QVC Group Inc (QVCGA) 2005 Q3 法說會逐字稿

Good day, everyone, and welcome to the Liberty Media Corporation conference call. Today's call is being recorded.

During this presentation we may make certain forward-looking statements about business strategies, market potential, future financial performance, new service and product launches and other matters. These statements involve many risks and uncertainties that could cause actual results to 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 10K filed by Liberty Media Corporation for additional information about Liberty and for about the risks and uncertainties related to Liberty's business.

At this time for opening remarks and introductions I would like to turn the call over to the Chairman and Chief Executive Officer, John Malone. Please go ahead.

Good morning, everybody, and thanks for joining us.

Also on the call with me today on Bill Costello, who is QVC's COO, CFO, and President of International Relations. From Starz, we have Bob Clasen, President and COO and Bill Myers, CFO. And from Liberty we have our President, Dob Bennett and several other Liberty executives. We will all be available to answer your questions at the conclusion of my prepared remarks.

This morning I am going to spend a few minutes discussing third quarter 2005 results for Liberty and our two large private businesses. As you know, we completed the spin-off of Discovery Holdings in July and therefore no longer include Discovery Communications financial results in Liberty's 10Q quarterly earnings press release or on this call. Discovery Holdings has issued its own 10Q and quarterly press release, to which you can refer for information about its financial performance.

We had another solid quarter of financial results. As I will discuss in more detail later, we continue to achieve healthy revenue and OCF growth at QVC.

Starz continued to experience positive subscriber growth trends while revenue was flat year-over-year, as the new Comcast contract, combined with the devastating hurricanes along the Gulf Coast, creates difficult comparisons with last year's results.

In addition to the solid financial results, we're also pleased to announce the appointment of Michael George as President and CEO of QVC -- another McKenzie guy, by the way -- and the hiring of Greg Maffei as Liberty's CEO-elect and a member of our board of directors. I will talk more about Michael in a moment. Greg is actually on the call and we will ask him to say a few things at the end of this presentation.

We're very excited to welcome Greg into the Liberty team. Greg brings an outstanding track record and excellent financial and operational experience to the job. His background is a strong fit for Liberty, as we develop and open up a strategy around leveraging our core assets for growth and transforming or nonstrategic assets into growth oriented operating assets and using our financial flexibility to drive superior levered equity returns. Greg will be joining us virtually immediately to help us perfect our strategies going forward. He brings an enormous amount of financial engineering skill to the table.

Now let's take a look at our financial results. Our operating results in the third quarter were again strong. Liberty reported consolidated revenue of nearly 1.9 billion and consolidated OCF of 356 million. Compared to the third quarter of 2004, this represents increases of 13% and 11%, respectively.

QVC continued its strong performance, with 14% revenue growth in the quarter and 13% growth in operating cash flow, as the business experienced strong performance in all of its markets.

Starz revenue was flat in the second quarter, primarily driven by subscriber growth of 8% being offset by a decrease in revenue associated with the new Comcast affiliation agreement and the effects of hurricanes Katrina and Rita. Operating cash flow declined within expectations, largely due to higher programming costs, as we've previously discussed.

If we take a closer look at operating results, Q had an outstanding quarter, highlighted by revenue and OCF growth of 14 and 13%, driven by strong growth in both the domestic and international operations. Domestic revenue was up 11% over the third quarter of 2004, driven by increased sales to existing customers [inaudible] in the areas of jewelry and accessories.

QVC.com sales increase to 17% of total revenue from 15% in the same period last year, while the average sales price again increased 5%. OCF increased 12% in the quarter as a result of the revenue growth, while OCF margins were flat, as a modest decline in gross margin percentage was offset by efficiencies in call handling, lowered telecom expenses, and an increase in the mix of interest of internet sales.

International revenue in OCF increased 21% and 16% respectively, and 22% and 17% excluding the unfavorable foreign currency effect, i.e., the strengthening of the dollar.

Revenue increases were experienced in all international markets in which QVC operates and were primarily attributable to greater sales to existing subscribers and strong subscriber growth. Operating and cash flow growth was primarily attributable to the revenue growth, while margins declined modestly through the changes in product mix and inventory obsolescence requirements.

A quick note on QVC's fourth quarter: As some of you may recall, last year the Company reversed a 6 million sales tax accrual and enjoyed an 8.1 million credit to its obsolescence provision. These events increased last year's EBITDA by 14.1 million. Comparison to this year's fourth quarter will be negatively impacted. You can quiz Bill Costello on that later.

This was anticipated during budgeting and as a result, it does not affect full-year guidance, which remains unchanged, with revenue forecast to increase by low double digits over 2004 and OCF and operating income by mid-teens.

In October we were pleased to announce the hiring of Michael George as President and CEO. of QVC. As you may recall, Doug Briggs has been trying to retire for years and he's finally decided to do it. Michael has an outstanding background and reputation in retail, having spent the bulk of his career at Dell and McKenzie. Michael's analytical skills, customer orientation, and new media retail experience make him an excellent fit to follow in the footsteps of Doug Briggs. Michael will join QVC in December and become the CEO upon Doug's formal retirement at the end of the first quarter. There is going to be quite a steep learning curve for Michael there, sitting beside Doug.

Starz continued to experience solid subscriber growth in the third quarter, while revenue remained equal to the same period last year. Flat revenue was attributable to the new Comcast affiliation agreement, as I've previously said, announced in July and the effects of hurricanes along the Gulf Coast. As we've previously noted, the new Comcast contract will reduce Starz' marketing expense while providing predictability for the Company and for Comcast and the opportunity to gain a substantial number of additional viewers for Starz channels in the Comcast systems. It also provides for the launch of Encore On Demand on the Comcast systems, to complement the existing Starz on Demand. The addition of On Demand has been shown to improve customer satisfaction and reduce churn.

[Inaudible] programming increased 15% in the quarter, as expected really, resulting in a reduction of cash flow versus the same quarter a year ago. However, we are beginning to see a slowdown in the rate of programming cost increases and we expect 2006 increases overall to be less than 10%. That compares to expected increases of 18 to 21% for 2005 as a whole. We have Bob Clasen here in case you want to get more deeply into that subject.

Last year Starz began developing a streaming internet movie service. Operating expenses including programming costs totaled 17 million in the quarter. Based on learnings -- I don't know why we put that in there -- [laughter] over the past sixteen months, Starz will launch a new version of the service early in 2006. Starz believes this service will be very compelling for its subscribers and expects that to drive meaningful revenue growth for the Company.

I will remind you that on our last call, we talked about the substantial development costs related to trying launching Starz into the Internet, and I think going forward we're going to start breaking that out for you so you can see Starz as a going-forward business acts the initiative into the internet. So, i.e., we have a mature Starz and a developing Starz internet business and we want to break those out.

Finally, the Company has extended its EchoStar agreement under its current terms until January, and continues to negotiate a new affiliation agreement.

Full year 2005 guidance of 1 to 1.05 billion of revenue and 150 to 170 million of EBITDA is unchanged. However, we expect to be at the low end of the range for revenue and the upper end on EBITDA.

Operating income guidance has been modified to reflect better estimates of certain non-cash adjustments. This increase does not reflect a fundamental change in the performance of the business.

Now, in addition to the performance of our private assets, we continue to maintain a strong capital structure with over 19 billion in public holdings and 10.3 billion in fixed amount of debt. As we outlined at our investor conference in May, we believe we have significant financial flexibility and continue to invest in our core assets and to make strategic acquisitions of growing assets.

Going forward, we will continue to focus on maintaining operating momentum, converting our nonstrategic assets into cash or levered cash growth businesses, using our cash and debt capacity to make levered acquisitions of growing assets and disaggregating assets to improve their growth prospects, and finally, using leverage to drive an improved equity return.

We are in the process today of clarifying our strategy to achieve these objectives and are analyzing a number of structural strategies to that end. One such strategy that is under consideration by Greg, myself, and my senior management team is basically, and we actually had a Board meeting yesterday, and the Board authorized me to proceed with the creation of a tracking stock representing our assets in what we call Liberty Interactive, which are QVC, IAC, Expedia, and a few smaller business ventures. This entity will be modestly leveraged. I think it will have outstanding free cash flow and earnings growth prospects. By creating a tracking stock for the set of assets, we'll get clearer focus on them. We believe that we will create a currency which will be more useful in trade, much more proportional to its underlying values than the L stock, overall.

This probably will represent somewhere between 70 and 85% of the Company's equity asset, equity value. We are perfecting exactly how it will be structured, how it will be leveraged.

Use of a tracker has worked well for me, personally, in the past, so I kind of favor that approach. It gives us the complete flexibility to continue tax consolidation, eliminates the need for modifying our debt structures at the present time, because under a tracker you can assign debt obligation without actually having to move them or refinance them. It avoids a number of regulatory hurdles in a spin-off, which would take some period of time to line up, and yet it really establishes effectively the direction of the Company structure, long-term.

So we'll be coming back to the shareholders with specifics on that in the not very distant future. We're wearing out our computers here trying to do projections, but I think it is going to be very interesting for the Company to go in this direction.

With that said, and I know that will cause -- the thing I want to say is -- and I guess I am going to get questions on this call on it -- but I certainly welcome shareholders' input as we move in this structuring direction. As you know, we have spun off the international business and organized it. We've spun off Discovery holdings and in the process of optimizing it, and so this creation of Liberty Interactive clearly signals a desire long-term for an ultimate separation, but it gives us the latitude to optimize taxes and take our time in the structuring of our debt liabilities and tax liabilities in the pendency of any ultimate spin off.

It also give us us the opportunity to but Greg Maffei to work across both businesses, as our new CEO-elect. And with that, Greg, can you say a couple of words?

Thanks, John, I'd love to.

The attraction of Liberty was pretty easy. It's great assets and businesses, it is a great team, and -- led my John, and a great opportunity. So my plan is to work with John and Dob over the next several months on the strategy that John has begun outlining here, helping the Company leverage its operating assets with new interactive businesses, trying to provide clearer transparency into the interactive portion, which has been very successful and has even greater prospects ahead, we believe, and trying to help the team work on tax efficiently, reaping and re-employing the investment assets that the Company has, which are substantial. And I think that's a great challenge, but also a great opportunity, and I think there is a lot of upside in it for all of us if it works well.

Thank you, Greg. That concludes the formal remarks and I will turn the call over to the operator for fielding questions.

Our question and answer session will be conducted electrically. [OPERATOR INSTRUCTIONS] We'll go first to Bishop Cheen with Wachovia.

Thank you for taking the question. Two questions: You talked a lot about taking inputs from equity holders. Any color on what the realignment is going to do, ultimately, to bond holders and the total leverage debt Consolidated Liberty is at now? And second question, will there be more transparency on the hedges and what the dollar value of unwinding the hedges would be to the portfolio?

Yes, I think first of all, certainly during the pendency of a tracking stock structure, there is really no change in terms of the assets that the debt holders can look to. When we allocate debt responsibility to a tracking stock business, it's sort of a telegraphing of what we expect to do down the road, in terms of an ultimate separation. But it in no way, initially, has any impact upon the assets that underline the debt.

One of the reasons why the Board has decided to take this direction is to simply the Company from an analytical point of view. The interactive tracking stock, centered by QVC but with IC and Expedia in it, will really represent what I would call the easy part of Liberty's challenge. Those are well established businesses with very strong growth rates. They have clear momentum. They have clear vision of their future. We intend to modestly lever them in terms of the assignment of debt obligations to them, and really, they will have no complex financial or tax structure related to them. So absolutely plain vanilla, clear marching orders, lots of dry powder to expand in that e-commerce, video commerce, internet services space, so that one I think will be very clear.

The rest of the Company is where one gets into, I would call, a fairly high level of complexity with respect to financial hedges, derivatives, collars, and, in particular, deferred tax liability of all various shapes and sizes. So part of the benefit of this is to take perhaps 75%, 80% of what the equity holders perceive to be the equity value of the Company as it sits today, and keep in mind, we believe that the Company trades at a deep discount to the sum of its parts. But that portion, with its clarity, should trade very close to intrinsic values because of its simplicity, lack of complexity, and so on.

The quid pro quo of that, of course, is then we will have the rest of the Company, which will, on a percentage basis, seem even more complex relative to its equity, and therefore put a real burden on us to have transparency, to do a better job, better than we've done so far, perhaps, of helping the shareholders understand exactly what the tax issues are, what the bases are of the various assets, what the flexibilities are with respect to transactions that might be tax deferred or tax free. So, we understand and we welcome greater focus, let's call it that, and one of the big challenges that Greg and I and the tax department face is how to take that set of residual investment assets and migrate them into strongly growing operating businesses in a tax efficient way.

So I welcome your questions. We will be very careful not to unnecessarily shake up the debt side of our balance sheet.

Thank you, Dr. Malone.

You're welcome.

We'll go next to Doug Mitchelson with Deutsche Bank Securities.

Thanks. John, first, I'm wondering how many publicly traded companies you would like to control, but a more serious question, any updating your thoughts surrounding your News Corp stake? Many have speculated that the News stock was the next likely spin-off, rather than the InterActive essence.

Well, I really don't have -- we continue to explore various things with News Corp. We don't have anything specifically that we want to discuss publicly at this point. Our goal is basically to maximize the long-term value of our News Corp holdings on an after-tax basis. And as you know, the tax laws are in some state of flux right now. We're seeing proposed regulations floated by various congressional committees. We have to be very careful not to try to go into some transaction and find that the tax rules or regulations are either so grey that we don't know what the outcome will be, or worse. So we're being cautious about charging ahead.

So I think what -- what I learned when I went to school was, solve the easy problems first. In our case, the easy problem is to identify this Liberty InterActive business, which, depending on how you want to count, could easily represent 80% of the solution. So I want to fix that one first and make sure that's in the right direction. Very similar to what we did with Liberty Global. Give it clear direction, simplicity, a balance sheet that gives it elbow room but appropriately leverages its cash flow to give it a trajectory as an earnings growth company.

That's the simple part. What you're talking about in terms of what to do with the News Corp stock is very complex, in terms of how it impacts various restrictions, 355 regulation, taxes, and what people may or may not want to do if you put yourself into a particularly awkward position, relative to some assets.

I don't want to get into any more detail than that. It's a complicated issue.

All right. Thank you.

You're welcome.

We'll go to Andy Baker with Cathay Financial.

Thank you very much. Two questions. One for John, one for Bill.

John, you have been pretty outspoken over the past year, in terms of talking about driving superior leveraged equity returns while at the same time, Liberty has gone out of its way to show how under-levered its balance sheet truly is, when you factor the underlies against the exchange of olds and look at your liquid assets as well as your cash flow.

Now, in the past I know you had said that a buyback would not move the needle, but given the fact you've done two large spin-offs in the past year-and-a-half and really shrunk your equity, such that a buyback would actually move the needle now. Why are you not more actively pursuing a stock buyback with the shares at -- you know, we look at is low to mid-30% discount to NAV.

Well, I think, as I explained once before, one of my philosophies in life is not to borrow money against assets that don't have cash flow. I'm perfectly comfortable to take leverages to 4 and even 5 times against growing cash flow streams. I am not prepared to leverage up against common stock equities that can go up and down with the with the whims of the market and don't represent cash flow. So that's really why we haven't gone that way. So, I think what you can read is that we're going to create this internet, this InterActive entity with a strong balance sheet and an ability to shrink its equity against its cash flow streams, because in that situation you're not putting debt holders at unnecessary risk because you do have a stream of -- financial stream to service that debt.

That's my model. That's the model I am comfortable with. I am not comfortable with borrowing a lot of money against low tax basis equity assets, which I then have to liquidate in order to service the debt. I don't think that that's prudent. I don't think it goes in the right direction of creating shareholder value.

So the only way you're going to see leverage go up overall is if we can figure out a way to swap equity assets in the redemption of stock in a tax efficient way. But I don't want it use debt leverage to do it. I think that would be foolhardy. And our board wants a long-term value creating business, not a short term pop in the stock followed by sleepless nights of tossing and turning and having to give bad news to bond holders. That is not a prescription for happiness, in my book.

Fair enough. And on to Bill. Great quarter. How do you keep this up? How long can this keep going, in terms of, when does the product mix catch up with you and not go -- not going your way?

You know, every quarter is a different quarter. Every month is a different month. We just try to keep on doing what we're doing. When we execute as we did in the quarter, the customer supports us. As you know from listening to our results in the past, we never really dwell on the fact that there was the weather, it was this, that, and the other thing. We really believe we're in control of our destiny and to the extent that we do well, we're executing okay; if we don't do so well, it is going to be somewhat lower, and it goes month by month.

One of the particularly encouraging things that we're really excited about this year is the double-digit growth rate in the U.S., which we didn't have last year or the year before, so that excites us in addition to adding to the growth that we're experiencing in the international market.

So, we're on all cylinders now, but there's absolutely no assurances that next year it will be double digits. It might be better, less this year, but it really is going to depend on how well we execute the business.

Thank you very much.

And the thing I would add to that is, we see opportunities to acquire and develop incremental businesses in and around the electronic commerce space that will ultimately be synergistic with QVC. So not only do we have organic growth within Q, there are opportunities in the future for Q to consider incremental markets to launch in. And then there are also vertical niches within e-commerce, we think, that it will be interesting to explore development.

So, you know, the sustenance of the QVC growth doesn't necessarily have to be all narrow organic, although we certainly love it that way. And of course we applaud the management team down there that's done a fabulous job again this quarter.

As do we. Thank you.

We'll go next to Philip Olesen with UBS.

Thanks. A couple of questions, just trying to maybe get a little bit more details on your thoughts on this potential spin. First, why would you do the tracker rather than a full asset-based partial IPO?

For one thing -- well, you could sell up to 20%, I guess, of an identified subsidiary without interfering with anything and put a price on it. That would be a structural alternative. Frankly I like the tracking stocks better. It gets -- it gets the shareholders aligned, it allows shareholders to shift their holdings in a tax efficient way out of one part of the company and into the other, if they like, concentrate their ownership in whichever side of the enterprise they feel more comfortable with, as opposed to an IPO, where you've got an independent -- you've got a new set of shareholders you're trying to please, you're raising a little bit of capital, maybe a lot of capital. In this case it would probably have to be a huge IPO.

I don't see the reason to take an IPO haircut in order to deliver value to our existing shareholders. [Inaudible] all of those kind of things.

Structurally -- I am going to point out, I have done a number of tracking stocks historically and for me they've always worked quite well. But they -- keep in mind, the objective of a tracking stock is to give clarity, visibility of where you're ultimately going, but not cause you tax problems, not cause you to take regulatory risks or tax risks or, frankly, not cause you to have to pay premiums to debt holders in order to shift debt. All of which would be required if we made a physical separation. Even with an IPO of a separate subsidiary, we would have to do something in and around the debt structure, which we may or may not have the rights under our debt covenants to do.

The tracking stock structure is very convenient because it gives you complete flexibility with respect to those issues.

Now, in terms of, I guess, the debt structure, is it fair to assume, then, as part of the initial spin there will be kind of an accounting allocation of Liberty's existing debt between the InterActive business and the remaining hold co, but that's --

Yes. That's how it works.

But all the legal obligation of all the bonds would remain at Liberty Media and in theory, those bond holders would still have full recourse to the assets within the InterActive business.

To the degree the entity that they were assigned to, that the debt was assigned to, failed to be able to service that debt, then there would be a look-through to the other entity. However, we intend to set it up in such a way that both entities look very solid with respect to their abilities to take care of any obligations that have been assigned to them.

And from the -- if the ultimate plan would be a full legal separation, is that a multiple-year process, i.e., how much --

I think two to three years is my guess, because there are still substantial tax attributes that are very beneficial to the Company, taken as a whole, that would not be available if we were to do a separation earlier than two to three years.

And then, I guess, the final: so you forward the clock a couple years, you've spun off the 75 to 80% of the equity value, the remaining assets are largely Starz and Liberty or News Corp. voting shares.

Well, there's $19 billion, I think it is, worth of public equities, a whole bunch of hedges, collars, some of which have very substantial value in and of themselves, exchangeable debt obligations that are trading at varying discounts to the market. It is a complex story. You can't sort of summarize it in a one liner. It is a complex set of financial assets and a complex set of financial liabilities.

And so -- the answer is yes, you end up with a residual company which has lots of assets and lots of complex liabilities, some of which -- or at least half of which, probably more than half of which, will turn out to be tax oriented. Deferred tax liabilities and tax liabilities of one kind or another. And so that's why Mr. Maffei's expertise in financial engineering, I think, will be a very valuable addition to the team here.

Consider the source of that comment, guys. [Laughter].

Not that we lack some of those skills to begin with, but no, this is a complex Gordian knot with respect to that piece of the puzzle, and we have had external advice from various investment factors looking at this and suggesting various evolutionary paths. The one that the Board favors is that the residual company take advantage, be opportunistic, and try and turn itself into something of superior equity value rather than discounted equity value. I mean, obviously it is riding with a substantial discount because of the holding company and the nature and the complexity. So if we can get rid of that complexity over time and roll those assets into simpler operating or control positions, a different theory of the case as it were, we think we create an enormous amount of value for the shareholders. That's the challenge.

Is one of the paths -- or, put it this way: post the full legal separation of InterActive, could one of the paths be a tax efficient way, where News Corp. could acquire the residual Liberty Media by issuing non-voting stock as a way of effectively redeeming the large voting control block, or larger voting block, that Liberty currently owns?

That has certainly been suggested as one possible outcome.

Then, final question, more -- on a different subject, when you as someone with a lot of experience in the cable industry as an operator, look at valuations today, what's your impression, what do you think is driving cable levels down to the areas we're seeing now, and does that in and of itself create an opportunity for Liberty?

Well, what you have to look at, I think, is the disparity between the way the big public companies are trading and the way the private market is paying for -- let's say, less quality, higher prices. And we're seeing in the private market 11 to 12 multiples for cable assets, cable systems that are not particularly sought after by the major operators, while we see Comcast, perhaps, as a -- if that's what you're referring to -- heading toward maybe a seven multiple or even lower. And part of it has to do with the availability of funds flowing into the private equity world, and the availability of high debt leverage from the banking institutions driving these private deals, whereas a Comcast, for instance, don't want to step on Brian's toes here, but they're fully taxable on the margin and their leverage on their equity has come very substantially down.

So if you do just an equity growth model, it is pretty hard to sustain or justify an 11 or 12 multiple unless you have leveraged, tax-sheltered cash flow growth, which was the traditional model that we always use in building cable companies. At the point that you get to full taxability and your leverage, because of your size, can't be more than 2.5 times or 3 times, it is pretty hard to do the arithmetic -- it's all mathematics -- to find the kind of equity returns that the more highly leveraged, more rapidly growing businesses can provide. So --

Does that, then. call for --

-- on top of that I would like to say, there is always the competitive issue of will the RBOX engage in suicidal price cutting in the data business in an effort to protect their wireline side. That's kind of an intangible right now that's overhanging value.

Does that then call for potential breakup of some of the larger cable operators, where they could potentially monetize individual clusters as a way of tapping into the multiples available in the private market?

Well, those of you who remember me back in the [Leo Henry] days, that's what we were doing. We were taking some of our assets, dropping them into partnerships and leveraging the bejesus out of them. Actually, in those days, to us leveraging the bejesus meant six times. Today it probably means eight times. But, yes, one could, as a pure financial matter, do that.

On the other hand, the synergies that these large companies like Comcast are getting out of their scale is a very important reason why their cash flows have been so strong over the last couple of years. So it would be quite a dilemma to think about physically breaking them up. There may be some kind of -- you keep your synergies, but you get private investment into sub-set somehow, on a more leveraged basis, might be a way to go. But you know, they repealed the general utility section of the tax code, so that you can't get a step-up in your tax basis the way you used to be able to in doing those kind of transactions, and so while you can increase the leverage, it is very difficult to get to redepreciate the assets again, like we used to be able to do.

So in the old days, we used to churn assets in order to get new tax basis. And then the leverage plus the tax basis depreciation gave us a very effective shelter on our businesses. That's not available in the tax code.

All things said, it is not easy any more to come up with a financial model that can sustain the kinds of returns, the kind of internal rates of return, that the industry historically had, absent the 20% organic growth numbers.

So I guess that's a long answer to a short question.

I appreciate all your time. Thanks.

We'll go to Jessica Reif Cohen with Merrill Lynch.

Thank you. I had two separate topics. One, on the residual company or, call it old Liberty. John, could you discuss where you're going when you convert the nonstrategic assets into operating assets, what are the target areas for growth, what sectors, is it all domestic? And, I guess, what will this look like when the tracker is legally separated?

One of the interesting philosophical issues here is -- well, first of all, we'd probably call the residual company, for convenience, Liberty Capital. That would sort of be a capital company with some operating businesses already in it and some venture capital businesses in it.

One of the interesting things is, if you go down this tracking stock route, you don't have to be patient about that part of the business because that part of the business is well defined, as I've mentioned before, great characteristics, growth characteristics, potential pipeline of small acquisitions and start-ups, it can be an interesting business.

Liberty Capital, the residual company, needs to be patient. This is a terrible time for us to be out, say, trying to bite the stress debt, when the debt markets are spreads -- very close to the lowest spreads in history, between junk and investment base.

It is a bad time to be competing with private equity for cash flow assets because private equity is out there. So I guess the point being that we think the residual company therefore will take its time about figuring out exactly what its strategy is, going forward, but part of that strategy is the ability to monetize the investment positions into other assets that have superior performance on an efficient basis. I think that's the core of it.

If you ask me today exactly which direction do we want to take it into, does it want to be venture Capital, does it want to be a nesting company, developing, incubating additional businesses. I would say that could be part of the picture. Taking some of our current small venture capital activities and growing around them into spaces that look quite attractive in terms of organic growth and consolidation opportunity. It could also be that we just decide to liquidate the thing.

I would say it is firmly up in the air what the strategy will turn out to be, but we will encourage the shareholders of the Company who want to stay with it in that way, to be patient because we think that this is the wrong time to be trying to be aggressive in certain areas that would normally be areas we'd be aggressive in.

So, a work in progress, Jessica. The right way to look at it, I wish I could be more specific than that. If the opportunity is there to become a technical venture capital company, remember we did that a few years ago with a thing called Tech Ventures and is worked very well for us.

It could be that we evolve into a distressed debt company, because we believe that a lot of the private equity deals that have been so highly leveraged will come unglued in the next couple of years and give us the opportunity to do some very favorable acquisitions in that space, probably coming at them through the debt side. But I can't really say anything other than we're going to have -- we're going to try and maximize our financial flexibility so that we can take advantage of opportunities as they present themselves.

Then I would like to just completely switch gears and ask you about Discovery. Could you or somebody on the call discuss the outlook for the fourth quarter in 2006, as this is the period that will reflect the 2005 up-front, and can anyone comment on Discovery's plan to increase investment in programming to try to recover the ratings that were lost in the last year or so?

Well, no, this isn't a Discovery Holdings call, so we really cannot discuss Discovery.

But you're not going to have a separate Discovery call.

No. You can call, I guess, and try and get whatever information you can from the Discovery people, although they don't really want to talk to people.

I can give you my observations and I will take a minute or two out of this Liberty call to do that, since a lot of the people are Liberty shareholders.

You know, Discovery's ratings issues really relate, I think, to two things. One is, the hit show Trading Spaces got them to a level of ratings and ad sales that was not sustainable on The Learning Channel in the short run. Because that show was a hit, it ultimately was copied by, I believe, 29 other shows, and so while it still performs quite well for the Company.

Discovery has gone through the process of bringing in several new highly talented programmers to attempt to do two things. One is protect and defend the brand and the identity of the channels, and number two, improve, obviously, the ratings. So they're struggling a little bit with that issue. But that said, I believe that their revenues as a company are -- the guidance is still 15%, and the cash flow is roughly 5% for the year, more or less. In that range. I am not authorized really to give guidance on Discovery. I am giving you my outlook, my personal outlook, as a shareholder.

International has done very well this year. Domestic, I believe, needs to get its programming back on track, and I believe it will.

But it's been a little bit soft, and obviously as you know in this business, if you're a little bit soft, then you make 12 and so on, so there is a little bit of a legacy issue when your ratings go softer than you thought they were going to be. That said, Discovery has some very powerful initiatives going, not only in terms of programming budget in their core networks, but also they have a big investment going in the educational space, where their efforts to develop what I call a video encyclopedia seems to be going very successfully.

This is essentially a broadband over the top service, which is now, I believe, licensed for something north of 70,000 schools. This is highly specialized, based upon the state teaching requirements in each school, and they are currently in trials testing this as a service directly to the homes, so that the kids will see -- have the same educational tools in -- at home as they have in the school.

Now, that's one of the businesses in which Discovery is investing and therefore some of the softness in their operating income is attributable to increased investment, start-up losses related to these initiatives, including the launching of new channels internationally.

So, that's an observation that I would make at this point on Discovery, and that's really all -- I am really not supposed to be talking about Discovery, so that's all I am going to say on the subject.

All right. Thank you very much.

You're welcome.

We'll go to Alan Gould with Natexis Bleichroeder.

Thank you. John, a couple questions. Does creating the tracker have any tax impact on time frame of potential spinoff or sale of either the tracker or the entire Liberty Media?

Second, what would the tax liability of the Company be today if you marked all your equity hedges, derivatives, et cetera, exchangeables, to market? Would it be greater than $2 billion. And three, what happens to Starz Encore? It doesn't seem to fit too well into Liberty Capital.

Boy, three questions.

The first question, I am pretty confident that the tracking stock does not have any effect whatsoever on anything else you want to do from a tax perspective.

Number two, I don't know the answer to the question you asked with respect to mark to market, all your assets. We've done the analysis that said if you just go out bluntly and liquidate all your equity portfolio and pay all the taxes related to it and essentially pay off all the stuff that's created deferred tax liability, in terms of the private assets, you get a pretty substantial shrink in the sum of the parts. People have asked me why I don't -- why don't we just do that and I say, if we just did that, if it was just blunt liquidation, A, I don't think we would be happy, but I think that the sum of the parts reduced by that activity would probably be somewhere in the vicinity of -- looking like the stock was then trading at a relatively small, maybe a 10% discount from the brute force liquidation sum of the parts. That gives you some sense of what the tax liability would be.

Now, fortunately, I think if you asked Warren Buffit that question about Berkshire Hathaway, you would get roughly the same answer, maybe it would have a negative sign on it.

Okay.

So, very few companies are asked, what if you just go sell everything and pay the taxes. But that would be the effect of it. We obviously have no intention of doing that, so we think we're trading at a 40% discount to the sum of the parts if we had no taxes whatsoever to worry about. So somewhere between where the market is and a substantially higher value capturing that differential is a function of how skillfully we can wind our way through the tax issues.

Okay.

I think that's the best way I can describe it.

From a Starz/Encore/Liberty Capital?

Starz/Encore, I still think is a terrific asset. As we've talked in the past, it has going through a bubble in its product costs, part of which is just related to the unfortunate history of its relationship with AT&T subsequently Comcast, and you know, which essentially got Starz to believe that it could afford to pay a lot more for output deals because those output deals were being shared by AT&T in terms of the cost, and then when Comcast, as you remember, bought AT&T, that sharing went away and all of the cost was laid on Starz Encore. So they have a higher than wanted programming cost structure. Another component of that was they stepped up and bought all the DOD and IP rights for the subscription windows on those output deals. That added a very substantial cost layer. That was deliberate and that was an expectation that within the time frame of their contracts we would see develop an IP video host business that would justify that investment.

So those are the two issues. As those cost bubbles, the one has to be digested and go through the digestive tract and be dealt with, that is the excess cost on content. The other component is really the challenge of developing an interactive movie business based on the rights that we pay for. As I mentioned earlier, we intend to start to give that greater visibility going forward. So you will be able to see what the drag on Starz' cash flow is, related to the efforts to develop that business, in some kind of a rational allocation of the output deal costs to that.

I am not sure what Liberty Capital is going to be, as I said before going forward. It could well be that we want to get aggressive in Interactive company. There is one model, by the way, that our external corporate development guys are looking at, where we get very active in trying to deliver content to wireless devices, for instance. The issue of portability for Starz Encore.

There are a number of possibilities, and as I say, when you're in this state, what we're doing is solving the easy problems first. I don't know if any of you ever took the SATs, but the guys who get the lousy scores on the SATs are the guys who get bogged down on a question that's a little complicated and they spend all of their time on that one and the easy questions never get answered.

So that's why I am telling you, in all honesty, we are focusing this call on the announcement that we think we're going to solve the easy one first and that we clearly do have complex issues related to the future of Starz and the best way to develop its business going forward, as well as things like WildBlue, which is our satellite high speed business, and Power-Line Internet and TruePosition, which is our cell phone location business, and the Game Show Network and -- so there are a number of businesses that we think potentially could become quite valuable if they are developed properly, and Starz Encore could well be one of them. We just aren't ready to announce that yet in terms of that we have a clear vision for those assets.

So I think what I am trying to do is, I have been in the job I think six or seven weeks, [laughter] and I am being CEO and the board asked me to make things happen, and so what I am saying to shareholders, okay, the first thing I am making happen is I am going to solve the easy ones. The second thing I am going to do is bring in Greg Maffei to help me solve the hard ones.

Okay. Thank you.

You're welcome.

We'll go next to Tuna Amobi with Standard Poor's Equity Group.

Thanks. Good morning. John, I was wondering if you can comment on how you voted on the News Corp stake and how you view that as a leverage, in terms of the resolution of the talks that you're having. And what is the possibility that, given the tracker, that -- what does that mean for the timing of a possible deal, if at all, with News Corp, given the fact that it seems like News Corp would be a substantial holding within Liberty Capital. So I am just trying to get some thoughts around the -- first, the voting and then what this structure means for the News Corp stake.

First of all, the voting, A, we continue to be very supportive of News Corp's management paying [inaudible]. So in no way, and we've said this over and over and over again, are we in any way hostile to News Corp. Second of all, to vote no on Peter Chernin and Chase Carey, two of the finest executives in the industry, would to me be brain damage. So we had no problem internally saying we were going to vote for the recommendations of the Board of Directors of News Corp. We are and continue to be friendly to News Corp. We continue to try and work with News Corp to find win, win, win situations, not only with respect to our stock holdings in News Corp but how we can work together globally in terms of developing and building assets and making sure that we avoid stepping on each other's toes where possible. So that's our posture.

Vis-a-vis our current view of it, I think our current view is News Corp stock is cheap. I am not sure that it would be in the interest of our shareholders today to monetize our News Corp position. I think it is cheap. I think it is at the low end of the trading range and so I would be very reluctant to try and do something right today. We think News Corp can drive its equity through its stock buyback plan that's been announced.

I am very interested to see how Rupert does as he tries to move News Corp increasingly into the internet space. Clearly, his acquisitions in the internet space have been controversial. Rupert has done controversial things in the past and frequently they have turn out to be visionary. So I am waiting to see the market realize that he didn't just throw away a couple billion dollars.

So that's kind of the posture. We continue to have friendly discussions with them about, is there a way that our ownership could be restructured in such a way that it enhances News Corp and it enhances Liberty. But we're not in any great big hurry. We think it is a great asset. It's part of the financial engineering of Liberty Capital that Greg and I and Dob are going to really be spending a fair amount of our time thinking about.

There have been a number of proposals from various investment banks that have been floated and we've done models on those. We haven't gotten anything yet that gets us really excited, to tell you the truth.

I would definitely agree with you that the stock is cheap, but if you go on the premise that part of that cheapness may have to do with the poison pill, despite the excellent job, I think the management of News Corp is doing, as you eluded to, then why would you not be concerned about that?

I would love to have a show of hands if I could on this call as to who thinks that News Corp stock is depressed by the poison pill. I have heard that theory, but I don't understand it myself.

If the people think really, if the poison pill wasn't there that Rupert would somehow or other change his long-term perspective? I don't know. You know, if in fact they believe that, then it would be certainly in their corporate interests to try and do something with us that would eliminate the need for the poison pill.

Okay. And if I can switch gears here, on the IP Video, it sounds like you're allocating a portion of your programming costs to that business. My question is, does the current agreement, the program agreements that you have at Starz, did it contemplate the rights associated with this business? And how should we think about the balance between current and library titles and what is the -- can you talk a little bit more around the business model of that?

I'll ask Bob Clasen to try and amplify that.

The studio agreements, both for our output product and for the library product, beginning about four or five years ago, all included a step-up of On Demand and internet rights. And so when we took our fledgling Starz! Ticket internet product to market, about sixteen months ago, we had clear validation in our agreements with the studios about our opportunity to do that and as it said in the comments, the lessons that we have learned will be realized as we make announcements in the new year.

So the rights that we have are extensive and we think very valuable because they mirror the same windows that you find at the television, so during the periods that would be the typical output windows for pay television, at the television on the video services, it would be the same for the internet and conversely, the exclusive periods where there are -- where the studios are not able to utilize those very attractive output titles between our windows, still exist on the internet. So we think this is a very valuable asset for us that we are working diligently to figure out the right way to monetize it in this new world.

There is a lot of talk been going on about IP video and video on demand over the internet. I think the recent announcement that Apple is getting actively into the business is just going to stimulate interest in that area and Starz has been very early, in terms of trying to put together internet delivery of movie product on a subscription basis, and I think that that's one of those -- you call it a Venture Capital effort on the part of Starz Encore, you never know how those are going to turn out with respect to timing, but I would bet anybody on this call that that will become a very big business. Whether we got the timing right, whether we got the right rights. Those are all the issues.

But effectively, the public's appetite to get content off the internet onto storage devices which are portable and flexible I think is going to be a huge business and one that we're very focused on in terms of Liberty Capital and its ability to play in that space, not only with the content businesses that we already have but looking at other potential content businesses that would be particularly relevant to that space.

And especially in portability, the reason that this is complex is that there are many pretenders. The studios in particular, I'm sure the television station producers, those who are the rights holders in the IP world have very stringent requirements for digital rights management. And companies like Starz are at the forefront of honoring and protecting those rights. And so as we look to solutions for portability, it needs to be solutions that are legitimate and honor those rights and we're right in the middle of all of those discussions right now, both with the consumer electronics people and with the hardware folks, the software people, the studios, and of course the potential distribution affiliates.

I think what you're going to see is in the next few months you're going to see a flurry of announcements as various portal owners, pretenders, whatever, make announcements of rights deals with various content holders to attempt to have a position in this business, whether it's the video store or at Apple or it's Google or it's Yahoo or it's people doing it over the top, or whatever. This is going to be a very hot area now in terms of announcements, in my opinion, over the next three to six months.

In terms of actual reality, what's kind of interesting is the iPod is sort of the device that exists in large quantities and therefore it gives this Apple thing an unusual early edge in terms of portability, because there are so many video capable iPods out there that my guess is, in terms of devices, that we will be demonstrating this in the U.S. This is probably the first place it will hit big time, and whether people are interested in watching full length movies on a screen that size, I don't know. It has also been hypothesized that they'll watch these movies on their cell phones.

So it remains to be seen what the public's appetite is going to be for portable devices playing what kind of entertainment and information content. But it is a very interesting sector and it's certainly going to add value to people who have content and content rights. And so that's one of the things that our internal guys are looking at quite a bit.

And well said. And finally, if I can ask -- I was wondering if I can ask maybe Mr. Gregory Maffei to compare his experience at Microsoft and some of the other roles that he's had, in terms of, does this signal that we should be expecting some deals frenzy in the years ahead, given Mr. Maffei's background, primarily on the deal side, whether this -- what comparisons should we draw from his experience in the software industry and the other positions he's held, in terms of what's actually happening right now in the media landscape. So, any comments around those issues would be helpful.

Sure. I would like to think I bring some deal experience, but Liberty is a company that certainly is not short on deal experience or expertise.

I like to think that some of the things that are going on, where you clearly have a convergence of traditional or old media and the internet space is a space that I have some experience in, games and the like, mobile, telecom as ELEs are converging around IP. I think that is a very interesting space, one that Liberty has a lot of assets that can be enhanced, leveraged, and accelerated by that convergence, and that's an area that I clearly would like to help and I think there are some good opportunities that I can assist the Company in. But I think John has pointed out that some of our opportunities that are low hanging fruit and are very clear and the tracker will provide greater transparency around those.

But in addition, on the deal side, working through and redeploying effectively, tax efficiently some of the other investments that Liberty has is a great opportunity as well. So part of the appeal of this job for me is both the operating role and being involved in growing some of those businesses in the internet space and working on some of this deal stuff and I think it is a good marriage of some of the things I have done in the past and I look forward to helping out.

I might say that when it came to bringing new senior executives into the Company, we felt it was very important that they bring with them new media, internet genes. So with Mike George going in at QVC, you know, he ran the internet marketing operations at Dell and had a lot of experience with that interface. With Greg we get somebody who actually is on the board at Electronic Arts, so he certainly understands games and interactive games.

Spent a little time as Chairman of Expedia.

Chairman of Expedia for several years, certainly understands that business as well as understanding Barry Diller's very delicate psyche [laughter], and all of which are skills that will be put to the test in the future.

And, you know, employers that I've worked with in the software space, both Microsoft and Oracle, have spent a bunch of time thinking about how the internet is going to impact many kinds of businesses, including the media business, and how software is an underlying element of that. I like to think those skills will be helpful as well.

I guess we have time for one more question.

We will take our final question from Adam Spielman with PPM America.

Thanks. Just two questions. John, I was hoping, just so I didn't -- make sure I heard this right -- for your interactive tracker you're talking about QVC and then the two former interactive stocks, Expedia and surviving InterActive?

Yes, and there may be a couple of other small interactive related businesses that might be in there. But that's the bulk of it, yes.

And then, obviously those all fit into the interactive category, but similar to your other financial assets, Expedia and InterActive are just that, they're just common stocks.

Well, not really, because keep in mind, we own, what, 55% of the votes now, I think, in those two businesses. Barry manages them, but he does it through our proxy, and if a bus gets buried, those become consolidated subsidiaries of Liberty InterActive. So, I am not hoping for that, of course, [laughter], but I think it is more -- we look at those two businesses as more than just stock interests. Okay? Much more than just stock interests.

Those are strategic assets for us. We certainly -- I think we own something like 23 or 24% of the economic and something in the mid-50's now of the votes. We have preemptive rights on any dilution. This is not just a passive equity interest that we have in those businesses.

What are your thoughts on -- is that enough to own -- to control 55% of the vote and 20-some% of the economic or -- what are your thoughts on doing a more active acquisition or consolidation of thos businesses, especially in light of your comments in the past that those businesses are over capitalized.

Well, Barry, at least with respect to AIC, has been doing something about the over capitalization by shrinking his equity fairly aggressively.

Keep in mind that this goes way back to our original deal with Barry. You can't hire a guy like Barry Diller. You have to make him your partner and that's what we did. And so for as long as he wants to be the CEO and run that thing, he is our guy, he runs it, and that precludes the accounting rules from allowing us to consolidate. Okay?

So, whether we do equity accounting, look-through accounting, mark-to-market, whatever we're going to do on it, it's that one element, i.e., our deal with Barry, that keeps it.

Now, the question is, does Greg Maffei's close personal relationship with Barry give us an opportunity to modify that deal? Probably not. Barry enjoys his independence and his autonomy and that was the deal we cut. But from a corporate point of view, corporations live forever and individuals have finite life expectancies. So I think that when we look at it, we see more than just the value of the stock there.

And then, the second question is, just going back to the separation and how you -- I understand it's a couple years away, but how you push the debt around. I mean, you have investment grade indentures, you have a lot of flexibility as to what you can do. What are your preliminary thoughts on what -- you say modest leverage on the interactive business, how would you do that and what's kind of a target, give a target leverage ratio that you would think about --

We really don't, at this point. We've had the Goldman Sachs guys have very nicely done some models for us and given us their views. We're very interested in the views of our shareholders, in terms of what kind of leverage on a business like that we think will help the equity trade the best, provide the right leverage on the common equity, and provide -- what we think the metric on that company will be earnings growth and so we're building models to show us what the optimum leverage is to generate the most consistent and predictable earnings growth curve for the business. We certainly wanted to have sufficient capitalization that if its equity under-performs, which we don't expect, that it could systematically shrink its equity.

So you don't know whether you'd foresee raising stand-alone debt [inaudible], then paying a dividend back to old Liberty or just signing existing debt to the --

The most likely outcome initially would be just assigning a certain level of debt to the tracker and with certain characteristics. And those might mirror existing debt obligations of the parent. Over time, we might give debt holders in Liberty the opportunity to swap their debt into instruments directly of the other entity, although that's not necessary, but it might clarify and make things simpler. But those are the thoughts.

Some businesses do better with more leverage, some businesses do better with less leverage. I think if you're in the cable business and you're all about EBITDA growth and IRRs, you want leverage at 4 to 5 times. If you're in an earnings company with pretty good growth characteristics, you may not want leverage that high. You certainly want to be able to push your earnings growth by the retirement of debt liability and still retain leverage on the equity.

So, our financial guys in-house are running lots of models for the board in terms of what the optimum debt characterization ought to be on that tracker, but it is safe to say it is going to be leveraged somewhere probably between 3 and 5 times.

Okay. Thank you.

Thanks, everybody. We appreciate your support, and I apologize because we can't give you greater clarity on Liberty Capital or the rest of the Company, but that's a work in process and as we have clearer vision on components of it we will certainly disclose those as we go. Thank you.

This does conclude today's conference. Thank you for your participation. You may now disconnect.