QVC Group Inc (QVCGA) 2006 Q4 法說會逐字稿

Good day, everyone, and welcome to the Liberty Media Corporation year end 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, news service, and product launches and other matters that are not historical fact.

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 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 Media.

These forward-looking statements speak only as of the date of this presentation and Liberty Media expressly disclaims any obligation or undertaking to decimate any updates or revisions to any forward-looking statements contained herein to reflect any change in Media's expectations with 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 form 10K for additional information about Liberty Media, and about the risks and uncertainties related to Liberty Media's business, which may affect the statements made in this presentation.

On today's call we will discuss certain nonGAAP financial measures, the required reconciliations, preliminary note, and schedules one through three can be found at the end of this presentation.

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.

Thank you, operator, and thank you -- for all of you for joining us today.

2006 was an exciting and in fact transformational year in many ways for Liberty Media. Today we'll discuss many of the important developments of the past year and take a look at the full-year and fourth quarter operating results for the assets attributed to Liberty Interactive and those attributed to Liberty Capital.

I'm joined on the call today by QVC CEO, Mike George, Bill Costello, and QVC's CFO, Dan O'Connell. From Starz, we have Bob Clasen, Chairman and CEO; Bill Meyers, President; and Glenn Curtis, CFO. From Liberty I'm joined by several of our senior executives and we'll also be available to answer your questions following our prepared remarks.

I'll open today by discussing some of the developments of the past year and then I'll turn the call back to our Controller, Chris Shean, who will talk about LINTA's Liberty Interactive's attributed businesses, including significant events during in year, financial results and liquidity picture. Chris will follow that with LCAPA, Liberty Capital, and its attributed businesses before handing the call back to me. And I'll close with a brief discussion of our outlook strategy for 2007 before opening up the call for your questions.

So let's take a look at 2006 and some of the things we did. As I mentioned, I think it was an eventful year at Liberty and we're proud of some of our accomplishments.

In May we issued the tracking stocks for Liberty Interactive and Liberty Capital. We took this step for a number of reasons, including to provide investors with a clear choice of which group of assets they would like to invest in, to simplify Liberty's overall structure and more efficiently allocate capital between our various businesses, and lastly, to focus the complexity inherent in the diverse group of assets and financial instruments that have been attributed to Liberty Capital to allow for more efficient simplification of those assets and the creation of a clear operating company structure.

We believe we've achieved some of these goals and we're on the path to do more.

On the Liberty Capital side, we announced a number of strategic transactions. The most notable of these was our agreement to exchange our News Corp shares back to the company for a 38.5% interest in DirecTV, three regional sports networks in Seattle, Rocky Mountain, and Pittsburgh, and $550 million in cash.

Our News Corp position has provided a great return for our shareholders over the years, but as a noncontrolled interest with a low tax basis, was likely to continue to be heavily discounted in the marketplace as long as it was captured inside Liberty Capital. And we didn't believe it would be fully reflected the value of that News Corp shareholding in our own stock price. It is our belief that the exchanges we're undertaking and our resulting investment in DirecTV will create greater financial, operating and strategic flexibility for Liberty Capital and its shareholders, and we've already seen some of those results.

Adding DirecTV in the [inaudible] is a critical step in our efforts to transform Liberty, as I mentioned, into a focused, well-positioned operating company.

Other transactions are announced or completed at Liberty Capital during the past year include: the sale of our 50% stake in Court TV, the exchange of our stockholdings in IDT, and our various interest in IDT, for a 100% position in IDT Entertainment, the sale of our interest in OpenTV, the agreed-upon sale of On Command, and most recently the agreement to sell our CBS stake tax sufficiently back to CBS for its owned station in Green Bay and approximately $175 million in cash.

Turning briefly to Liberty Capital's operating businesses. Starz, it's major unit, continued to experience positive subscriber growth. And while these trends were good, they were somewhat offline by a decline in effective rates resulting in year over year revenue growth being moderated. Operating cash flow also increased in 2006, and the year ended on a positive note with programming costs continuing to climb in the fourth quarter.

We've mentioned this trend in the past as one of the positive long-term secular trends at Starz and we expect this trend to continue in 2007 and beyond.

Turning to LINTA for a moment, our businesses there, led by QVC, continue to produce positive financial results.

Chris will discuss these in more detail in a moment, but I want to note we once again achieved healthy revenue and positive operating cash flow growth at QVC, Provide Commerce and BuySeasons, the latter of two which were acquired during 2006 and will continue to seek -- we will continue to expect positive results from those businesses and continue to look at strategic acquisitions, which can enhance the Liberty Interactive positions going forward.

Finally, since we created the tracking stocks last May, we've repurchased about $1 billion -- just under $1 billion of Liberty Interactive stock and what we believe are attractive operating cash flow multiples. With that I'm going to turn the call over to our Controller, Chris Shean, to walk you through the operating performance and accomplishments across the company.

Thanks, Greg. There's a slide presentation online that I'll be speaking to with these comments.

Taking a look at Liberty Interactive, a quick snapshot for full-year revenue and operating cash flow performance of LINTA. As chart indicates, Liberty Interactive's attributed businesses turned in a solid financial performance in 2006, highlighted by another strong year at QVC.

Overall, those businesses experienced 13% revenue growth and a 19% increase in operating cash flow. These results were enhanced by acquisitions at Provide Commerce and BuySeasons during the year.

However, the primary driver was the 9% revenue and 16% operating cash flow growth at QVC. I point out that while QVC was experiencing strong and balanced growth across all of its product categories and markets, others in the industry continued to struggle.

Now looking more closely at LINTA's results, as we've stated on many occasions, QVC's long-term approach to its business will at times yield variability and short-term results. However, while QVC's growth slowed in the fourth quarter as compared to a very strong second and third quarter and an impressive fourth quarter in the prior year, LINTA's businesses still managed 11% revenue and 21% OCF growth in the quarter. This rounded out a year in which the businesses saw continued growth in all quarters and achieved record sales in operating cash flow.

Obviously, the inclusion of Provide Commerce and BuySeasons, which were both acquired during the year, helped to drive growth at LINTA. We believe these types of acquisitions, coupled with QVC's continued organic growth are important to the ongoing expansion of LINTA. As a result, we will continue to seek accretive acquisitions of commerce companies that add unique value proposition, strong management team, and good track records to drive continued growth at Liberty Interactive.

During the year, we actively used the financial flexibility created by the assets attributed to LINTA to shrink its equity and drive enhanced shareholder returns. We will continue to evaluate opportunities to use Liberty's financial flexibility to continue to evaluate opportunities to use Liberty's financial flexibility to continue to shrink equity, pay down debt, and/or make strategic acquisitions. Going forward we expect LINTA's revenue and operating cash flow to grow annually at high-single to low-double digits on a percentage basis over the next three to five years.

Now let's take a closer look at QVC's year. QVC had another solid year. 2006 revenue and OCF growth of 9% and 16% respectively were driven by growth at both its domestic and international operations. Domestic revenue was up 7% for the year, driven by increased sales to existing customers, particularly in the areas of accessories and apparel.

The average selling price grew 3% during the year and shipments were up 5%. Domestic operating cash flow increased 13% for the year, while OCF margins expanded 130 basis points to 24.7% in 2006. This was primarily driven by slightly improved gross margins, favorable bad debt experience on the company's private label credit card, and a $15 million reversal of franchise tax reserves. QVC.com sales increased from 18% to 20% of total domestic sales during the year.

International revenue increased 12% for the year, while OCF grew 26%. Revenue increases were experienced in all international markets in which QVC operates and were primarily attributable to greater sales to existing subscribers and continued subscriber growth.

Operating cash flow growth was primarily driven by revenue growth, a 200 basis point improvement in gross margins and operating leverage. International operating cash flow margins increased over 200 basis points to 20.4% for the year. Excluding foreign currency exchange affects, revenue and operating cash flow grew 13% and 27% for the year.

Fourth quarter revenue growth slowed somewhat at QVC relative to the second and third quarter as the company faced difficult comparisons to the fourth quarter of 2005. Total revenue in operating cash flow increased 7% and 19% respectively. On the domestic side, revenue grew 4% for the quarter as the average selling price increased 3% and units shipped grew 1%. Domestic OCF expanded 16% for the quarter, partly driven by the previously-mentioned reversal of franchise tax reserves.

QVC.com sales increased from 19% to 22% of total revenue for the fourth quarter. International revenue and operating cash flow grew 17% and 28% respectively in the fourth quarter. Revenue increases were due to favorable foreign currency trends, subscriber growth, and increased sales to existing subscribers, while OCF growth stemmed from higher gross margins. Excluding foreign currency affects, international revenue and OCF grew 10% and 23%.

We continue to be very pleased with QVC's ongoing operational performance and expect continued good performance under the stewardship of Mike George and its new Chief Operating Officer, Meade Rudasill.

The next chart gives a quick snapshot of overall LINTA fourth quarter highlights. In addition to ongoing growth at the LINTA businesses, we continued to purchase LINTA equity. During the quarter we purchased 10.2 million shares of Liberty Interactive series A common stock for a total of $223 million.

Since the creation of the tracking stocks and through the end of 2006, we have repurchased 51.6 million shares for $954 million, representing 7.3% of the shares outstanding at the time of the creation of the Liberty Interactive tracking stock. As we've noted, the businesses attributed to LINTA have significant liquidity and we're look to put that liquidity to work to enhance equity returns. We will continue to evaluate alternative uses of LINTA's liquidity to determine what we believe is the best path to driving this strong equity performance.

Also during the quarter, the value of our IAC and Expedia stakes increased by over 30% or approximately $1 billion. The solid operating performance, share repurchases, and appreciation of our investment positions, continued positive trends at Liberty Interactive, and the stock has performed well in response. We believe this is a systemic formula for strong, long-term equity appreciation for LINTA.

During the quarter, LINTA's share price increased 6% to close the year at $21.57 and has seen further gains since that time. Now let's take a look at LINTA's liquidity picture.

In addition to its solid operating performance, 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 over $5 billion, and with share repurchases through year end, as $6.4 billion of attributed debt, I think, on a principal basis. Excluding the value of investment positions at Expedia and IAC, Liberty Interactive's attributed net debt of $5.5 billion equates to a multiple of 3.3 times annual operating cash flow. As a result, the LINTA businesses have significant liquidity to grow organically and through acquisitions and to shrink LINTA equity has Liberty management deems appropriate.

Now let's turn to the Liberty Capital businesses. As we've mentioned in the past, 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 investments for controlled, cash flow-generating operating asset that is we believe -- and we believe we're making good progress on this front.

In the meantime, Liberty's -- LCAPA's largest attributing operating assets, Starz, is showing signs of improving its financial performance.

During 2006, Starz's revenue grew a modest 3% and OCF increased 9%. I'll talk more about this shortly.

Overall, Liberty Capital reported a 12% revenue gain and a 17% OCF decline, primarily due to operating cash flow deficits at newly-acquired subsidiaries, Starz Media, and FUN Technologies. For the quarter, LCAPA revenue increased 25% while OCF declined 5%. These results were driven by positive results at Starz, offset by operating cash flow deficits again at Starz Media and FUN Technologies, and a reduction in TruePositions EBITDA due to a change in its revenue recognition on one of its contracts.

Also, as part of our year-end closing procedures, we did recognize an impairment charge of $113 million related to goodwill and other intangibles on our investments in FUN Technologies, principally due to poor operating performance and a decline in market value of its stock.

Let's take a closer look at the events of 2006. As mentioned earlier, the income statement is only part of the story at LCAPA. The largest story this year is the significant progress we made towards reducing complexity and focusing our assets. I won't restate all the activities of the year, but as this chart indicates, much was accomplished.

Two months into 2007, this momentum has continued with the announcement of our CBS exchange. There is more to do and during the year we will continue to work to reduce complexity and increase the operating orientation at Liberty Capital.

On the operating side, Starz made a couple of important moves during the year to refine its strategy and introduce its objective of audience aggregation. The acquisition of IDT Entertainment, rebranded Starz Media, adds DVD distribution, animated feature film production, proprietary live action, and animated series production and contracted 2D animation production to the company's portfolio of businesses.

Additionally, Starz created Overture Films in the fourth quarter and now has the capability to create a wide array of animated and live action programs for domestic and international distribution across multiple platforms. Starz management believes this will allow the company to successfully aggregate audiences, thereby positioning Starz for growth in 2007 and beyond. Taking a quick look at Starz's operating results for 2006. They continue to experience solid subscriber growth in 2006 as Starz Channel subscribers increased 6% for the year while Encore's grew 7%.

For the year, revenue grew 3% as subscriber growth slightly outpaced the reduction in the effective rate that resulted from certain of Starz's new fixed rate affiliation agreements. Starz's operating expenses increased 2% for the year as a 5% increase in programming expenses slightly offset an overall decline in SG&A. Programming costs increases were primarily attributable -- primarily driven by additional amortization of deposits made under certain of its output arrangements. The SG&A decline is a result of a reduction of marketing activity with Starz's affiliates.

During the fourth quarter, Starz experienced a 4% revenue increase and a 72% operating cash flow growth. Revenue growth for the quarter resulted from increased subscription units more than offsetting a decline in the effective rate. The OCF increase was driven by a decline in operating costs, as programming expenses declined in the fourth quarter.

Starz expects this trend of declining programming expenses to continue in 2007. The next slide shows a quick snapshot of overrule LCAPA highlights for the quarter. The fourth quarter was an extension of the active pace set throughout 2006. We continue to make good progress towards reducing complexity and transforming the Liberty Capital attributed assets into strategic operating assets. Again, I won't rehash the events of the quarter, but we are pleased with many of our accomplishments.

Now let's take a look a quick look at the LCAPA liquidity position. LCAPA's businesses are also in a position of financial strength. At year end and including our News Corp stake, LCAPA had approximately $18.2 billion of public investments and derivatives and nearly $2.3 billion of cash and liquid investments, which together at approximately $20.5 billion, are only partially offset by $4.7 billion face amount of attributed debt. This provides LCAPA with significant flexibility to grow its businesses and will play an important role in the strategic direction of these assets going forward.

With that said, I now turn the call back over to Greg to recap the year and talk about what's ahead in 2007.

Thanks, Chris.

Well, as you've seen through the year, 2006 was exciting and we believe productive. We've restructured the company in many cases, completed several acquisitions, divestitures, and exchanges, delivered good operating performance on our large, controlled subsidiaries and significantly shrunk Liberty Interactive's equity.

The stocks have responded well to these many events on a pretracker basis, our equity grew about 31% for the year. So old L -- I know it's hard to keep track of the many letters we hand out, but old L is up about 31% for the 2006. Pretty good performance. We're pleased with it, but we think there's more to be done. Liberty Interactive should continue to drive good operating growth in 2007 and beyond, and Liberty Capital continues -- in particular continues to trade at significant discount to its underlying asset value. We believe we've got upside in both businesses in 2007 and beyond.

So where do we go from here? Well, the first step is today, we announced a self-tender or Dutch auction basis for $1 billion worth of shares at Liberty Capital. We, as I've mentioned, we believe the stock's attractive at current levels and are offering to purchase that $1 billion at prices between $105 and $113 per share. The tender should launch within the next week. So two months into 2007, we've continued last year's momentum and expect some more of the same.

We do expect continued good operating performance at our large controlled subsidiaries while QVC and Starz focus on their operations, we also continue to expect to continue to work on perfecting our structure, making strategic acquisition, hopefully simplifying our portfolio of assets and creating an even more focused operating company. Notably, DirecTV should be joining us, perhaps around July. We're very excited about that business, it's operating growth and prospects, and in particular its financial prospects.

We're very excited about how we can work at Liberty Media across our businesses with the DirecTV Group. It's an exciting change, it's an exciting series of changes over the last year. I think everybody here is excited about them. Our job is not only to run those businesses well, but to continue to try and find synergies across the businesses, and I think better explain the story to Wall Street, because there is upside, we believe, in having that story made more transparent and clear. And that will also be one of our focuses for 2007.

So with that I would like to thank you all for joining us today and listening to our prepared remarks and for your continued support of company. With that, operator, I'd like to turn the call back over to you to answer questions.

Thank you. [OPERATOR INSTRUCTIONS] And we'll take our first question from Bishop Cheen with Wachovia.

Thanks for taking the question. Good morning. Question on the balance sheet. The last two years, Greg, and I know you watch some of it from the sidelines despite --

Almost all of it.

-- Liberty has actually improved its leverage and all the moving parts. And as you pointed out, you're monetizing in a tax-efficient basis some of the assets you've been toting around. Are you with your balance sheet where you want to be? Is there more improvement to come? Is there more leveraging up to do to achieve certain agendas and goals for your stock?

I think it's a great question, Bishop. Let me say, the goal with the stock, obviously, is to see continued rise and hopefully a continued rise on a sequential basis and forward. So we're looking for a continued shrink strategy, I would argue, at businesses where we have clarity about where they're headed and they're generating free cash flow, rather than a one-time shrink only and thinking that's going to have such a major move on the stock.

The more clear case is Liberty Interactive. We went out with a targeted leverage of between three and four times. We actually, when we created the tracker, went without with a leverage of about 2.8 times. We've gone out and raised subsequent financial capability and have increased the leverage, and I think we've increased the potential for leverage and are now more comfortable with the idea that leverage could be as high as four or five times there.

How we get to that leverage target and over what time frame, we're going to be somewhat opportunistic and we're going to weigh, as we said before, the opportunity to repurchase our own stock and find accretive, synergistic acquisitions. So the Liberty Interactive story is pretty clear, and I think we're going to continue to shrink that equity at attractive prices when we think the OCF multiple is attractive over time, pretty crisply. Liberty Capital has always been a little bit more in flux, even since May, partly because the nature of the assets and what's in the Liberty Capital bucket has changed so dramatically and we expect there'll be more change over the period.

We've obviously gotten a big, if not control position, major influence position, which we expect to close on in July or thereabouts with DIRECT, and that will change our profile to a degree. But we are probably, because we don't have access to that cash flow, we remain more cautious about our ability to put leverage on Liberty Capital than we do with Liberty Interactive, where we have access to all of the cash flows.

So we still have -- I agree with your statement. We still have the opportunity to utilize further fire power and further leverage and further utilize our cash at Liberty Capital, but we probably will be more judicious about how we do that until the total picture becomes clearer, and our access to what cash flows becomes more crisp.

Today, it's still in flux. So I think the Liberty Interactive story is clear, the Liberty Capital story, we obviously are making a statement about the ability to use some of that excess cash by our announced self-tender, but we're not as positioned to make a statement about what the long-term leverage focus is, just because of the nature of the changing asset base.

Thank you, Greg. That's very helpful.

We'll go next to Imran Khan with JPMorgan.

Thank you for taking my question. Hi, Greg. A couple of questions. First, I was wondering if you can give us some color on the QVC side.

How the average selling price and unit shipment did in the international market, primary Japan and France and U.K. market? And secondly, with DirecTV acquisition, I was wondering if you can give us some sense like what kind of synergistic opportunity you see for QVC -- for channel placement? Finally, it might be a naive question, but do you see an opportunity at some point to break up Liberty Interactive, Liberty Capital, for better -- for much more better structure? Thank you.

I heard a couple of questions in there and I think the one regarding the international ASPs and performance at QVC are probably best answered by Mike, or perhaps Bill.

Okay, thanks, Greg. This is Mike, I'll jump in.

In the U.K., ASP increased slightly in constant currency, up about a point, and units were up about 7%. In Germany, units were up about 15%, and ASP in constant currency were down about 7%. In Japan, units were up just shy of 30%, around 29%, and local currency was down slightly about 2% points.

If you look at that, we felt pretty good about the balanced growth between units and currency and ASP in both the U.K. and Japan. Germany did trade down their ASP somewhat, as I mentioned. That's a little bit of a mix issue. The Germany margins were really bolstered in the year, and one of the drivers from that was reducing electronics in the mix, as an example, which has become a tough margin business in Germany.

So some of that was mix related, but not all of it. So one of our focus points will be getting the ASPs up somewhat in Germany in the coming year.

Great, thanks, Mike.

As far as the opportunity to get synergies with DirecTV, as I mentioned, the deal is not yet closed and we're not expecting that until summer time. And when it does close, we will not be the 100% owner, but the roughly 38%, 39%, 40% owner. So while I think we will have influence and we hope -- expect to work together, there will obviously be a need to recognize there are other shareholders involved.

That having been said, we -- one of the things that attracted us to DirecTV was the strength of its distribution and the opportunity to work together on many kinds of initiatives, including content initiatives and perhaps mutually beneficial opportunities with our existing content portfolio, including QVC and Starz and others. How exactly that will transpire, what form that will take, we're still working on and we're not prepared to announce that today, but that obviously is one of the appealing aspect that is we believe can be mutually beneficial to both Liberty Media and DirecTV.

And the last part of your question about any potential split between capital and interactive, when we announced the trackers, we of course told you that we had no plans for that split, and we pointed out there were several hurdles, which would make the split if not impossible, unattractive, including concerns about tax efficiency between the two businesses and some other factors. Some of those factors and challenges still remain, and I have been getting a full level indoctrination from Dr. Malone on the benefits of trackers. So I -- the potential discounts, or challenges that we have because of the trackers in the marketplace, I think, is still unclear.

We know there are some tax benefit, we know there are some other benefits, and we weigh how much we are taking a discount because we are in a tracking company structure. So while I will not say that we are never going to split those businesses, it's not our intention to do so today, and we do continue to look at the benefits that we get from holding them together.

Okay. Thank you very much. Very helpful.

Thank you.

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

Yes. Hi, guys. A couple quick questions here. The first is on the competitive landscape with HSN and with what Mindy Grossman has been going over there. Can you comment a little bit about any sort of traction you're seeing there, even from your ownership stake within IAC.

And secondly, Greg, can you talk a little bit about what you ideally think the leverage can be over at IAC, and particularly any conversations maybe you've had with [inaudible]?

Let me comment first on Mindy Grossman and like. We have, by reputation and by what we hear from our board position have only respect for what Mindy is setting forward to do at the company. We think she's obviously got a great merchandising capability and a strong background experience and brings good perspective.

That having been said, it's not been clear in the operating results and I think they would be the first to argue that it's a long-term turnaround. But it's not been clear at the operating results that they are having much traction. As far as what impact we have they're having on us, it's -- we do not believe it's enormous yet. I'll let Mike and anyone else on the team contribute to that.

Yes, I don't have much else to add. We don't -- we're focused on our business. As Greg said, we really haven't seen any material change in the competitive landscape that causes us to be at all concerned about our growth prospects. So really no change from our standpoint.

And on the second part of your question, as a major shareholder in IAC, we obviously have a respective view on IAC's financials. We stated what we believe leverage ought to be at good-sized -- good growth businesses with high free cash flow capability and characteristics, such as Liberty Interactive, and I don't know any reason why the same ought not to be occurring at IAC. We've stated that and I think John Malone, the Dr. has been quite vocal about saying that in the past and I think we remain of the view that more leverage could certainly be applied to those businesses. What the actual target is, and I don't -- we're not -- what they think their other prospects are for the cash, we're not probably as on top of that as they are, but in general we would argue they're probably underleveraged.

Thanks, Greg.

We'll go next to Benjamin Swinburne, Morgan Stanley.

Thanks. And good morning, guys.

Couple questions. One on broadband and DirecTV's competitive position. One of the debates going on the last couple of years, which did impact DirecTV's balance sheet or lack of leverage was their exploration of broadband opportunities in the marketplace. You're involved with Wildblue and you have your eyes all over the media telecom world.

So I would love to get your prospective on if does DirecTV need a data partner or data product, would you want to own the network, are there technology out there that look interesting, or has this been overhyped in the marketplace and they're well position as a pure play video play? Second, just your comments on old media assets. There have been some runs in valuation on radio and outdoor and local TV stations. You guys made a recent swap on the TV station side.

What are your feelings about those kind of businesses where recent product multiples have been coming out. Expensive, attractive, anything you could add there would be helpful. Thanks.

On the first point, I think we are hoping to be a good partner with our friends at DIRECT and bring some perspective across as you mentioned our telecom and technology interest to be helpful there. WildBlue is one part of that.

There is an existing partnership with Wildblue and DIRECT and Echo, which is obviously targeted at the rural subs who are less able and have few other choices. It is interesting, there continue to be new forms of broadband arising, both new players on the fixed side, but obviously new more players technology driven, and because of new forms of spectrum being released on the wireless side. Whether we need to be an owner of those or whether we can partner with those, whether we should buy or lease, and how important it is to have those bundle be super tight are open questions.

One of the questions we would point is that the greenfield returns are probably less attractive in that business. The incremental returns may be good, but the greenfield returns are probably less attractive in that business than some of the other alternative businesses that DIRECT is in [inaudible]. So you weigh how much you want to go to start that. And there is technology risk. That having been said, the triple play is one part. There's also going to be, in our minds, a quad, quint, and sextet play, mobile voice, mobile data, and mobile video, all of which will be important to our long-term future.

And so we're very much focused on working with DirecTV to think about those quad, quint, and sextet plays, because that's where we think the future is going to be. And we think there will probably be more value creation opportunities in the fixed wireless interplay than there is in the straight fixed broadband market, which is likely to get relatively more commoditized compared to the wireless alternatives. But a lot of that is the future.

I think your question is right on in asking how much do we need to have the tight bundle, how much do we need to own fixed in our own capacity in the triple play. I think those are open questions that we are working with DIRECT on and trying to be helpful on. As far as old media, we think that a lot of the old media assets are very attractive. We think they continue to be overdiscounted in the marketplace.

That having been said, they obviously have had quite a run, and candidly, our ability to compete with them, compete for them, rather, with private equity and the leverage that they can put on is difficult for us. We are probably more than most public companies, believers in the capability and the attractiveness of leverage and the willingness to finance things nonrecourse can take that kind of diversified risk.

But we are probably do not have as broad a portfolio and a short-term or perspective that we're going to buy them, fix them up, and flip them the way private equity can do, and because we're likely to be in the business for a longer time frame, it probably inhibits our flexibility to move in and out on a short-term basis, and makes us less competitive buying those assets straight up where we do not have operating synergies.

So I think we would be most interested in old media assets, where there are places, we believe, the cross promotion, the cost structures, the ad sales capabilities across other synergies like that give us strength to be more competitive with private equity.

Thank you. Very helpful.

We'll go next to Robert Routh, Jefferies & Co.

Good morning. I have three quick questions.

Obviously, the results are great given what you've done in the short amount of time. But given Malone's history of always wanting a play thing with Bell Atlantic and TCI, with TCIVA. I'm wondering whether he's considering creating a Liberty ventures entity, which would be a spin out of LCAPA and simplify the structure even more on a pro rata or Dutch auction basis. Because being history repeats itself, that's always been something he's wanted and would make a lot of sense.

Second, I'm wondering whether there's any possibility, given what I'm seeing happen, because obviously FOX/Liberty Sports was created with Rupert and John, now John sold it to Rupert and now he's got three networks. And as we, I believe, looking at the [Dolen's] networks, it would seem there's a possibility that down the road, if it was allowed, that the recreation of FOX/Liberty Sports could be a very beneficial asset given the Sunday ticket and everything else to DirecTV.

And finally, if you could comment whether or not Interactive Corp is not willing to leverage up to the level it should, if Liberty was inclined to sell their 21% position, would the irrevocable proxy go away upon a sale of that to a third party?

Complicated list, especially when you start it with a but, come on.

I'm just hedging it.

I'm teasing you.

As far as the idea of Liberty ventures, I would say our first focus is to try and monetize tax efficiently, whether through sale or exchange the assets that are in Liberty Capital and redeploy them as smartly as possible, could mean through repurchase of shares, as we're doing today.

But we hope it's through accretive acquisitions or accretive transactions that build on the base of interesting businesses that we're putting in there today. The interplay between distribution and content, some of the areas around new media, some of the areas around wireless we talked about are all interesting.

Sure. But is it a possibility that --

Let me just -- I'm going to give you a but fact.

Okay.

There could be -- come a time when some set of these are intractable and we need to think about what else we want to do with them. One of the problems is, is that Liberty ventures in today's environment will trade terribly in today's environment. Look how Liberty Capital has traded until recently when we showed more focus. But a portfolio of nonsynergistic financially-oriented assets will not trade well. At least we haven't been able to make it trade well.

And consequently, one of the reasons while we reduced our venture capital activity, other than four things that we think are truly strategic or give us windows into businesses we might want to get deeper into, it's because we do not believe it's easy to find value in the public marketplace for those kind of assets. While I'll never say no to Liberty ventures, or never say no to changing some structure in Liberty Capital, I will point out some of the challenges around that kind of a perspective.

When it was down back in the TCI days with the many TCI ventures and TSAT and many other kind of partially-owned things, the strong distribution anchor and the market's willingness, perhaps in the '90s, to give us credit for those was better than our position today and our ability to get full value for those assets.

Great.

That's our perspective today. Of course --

Thank you.

Who knows, right? As far as the RSN and Sports, I can't comment or have no absolute vision. I don't think FOX is likely to be a seller on his businesses. He likes his sports businesses and I think we like the sports businesses. Differentiated programming is one of the key ways to help your distribution asset. We think that Chase and his team have done a great job with that to the degree that we collectively can bring new energy and now assets to that differentiated sports programming, incoming these RSNs and perhaps other sports programming. We're very open and very interested.

So it would be possible -- of course, nothing -- Liberty, you never know -- that something along the lines of what was initially created, which was a partnership between Liberty and FOX, or News Corp., could be created where you're kind of working together again?

I just think, hard to speculate on that. But let me point out a few of the hurdles. We just mentioned already that if we were not the majority owners and I think News might have the exact same perspective, you have a difficult time getting full credit in the marketplace for them.

There would be tension around what we want to do with those using our distribution asset versus how they want to leverage it to help their other programming assets or internationally their distribution assets as well. So I think those are two hurdles that are not insurmountable, but not insignificant hurdles.

Sure.

That argument said, we continue to have good relations with News and would love to think about ways to cooperate and create mutually-beneficial partnerships.

Got you.

What would happen at IAC? We look at that and I've mentioned already our challenge for getting full value for partially -- or nonconsolidated positions. And we hold an economic interest of 21%, 23% depending on what they bought back at IAC. It's unlikely we're getting full credit for that inside the Liberty Interactive structure.

We are -- I think it's complicated by the fact that we do have high voting shares. Think about our ultimate control there. Weigh that against the low tax basis we have.

The stock has seen a significant rise. It is the probably today an investment asset rather than one in which we have great operating strategic value, but it is one because of that control position, ultimate control position, we in the low tax basis, we weigh what we wish to do with it. And we worry whether more leverage would add value, it's been pointed out. I would say there's no clear choice there about which way we're going to go, but the concerns you raise are ones that are in our minds as well.

So hypothetically, if you were to sell your position to Time Warner, would that irrevocable proxy go away?

I think -- that's complicated. There's a whole series of offers that would go back and forth, which Barry Diller would have the right to take the proxy and hold the proxy. And what would happen to it, it's far from clear it would go. It really depends on the facts and circumstances.

Okay. Just possible, but nobody knows?

Yes.

Okay, great. Thank you very much.

Yep.

We'll go next to Jeff Shelton, Bleichroeder.

Thanks.

The one-year anniversary of the tracker split is coming up, and I believe you have the right to buy in the Liberty Interactive stake. I was curious under what circumstances does it make sense to go forward with that option?

Then a couple of numbers questions here. Could you further detail the impact of the positive bad debt experience in the fourth quarter on the domestic and the obsolescence provision on inventory on the international side? Thanks.

We are -- we have no intentions, certainly not any that we're announcing today on reconsolidating the trackers. As you point out, the anniversary is not until May. Until then, it would be very difficult to do. We -- I think I started the -- mentioned earlier on the call, when asked the question that we find benefit in the tracker position today, and I think that benefit remains.

So what circumstances would cause us to change from that perspective would be a series of circumstances in which we saw the tracker section -- tracker structure not being positive. That might include a perception that we had an enormous discount that was insurmountable because of the tracker structure, the reduction in tax expense, the removement of some of the impediments on splits. All of those conditions could change, but I don't foresee them changing today.

Okay. And on the QVC side?

On the QVC side, I'll throw that over to either Dan or Bill to talk about bad debt at QVC domestic and obsolescence at QVC International.

Thanks, Greg. Since 2002, we've experienced sequentially better bad debt experience primarily related to our in-house credit card. And for 2006, we had $4.4 million less in bad debt write-offs than the prior year. On the international side, the margins were improved by about 70 basis points internationally to improved obsolescence experience.

And did that all show up in the fourth quarter?

It was 65 basis points for the quarter and 72, actually, for the year.

Okay. If I could, one follow-up question. I didn't see in the release, anything on QVC Capex or free cash flow? Do you have those numbers?

That information will be in the 10K that will get filed close of business today.

Okay, thank you.

Thank you. Other questions, operator?

We'll go next to Morris Mark, Mark Asset Management.

Hi. I just wanted to -- Greg, I wanted to follow up on Ben's question earlier, but on a more pointed basis. You have a strong background in technology, as does John.

I'm sure you would agree that the growth of internet video is going to mushroom over the next two, three, four, five years. Taking that factor into account, can you tell me the strategic benefit to you from owning DirecTV, and how it's going to be able to compete with that kind of capability that the cable companies will have?

I think internet video will continue to grow, we would agree with that proposition. How much that causes a deterrent to DirecTV's business is unclear to me. I do not -- the growth of internet video is not tantamount in my mind to the elimination of satellite TV business.

No, no. I don't think it directly challenges viewer video in the sense of broadcast, but it certainly makes the bundle a much more powerful product, because if you have the bundle, you get broadband, which would give you internet video, and you get traditional cable, which would give you something equivalent to what you get from DirecTV, so that's really --

I think the question of the bundle is one clearly that DirecTV understands and has partnerships today with Qwest, Verizon, and BellSouth, all of which, from what we can see in the dealings we've had, all of whom want to increase and strengthen those partnerships to provide bundle. Then in the AT&T territory, through third parties like EarthLink, we continue to have a broadband access as well that we bundle and then obviously people can go get their own access in a variety after other forms. How we tighten that bundle, what we can do to enhance that, how important that is, it's not clear there are that many customers today that choose the bundle and that's driving their mentality. Your to your point, as internet video grows, how will that increase? It's one of the things we're weighing and one of the things we're looking at.

And are you taking that factor into account, you feel very happy about switching -- I understand the financial benefits, but switching your strategic position from owning News Corp, which is going to have a big play on the internet through My Space, to DirecTV, which is going to have to confront that issue.

Last time I looked, My Space is about 2% of the business, at best, of news News Corp. I don't think that's going to drive News Corp's value overwhelmingly. I think News Corp has a lot of great assets, it also has some existing challenges. And if you don't like satellite -- By the way, last time I looked, it is a big satellite company through Sky Italia, through [inaudible], through a whole bunch of other satellite assets, in Asia as well.

We made a choice that we absolutely believe is the right choice. Do we recognize that we need to work through and address broadband issues, you bet. But I don't think anything that you've mentioned isn't something we haven't considered and weighed and still believe we're making the right choice.

Appreciate that very much. Thanks, Greg.

Yes.

We'll go next to Jason Bazinet, Citigroup.

I just have a question on Liberty Capital.

Yes.

Assuming that the Time Warner transaction goes through, how do you think we should think about those much smaller stakes with entities like Sprint and Motorola and the like? Are those sort of residual others, or do you think there's an outside chance that those get resolved in tax-efficient ways as well?

Well, we -- Jason, that's one of the things we weigh, Time Warner, Sprint, Embark, Motorola, Viacom, Crown Media, all of which are -- declining in size of -- all of which are the next set of assets to look at and we continue to work with. We would like to do something thoughtful on -- They ever probably more intractable than the ones we've done. That's why the ones we've done got done first. But we continue to work on those and we certainly think there are opportunities.

Okay, that's great. Thank you.

We'll go next to Andy Baker, Cathay Financial.

Thanks for taking the call. Before I go to the question, I want to take the chance to say a farewell to Bill and best of luck. It's been a pleasure knowing you and working with you.

On to the questions. Greg, do you have a sense, I know you've told us in the past I know what you thought your after tax or brute force liquidation NAV was. I'm just wondering if the current buyback is above or below that and whether or not, I think we talked in the past, that a buyback above after-tax NAV is sort of a bet by the board that management can actually get out of those remaining tax liabilities or the remaining holdings in a tax efficient manner.

And to Mike, this is the first time that we've seen on LINTA the term high-single to low-double digit growth included in the -- for the operating cash flow. I was wondering does this constitute a reduction in guidance?

Let me hit on both those, if I might, and I'll let Mike comment as well. So on the brute force liquidation, I think that's becoming less and less relevant a metric. Why, there is, I would say, virtually zero chance we're going to do a brute force liquidation and there's virtually zero chance we would brute force liquidate DirecTV, which is the largest tax liability left, even though we've got a massive step up and avoided a bunch of taxes, assuming that the transaction contemplated go through and the way contemplated, our base is still well below the current marketplace. I think there is zero chance we would do a transaction which just sold DirecTV out of Liberty Capital and incurred the tax at the corporate level there.

So if you just -- that brute force liquidation is almost a meaningless statistic. That's -- if by a calculation of what our tax liabilities are, that's a big percentage, and we go through the list of these others, I don't think we'd do the same things with Starz or the like. Whatever the goal is, to try to put ourselves in a position where we're not sellers of Liberty Capital, but if one were ever a seller, it would be for the corporate entity and not incurring the taxes. So I believe that metric is less and less meaningful.

What we think is the fair value of Liberty Capital, we obviously believe it's higher than the price which is we're tendering, substantially higher, and that is why we are tender. As far as the guidance, we believe the guidance we put forth is entirely consistent with the guidance we put forth beginning last May. No change. If it is changed in any way our wording, it's because of our drafting or our perspective. I don't think we have any different view of where we think the businesses are going.

Mike, do you want to add anything to that?

I agree with that. No change at all in our view of the long-term outlook of QVC as part of the overall items, no change at all.

All right. Great. Thanks a lot.

Thank you, Andy.

Great quarter.

We'll go next to Jolanta Masojada, Credit Suisse.

Thanks very much. Could you talk, first of all, about how the tender offer fixes your view on the future ownership levels of DirecTV? And secondly, at QVC, QVC.com has grown to be a significant component of the domestic sale. Can you talk about the opportunities of QVC.com on the international businesses?

I'll comment on the first and let Mike or Bill or whoever wishes to comment on the second. I don't believe there's a direct correlation on what we think our ultimate ownership position at DirecTV and our today self-tender at Liberty Capital. We have said in the past that our perspective on what we might own at DirecTV could be as high as 100% or could be as low as 25.1% and could include our using our influence to try and encourage the leverage to be -- the leveragability at DirecTV to include a dividend. You've got a range where we can take a lot of capital off the table and selling down to getting a dividend, to where we would have to step up for a lot of capital, or deliver a lot of shares to complete 100% ownership.

What today is about is largely the fact that if you look at the underlying values at Liberty Capital and you look at the cash that we have and you look at where we're trading, that argues you ought to do something about trying to capture that discount and put it in the hands of the shareholders who want to stay for the long-term and believe for the long-term that they -- we can doing something to move toward that ultimate long-term pretax value.

So how that -- what that says about it, where we're going direct, I think we're going to monitor that, and we will, as always be somewhat opportunistic based on both our strategic perspective and where the relative values are. I'll let somebody at QVC talk about QVC.com internationally.

Okay. This is Mike. Let me just give you the numbers and then I'll give you a little color commentary on it. Domestically, for the full-year '06, our internet penetration was a little north of 20%, and in -- that's domestic.

U.K. was about 15%; Germany, a little shy of 8%; and Japan about 15%. The Japan numbers also include their internet application on the mobile phone. So that's both. So you can see that all the international markets are below the U.S. They are all on about a similar trajectory, if you adjust for when the internet was increased to the U.S. business.

So we expect to see a couple point gain domestically each year in the internet, and some similar gains in the international markets. We certainly think the addition of a mobile device in Japan will help grow our internet mix and the U.K. just launched a mobile application this fall. We don't expect that to be material, but it will be one more avenue to continue to increase. The U.K. also does a significant business with the buy it button on the remote control, which is also a fully automated form of ordering, and that adds about another 10 points or so to the U.K. number.

So we see continued upside in each market, probably growing at about similar rates to the growth in the penetration on the U.S. side.

Thanks, Mike. Operator, let's take about two more questions, please.

Okay. We'll go next to Louis Sarkes, Chesapeake Partners.

Hi. Could you just review for Liberty Capital what the outstanding shares are and what is closely held. And I didn't see it mentioned, is management going to be tendering into the offer, or not?

That's at the fully diluted, the common outstanding day is 140 million, 140.5 million. You'll see the numbers in the K, but it's about 140.5 million shares outstanding.

And I don't believe we've made any statement of intention, nobody in management has made a statement of intention, nor were they asked about a statement of intention -- well, they will be, but they have not yet been asked -- in the papers you'll see that, but we've not yet been polled, so we haven't made a public statement yet. But obviously, as required in the --

Okay. Sure. Of the 140.5 million, how many of those shares are owned or controlled by management?

Of the 140.5, how many are owned or controlled by management? I would guess between 3% and 5% of the shares, of the economic interest.

Okay. That's what I was wondering, the actual share numbers.

It's under 5%. The economics. It's higher of the vote because of the presence Dr. Malone's greater ownership of the B shares.

Okay. Thank you very much.

Thank you. And you're realizing that most of management is relatively more recent and their economic interests are probably more in options.

Understood.

Thank you. Last question, operator.

We'll take our final question from [Tom Donatelly, Clear & Bridge Capital].

Great. Since you have been so frank in your thoughts about leverage that you think exists, or should exist at something like IAC, and since you peeled back the onion extensively in your analysis of DTV, what do you -- your comments seem to suggest that you think it's underleveraged, so more directly, what do you think the leverage should be on an asset like that? And then I have a follow up.

I think clearly we've stated publicly one of the appeals of DirecTV is the financial flexibility it has in its ability to leverage further. And I think people -- well, we pointed out DirecTV has been weighing how to use that flexibility, whether through share repurchase, which they've done some of, and they made a further announcement yesterday that they'd be opening a share repurchase, or whether, as has been speculated, they would use some of it for broadband or other initiatives.

What that ultimate leverage ought to be, I think Mike Palkovic, Chase Carey are probably in a better position to know for sure the ultimate number, but I think the numbers at $6 billion or $8 billion, perhaps as high as $10 billion high, are not numbers based on what we know, and our conversations with them, they would be uncomfortable with.

Okay. Just as a quick follow up, even though it's not a direct comp, we obviously have a pending transaction through XM and Sirius and while they are different dynamics and characteristics of antitrust features of that transaction, do you see certain similarities of the ability of your guys as a highly influential potential or shareholder to be able to potentially drive a merger in that space from an antitrust point of view?

Well --

If you wanted to?

I guess I will say we will watch XM/Sirius with interest. Of course we set out at DirecTV with Echo being one of the few large transactions which has been turned down. So whether they've got a shot, we're not sure. We have got a host of initiatives underway with EchoStar to try to capture some of the synergies that is one would get through a merger, but not rise to the level of antitrust consideration, whether it be looking together at broadband or things like that, where you would capture some of the benefits. Where we go with that ultimately, we clearly see the synergies as being worth a lot.

I guess I don't know enough about the antitrust perspective given we'll watch how this plays with XM/Sirius. And would note that there certainly would be problems with us being sellers of our business having just completed a 355 exchange, problems with us being a seller of DirecTV.

Right. Thank you.

Thank you. I thank you all, as I said, for joining us today and for your support and interest of Liberty Media, and thank you, operator, for the call.

Thank you. This does conclude today's conference. Thank you for your participation.