QVC Group Inc (QVCGA) 2006 Q3 法說會逐字稿

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

This presentation includes certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements about financial guidance, business strategies, market potential, future financial performance, new service and product launches, and other matters that are not historical facts.

These forward-looking statements involve many risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements, including, without limitations, possible changes in market acceptance of new products or services, competitive issues, regulatory issues, and continued access to capital on terms acceptable to Liberty Media.

These forward-looking statements speak only as of the date of this presentation and Liberty Media expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statements contained herein to reflect any change in Liberty Media's expectations within regard thereto or any change in events, conditions, or circumstances on which any such statement is based.

Please refer to the publicly filed documents of Liberty Media, including the most recent for 10Q for additional information about Liberty Media which may affect the statements made in this presentation.

On today's call, we will discuss certain non-GAAP financial measures. The required reconciliations can be found on Liberty Media's website at www.libertymedia.com.

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 good morning. This is Greg.

This quarter is the first full quarter under our new tracking stock structure. And today we'll cover the performance of the assets attributed to the Liberty Interactive and Liberty Capital tracking stocks.

I'm joined today on the call by a host of our executives, including QVC's CEO, Mike George; QVC's CFO and President, International Operations, Bill Costello. From Starz we have Bob Clasen, Chairman and CEO; and Glenn Curtis, its CFO. From Liberty I'm joined by many of our senior executives, including Chris Shean, our mustachioed Controller. We will be available to answer all of your questions following my prepared remarks.

I'll open today by discussing LINTA's attributed businesses, including significant events during the quarter, financial results, and our liquidity picture. I'll follow with a similar review with LCAPA and its attributed businesses. And then we'll open the call up for questions.

The third quarter was highlighted by continued strong financial results at the businesses attributed to Liberty interactive. On a combined basis, the LINTA businesses reported 15% revenue growth and a 20% OCF, operating cash flow, increase driven by strong operating results at QVC and the inclusion of Provide Commerce, which was acquired last February.

During the quarter, we completed the acquisition of BuySeasons, the operator of BuyCostumes.com, the world's largest online-only retailer of costumes and accessories. We like the company and we like the space. Halloween is America's fastest growing holiday. This deal also furthers our strategy of adding direct- to-consumer web businesses that can generate synergies with our other Liberty affiliates and benefit from the video promotion power of QVC.

During the quarter, we repurchased 22.1 million shares of Liberty Interactive series A common stock for a total of $390 million. After the quarter, and through 10/31, we repurchased an additional 5.1 million shares for $109 million. Since the creation of the tracking stocks and through the end of that October, we've repurchased a total of 46.6 million shares for $840 million, representing just shy of 6% of the shares outstanding at the time of the creation of the tracking stock.

As we've noted, the businesses attributed to LINTA have significant liquidity generation capabilities, and we're looking to put that liquidity to work to enhance our equity returns. Given the repurchase activity during the second and third quarter, our Board recently increased our authorization to repurchase Liberty Interactive shares by an additional $1 billion. We will continue to report quarterly on share repurchase activity.

In October, we completed the acquisition of the ownership interest in QVC held by its officers and employees and now own 100% of the stock of QVC. We paid $482 million comprised of 434 million in cash and the balance in phantom stock units.

In October, QVC entered into a new credit agreement which provides for an unsecured 1.75 billion credit facility. This credit facility is in addition to the 3.5 billion facility that was entered into in March of '06. The new facility will provide additional liquidity to pursue acquisitions or LINTA share repurchases.

The solid operating performance in share repurchases continued positive trends at Liberty interactive and the stock has performed well in response. We believe this has been a systematic formula for strong long-term equity appreciation at LINTA. During the quarter, LINTA's share price increased 17.4% from its June 30th close.

Now let's take a closer look at the results. Liberty Interactive once again turned in a solid financial performance during the third quarter, highlighted by another strong quarter at QVC. Overall, our cash flow was up 15% -- sorry, revenue was up 15% and operating cash flow was up 20%. These results, as I mentioned, were aided on the revenue side by the inclusion of Provide Commerce. However, the primary driver of both revenue and operating cash flow growth was 12% -- was the impressive 12% revenue growth and 20% operating cash flow growth at QVC.

As in the second quarter, the third quarter results were impressive, particularly given the difficult comps from the third quarter of 2005 and in light of QVC's primary competitor again experiencing challenges of flat revenue.

Now let's look more closely at LINTA's results. Domestic revenue at QVC and operating cash flow grew 11% and 16% respectively, as the company increased sales to existing subscribers. The Company experienced strong performance across all product categories with particular strength in accessories and apparel. Domestic shipments increased 7% to 27.6 million units in the quarter and the average selling price grew 4%, from $4.39 to $4.48 -- $45.48, excuse me.

Internet sales continued to increase as a percentage of total sales as QVC.com accounted for 19% domestic revenue in the quarter, up from 17% in the same period last year.

The domestic operating cash flow margin increased 110 basis points due to a 50 basis- point increase in gross margin combined with operating leverage and higher credit card income on the Company's private label credit card.

International revenue increased 15% and operating cash flow grew 31%. This was due to increased sales to existing subscribers, subscriber growth in all markets, and favorable foreign currency exchange rates. Excluding the favorable impact of foreign exchange rates, international revenue increased 13% during the quarter while operating cash flow grew 30%. Overall, international operating cash flow growth was driven by the revenue increase and margin improvement as gross margins increased by 190 basis points to 37.2%.

Execution and a long-term approach to the business continue to pay off for QVC. Our business grew double digits in every month, primarily based on same-store sales. QVC's merchandising expertise, executional excellence, and attention to the customer allow the Company to drive superior financial results in fully distributed markets. This performance and management's attention to detail give us great confidence in QVC's long-term prospects.

Provide Commerce reported quarterly results ahead of our expectations on -- particularly with operating cash flow growth on strong cost control. For the quarter, revenue was up 17% and normalized OCF increased by a significant percentage off of a fairly low base. During the quarter, Provide completed the acquisition of Shari's Berries, which will complement its Secret Spoon confection line.

As we've stated consistently, QVC's long-term approach to its businesses may periodically yield varying results over short periods. We were again ahead of our forecasted long-term growth rate in Q3, but expect results more in line with our long-term forecast in Q4, given what we've experienced in October and the tough comps that lie ahead, given our strong performance in Q4 last year.

Now let's look at liquidity. We continue to maintain a strong capital structure and good liquidity at the businesses attributed to LINTA. LINTA has attributed cash and public investments of $4 billion with year-to-date share repurchases and has about 6.4 billion in debt.

As I mentioned previously, QVC entered into a credit facility and, in September, used capacity under its existing facility to repay senior notes that came due. Liberty Interactive currently has net debt at just under $5.5 billion, which equates to a multiple of just about 3.5 times annual OCF. As a result, the LINTA businesses maintain significant liquidity to grow organically or through acquisition or to shrink equity, as we deem appropriate.

Now let's turn to Liberty Capital. We also experienced another active quarter at the businesses attributed to Liberty Capital. Our success was somewhat mixed, but we continue to make good progress towards reducing complexity and transforming the attributed assets and strategic operating assets.

During the quarter, we completed the exchange of all of our IDT interest and cash for IDT Entertainment and the assumption of its debt. IDT was a passive, illiquid investment that did not logically fit with our other LCAP or portfolio investments. The exchange for IDT Entertainment, which has been rebranded Starz Media, provides us with a business that we control and we believe is highly complementary to Starz.

Bob Clasen and Bill Myers are pretty excited about this transaction, as it will help transform Starz from a more narrowly focussed cable operator into a broader based, fully integrated media company. This gives the Starz team the exciting capability to introduce wide ranging programming that can be distributed on many platforms around the globe.

In October, we announced an agreement to sell our controlling interest in OPTV to an unrelated third party for aggregate cash consideration to Liberty of about $113 million. Given our focus on branded products and services delivered to the end consumer, Open TV didn't fit strategically with the future direction of the Liberty Capital attributed businesses. So we're pleased with this further step towards streamlining our portfolio of businesses in LCAPA.

During the quarter, the value of our News Corp stake continued to grow, and as September 30th was valued at over $10 billion and more today. We continued our discussions with News about tax efficient structures that would mutually benefit the shareholders of both companies. We are pleased with the progress to date but do not yet have a deal to report.

Let me make one more comment about our News negotiations. There seems to be at least some conjecture that if we did a swap of our new stock for News's stake in Direct that we might be under some obligation to move to hard control of Direct. This is not so. While I'm not sure where our negotiations with News will take us, one of the elements of a DirecTV deal that is appealing is the flexibility that we would have.

Depending on price and conditions, we could take advantage of our stepped up basis in News's direct position, compared to the tax basis in our stake in News -- I'm sorry I skipped there. We could -- excuse me. Let me start again: One of the elements of the DirecTV deal that is appealing is the flexibility that we would have. Depending on price and conditions we could stay at 39% and have significant influence on Direct, increase our stake, or even sell down to 25.1% of Direct, taking advantage of our stepped up tax basis and News's direct position compared to our tax basis and our stake in News and still retain the tax-free character of the overall deal under Section 355.

During the quarter, we also continued our discussions with Time Warner about the exchange of our Time Warner shares back to the company for a combination of cash and operating assets. These discussions have been ongoing and I can't predict the timing of any deal, if any deal occurs.

The businesses attributed to LCAPA turned in results as expected. The group's largest business, Starz Entertainment, reported a modest 3% revenue increase while operating spend outpaced revenue increases, resulting in a 4% decline in OCF.

Now let's take a closer look at the quarter. For the businesses and investments attributed to Liberty Capital, the combined income statement remains a smaller part of the story. Our objective is to change that over time through the exchange of passive and nonstrategic assets for controlled cash flow generating operating assets. In the meantime, LCAPA, largest attributer to operating assets, Starz, is showing strides in improving its operating financial performance. While revenue did grow modestly and OCF declined moderately in the quarter, programming cost increases are slowing and SG&A declined in the quarter.

Overall, LCAPA reported a 9% revenue gain due to the inclusion of FUN Technologies and the revenue growth at TruePosition. LCAPA reported a 43% OCF decline, primarily due to the operating cash flow deficit at the newly acquired Starz Media.

Now let's take a closer look at the quarter for the LCAPA business. As I mentioned earlier, the income statement is only a part of the story, but in that area, Starz continued to show strides toward improving financial performance. Subscription units continue to grow, as Starz and Encore subscription units increased 7% during the quarter. This in turn drove a 3% revenue growth.

On the cost side, programming cost increases are moderating while SG&A has declined, as the elimination of certain marketing commitments under the Comcast affiliation agreement have more than offset the increased marketing spend behind the launch of Vongo. Starz continues to stand behind Vongo to increase our content offering, raise awareness of the service, and drive consumer uptake.

For the remainder of '06, these expenses, as well as marketing costs associated with Starz' traditional services, may outpace the reduction in other marketing commitments. As such, our guidance remains unchanged as we expect full-year results to be substantially similar to those achieved in 2005.

Finally, and as I've stated before, we're making progress in reducing complexity and focusing our assets at LCAPA. Since the formation of the tracking stocks just 6 months ago, we've sold our interest in Court TV, exchanged our IDT interest for IDT Entertainment, and announced an agreement to sell our controlling interest in OpenTV. We're pleased to own those assets, but we believe these transactions furthered our strategy of converting investments into strategic operating businesses that have synergy with our current companies.

We'll continue to work to reduce complexity and increase the operating orientation at Liberty Capital. Obviously, we are working towards converting our News, Time Warner, and other public equity positions into those kind of operating businesses and hope to have more to report over the periods ahead.

Now, let's look at the liquidity texture at the LCAPA businesses. Here we are in good financial strength. LCAPA has approximately 17 billion of public investments and derivatives and 2.1 billion of cash and liquid investments, which together at 19 billion are only partially offset by the 4.7 billion face amount of debt. This provides LCAPA with significant flexibility to grow our businesses and will play an important role in the strategic direction of those assets going forward.

With that said, I thank you for listening today and now I would like to open up the call to questions.

Thank you. [OPERATOR INSTRUCTIONS] And we'll take our first question from Jason Bazinet with CitiGroup.

Hi, thanks so much.

I just have one quick question. Overall it was a good quarter, but I was looking at the domestic reach numbers in the quarter and it looks like it ticked down. And I was just wondering if you could comment on that.

That -- this is Greg and I'll comment.

I think we reclassified something. There has been no decline, really, in the numbers. I think we were up probably a couple hundred thousand during the quarter. I don't have the exact number. But we've seen no decline and that's really a function of classification and I don't know if Bill or Mike want to add to that.

No, that's right. We haven't seen any decline in our reach.

Okay. All right. Just wanted to check. Thanks so much.

Thank you.

Thank you. We'll go next to Robert Peck with Bear Stearns.

Hi, it's actually [Lillian Joe] for Bob. Congrats on the quarter. Just a couple of quick questions on Liberty Interactive.

First of all, I'm wondering if you can elaborate a bit more on the rationale behind the purchase of management stakes and explain how exactly the phantom stock units work.

And secondly on QVC.com, we noticed that during the quarter QVC.com as a percentage of domestic sales was 19% and which declined from the 20% last quarter. I'm wondering if it's a pure function of seasonality or something else is going on in this segment? Thanks.

I'll comment on the buyout and then I'll let Mike talk about .com.

In management buyout, the bulk -- or a substantial portion of the amount -- was to retire the stake of retiring or retired executives. But in addition, we've got a long-term goal of -- I think we talked about at our QVC investor day a few weeks back about trying to bring the QVC interest into Liberty interactive and have all of the QVC management team's equity orientation, long-term, aligned with the shareholders of LINTA.

So the combination of cashing out some of the existing positions, granting new options at Liberty interactive, I think achieved our goal of gaining 100% control of QVC and aligning the employee and management perspective more closely with the shareholder perspective.

Mike, you want to talk about .com?

I'm sorry, the .com question cut out on me. Can you just repeat it?

She's asking about the fact that while we were up year-over-year sequentially, we were down from a 20% number in fourth quarter -- third quarter, rather -- and did that reflect anything other than seasonality?

No, it really doesn't. We don't try to manage to a specific .com outcome. It will bounce around in that range, partially due to seasonality, partly due to just the mix of programming that we have on air.

But in general, we look for our .com penetration to increase a couple percentage points every quarter within a reasonable range and so that's what we saw this quarter. We're comfortable that that will continue at about that rate going forward.

Great. Thank you.

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

Hi, thank you. This is [Saborrah Buda] for Vijay. And we had a couple of questions.

First of all, your purchase of the QVC interest for 42 million, it suggests a high evaluation for QVC relative to current market values, so I was wondering if you could walk us through your calculation regarding that 42 million.

And then secondly, can you tell us what CapEx at QVC was in third quarter? Because given that guidance for 2006 is 355 million and the first 6 months' CapEx was about 100 million, we were wondering if you see the spending playing out differently in terms of some of it going into 2007 or whether you expect there to be more spending in the second half. Thanks.

Thank you. I will take the first one about the repurchase of the QVC interest and then, Bill, maybe you could talk to the CapEx, Bill Costello, the CapEx at QVC.

As far as the repurchase, we had been under a formulaic methodology, historically, on how effectively the PSAR program at QVC works and the way that they were compensated and incentivized on growth and cash flow. And that is how the valuation was arrived at for repurchasing those interests.

As I said, part of the goal was -- in repurchasing those interests -- was not only to provide liquidity to some retired or retiring executives, but again, to align the interests of management and the employees more closely with the LINTA shareholders so they're no longer in the formula, they're on the same basis, market basis, that all the LINTA shareholders are at.

Bill, do you want to talk about the CapEx?

Yes. I just want to add one thing to what Greg said on the valuation in answer to the question, and that's the amount that's included in the press release is on a gross basis, it doesn't include the $140 million which the employees had to pay in to exercise. So if you looked at a net basis, it's closer to the 342 than the 482.

Right. That --

With regard to the second question, I don't have the CapEx for the third quarter here, but in answer to you -- where I think you're going to go is the 355 million was our ballpark or was our guidance for capital expenditure for the year. Right now we're looking at about 260 to 275. And again, most of that will flow into 2007.

Just to add one point. Bill is exactly right about when you're looking at the net amount of cash that needed to be outlaid or laid out, rather, by QVC. But your point about the formula for valuation was also right and Mike was addressing the point and that is that we're off of a formula now.

Thank you.

Let's go ahead and go next to Andy Baker with Cathay Financial.

Thanks a lot and congratulations on a great quarter.

I was wondering if you could give us some color on the units in Europe and also how the growth rates looked across the various European and Japanese markets, please?

Bill, do you want to take that?

Sure. Yes.

Japan continues to be strong. UK is where we expected it to be, low double digits. Germany has been somewhat of a disappointment on the top line, but part of the reason there is because they've had some changes in lines of business and their merchandising mix, as well as one or two other things that they've tweaked the business with. So actually on an EBITDA basis, they're performing better than we expected, but on the top line basis, they're a little softer than where we'd like to see them.

And can you give us the overall? I know you [inaudible] in the Q, but the overall units shipped internationally this quarter?

I could, but I don't -- I can get back to you on that. I don't have that detail here.

Okay. That'd be great, thank you.

Thank you, Andy.

Thank you. [OPERATOR INSTRUCTIONS] And we'll take our next question from Matthew Harrigan with Janco Partners.

Can you reflect a little bit more on [IACHI] and how it fits strategically? I mean, you've been relatively quiet on that. And then a few months ago, when you initially did the tracking stock, LCAPA, you really were fairly open [kimono] in saying that saying that things could go another way -- in multiple directions as far as the continuity of the business. Do you feel more firmly committed to it on a continuity basis as opposed to eventually winding things down on the basis of what's happening -- happened over the last couple of months and, in particular, possibly with DIRECTV?

I think our position on InterActive probably remains consistent. We're pleased with the improved stock price at InterActive and the good performance in some of its businesses. I think we believe that both Expedia and InterActive are underleveraged today and that's probably not maximizing equity returns.

What its long-term role or position in the Liberty family is not entirely clear. We are enthused about the fact that we're the ultimate control entity of that, both of those companies, and that is appealing. But we are obviously interested in trying to maximize the value of Liberty InterActive over the short and long-term. And we weigh the long-term appeal of that control position against the relative, probably discount that are experiencing because of holding a large, somewhat passive, stake in IAC and Expedia today. And as I mentioned, we probably would look to see those businesses capitalized differently to maximize their equity returns.

So I think our position and our views are probably unchanged from 6 months ago. We've seen -- in that 6 months I think we've probably seen slightly better performance at IAC and slightly worse, or more than slightly worse, in terms of the stock price performance at Expedia. And we do remain disappointed in the market share losses at Expedia.

So we weigh the whole thing and I don't think we have a clear answer today, but we continue to think about it.

Thank you.

Thank you. [OPERATOR INSTRUCTIONS] All right. It appears there are no questions at this time. I would like to turn the program back over to Mr. Maffei.

Well, if there are no questions, I'd like to thank all of our investors and other listeners who've joined today and to thank our management teams who are out on the line and here in the room. And we look forward to continued good performance and hope to see you next quarter. Thank you very much.

That does conclude today's conference. You may disconnect your line at any time.