QVC Group Inc (QVCGA) 2005 Q4 法說會逐字稿

Good day, everybody and welcome to the Liberty Media 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 limitations possible change in market acceptance of new products an service, competitive issue, regulatory issues, and continued access to capital under the terms acceptable to Liberty. Please refer to the subsequently filed documents with the Liberty Media corporation and the most recent form 10-K filed by Liberty Media corporation for additional information about Liberty and 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 President and Chief Executive Officer, Mr. Greg Maffei, please go ahead, sir.

Thank you. And welcome all of you this morning and thanks for joining us. I'm pleased to be on my first quarterly call as President and CEO of Liberty. And I'm excited to be part of such a vital organization.

Today on the call, with me, we have Michael George, QVC's new President, and in about a month QVC's new CEO, on Doug Brig's retirement, along with Michael, we have Bill Costello, QVC's COO, CFO, and President of International Operations. From Starz we have Bob Clasen, President and CEO and Bill Myers the Chief Financial Officer. And from our newer subsidiary, Provide Commerce, we are joined by CEO Bill Strauss. Along with me here at Liberty, we have our Chairman, John Malone, and many of our other senior executives and we'll all be available to answer your questions following my prepared remarks.

I'm going to spend a few minutes discussing our 2005 activity, full-year and fourth quarter financial results of Liberty, and particularly focus on our two largest controlled subsidiaries, Starz and QVC. I will also discuss our balance sheet and liquidity position before opening up the call for some questions.

2005 was a good year for Liberty in many respects. During the fourth quarter and for the full year we continued to produce positive financial results. As I will discuss in more detail later, we once again achieved healthy revenue and OCF growth at QVC, and despite a difficult environment, Starz continued to experience positive subscriber trend set while somewhat offset by the decline in rates. Resulted in year-over-year revenue growth.

In November, we announced our plan to create a tracking stock to better follow the performance of our interactive assets. We believe this transaction will be completed in early May and the tracking stocks will begin trading at that time. Both Liberty Interactive and Liberty Capital are expected to be listed on the NASDAQ. I will take a little bit more time to talk about the trackers in a moment.

Also in the fourth quarter we announced a new investment and a new acquisition. In November, we announced our plan to acquire 51% of [Fun Technologies], we expect that transaction to close in a matter of a few short days. Fun Technologies is an industry leader in casual skill and vanity sports games. With This investment we are getting access to a proven management team, and addressing a demographic we understand through our affiliates at QVC, Court TV, and GSN. Skill games in particular are rapidly growing in popularity, and participation, and we believe through cross-promotion on GSN, the network for games we can leverage the power of video to accelerate Fun's growth in this industry. Fun will become a part of Liberty Capital.

We also recently completed our acquisition of provide commerce. Provide will reside in Liberty Interactive and serves as a perfect example of the types of examples that we believe QVC and Liberty Interactive vehicle will afford us. Provide has a strong management team that has created a unique value proposition by reengineering the flower delivery supply chain in a Dell-like fashion. We were able to provide -- to acquire Provide in a reasonable valuation and believe through the power of QVC's video engine we can enhance Provide's already impressive top line growth.

In January of this year, Starz relaunched its IP content delivery service under the brand name Vongo. This service will initially offer customers unlimited download new movies in the Starz window, basically the pay TV window, for 9.99 per month. We are in the process of evaluating other digital content opportunities to add to this service.

Two weeks ago, we announced that we filed for HSR clearance to increase our stakes in IAC and Expedia. We have long been supporters of Interactive and Expedia and believe in these businesses. In particular, we believe they are taking appropriate steps at both companies to capitalize themselves efficiently and drive increasing leveraged equity returns. We did not have a current history HSR clearance and need to file for clearance to acquire additional shares, whether from a third party or through our own pre-emptive rights. In either case, we made this filing to create flexibility, to be opportunistic should the situation merit.

Finally, we announced my transition last week to the President and [CEOO], I'm excited to be joining Liberty at such a time, and enjoy working with the management team. I would like to take this opportunity to thank Bob Bennet personally for his assistance in the transition, and on behalf of the entire organization for his many years of leadership and dedication to maximizing shareholder value. We're pleased that Bob will continue on the Liberty team in a strategic capacity and as a member of our Board and I and many of us look forward to working with him.

Now let's take a look at our financial results. Overall operating results in 2005 were good. Liberty reported consolidated revenue of nearly $8 billion in consolidated the operating cash flow of $1.6 billion. Compared to 2004, this represents increases of 13% and 10% respectively. QVC's performance was particularly impressive, hosting 14% revenue growth in 2005, and 16% growth in operating cash flow, as the businesses experienced strong performance in all of its markets and across all product categories.

Starz revenue grew 4% in 2005, driven by an increase in average subscription unit for SDG, services particularly offset by a reduction -- or excuse me, partially offset by a reduction in the effective rate charge for such services. Operating cash flow declined within expectations, largely due to higher programming costs, and increased SG&A expense, primarily related to the development and launch of the new Vongo service.

Now, let's take a look at our operating results by business unit. QVC had an outstanding quarter and an outstanding year. 2005 revenue and OCF growth of 14 and 16% respectively were driven by strong growth both in domestic and international operations. Domestic revenue was up 14% in the quarter, and 12% in the year, was driven by increased sales to exist can customers, particularly in the areas of home, in the quarter, and apparel and accessories for the full year. QVC .com sales increased to 19% of total revenue for the fourth quarter and 18% for the full year. QVC's average selling price increased 4% both for the quarter and the year.

Domestic operating cash flow increased 8% in the quarter and 11% for the year while OCF margins declined 150 basis points in the quarter and 20 basis points for the full year. This was primarily driven by lower gross margins as a result of an anticipated higher inventory obsolescence provision on the year-end inventory balance which was outlined for you on Liberty's third party -- or excuse me, third quarter conference call. International revenue increased 14% for the quarter, and 20% for the year. And 24% and 22% respectively, excluding unfavorable foreign currency effects. OCF increased 42% for the quarter, and 34% for the year, and 53% and 35% excluding the unfavorable foreign currency effect.

Very strong cash flow growth. Revenue increases were experienced in all international marks in which QVC operates and were primarily attributable to greater sales to existing customers and strong cyber growth. Operating cash flow growth was partly attributed to the revenue growth while cash flow margins also increased from 16 to 20% for the quarter and 16 to 18% for the year, primarily due to a lower inventory obsolescence requirement. Needless to say, we are very pleased with QVC's ongoing strong operational performance, but 2005 was a year that may be hard to repeat. Nonetheless, we do expect continued good performance under the new stewardship of Michael George and the ongoing operational guidance from Bill Costello.

Now, let's turn to Starz's results. Starz continued to experience solid subscriber growth in the fourth quarter and for 2005 as a whole. Subscriber growth for the quarter was offset by a decline in the effective rate charged for the Starz and encore services. For the year, revenue grew 4% as the subscriber growth slightly outpaced the reduction in the effective rate. As we have mentioned throughout the year, Starz operating expenses have increased every period due to higher programming costs. For the fourth quarter, operating expenses increased 8%, while the increased totaled 15% for the full year. This is primarily driven by increased programming costs as I mentioned.

Cost programs increased 16% in the quarter and 18% for the year primarily driven by percentage increases in the first run films and higher costs per total due to new rate cards per movie title under certain of Starz's existing agreements. However, we are beginning to see a slowdown in the rate of programming cost increases and we expect 2006 increases to be in the mid single digits. Operating costs were also negatively affected by higher SG&A expense associated with the development and launch of Vongo, which was announced in January, at CES. These increases were partially offset by a $16 million decrease in sales and marketing as Starz Encore group participated in fewer national marketing campaigns and obtained reduced marketing commitments under its Comcast affiliation agreement.

Additional cause of Starz increased license programming costs has been the acquisition of IP rates to wit, the films Starz has licensed. As a result of these rights and based on Starz's experience with Starz ticket, the company relaunched its IP movie service in January at CES. Starz believes this service will be very compelling for subscribers and it expects it to drive meaningful revenue growth for the company.

Finally, the company has negotiated -- has extended it's Echostar agreement under its current terms until March of 2008 -- Excuse me. March 8th. And continue through negotiate a new affiliation agreement. In addition to our solid operating performance, we continue to maintain a strong capital structure with over 14 billion -- excuse me 19 billion in public holdings to just under 10 billion face amount of debt.

As we move forward with our structural charges, we believe we have significant financial flexibility continue to invest in our core assets, make strategic acquisitions of growing assets, and repurchase equity. With either Liberty Capital or Liberty Interactive should we believe that either trade had a significant discount to the underlying value. Going forward, we will continue to focus on maintaining operating momentum, converting our nonstrategic assets into cash or leveraged growth businesses, using our cash and debt capacity to make leverage and acquisitions of growing assets, disaggregating assets to improve their growth prospects, and using leverage to drive improved equity returns.

Before I turn the call over to questions, let's review the structural changes we are undertaking to reduce complexity, increase transparency, and provide financial flexibility. One quick note. Normally, we would be providing detailed guidance for QVC and Starz on this call. However, we will not be giving 2006 guidance today, as we believe that going forward, guidance will be more meaningful in the context of the two tracking stocks. In fact providing greater transparency of the leveraged equity story at QVC is one of our key aims for Liberty Interactive. Since there are several open items with the structure, composition, accounting and compensation and tax rates that we do not expect to have fully resolved for a couple of week, we intend to give guidance for Liberty Capital and Liberty Interactive next month. In fact, we intend to have a full road show introducing those companies to the marketplace ahead of trading and at that time, we will lay out specifically what the financial reports for those companies will look like and give greater transparency into the holdings of each of those entities.

As we mentioned of late, we have been repeatedly reminded of our complexity and the resulting discount in our stock price. We have heard this concern and have created tracking stocks that we believe will simplify our structure and provide financial flexibility while highlighting QVC, and our other strong interactive assets. On the interactive side in particular, our goal is to create a clean e-commerce company that will trade in line with its peers. The interactive company will include our operating company's QVC, and our recently acquired Provide Commerce, in addition, we will include our strategic investments in Interactive, Expedia, GSI Commerce and Commerce Hub. We believe that these dynamic and strong performing assets are undervalued in the Liberty portfolio today and should be trading at much stronger multiples.

By separating them out, and creating an interactive company, we believe we will achieve this while gaining significant financial flexibility to continue to grow these businesses organically, internally develop new areas of growth, make acquisitions, and shrink Liberty's interactive equity if we do not believe it is trading at a valuation consistent with its specialty retail and e-commerce peers. When trading in line with these peers we believe Liberty's equity will strong as a strong currency for additional strategic acquisition opportunities. Specifically our objectives will be to continue QVC's strong operating performance, leverage its powerful video engine to promote brand and e-commerce businesses, make strategic acquisition, build new lines of business, and drive consistently strong earnings and cash flow growth. We think the market will quickly recognize the value of Liberty Interactive and price it accordingly.

Now let's take a quick look at Liberty Capital. The remainder of Liberty, including Starz, our large holdings in News Corp, Time-Warner, Sprint, Motorola, Viacom and CBS, our private affiliates like True Position and Wild Blue, our derivative instruments and exchangeable debt remains at the year end calling Liberty Capital. Our objective will be over time to reduce the complexity of Liberty Capital by tax efficiently transforming many of our non-controlled and non-cashflow generating assets into strategic cash flow producing subsidiaries. It will take some time, but we are confident that we will eventually be discussing.

Also, if as expected, much of the discount that we see and others see in Liberty is focused on the Liberty Capital entity, we will be in a position to more efficiently target our share repurchase program to shrink the equity of this tracker. Going forward, our strategy will be to drive growth through exchanging nonstrategic, non-cashflow generating assets into controlled free cash flow producing strategic businesses. We are exploring a number of areas of focus, some of which we have initial -- some of which we have initial investments including Skill Gain, Mobile Media and Ip Video as the first areas of instruments. As I previously mentioned, we recognize we have heavy lifting to do here at Liberty Capital but we also believe that over time, we will have a dynamic growing entity that will give our shareholders strong returns for their position.

Now, let me quickly summarize what has been a busy year for Liberty. As you've seen, we continue to produce strong organic growth in our core businesses. We expect that to continue in '06. As you will recall, we are also employing a new strategy which was begun in 2004, of disaggregating businesses by distributing to our shareholders. In July, we c completed our second such transaction when we distributed our 50% interest in Discovery Communications and our wholly owned subsidiary Ascent Media Group to our shareholders. We believe that this will add value to our shareholders by putting Discovery in a stronger position to take advantage of growth opportunities.

In 2005, we also completed our debt reduction program, which had begun in 2003. This further strengthened our balance sheet and enhanced our financial flexibility. We also announced two significant management changes in 2005. First, we announced the Doug Brig, who had so successfully led QVC for so many years will retire effective the end of first quarter of 2006. We are very pleased to announce that he will be replaced by Michael George, who through his experience at Dell and MacKenzie shares QVC's philosophy of customer respect and brings a wealth of Internet experience as well. And as I mentioned earlier, Bob Bennet announced he will step down as President and COO roles in which he served Liberty's shareholders so well for years, and I was hire to replace Bob, and last Wednesday became President and COO of Liberty.

And finally, Commerce, a large investment in Fun Technology and the rollout of Vongo's IP content delivery services. These actions were undertaken at about the time that we announced our plan to form tracking stocks to better track the performance of our assets. As I mentioned we believe the strategy will serve our shareholders well and we will be talking much more about these in the weeks ahead lead up to our shareholder meeting at which time we expect the tracking stock structure to be approved. So. Thank you for joining us today, and I would now like to turn the call over to the moderator, who will open it up for questions.

Thank you. [OPERATOR INSTRUCTIONS]. We will go first to Kathy Styponias with Prudential Equity Group.

Hi, thanks. My question is regarding QVC. Could you give us a sense of what the margins were both for the quarter as well as for the year for Japan, the U.K., and Germany, that was something you used to disclose in the 10-K this time around? Thanks.

Bill, are you going to handle that? Bill Costello, do you want to handle that?

Excuse me. When you're talking about the margin, Kathy, I assume you mean the operating margins.

Yes.

In other words not the gross margin but the operating margins?

Correct.

The highest one is in Japan because we have the highest average selling price there and the lowest return rate. And Japan's gross margin is about 21.5%.

Was that for the quarter, or for the year, Bill?

I'm giving you for the year. I don't have the quarter in front of me so just let me give you the year. 21.5%. And Germany is 16.1. And the U.K. is 15.5.

Thank you.

Okay.

We will go next to Bishop Cheen with Wachovia.

Thanks for taking the call. And welcome, Greg.

Thank you.

Let me focus on two things and I guess I'm looking for more body language than exact answers, because I think much will be explained in May or whenever you do the road shows. Two focuses.

One, the debt reduction program, the magnitude of debt reduction going forward. In the past two years, Liberty was very specific on the amount it wanted to pay down, and it did. Second, a little more transparency around the tax impact, the hedges. In other words, will you be providing what it would cost each quarter when you release numbers to unwind the hedges around your specific positions? You used to do that back in the day.

So on the first one, I don't believe that we now have an articulated debt reduction strategy or target. In fact we're holding our powder dry in the event that the equities of our either tracker isn't performing to the level that we believe is appropriate and we want to have the flexibility to repurchase those equities. That's I think our first priority.

And in addition, we have been using some of that capital to do strategic investments or acquisitions like Fun and Provide, and if we see more of those opportunities ahead, particularly on the interactive side, and we want to keep our powder dry for that. Second, while I don't know the historical policy that you articulated, pre-dates my time, I believe that we are not going to give an incremental detail on the cost on line hedges. I believe that will not help us as we are out in the marketplace moving on even those instruments.

Okay. Last follow-up bonus question. The original concept of the tracker restructuring, is that all of the assets would still be structurally guaranteed, or support the debt. Has there been any change in that approach to how you structure the tracker?

Well, when do you a tracker, you are just allocating for in effect accounting purposes, or articulating as a return purposes, what will go where, but are you not actually physically changing the legal requirements of any set of assets to support any set of debt. So the institution of the tracker itself will not have any change on what assets support what liabilities.

That's very helpful. Thank you.

We will go next to Phillip Oleson with UBS.

Thanks a lot. It is actually a bit of a follow-up to that question. And understanding that the tracker only allocates the debt between the two entities, it was my understanding that it would be your desire ultimately to proceed with the full asset to the extent -- in that scenario, what is your intention in terms of legal needs to buy the existing debt between the two entities? I know in the form 10, you've already provided how you will allocate it, but what actually happens upon the event of a full asset based spin?

Well, I think as we've articulated previously, we have no intention of a spin today. But were one to complete a spin, you would have to, as you rightly pointed out, physically and legally move the debt over to the various entities, and there are several ways for which that can be accomplished. We're not articulating all those today but you're exactly right, they would have to be done before any actual spin could be completed.

And in terms of a gating factor for the -- to the extent that were you to pursue an -- and after the extent, is it fair to assume that the five-year ownership of QVC would kind of be the -- a time frame that would have to have that anniversary before a spin would be likely, or at least feasible?

I don't think I am going to commit or we are going to commit that that is the gating factor. I think you're correct in pointing out you need a five-year trade or business. Whether QVC would be the qualifying asset or we have another means of achieving, that -- that's one of the things we are going to continue to maintain flexibility upon. But obviously we would need, as you rightly point out, a five-year trade or business.

Are there any other factors that we're supposed to be focusing on?

I think you rightly pointed out you would physically need to do the exchange or the movement of the liabilities. There are some issues around -- which are not gating issues, but are factors that would cause us to consider the timing of any spin that might be thought about in the future, including the fact that QVC is a taxpayer, but the Liberty capital side is likely to be a -- generate losses which would be effective to keep those combined from a tax basis and obviously any actual asset spin would lose that opportunity, and therefore be tax inefficient. So at a minimum, for some period of time, while we're in that position, that would not be particularly attractive, and there may be other factors but those would be among the leading factors.

Great. Thank you.

We will go next to Michael Savner with Banc of America Securities.

Good morning. Thanks. Three quick one, if that's okay. First, for Starz, based on revenue growth over the past few quarters, couple years, it would seem like mid single digit growth programming costs and continued investments in SG&A would imply that expenses would probably still grow faster than the top line so I just wanted to see if that kind of conclusion is directionally accurate.

Second, maybe touch on your Time-Warner interest. Obviously you're moving forward to regain control of your voting rights, and wondering if there is a way for you to monetize that interest through an asset swap, if that's something you would pursue, and if so, if there is anything that you could discuss publicly that would interest you.

And third, Expedia going into LI, operationally not as synergistic as some of the other businesses that are going to be part of the Interactive company. Just wondering again the logic behind Expedia and is it simply the growth characteristics match the rest of the assets? Thanks very much.

I will let Bob Clasen, you want to take the first one about growth rates of expenses?

Yes, that would be fine. First of all, programming costs do peak in 2006. So we do expect, as Greg pointed out, that especially early in the year, our programming costs will peak and then reach a plateau, and so for the year, it certainly will be a growth ahead of our revenue, but perhaps, as we look forward, to '07 and '08, we have a much stronger chance of managing those costs at that point.

Secondly, the real issue is what happens, I think, to Vongo. I think we've got a very good handle on our marketing and G&A expenses, but it depends on how Vongo develops. You know, Vongo is also a wholesale product, and we are in discussions with affiliates about using Vongo, which was because of the technical nature of Starz Ticket, an option that we didn't have.

So if we are able to use that as a wholesale product, that of course changes the pricing configuration dramatically, although we would continue to keep it as a retail product, since -- and I think it is a -- you know, let's see how Vongo proceeds over the next year, and how many additional resources we need to put behind it. Other than those two factors, I think we have a quite good handle and should be able to keep our expenses well in line with our revenue growth, and by '07, hopefully the programming costs will have plateaued.

Thank you, Bob. The second question you had was regarding Time-Warner and our ongoing discussions and while I don't think we want to -- we don't have anything to announce, we are in continued dialogue with Time-Warner about ways in which we can easily and beneficially maximize. They've announced their repurchase of quite a lot of stock. We are a big stock holder.

We would love to get some operating assets. They have announced some 6 their operating assets are for sale. Whether a transaction will come from all of that, I can't forecast, but clearly we're in discussions with them and those things are all of interest to us, particularly in ways in which we can do that tax efficiently and not be -- and somehow manage a tax-free redemption. As far as Expedia and Liberty interactive, there has been healthy debate about that throughout the company and I will let our chairman, Dr. Malone, opine.

As Greg said, it was a very close call. Weighing in favor of putting it with interactive, were factors such as its growth rate, it is an Internet-based service, and it does have a fairly consistent management control structure with IAC. So also, structurally, it would be very difficult for us to separate the two businesses physically, because our ownership of the two businesses, because they're held in a holding company. And therefore, it is more convenient to keep them together.

Obviously, going the other way, was the fact that, you know, it is an investment position at the present time, and therefore, we don't consolidate it, although we do equity account for it. So it was a very close call. And it could have gone either way. I think is the right way to look at it. But we thought on balance, the structural issues really said that it probably should stay with Interactive because of the consistency of the relationship with Mr. Diller.

Great. I appreciate it. Thank you.

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

Thank you. If we could take the questions one at a time. On the interactive side, should we expect the strategy will be mostly on the consumer Internet side or are you willing to consider business to business opportunities?

I think business to business is unlikely to be in the purview, just given what we already have in there, and trying to leverage the assets and have them work well together as an operating unit so I think this is unlikely.

Okay. And on the Vongo, I was wondering what is the strategy in terms of offering some of these titles on an a la carte basis and if there is anything at all on the advertise and supportive front, how you're thinking of that model to kind of support what you already have.

Well, I think our belief is that while there will be some demand for a la carte pay per view type offering, that in general, most content that is successful and particularly those that will be demonstrated longer term video content on the web, not necessarily music content is, not going to be either pay to own, or pay per view, but will tend to be their ad supported or subscription, and movies lend themselves to subscription given the length and lack of desirability of dividing it up into segments with ad support in between.

So while you never want to say never, and I do think pay per view will be an interesting addition, and possibly burn to own will be an interesting addition to the Starz -- and the Vongo offering, that the primary driver and the think which will differentiate it are the exclusive IP subscription rights that we have and we can offer consumers and we think that will be very appealing to consumers to have a known cost with unlimbed capabilities, unlimited downloads from a quite large library. I think our goal where I've discussed it with other content providers is to continue to beef up and bulk up on that library, both on an exclusive and nonexclusive basis, and add both subscription content and pay per view to complete the offering but with the primary driver being subscription.

Bob, do you want to add anything?

I would just say that you're absolutely right, it is really the subscription product that becomes the anchor. Having pay per view and VOD products which is a slightly earlier window also gives greater attribution to the site and also think of Vongo more as a platform than as a product at the moment.

Certainly, we're positioning it for the product that is on it, but to your question whether it be ad supported or whether it be just the addition of other content or more movies or television, those are all in development, but over time, we would expect that Vongo itself would become the residence of other products, besides just the anchor subscription product that consumers have historically embraced as a way to fix their costs and yet get good value.

Okay. That's very helpful. And one last question, if I may. On Liberty Capital, I understand that you are leaning against a possible liquidation, but let's say a couple years down the road, and it happens at that complexity is not being addressed in a timely fashion, in terms of maybe growing the operating assets, for that unit, at what point then do you kind of decide that liquidation might be an option in terms of the time frame that you're setting. And I realize it may be early but maybe any comment around that would be helpful.

I would make two comments. First, I've been CEO less than seven days so I'm not quite ready to liquidate it. [laughter]

Okay.

Secondly, that one of these things which has led to wanting not to drive towards liquidation has been that that is the least tax efficient means to achieve value for our shareholders. And keeping in mind our first principal that that is what we are aiming for, to deliver tax efficient or after-tax high returns to our shareholders we do not believe that will be an attractive means in which to do it and so while you never want to say never, that appears to be the least attractive alternative for our shareholders today.

Thanks very much.

We will go next to Jessica Reif Cohen with Merrill Lynch.

First, a couple of questions. I guess first on the QVC on the international side, the growth after adjusting for exchange rates was 24% but the year before was 30. You made it sound like '05 is going to be very tough to beat. So maybe you can clarify this, that on domestic and international? And on the international side, just wondering if you could say where you see the organic growth coming -- what do you think the organic growth rate will be over the next say three years? I have additional questions but I will start with that.

Okay. I will comment briefly and then let Bill Costello or Mike George pick up but I think when have you a year like QVC just had, with the kind of domestic growth it has had, which is a positive outlier above its historical trend, one is intuitively or inherently cautious about projecting that that higher level of growth is going to continue. So I think it is a natural caution which is leading us to suggest don't take the single data point that is above the trend, and assume that that is the new trend. Bill, do you want to add anything on the international side?

Yes, I agree. Jess, you wouldn't expect the international growth to slow down a little bit, because, you know, as we mature, we're coming to the saturation points on the additional subscribers, so that the growth that you get from the subscriber growth, which we've been getting for the last three or four years, is what has really led to the dramatic revenue increases from year to year, but we think it is a pretty solid business going forward, but I think you would be looking for things more in the range that we experienced in 2005, and maybe a tad less on the revenue line, as we go on, as we saturate the subscriber market.

With regard to domestic growth, I just follow up with -- on what Greg said, is because we tend to look at the business over a little longer term horizon, than just one or two years, and our guidance in terms of the business has always been that we believe very, very strongly, that we can grow the base business, the domestic business, on a 10% annual growth rate. And we are very fortunate to have a tremendous year in 2005, very, very happy with those results, and so, you know, when you are growing the business at 10% compounded annual growth rate, some years are going to be a little bit more than the 10, and some years are going to be a little less than the 10, and 2005 happened to be a little bit more, but in terms of the long-range picture and five-year period of time, we still adhere to our previous guidance of 10% annual, compound annual growth rate.

Great. Just switching gears, I have a couple more question, on Vongo, it is not really clear what the status of your download rates is for films, you can update as to who you actually signed am.

I'm sorry, it is not clear exactly what?

What the status is of the download rates. Do you have all of the companies? Has Disney signed? Can you clarify what rights you actually have at this point in time?

We have, you're asking now on, just to be clear on a subscription basis or a pay per view basis?

I guess Vongo for subscription and if you have something --

We have exclusive rights to those products which we have -- Starz products which we have in the paid TV window, and we have exclusive rights for a movie IP subscription service. And that that would be primarily Sony and Disney products. So all of those -- and Revolution, which is a subsidiary we own a third of.

And when you look at those -- you see those things that are demonstrated on the Starz pay TV window, it is pretty much assured that we have the same rights exclusively on the IP subscription window. In cases where we may not also be showing it, it is likely that we have negative rights preventing anybody else from showing it even during those periods in which we are not allowed to be showing it, in the pay window is over, for example in the broadcast TV window, there may be movies shown on linear television which are no longer in the pay window but for which we still have exclusive IP subscription detail rights.

Okay. Thank you. And then two more questions. On Liberty Capital, you mentioned that your focus would be in getting strategic care assets, can you clarify what strategic is? Did you mean content? A gentleman said on one of the calls that you would consider looking at the stress set? What is strategic to you? What area is strategic?

I think is right, strategic can certainly be in the eye of the beholder and I think we outlined some of the areas where we have interesting toeholds in businesses. The intersection of what GSN and Fun Technologies, in the skill game and casual gaming, is a very interesting intersection for us. We see it as a high growth area, where we have a good position that might be able to be added to. Similarly around some of the things we begun to do and not as well articulated in mobile video or some of the things in Vongo, those are areas in the IP subscription, those are areas that we may enhance and add to.

The reason we say that is that it is a lot easier to find strategic businesses and add to them, than to start de novo. That is not to say that we wouldn't swap for an asset and begin to use as at as a platform on which to build if we thought we could swap for some asset and make it attractive over time by adding incremental businesses to it and we want to think how all those put together and particularly in those areas where we already have a foothold and a toehold.

And lastly we will be certainly be motivated in some of those potential redemptions by the fact that avoiding, in many cases, billions of taxes, is a overwhelming motive against the strategy as well. So you're trying to weigh those various piece, what you already have that is interesting and what you can get that you can build on, and the tax impact and I think we're trying to do all the of those.

As far as John's comments about spread sets, I think he is right to point out that there have been various times at which very attractive returns have been achieved by going into the spread set, that is probably not today, when the spreads off of Treasuries on high yield are very tight.

But it is coming.

The Chairman quickly points out, the storm may be ahead still.

One last question. You were very clear of the time Warner, you know, tax efficiently maybe for an asset, can you just give an update on what you're thinking on News Corp?

Well, I think we -- our position at News Corp is in many ways more attractive and more strategic. We are very impressed with the things that News has done, repositioning itself in the Internet space, driving and doing well with its businesses, and we are -- we think it is attractive valued or undervalued and therefore an asset that we feel very comfortable holding.

In addition, our position on holding, almost 19% of the votes now, because they continue to repurchase stock, gives us potentially more influence than in the case of a Sprint or a Motorola or the like. And it is theoretically an area where we have more knowledge, more comfort therefore, more visibility, so holding it is well -- while we are continuing dialogue and would love to do something strategic with them, holding them, perhaps influencing them in a positive way over time are all attractive options.

Thank you.

We will go next to Matthew Harrigan with Janco partners.

If you say there is a certain flux on Liberty capital and Liberty interactive I think of the initial form 10, you had Expedia and capital somewhat to my surprise, one thing that would probably tend to concentrate in the NAV discount at Capital is I think the distribution ratio on LC was about 0.05. Is that one of the things that is in flux? Because I think even with moving Expedia over to Interactive, you would still have potentially a near triple digit or into triple digit NAV on that animal when it came oust the blocks, in early May, and then I had one follow up.

Okay. You're talking about -- when you say distribution ratio, you're talking about the relative weight of the two assets?

No, the -- I think every Liberty shareholder was to get .05 shares of Liberty capital.

Like one for 20.

Exactly so that has the effect of creating a triple digit stock pre-NAV discount it makes it a little bit list liquid a little less attractive to retail investors.

And I think we would be happy to have shareholders like you where the NAV would be above many other people's estimate force the NAV so a triple digit number on the NAV even doing a 1 for 20 would be well above what I've seen in any analyst projections and frankly in our own internal projections.

I thought my NAV lines were in line with the street and I will go back and look at my work.

Maybe I'm not reading the same street material you are but I don't think you're quite that high.

Depends on how you look at the tax. That is really the big swing.

And then I guess my follow-up was you talked about the dot-com component on QVC domestically. Can you talk about your efforts to expand that component in your overseas markets as well?

Maybe Mike George, do you want to try and tackle that one?

Yes, we're doing it -- I mean and since, the international is my bailiwick, we're doing it the exact same -- the strategy internationally is the same as domestically, IE, you know, we don't offer things differently, or different products on the sites that we have on the TV. We make it one shopping experience, compatible throughout. And Greg mentioned that we were about 18% for the year here, and it is beginning to grow domestically, or internationally also.

I know that it is about 7%, 6, 7% in Germany, it is about 11%, 11, 12% in Japan, and I'm not quite sure on the U.K. number, but our strategy with dot-com sales internationally is the exact same strategy as we have here in the U.S. is, to make it one transparent shopping experience for our customers, and also I should point this out, it doesn't have an impact on the revenue but it certainly does enhance the customer shopping experience where they can track the orders, they can talk to the host, they can see the program guide, they can get more information about a variety of products, and as we go forward, I think we're on the road show, where Mike is, thinking about other opportunities for us on dot-com and as time goes on, we will be prepared to share that in more detail with you.

And when you look at the scale logistics of going into incremental markets, I mean you said before, it is really tough to go into markets even the size of the Netherlands, even with the EEC supposedly a common market. Is that still your thinking in terms of just concentrating on the market you have and going to China? Or could we see some new announcements?

Well, we're certainly going to be opportunistic, but I think you're absolutely right, in referring to my previous remarks. I mean as I mentioned before, there is only six countries with more than 10 million -- or 10 million multichannel homes and we happen to be in four of the six. The other two happen to be China and India. And you know, we really think China is going to be a great market for us down the road, although now it is a little too premature. Should digital terrestrial continue to expand out, we are going to be looking at those markets. I mean again, very opportunistic, but really haven't changed that much from where we were at the last analyst meeting in terms of guidance and future international potential.

Great. Thank you.

We will go next to Alan Gould with Bleichroeder.

Thank you. I've got two questions. First, can you tell us when the window opens for the -- opens and closes for the put/call that have you with Time-Warner on Court TV?

And secondly, it looks like the fair value of your public investments is $18.5 billion. If were you to adjust it with the hedges mark-to-market, what would be the fair value be?

On the first point, the window is open. And on the second point, could you just repeat the question?

Yes, it looks like the fair value of your public equities is about $18.5 billion at December 31. If were you to also mark-to-market the hedges, where would that fair value be?

Something on the order of another $900 million.

Okay. Thank you.

Maybe a billion. Somewhere between 900 million a billion.

We will go to April Horace with Hoefer & Arnett.

Hi, good morning. A couple of quick questions, a little bit more on the same Internet and QVC, can you give us any kind of color as to what percentage of the sales would go to the Internet coming from 18%, going to 25%? And how does that translate into improvements of operating cash flow at QVC? And then I have another brief question.

Okay. Mike is going to answer that.

We see the Internet penetration continuing to grow at a healthy rate. You know, more and more of our customers are getting comfortable with shopping on the Internet. And we think, as more and more homes are outfitted with broadband, we can make that shopping experience even more engaging. One of the things we can do uniquely is take these great video assets and put them on the Internet, so one of the ways we will continue to drive penetration with the Internet is, as Bill described it, to have a very synergistic experience with the TV show, and have much more dynamic and compelling video content on the web that we think is fairly unique to us.

So while I can't give you any specific numbers, look for our Internet penetration to continue to grow at the kind of rates we have been growing it at. And in terms of its impact on the P&L and Bill can add to this, but clearly, it gives us an operating expense advantage on the Internet, primarily because we avoid the cost of the phone call, so there is some additional financial leverage on the expense line that we get when we shift customers to the Internet.

And then my follow-up question is on Vongo. You were talking about meaningful revenue for Vongo going forward. Will you separately disclose that in the future? An then can you give us any kind of break-even point as to how many subscribers you might need in order to break even for that business?

I don't think we have yet started on a disclosure policy. But when it becomes meaningful, we will obviously disclose it. It is not near that point yet because we just launched less than two months ago. As far as what are the break-evens, that will really depend on what kind of distribution methods we use, whether it is the wholesale distribution or the retail that Bob mentioned, our plans to work with some of the -- our affiliate, MSO affiliates and certainly we would have the same kind of discussions with telcos and looking at IPTV experiences and would also be impacted by the scale of additional incremental partnerships that we do in the content area. But I don't think we've yet -- it is a floating break-even based on what your assumptions are and I don't think we're making public that number today.

Okay. Thanks. That's all I got.

We will go next to Eli Lapp with UBS Principal.

Thanks. Just one question. You mentioned several times that you would look to buy back stock if you view it as undervalued. You could give us sort of your mind set when it comes to debt valuation? And do you look at it in a similar vein? Or does that not really play a role?

Well, I think we would pay attention if at any time we thought our debt was particularly undervalued and we could achieve increased returns by repurchasing that debt, which we weigh that against any other alternatives, whether it be purchase to third party companies or purchase of our own equity, et cetera, we will weigh all those alternatives but we are certainly not adverse from the repurchase idea if that proved to be an attractive alternative.

Does it have to be more a severe move meaning a greater standard deviation, so to speak?

Well, the potential to have debt be mispriced is certainly there, but it tends to be less than equity, so it would have to be the greater standard deviation, I don't know, but it is more unusual it strikes me that you get your debt particularly underpriced relative to your potential you may get with equity under priced.

I think that is true. Frankly part of the reason I'm asking the question is because if you go with Dr. Malone's thesis that are you going to get a lot more distressed debt available, I'm not going to opine on that, but if that is the case, that would suggest that are you probably going to have a more severe move in Liberty Media's debt as well, rational or not, that's generally what happens.

Well, I certainly agree, and I guess we would be -- we already mentioned we would look at distressed debt. We certainly would, if our own potential were distressed, we certainly wouldn't be be adverse to looking at that as one of the alternatives, and theoretically one that we did more in the marketplace or had an opportunity to be particularly knowledgeable.

Can you look at it on the capital company, that our debt is essentially financing, and an investment portfolio, so at the point that the debt costs in the market was higher than we thought the depreciation and the portfolio was, it would make sense to run the machine that way. We always have to look at the tax leakage, you know, of selling the underlying equity, and repurchasing debt, or going another way, it is very much a tax issue.

Okay.

And it relates to a lot of the other tax complexities that we have, some of which, unfortunately, we really don't know what the outcome is going to be until the government rules. So there is other elements of uncertainty in it that prevent you from making a -- just a straightforward mathematical calculation. You have to put some probability into it for the likelihood, for instance, that our current tax treatment of our exchangeable debt will in fact hold up, if it is ultimately challenged by the IRS. So it is not a simple mathematic.

Okay. Thanks a lot.

We will go next to David Smith with Western Assets.

Gentlemen, just one of the things that struck me earlier in Greg's presentation was the question of going through the tax impact on the hedges versus the underlying were, and what the net tax effect was on the investments, and you basically said you didn't want to do that because you were looking at the hedges which -- and the hedges are basically, I think a lot of them run through the debt, and with the exchangeable securities, so, at some point, isn't this dollar amount material? And I guess I'm curious how --

Yes --

How you're getting to the point where you can sort of not tell me what it is, given the size?

Well, there's two effective hedges. One is the exchangeable securities, okay? And those the market tells us what they were every day, because they trade.

And they are material.

And they are material.

But I can't see your tax impact on -- I can't see your tax basis on that.

On the exchangeables?

Yes. Or on the underlying -- on the combination of the underlying and the exchangeables.

Because keep in mind, that one of the issues on the exchangeables is that they're not -- they're also settleable in cash. They're not necessarily settleable in the underlying security. So then you have to weigh whether or not you would cash settle 24 years from now, or -- and you also have to weigh what the IRS's treatment will ultimately be of the tax deductions that come with the interest rate on the exchangeables. So it is a very complex subject. And unfortunately, if we were to pop off and try to give simple guidance, we would probably be confusing everybody or misleading people. And that's run one of the reasons we don't do that.

John, I do confusion quite badly, but thank you.

That is really the issue. I mean it is all tied up into --

If I give a call in, maybe we can kind of walk through theoretically.

Yes.

That's fine.

I think it goes to Greg's earlier comment about the split-off, when you would do it, that all ties into the extraordinary tax treatments that will benefit us, assuming that our tax positions are maintained.

But it is also sort of difficult at this level to understand the macro size of these, and how they're sliced. Does that make sense? Or how they would be --

This is Chris Sheehan. You know, there is some information in our tax footnotes that outlines basic differences with respect to the exchangeable debt.

Great. Thank you much.

We will take our next question from [Edward Officano from Sigma Capital Management].

Hi, just a quick question on just the strategic view. Is there any interest in the auction for Univision? Does the company have any interest in that?

Well I think we're -- I'm not sure it is in our interest what we're going bid on or not but if you look at that kind of an asset, it is not an obvious one where we have -- we bring a strategic synergies or the like to enhance it. On the other hand, at the right price, even many of the traditional video assets, if given appropriate leverage can be attractive, so you know, we would watch the Univision auction with interest.

That one is completely related to Televisa, and the continuity of the flow of develop la, novellas and so one would be taking a great deal of risk if one went into Univision without some close working relationship with Televisa

You need a good Mexican partnership to make that partnership work.

In tandem with Televisa, in partnership with Televisa, is that something that Liberty would be interested in.

You never say no to these kind of things. At this point, it hasn't evolved to the point where that is something that we have to make a decision on.

Okay. Thank you.

We go next to Andy Baker with Cathay Financial

Thank you. A couple of questions, the first one is for Bob, the 10-K broke out the impact of the decrease in effective rate for SEG services, I assume that is due to Comcast, going forward, I mean when the Comcast deal is anniversaried, and I guess, you know, how do we look at that in terms with the Comcast there, with the other distributor, you know, the additions there, how should we view that as impacting your revenue growth?

I wouldn't say that that is actually the correct analysis, as we point out, in the 10-K, we have moved to a number of fixed deals, where the affiliate is paying us a certain number irrespective of their exact number of subscribers, and it was about 18 months ago that we began to suggest in a mature market you would be on consignment sales of Starz, selling at a lower rate than you were for the first 10 million that you had, so I think that might be a more interesting way to look at it, certainly Comcast has an impact on, that but there are those two other factors as well.

We are, with Comcast, on the Encore side, through a contract that will run through September of '09, and on the Starz side, which is our flagship product, it is through 2012. I think we do disclose all of the other contracts that -- and when they are coming up for renewal. But as we get through this year, we have some key contracts to do, most particularly the echostar contract that we're negotiating right now, and DirecTV, and, you know, we're in the midst of talking to both those folks.

Thank you. And I guess for Greg, if I'm not mistaken, you have a forward contract on 70 million shares of Time-Warner that expires next month? Have you given any thought on how to settle that contract?

That contract is no longer in place. It is restructured and it is much longer term.

Thank you. We will go next to Vijay Jayant with Lehman Brothers.

Thank you. My question really is on Liberty Capital. Given 5.5 billion of debt, 750 million of cash, really two cash flow generating opportunities, two cash flow generating assets, but on command and Starz, and the opportunity for buying back stock, you know, how much leverage can you put on to add cash buyback? Because I think that is probably where the discount is going to reside when the spinoff happens so can you sort of talk to that? Say out of the box, how much can you do on buyback?

I don't think we've got a limit. I think we've created an authorization that will give us an opportunity to do a substantial amount of buyback, and that will be disclosed as we go out in the papers filed with the SEC on the trackers. But I would point out as far as sources of liquidity, we have the easiest and first source would be we have a bunch of hedges in place, we could borrow against the hedges, we have several places where we have high basis equities and not necessarily high vote.

Those are the most attractive potential disposition opportunities where we don't lose any of our influence. We have triggered perhaps even tax loss, not necessarily tax gain, and there is, you know, potentially several million dollars of equities that would qualify for that. And so there is quite a lot of liquidity, if we so chose. You rightly point out, it is a little bit risky or something you would be cautious about, borrowing against noncash flow producing investment assets to repurchase equity, so there are probably cautions or limitations in which -- how far you want to push that.

Thank you.

We will go next to Adam Spielman with PPM America.

Thanks. I just had a few questions. First, concerning the HSR filing on Interactive and Expedia, I was just trying to get a better since of what you're after. You obviously control the vote, but yet I think the voter maintains a proxy, so A, what do you really get for increasing your stake there and are you still at kind of differences with diller and the board on how much leverage or how to capitalize that company?

Well, first point, we -- we have a certain pre-emptive rights that we have the opportunity to exercise, and without that Hart-Scott-Rodino filing, we would not be able to exercise them, so in Expedia or IAC would issue more equity, we would not be able to utilize our pre-emptive rights. Just as a housekeeping matter we practically, we needed to do the HSR filing.

Secondly, IAC had a good run here, perhaps we should have bought more IAC before it had the big run. Expedia has had sort of a big drop. We should weigh whether we should be looking at buying more Expedia. I'm not making any statements about our intentions, but frankly we needed the HSR filing to create the opportunity to evaluate those investments.

As far as leverage, I think in general, we would be more aggressive and more favorably inclined towards incremental leverage on both of those businesses, given their cash flow generating opportunities, than the current management seems to believe is appropriate. But we have dialogue.

Second question, on -- is there any update on Discovery, the public holding entity, and any cooperation from your partners in the ownership of the underlying assets?

We -- that wouldn't be an appropriate subject on this call. This is a Liberty call, not a discovery call. Perhaps if you give John Orr a call offline, he can direct some of the -- address some of the discovery issues.

Thank you. Finally on Liberty capital, annual and are there 40 act issue, is there anything in particular that concerns threw about -- I understand perspective, you're not splitting the assets but from perspectively from legally splitting the assets?

We are certainly not going to opine whether we have issues or not but you're right we're always evaluating your -- when have you large investment position, and you evaluate their relative scope compared to the operating and underlying businesses, so we certainly pay attention to any of the issues that might arise.

Thank you.

We will take our next question from Robert Schiffman from Credit Suisse.

Thank you so much for take so many questions. Just really, two I think, or maybe three. With regards to borrowing in terms of where it is going to be going forward, you increased your QVC facility from 2 billion to 3.5 billion. Would you anticipate that future borrowings are all going to be done at the subsidiary levels rather than at the parent level.

Well, we will evaluate the relative costs of those financings as they go forward. In many cases as you rightly know and as you rightly point out you can achieve a lower cost of financing by putting the debt closer to the assets and I think that was one of the goals, was putting the QVC -- creating the size of the QVC facility.

I would point out that we will still have quite a lot of assets in Liberty Capital that are unencumbered by that facility and theoretically could provide incremental borrowing capacity, including the Expedia stake, the IAC stake, the stake in GCI, the stake in the commerce hub. So in general, those are not cash flow producing assets.

Are you concerned at all about structural subordination from a rating agency perspective? Or at this point, do you sort of just throw your hands up in the air with the rating agencies and don't really care?

There are some nods around the table. I'm not going to say we go quite this far but I am going to say we do our best to explain to the rating agencies the logic why we're putting debt where it is and why we're trying to bring in the lowest cost of capital on that debt while maintaining the maximum flexibility.

If you can help me out, I understand the tracker and debt allocation, that is not an actual legal allocation, or a legal transfer, but you have taken specific bonds and said it is going to be allocated to these entities. If and when there is an actual spinoff, are you required to keep those securities with those assets? Or would you have complete flexibility to keep or move those -- move the specific debt wherever you wanted?

I think we would have flexibility to move some of that debt around, at any time that we actually did contemplate or achieve a spinoff. So we have --

And if that's the case why, bother specifically allocating individual pieces of debt rather than just allocating levels of debt?

Because there are varying interest rates, varying tenor, varying cash flow maturities that impact the value of the underlying equity.

Thanks again.

We will go next to [Doug Calandria with Stearn].

It was already asked. Thank you.

Operator, maybe one or two more questions and we will call it a morning.

Okay. We will go to Morris Mark With Mark Asset Management.

Hi, can you guys hear me?

Yes.

I got the impression, listening to your discussion on Liberty Capital, that you really are in no rush to restructure your relationship with News Corp. Am I correct in that impression, that basically, you now really are looking forward to owning this stock for a long time? And secondly, to the extent that is or is not true, there is a lawsuit pending, I believe, in Delaware, challenging the preferred stock issuance on contractual grounds. Have you looked at that suit and do have you any feeling as to whether it has any possible merit and whether that might have or not affect your ability to at some point add to your position?

On the first point, you know, I don't think we have resigned ourselves, I think we look at that, our ultimate goal is to find a tax efficient solution, tax efficient asset. There are a range of possibilities to which that could, you know, get to that solution. In the interim, we hold an asset that we like, and we feel good about, and frankly won that we might be able to exert more influence upon, and so all of those, you know, give us comfort as far as if we need to wait, we're not anxious about the waiting period. I think I'm not going to comment on the lawsuit.

Okay. Thank you.

That does conclude the question-and-answer session for today. I would like to turn the call back over to our speakers for any additional or closing remarks.

I would just close by thanking all of our shareholders and interested listeners for participating in this and thank all of my fellow management team members who are spun around the country for participating as well. Look forward to talking to you next quarter and looking forward to seeing you many of you on the road show next month. Thank you, operator.

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