda and not a tread-water agenda and we would be enthusiastic at raising capital to further develop Discovery of equity capital where needed.

Thanks very much.

We'll take our next question from Richard Greenfield with Fulcrum Global Partners.

Hi. Could you just discuss or quantify the reduction in launch support that you had over the quarter? And also talk about where that's trending for the entire year versus last year? And secondly, you made a comment about guidance at Discovery and you said that after its expiration, you would no longer provide guidance. Does that mean if something changes during '05, you will update the current guidance for revenue and EBITDA? Thanks.

On the -- the launch support payments, that really came about last year, part of last year when we extended a couple of contracts, and so when you do that launch support money that you've already paid -- it's simply an amortization, it's not a cash. So, launch support amortization is extended over the life of the contract, so by extending a couple key contracts, we also extended the period over which the launch support payments are amortized. That addresses that question.

Oh, guidance. I think, we'll -- DHC intends to have a third quarter call and I assume at that time it will address whether it believes it's going to continue to hit its guidance or exceed its guidance or do worse than its guidance, then by the end of the year we will know whether it did or didn't and expect that that will be the final kind of cap on the series of guidance and we don't intend to give more.

I might say that part of our understanding with our partners of Discovery is that we will not be getting into a lot of detail with respect to Discovery's own operations beyond what's provided in the 10-Qs, simply because the Discovery partners did not want to expose Discovery or its management to the kind of legal exposure that would -- would be the case in a full public Corporation at this time. In other words, they didn't want to have the adverse exposure that would go along with being public without the benefits of being public.

So, during this interregnum, and we certainly hope this is an interregnum period during which we have to treat Discovery as a private company. We're going to be somewhat circumscribed in terms of access to the management of Discovery or disclosure of information with respect to Discovery, of which we're privy, but which we have agreed not to disclose.

So, that would mean that versus the 95 million of launch support amortization last year, can you not get into what that number should trend to this year?

That's correct.

Thanks.

And we'll go next to Spencer Wang with J.P. Morgan.

Thanks and good morning. Can you just update us on where you guys stand with respect to the Investment Company Act, particularly posted Discovery spin, my understanding is that was considered a good asset. And how may or may not the Investment Company Act impact your ability to deconsolidate other businesses? Thank you.

Sure. Of course, at this stage, QVC is a huge asset for us and a good operating asset for us. We also believe that the IAC and Expedia are good assets for us, and we'll be attempting to make that case, so that the vast majority of our assets, with the -- with the exception of News Corp. and the unborrowed against investment assets are good assets. So, we think we're in great shape as far as the Investment Company Act goes, and clearly, as we continue to try and transition from equity assets, to pass the equity positions into operating assets, that position will be enhanced.

Thank you.

And we'll go next to Morris Mark with Mark Asset Management.

Good morning, John.

Good morning.

I wanted to -- relative to your earlier comments, I had two questions on the News Corp. investment and one on QVC. On News Corp., I'm not sure from your comments, do you regard it as strategic? To the extent that you do, there have been articles in the paper over the last week indicating there's controversy within the Murdoch family that may or may not affect the ability of that trust in terms of how it's going to affect in future [audio difficulties] with respect to the investment, and do you see any issues there? And then I have an unrelated question on QVC.

Well, I think with respect to News Corp., what -- as a long-term investor, what we're most interested in is shareholder returns, which we think puts us parallel to all the other shareholders of News Corp. With respect to what happens with -- with respect to the Murdoch trusts and the relationships within the Murdoch family, we really don't have any comment. We wish Rupert well with respect to his family issues. We all have had those, and we really are not looking at that as some kind of opportunity or whatever.

I was looking at it more as a concern.

Well, concern or opportunity. I suspect that they are overblown by the press with respect to -- it's like anything else, I think the family will unite. It's always been an issue, Morris, if anything happens to Rupert, what's the governance of the company and how will the succession take place? That's no secret. We used to joke that the problem with News Corp. stock was half of the shareholders are afraid Rupert will die and the other half are afraid that he won't. But, so succession is always something in the back of your mind. You have to keep in mind.

That said, Rupert has been trying to bring James and Lockland [ph] up to third [ph] by having them run various aspects of the company and James, I think, has done a superb job of running Starz and now over at Sky and, I suspect that Lockland, his retreat to Australia it may just be temporary. So, you know --

They also have a very good management team.

Yes. As Dob points out, the internal management team of News is first -- absolutely first class. We think the world of Chernin and Dave DeVoe and so on. So, I don't know that there should be a lot of concern about the -- that said, Rupert is irreplaceable, I mean, there's really only one Rupert. I'm sure that any transition will -- would miss Rupert because he has a unique blend of operating skills and energy and political skills that are going to be hard to replace. But that said, I think that the Company is very well run, has assets -- very, very strong assets placement and if it just follows its nose, it's going to be very successful.

[audio difficulties] voting shares.

Morris, you completely broke up. Could you say that again?

I said along those lines, you're fully supportive of an aggressive buyback of both the voting and the nonvoting shares?

Well, I -- I would think that they ought to buy back the cheaper shares rather than the more expensive shares myself, because, they all participate equally in equity and why would you pay a premium to buy back the voting shares when you can buy the nonvoting shares for a 6% discount? I think, just from a pure financial point of view, the company should use its resources to shrink its cheapest stock that fully participates in the equity and forget about trying to skew one way or another the voting situation.

Okay. Completely different question. You had indicated in the last call that you were looking for a future CEO for QVC, [audio difficulty] some of the comment [ph] management. Can you sort of bring us up to date on that? Or did I misunderstand you?

Well, as is I think we all know, and I'm going to let Dob really handle it, but it's been known from the beginning that the current management team anticipated retirement over the next few years. And that there would be a process, but an orderly and relaxed process of introducing some new management into the senior ranks, either from inside or from outside, and Dob has really been on top of that one.

We have a search ongoing, Doug we expect to be with us sort of through the end of the first quarter next year and we hope to have a replacement for him in place in the next couple of months so that we will have a reasonable overlap. Bill Costello is on the phone, but Bill has agreed to hang around for a year or two, as well, to help smooth the transition and make an orderly transition from this generation of management, which has been spectacular in their performance to the next one, and also to help us recruit and find those people.

So, we expect that we will have an orderly transition that starts at the CEO level and then will work its way down eventually, taking over Bill's functions over a period of years, but it will be gradual and controlled and smooth. Based on the conversations we've had and the commitments that the existing management has made to the Company.

Thank you.

We'll take our next question from Tuna Amobi with Standard & Poor's Equity Group.

Thank you. Just first, a housekeeping question. Dob, I just want to clarify your tenure Discovery Holding. I read a report that it's -- your role as President is going to be for definite period. Is that true? Or is it going to be an ongoing executive role?

I have agreed to stay at least through the end of the year. Then we will have another conversation with the DHC Board. I'm perfectly happy to stay longer if it makes sense for me to stay longer, at least as far as I know today. That's just the understanding that I have with the Board.

Okay. And then on -- on the -- on the Comcast deal, I think I heard at Starz that you're looking for 10% increase in programming costs, I mean '06, and I think in the last call that you mentioned that the cash flow would turn around dramatically in '06. I was just kind of trying to place those two developments in the context of a current deal that you signed with Comcast, in terms of the -- so you can give us more specifics in terms of how that all kind of shakes out, on the programming cost side and vis-a-vis what -- what you're going to be getting from -- from Comcast? And what are the terms that were changing in this deal versus the card dealer you have?

The basic term that changes is that we've gone from really an ala carte business, in which, they pay us for every subscriber that subscribes to service, we've basically given them the flexibility to use the service broadly for a -- not entirely fixed, but largely fixed number that then will grow over time, partly with the inflation and partly with a couple of other adjustments. So that gives them certainty and also gives us certainty.

We have not and are not prepared to give guidance at this point for 2006 for Starz. We do know our programming costs will go up by what we think will be less than 10%. Revenue is a function not only of Comcast, we probably have a fairly good idea of what that number is going to be, but we don't yet know what kind of subscriber growth we will get out of our other distributors, so, we're not really in a position to talk too much about 2006, except that we expect a reduction -- a substantial reduction in the growth rate of programming costs. And we're -- we're doing very well on our other distributors, and I hope that revenue will grow. We have somewhat less upside with Comcast than we had before, but we also have substantially less downside with Comcast, so that's a bit of a trade-off. We also saved some marketing expenses. Overall, we thought that was a pretty good trade-off.

So just to clarify, what year does the deal become purely inflation increases? Adjustment?

Let Bill or Bob answer that specifically?

The deal, basically starts with inflation on the Encore side in 2007/2008 period of time. We have a couple of periods where we don't. And then Starz it grows with units over the next couple of years, as well as CPI.

We're really not prepared to go into the details of the contract, but just at a macro level --

Right.

I think that the shareholders should understand that -- that the way that the programming cost structure works at Starz is entirely a function of how Hollywood releases movies and how they do in the box office. So, this is the reason why when you project it out in the future it's a little hard to know if -- if the principle outfit deals cut back, of course, Starz's programming cost would go down.

How the recently announced Mirimax pull out by the Weinsteins will affect output by Disney or through Disney, and similarly, the declining output coming out of Revolution Studios that's released us through Sony, that the number of movies and how they fare in their box office outcome really determines what Starz's costs are. So, I think if Starz can continue to grow its revenue stream in the high single digits, and if Hollywood's output to us shrinks as is anticipated in terms of both numbers of titles and box office, we would expect that that then projects to a relatively strongly-growing EBITDA number beginning toward the end of '06, and then strengthening thereafter.

In addition, there are the incremental revenue streams that are expected to come about as a result of the exploitation of the IP runs, and additional exploitation of DOD rights, both with cable distributors, as well as on the IP side. And how fast the revenues kick in from those new sources is, of course, a function of a lot of things, including the -- the uptake of distribution by the Telco overbuild of cable, the appetite of the public to start receiving video product, movie product over the Internet and so on.

So, as we've said many times, we made a bet several year ago that those rights, those IP and Video On Demand subscription rights were going to turn out to be very valuable during the term of the output deals and it's still a bet. Very much a bet. We put in a homerun here and you could see rapidly escalating revenue streams with no offsetting costs, because essentially it's all bought and paid for. That's a bet that was made. When we made that bet, we thought we could rely on an AT&T/Comcast revenue stream, which as you remember a couple of years ago got -- got largely reduced. That said -- and that brought us to the kind of current run rate of Starz cash flow.

But as I say, the two factors to look to for a substantial increase in Starz free cash flow would be declining cost of product coming out of Hollywood on the one hand, and -- and increasing revenue streams from the exploitation of IT and Video On Demand rights, which were an important part of the output deals and were really quite expensive.

Understood, John. And one final question, if I may, on the talks with News Corp., I know that you were -- you were running up against the -- the tax law that was going to make it more difficult to -- to do a cash reach [ph] redemption, and although I realize that option was not particularly favored by you, but given the -- given the time that you indicated today that nothing definitely might happen this year, are you now going to be perhaps limited in the options that you might pursue in the future, in order to unwind that stake?

Well, it's not entirely clear what changes in the tax law will take place. There have been various suggestions that would interfere with certain options or make certain options less attractive. But we really don't know the answer to that. I guess the reality at this point is News Corp. has not come forward with anything that is attractive to us and apparently we have not come forward with anything that's attractive to them. While those discussions continue, we think that it's a wonderful asset and we think its returns could be very attractive if they were to pursue a more leveraged future.

Thanks a lot.

You're welcome.

We'll go next to Robert Routh with Jefferies & Company.

Yes, good morning. Just two quick questions. In the past, you used to break out assets that were public that you considered strategic. It was the old UnitedGlobalCom, News Corp. and InterActive Corp. I'm wondering if now you can kind of comment on, out of all your public holdings, is it safe to say that the News Corp. position is the only one that you view as strategic? Or are there any others that you would view as must-hold positions?

I'll point out that we've always said the IAC was in our mind strategic, keep in mind we, because of the redemption of the [inaudible] stake, I think we're now a 53% vote holder and over 20% equity holder in both Expedia and IAC. We've always regarded those as strategic. If you view our core business as video and Internet commerce, then clearly IAC and Expedia are dead center in that space, and therefore, we regard those as strategic.

We've always said that we don't regard Sprint, Motorola and Time Warner as strategic. In the case of Time Warner, we just don't have a big enough stake in total to make it -- to make it strategic for us. In the case of Sprint and Motorola, they just are not relative to the businesses we're in, and so those are financial assets.

Viacom is clearly in a space that we're interested in. We're not a material shareholder so we can't look at our equity position at Viacom as strategic, but a relationship with Viacom, and particularly with Viacom's two emerging pieces or parts, could turn out to be strategic to us, so since they're clearly in businesses that we're also in, Video Networks and particular, PEG TV. So, on that one, the relationship is strategic. The actual equity may be just tactical, and I guess that pretty much is the list.

And just one follow-up. Can you comment a little bit on all the kind of hodgepodge of assets that you have within the old Tech/Ventures group, and what you plan to do with them? The TruePosition, the IDT stock, those -- those assets.

WildBlue -- well, there's a mix. WildBlue, we're still quite positive on in terms of -- these things move at glacial speed, it seems, but they have launched Consumer Service. The service is working extremely well. We're quite enthusiastic that it represents a way to drastically improve high-speed interconnection to the rural market, and so we're very enthusiastic about that. We have some other Venture Capital-like investments, particularly in the power line broadband area, which we continue to pursue and are enthusiastic about its potential applications. That's the joint venture with Berkmans.

With respect to TruePosition, while the commercial location business has been slow to develop and catch the attention of the primary carriers, we think we're very well positioned in that business by virtue of the fact that we now essentially are universally deployed with both Cingular and with T-Mobile in the U.S. and are engaging in similar distribution internationally, and TruePosition to those who don't follow it, is a more accurate positioning system, especially for urban areas than GPS is. And, therefore, in conjunction with services, for instance, like City Search, which is an IAC company, the ability to, on your cell phone, tell you where the closest restaurant is or the closest restroom or the closest emergency room or whatever it is, seems to be a kind of interesting applications and we're very interested and continuing to invest in and broaden out the application side of the TruePosition vision. The actual equipment business probably at some point belongs with somebody who is more interested in manufacturing and servicing equipment. What else do we have?

We have -- we have IDT, which is currently trading at a discount with cash. We think IDT is a very interesting company and we've enjoyed our relationship and continue to enjoy our relationship with its management and I wouldn't be surprised with some kind of a structural change there sometime in the not-too-distant future.

With respect to On Command, we're in the process of implementing a new technology that they've called Nemo, which will substantially reduce the capital cost per room in the On Command business and greatly expand its flexibility in providing all kinds of in-room services, which seem to be very attractive to the hotel industry, to the lodging industry. So, we're still optimistic that that business will have substantially better operating statistics. On the other hand, it's not a business that's core to us and we'll see whether -- whether we want to hold it or whether we want to dispose of it and that will be opportunistic, based upon other -- other options. I think that's the list.

Okay, great. Thank you very much.

And we'll go next to Neil Deaton with Davenport & Company.

Hey, good morning. Based on the fact that you're happy with where your capital structure is now, and given your cash position on the balance sheet, could you foresee yourselves buying back any shares over the course of 2005?

Well, I would say it's a function of how we unwind ourselves out of some of these equity positions. We certainly are not going to drive ourselves into short-term taxes in order to generate liquidity to strength equity. That's not -- the machine doesn't play out well going in that direction. So, yes, we think our stock is cheap, but only cheap if we could shrink it in a tax-efficient way and, as you know, we have relatively low basis in a number of our equity investments, and, therefore, we have to be more clever as it were, in liberating that capital and -- and buying our own equity back is clearly an opportunity relative to other things we can invest in in a market where values are driven pretty hard by the surplus availability of private equity.

But the answer is, I wouldn't contemplate any major stock repatriation deal. If we were to do it, it might be more in the form of a redemptive exchange offer that would not trigger substantial taxes within the Company.

Okay, thank you.

And we'll take our next question come Alan Gould with Natexis.

My question has been asked, thank you.

I think we've got time for one last question.

Thank you, gentlemen. We will take our final question from David Smith with Western Assets.

Good afternoon -- morning, rather. Just out of curiosity, John, this Spring you spent a fair amount of time talking to investors about private equity and leverage and sort of the advantage they had. Has anything changed in your opinion on this? Is it still --

Well --

So much of it -- I mean, you sort of passed around today.

As short rates have come up, of course, presumably that should put pressure on the returns because private equity is essentially a very, a very highly leveraging, in order to get returns out of the entity. I believe that if we look at ourselves properly, we have -- we have some benefits that private equity doesn't have. One of the reasons why we stopped fighting the issue of investment grade is to allow us the latitude to go buy things that we would then consolidate on a highly leveraged basis, where we would isolated the debt risk to the individual entity. In other words, consolidate for tax purposes, leverage the same way that the private equity guys do, an asset we want to acquire benefit as a result of that tax consolidation, from consolidation, but isolate the debt risk. Now when the rating agencies look at that kind of a structure, they go nuts.

Yes.

Because they basically say, well, we don't buy this isolation of the debt argument. We're going to look at overall debt and so on, well, that essentially painted Liberty out of the private equity competitive space, despite it did damages to us and despite the fact that we have these tax attribute advantages going into these things that the private equity guys don't have. So, I want to make it very clear that we fully intend to compete head-to-head with private equity for assets we want, and to take the leverage up at least as high as they're willing to take the leverage on those assets to do it. And -- and that is something that would make rating agency guys throw up. I've found in my career we've done 100% leverage deals in buying cable systems for years where you isolate the risk --

Sure.

-- you consolidate, pay a premium for that lowest level of debt leverage for that strip, but by God the isolation of the risk and the ability to actually compete and buy things because you can do that, it's very critical in building the Company.

But the key thing you're describing too is it's non-recourse to the parent.

You got it. You don't go on the hook for the debt, but you do consolidate from a tax point. Now, one of the principle reasons why we needed to spin-off the international cable business is if we're going to -- if the international cable company is going to go out and buy incremental assets, in order to get the incremental returns on equity necessary, they're going to have to leverage those acquisitions through the roof. The same way the private equity does. I mean private equity is now down to looking for 15% IRRs, okay? And they can't use the tax benefits. Well, if we can buy something with a 15% IRR without tax attributes, then the IRR with tax attributes ought to be well into the 20s.

And that's my point and that's the aggressiveness that we're trying to set Liberty up to be able to compete and take advantage of. Otherwise, we're just a big, old, maturing pile of assets with no ability to compete for high returns. And we need to make that very clear, we don't intend to jeopardize the -- the true credit posture of -- of our straight debt, because we do intend to isolate risk, but on the other hand, we do intend to take leverage up on an aggressive basis in order to be able to compete for assets that we think are synergistic with us and that -- that given our tax posture can provide extraordinarily good returns for us and lead us to -- to the ownership of long-term assets that we want to own. I think that's the message. We do intend to be aggressive, but we do intend to isolate risk.

Very good.

You're welcome.

With that, I'll wrap it up. I'd like to thank all of you for joining us today. In addition to my announcement, you should probably also know this is Mike Erickson's last call. He's elected to go work in the international company. I want to thank Mike for all his help over the years, and I think you've done a great job and we wish him well at Liberty Global. And also if you have questions at this point, you should start steering them to John Orr, who is taking over for Mike in the Investor Relations capacity. Thank you all very much and we will see you next time.

That does conclude today's conference. Thank you for your participation. You may disconnect at this time.