QVC Group Inc (QVCGA) 2007 Q1 法說會逐字稿

Good day, everyone, and welcome to the Liberty Media Corporation first quarterly earnings 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 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 disseminate any updates or revisions to any forward-looking statement contained herein to reflect any change in Liberty Media's expectations with regard there to 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 10-Q 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 non-GAAP financial measures. The required reconciliations, preliminary note, and Schedules One through Three can be found at the end of this presentation.

And now 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.

Good morning, and thank you all of you for joining us. Well, we recently completed another busy quarter at Liberty, and today I'd like to discuss some of the developments of that quarter and take a look at the operating performance of the assets attributed to Liberty Interactive and those attributed to Liberty Capital. I'm joined today by QVC's CEO Mike George and CFO Dan O'Connell. From Starz we have CEO Bob Clasen, COO Bill Myers, and CFO Glenn Curtis. From Liberty, I'm also joined on the call by our Chairman, John Malone, and several of our other senior executives. We'll all be available at the end of the prepared remarks to answer any questions you might have. Let me open by discussing some of the developments of the first quarter. Then I'll turn the call over to our Controller, Chris Sheehan, who will talk about Liberty Interactive and Liberty Capital's attributed businesses including some significant events that occurred in the quarter and our overall liquidity picture. And then I'll close with a brief summary of the quarter and our outlook as we embark upon the balance of 2007 and as I said we'll open up the call to questions.

During the first quarter, we continued the fairly frenetic pace we set in 2006. As previously noted, the time we created the two tracking stocks, one of our key objectives was to reduce the complexity inherent in the diverse group of assets and financial instruments that we attributed to Liberty Capital. During Q1, we made significant progress on this front. During the quarter or shortly thereafterward, we completed the sale or exchange of a number of our noncore assets, including for the sale of our OpenTV stake for $107 million, the sale of On Command for $332 million in cash and $48 million in LodgeNet stock, and the 355 exchange of our CBS stake for $170 million in cash and CBS's O&O in Green Bay. Our team has done a very nice job of executing attractive tax-efficient deals that are transforming Liberty Capital into a focused operating business. One result of these transactions is also been significant cash generation. During the quarter, we put this cash to work by undertaking a self-tender for Liberty Capital A shares. This $1.3 billion self-tender was successfully completed in April and resulted in an 8.2% reduction in the outstanding Liberty Capital shares. If, as we hope, we complete further transactions, we're likely to grow our cash reserves and will consider further share repurchases as a means to creating shareholder value. Our board recently authorized the repurchase of up to an additional $1 billion of Liberty Capital stock.

Looking over at the operating side, first starting with Liberty Capital, the reduction of Starz programming cost combined with positive subscriber trends and modest revenue growth drove a very impressive significant 78% increase in operating cash flow. We expect ongoing reductions in programming costs throughout the balance of the year and commensurate increases in OCS. Looking at QVC, domestic operations rebounded nicely from a somewhat slower fourth quarter and achieved solid revenue and OCF growth. As Chris Sheehan will discuss shortly, QVC's international operations encountered difficult market conditions and some operating challenges that resulted in slower than expected revenue growth and a reduction in OCF. Provide Commerce and BUYSEASONS produced solid financial results in our quarter and our business development team continued its efforts to find additional strategic additions to our portfolio of interactive businesses, and completed as we announced yesterday the signing of a deal for the business Backcountry. The net result of the ongoing execution of our strategies has been continued strong price performance at Liberty Interactive and at Liberty Capital. During the quarter, LCAPA rose 13% while LINTA was up 10%. With that, I'm going to turn the call over to Chris.

Thanks, Greg. There's a slide show that goes along with the commentary. So I'm just going to walk you through those. First, let's take a look at Liberty Interactive. Here's a quick snapshot of the first quarter revenue and OCF performance of LINTA. As you can see, Liberty Interactive's attributed businesses continued to achieve strong top line growth during the quarter. OCF continued to grow as well, but at a slower pace as QVC's faced some challenges that I'll describe in more detail shortly. Looking more closely at LINTA, its businesses achieved 10% revenue growth and a 5% increase in operating cash flow. Provide Commerce and BUYSEASONS, which were acquired in 2006, experienced strong year-over-year revenue growth and Provide also continued to produce solid OCF increases. During the quarter, we continued to repurchase Liberty Interactive shares. Through March 31st, we had repurchased 1.5 million shares in 2007 and 53.1 million shares or just under 8% of shares outstanding since the inception of the LINTA share repurchase program. We did not repurchase at the same pace in the first quarter as we had in 2006 due in large part to the fact that our buying occurred during a 10B5-1 plan. Nonetheless, we continue to believe in share repurchases as a good means of enhancing shareholder value. And we still have authorization from our Board of Directors to purchase up to another $1 billion of Liberty Interactive equity. Also during the quarter, the value of our stakes in IAC and Expedia continue to rise, picking up where they left off in 2006. In total, those stakes increased approximately 5% in value during the first quarter.

Taking a closer look at the quarterly performance at QVC, they experienced consolidated revenue growth of 8% to $1.68 billion during the quarter and a 5% increase in OCF to $374 million. As previously mentioned, domestic revenue was up 8% for the year to $1.17 billion. This increase was mainly due to increased sales to existing subscribers, particularly in the areas of accessories and apparel. The average selling price grew 3% during the quarter to $46.04 and shipments were up 4% to $27.8 million. Domestic OCF also increased 8% for the quarter while OCF margins expanded modestly due to a slight increase in gross margins. QVC.com sales continued to grow as a percentage of overall domestic sales, rising from 20% in the first quarter last year to 22% this year. International revenue increased 9% for the quarter while OCF declined 2%. Revenue increases were due to favorable foreign currency exchange rates, increased sales to existing customers, and subscriber growth in all of our international markets. The OCF decline was due to lower margins stemming from a greater inventory obsolescence provision and higher product distribution costs. Excluding the effect of exchange rates, international revenue increased 3% while OCF declined 7%. International operating cash flow margins declined about 220 basis points during the quarter, primarily due to a 180 basis point decline in gross margins.

QVC Germany experienced unit increases, which were largely offset by decline in the average selling price and a 3% increase in the VAT. Gross margins in Germany also declined, resulting in a decline in OCF. In the UK, unit growth was largely offset by a reduction in the ASP. QVC Japan experienced revenue growth during the quarter and a modest OCF increase as the business was adversely affected by recent changes in the administration of Japan's regulations, pertaining to product claims over food, health, and beauty products. We continue to be pleased with the solid performance of QVC's domestic operations, but we're disappointed with the soft performance in QVC's international markets. We're confident that Mike George and his team have identified the significant challenges and that they will successfully address them in the periods ahead. Over the remainder of this year, we expect to complete the major capital projects that QVC has undertaken over the past two years and our CapEx should return to normalized levels in 2008. We will see some of the fruit of this capital this summer as QVC's new state of the art distribution centers in Japan and Florence, South Carolina open.

Now, looking at LINTA's liquidity picture, we continue to maintain a strong capital structure and good liquidity at the businesses attributed to LINTA. LINTA has attributed cash in public investments of $5.3 billion and has $6.4 billion of attributed debt. Excluding the value of its investment positions in Expedia and IAC, Liberty Interactive's attributed net debt of $5.5 billion equates to a multiple of just over four times annual operating cash flow. As previously stated, we would be comfortable sustaining net debt levels of four to five times operating cash flow. As a result, the LINTA businesses have significant liquidity to grow organically and through acquisitions and to shrink LINTA equity as deemed appropriate. Before I move on to Liberty Capital's businesses, Greg has a few comments about LINTA's less talked about ecommerce businesses and our overall acquisition strategy.

Thanks, Chris. I thought I'd take a moment just to address the ecommerce acquisitions that we've been doing. When you look at Liberty Interactive, it's quite easy to focus just on QVC since its overall size and success. However, at LINTA, we've amassed a fairly substantial fast-growing group of independent ecommerce businesses. Included in the Backcountry deal, which we announced yesterday, we'll have invested about $630 million in these businesses. Last year in 2006, it generated substantial operating cash flow and we expect them to grow significantly again this year. Based on the aggregate purchase price of the businesses, we paid less than 15 times '06 OCF or EBITDA and expect that the number for '07 is going to be approximately 11 times, i.e., the OCF we generate this year will mean we're paid about 11 times for that cash flow. For businesses that are going to we expect to have OCF growth of greater than 20% growing them on a sustained basis, we think these multiples are quite attractive and a good use for our capital. Not putting leverage on these companies, given their relatively high free cash flow rates, we also think we could comfortably leverage these to four or five times, again allowing us to purchase more ecommerce businesses or repurchase LINTA stock. Given the growth rate of these businesses and the potential for more acquisitions, one way to think about these ecommerce businesses is they're about approaching the scale of a smaller new country for QVC. We're not quite to that level yet, but that's a target that's not far out of sight -- that they could be to the level of one of the overseas groups at QVC. So as I said, we're happy with the progress on this front, and we continue to look for more ecommerce acquisitions that fit our model of strong management teams, good businesses with sustainable positions and high free cash flow generation and good growth at reasonable prices. So we're happy with that success. And with that, let me turn it over to Chris for some more comments about Liberty Capital.

Okay. As Greg mentioned earlier, we continue to make progress on transforming the assets attributed to Liberty Capital and to a well-positioned focused set of operating assets. Nonetheless, the combined income statement of Liberty Capital remains a smaller part of the story. Overall, Liberty Capital reported a 20% revenue gain and a 33% increase in OCF for the quarter. LCAPA's largest attributed operating asset, Starz Entertainment -- which for this purpose does not include Starz Media -- is continuing to strengthen its operations. During the quarter, its revenue grew a modest 2% to $265 million while it experienced a significant 78% increase in OCF, $73 million. I'll talk more about this shortly. Taking a closer look at Liberty Capital events during the quarter, LCAPA attributed revenue grew 20% in the quarter while OCF increased 33%. Revenue growth was driven by modest increases at Starz, the inclusion of Starz Media and a full quarter of FUN Technologies, which was acquired in the middle of the first quarter in 2006. These gains were partially offset by lower GAAP revenue at TruePosition due to some modifications and some contracts that affected some accounting treatment there. OCF growth was driven by increased revenue and reduced programming expenses at Starz Entertainment, partially offset by losses at TruePosition and the inclusion of Starz Media.

As mentioned previously, we've completed a number of divestitures and asset exchanges since the issuance of our tracking stocks. These transactions have resulted in the generation of significant cash reserves attributed to Liberty Capital. We put some of these reserves to work during the first quarter as we initiated a Dutch auction tender offer for Liberty Capital Series A common stock. This offer was successfully completed on April 5th and resulted in the repurchase of approximately 11.5 million LCAPA shares at a price of $113 per share, for total cash consideration of $1.3 billion. The repurchase represented 8.2% of the Liberty Capital shares outstanding. We will continue to evaluate share repurchases as a means of enhancing shareholder value as our liquidity position affords us. We continue to work on the completion of our News Corp exchange and expect to close that transaction in the second half of the year. We're also evaluating numerous other transactions and we'll report on those as they arise.

Taking a closer look at Starz, Starz continued to experience solid subscriber growth in the first quarter as Starz average subscribers increased 9% while Encore's grew 6%. For the quarter, revenue grew 2% as subscriber growth slightly outpaced the reduction in the effective rate that resulted from certain of Starz's fixed rate affiliation agreements. Starz operating expenses declined 12% for the quarter, largely a result of a 12% decline in programming expenses and an overall decline in SG&A expenses. The reduction in programming costs resulted from lower effective rates for the movies shown in the quarter, partially offset by increased costs from a higher ratio of first run movie exhibitions versus library product exhibitions. The SG&A decline is a result of a reduction of marketing activity with Starz affiliates. I'd add that the quality of Starz's movies is very strong this year, as their anchor studios had big hits last year, including Pirates of the Caribbean and the Da Vinci code, and Starz was able to buy great pay-TV movies in the open market at better rates than in prior years. In addition to its operating Starz and Encore movie channels, Starz management continues to be busy with the integration of Starz Media and the development of Overture films which will release its first film later this year.

Taking a look at the LCAPA liquidity picture -- the LCAPA businesses are also in a position of financial strength. At quarter end and including our News Corp stake, LCAPA was attributed with approximately $18.8 billion of public investments and derivatives and nearly $2.4 billion of cash and liquid investments, which together at approximately $21.1 billion are only partially offset by $4.6 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. Now, with all that, I will turn it back over to Greg for a quick recap of the year and talk about what's ahead for 2007.

Thanks, Chris. Well, let me summarize by saying we expect our continued rapid pace of activity and transformation that we did during the first quarter to continue. Liberty Interactive continues to execute successfully on its strategy. Our operating businesses grew revenue there and cash flow. We repurchased equity, and we're diligently seeking further strategic value enhancing acquisitions. While we were disappointed with QVC's international performance, the domestic businesses rebound and continue to show good growth. I think management and we are confident that we'll address the problems of international over the next several quarters.

Our transformation at Liberty Capital continues. We completed, as we said, several previously announced asset sales and exchanges. We initiated that large self-tender after quarter end. And we believe we took another important series of steps in simplifying the assets attributed to Liberty Capital while creating greater focus on our operating operations. Obviously we have a lot of work to do still, but we feel good about our progress to date. And we believe that the market as evidenced by the performance of both equities agrees we're on the right path. Looking ahead, we can remain actively engaged in strategic development efforts to determine the best path to drive shareholder value. We'll work to close the pending deals, led of course by the DirecTV deal, as we seek to divest and exchange additional non-core assets and pursue incremental strategic acquisitions. We have a lot of financial flexibility, and we look to put that to work to enhance our organic growth, shrink our equity and make strategic acquisitions. Thank you for your attention today and listening to our call and thank you for your continued interest in Liberty Media. With that, operator, I'd like to turn it over to questions.

(OPERATOR INSTRUCTIONS) We'll go ahead and take our first question from Vijay Jayant with Lehman Brothers.

Thanks, Greg, I have a few questions. First, if you see what Dr. Malone has done at Liberty Global, and also that LCAPA has been the standard, given your leverage at LINTA today, why wouldn't we see a massive buyback being instituted? There was a pretty modest million-odd shares bought in the quarter. The second question I have is -- given the 1-year anniversary of the tracker, I think May 4th is the date where you can probably recollapse LCAPA and LINTA. Is that a thought that's even on the table? And if so, the rationale for that. And I may have a follow-up, please. Thanks.

On the LINTA buyback, I think we probably -- with absolute hindsight, bought too little during the quarter and we probably should have bought more. Whether we will execute on a larger buyback in the form of a Dutch auction tender or the like, I think we'll be opportunistic given market conditions on that, as we were after the drop in February in Liberty Capital. Our program at Liberty Interactive has been more towards systematic shrink. But we probably haven't shrunk as much as we could. And we'll look to be opportunistic, as I said, to do that faster when conditions warrant. As far as recollapsing the trackers LINTA and LCAPA, I think the original logic for splitting them remains in place. That Liberty Capital remains today, even with the progress we've made, a collection of not integrated and somewhat disparate financial investment stakes and some operating businesses. And we probably don't have a cohesive story enough to make them integrated or reintegrated. That having been said, once we got Liberty Capital to that position where it truly is a focused operating business, we'll have to look and evaluate whether it makes sense to have them funded separately, whether the disparate shareholder groups and the audiences are still remained sufficiently diverse that we want to keep them apart. So I don't think we have any plans. And those are just some of the considerations we look at about whether we want to combine them.

If I can just follow up -- was there any period during the quarter you were sort of restricted from buying back stock because there were some pending opportunities that you were scoring, if you can comment?

We have always having those kind of discussions, but I don't think we comment on whether we're blacked out or not. We obviously have normal blackouts around earnings and the results, but I don't think we're in the business of commenting on whether we've been blacked out. That's not a precedent we want to set.

Thank you.

Thank you, Vijay.

We'll take our next question from Jessica Reif with Merrill Lynch.

Thanks. Just a couple of questions. First on LCAPA.

Hi, Jessica.

Hi. Two completely different things on LCAPA and then a question on LINTA. On Starz, I just want to clarify -- the programming cost sounds like you guys expect this to continue. Is it a lower price per film from Disney and Sony? Or is there something else going on?

I think it's more attributed to the fact that Sony and Disney are producing a smaller percentage of the overall pictures we're showing. We've done some things to be more effective and more efficient overall in how we show movies, but we're also filling in with cheaper priced films incrementally beyond what Sony and Disney are producing to make an overall lower cost. Bob, you want to add some stuff on that?

On the cost side, that's correct. They have for their own reasons decided to focus on tent pole films. And they have their core number of very big pictures. And they are doing less films around the edges. And that lets us go into the spot market, so to speak, and buy at very attractive rates because we're one of the few film buyers in the marketplace in the pay window.

One point to add there, Jessica. If one were to renew, and fewer and fewer deals are being renewed like the kind of output deals we have executed with Sony and Disney. But if one were to renew that today in a free market atmosphere, the price at which you renewed that deal would be substantially less, as well. So the overall market for pay-TV for a bunch of reasons. The overall market for costs for films in the pay-TV window -- whether output deals or spot deals, as Bob noted -- has come down substantially.

Much more meaningful for you is what happens with News Corp and DirecTV. Could you give some clarity on stuff later this year -- do you expect June, July? And if DirecTV recapitalizes once you've changed News Corp stock, can you clarify -- if it is a dividend that they issue, what would you use your cash for? Would you like to increase your stake in DirecTV? Would you prefer to diversify? And if so, could you clarify where?

Okay. On the first question of timing of the DirecTV deal, I think we've indicated there are four hurdles, were four hurdles at the time we struck the deal. One of them was the News Corp shareholder vote, which occurred and overwhelmingly voted in favor of the transaction. The other three are all government related -- an IRS ruling, DOJ clearance and FCC clearance. We are making progress on all of those as much as one can. I think the one that is probably the most likely to get solved first is the IRS and the DOJ next and probably the FCC last is what we're guessing. We certainly aren't looking for a June close. I think we always said because the FCC attempts to get things done in 6 months, which given our filing in late January would suggest a late July close at best. I think we're probably thinking late July would be optimistic and we're more like August, which is a difficult time in D.C. or maybe September. But we are at the somewhat at the mercy of those government agencies and we'll see the progress that they make. As far as a recapitalization, if DirecTV were to undertake that -- and obviously, while we have some voice, we are not yet closed as we just noted, and we are not a control shareholder, just a significant one or the significant one. And we don't know whether they will attempt a recap. But if they were to do that, I think we would look at conditions at the time to consider whether we wanted to redeploy that capital by looking at other businesses for Liberty Capital or looking at repurchase of Liberty Capital stock or incremental repurchases of DirecTV. And I think we'd have to look at market conditions at the time. I think overall we like the DirecTV asset, we like owning it, and I think we said we have flexibility to go to 25.1. We also have the opportunity to go up to the higher numbers. We could go to 49.9, I think without triggering any kind of issues on our shareholder letter with them. That's certainly something we consider. And there are alternatives around whether for cash or stock, thinking about increases in DirecTV. So I think we'd really have to look at market conditions at the time and what our other alternatives were both in terms of where Liberty Capital share price was, what other things Liberty Capital could purchase, and where the DirecTV share price was.

Can I just ask one question on LINTA?

Sure.

A combined question on LINTA. Can you give us some clarity on what the effect of this -- you mentioned the Japanese regulatory change. This is actually multiple questions in one. What actually is going on in the UK with the average selling price? And with gold discontinued because of price increases, multiple questions on QVC.

Well, I think rather than -- I can certainly answer them, but we have someone who is far more articulate. So I'll let Mike trigger off. I heard Japanese health and beauty issues, UK ASP, and there was a third. Gold.

Sure. Jessica, on the HBA regulations in Japan, the basic issue is that the regulatory authorities in Japan have adopted a more aggressive interpretation of existing laws as to how you position and sell health and beauty products. A lot of very specific issues related to our business like not allowing us to do a before and after shot when you show cosmetics. It's a series of changes like that. But the net impact has been to put a significant crimp in our health and beauty sales. As you may know they were about 40%, a little over 40% of our business historically in Japan and they've declined 10 to 15 points in the last quarter. So we're in the process of both trying to accelerate the growth of other businesses like fashion, fashion accessories, to try to fill some of that health and beauty gap as well as working with the regulatory authorities and trying to find a way to continue to sell these products that meets their requirements. So it has had a significant impact on our top line velocity in Japan. And that will take a little bit of time to work through given how meaningful those businesses were to our total. We think over several quarters we'll get that adjusted. But in the short run, it's a bit of a challenge for us.

In the UK, the ASP decline is actually related to the gold issues. We have seen our jewelry business, really around the world struggle a bit in the last year with the run-up in gold pricing, but it had a particularly significant impact in the UK. We continue to be in the jewelry business, we continue to be in the gold business, but our growth rate was negative in the quarter. And that was the biggest single driver of the deceleration in the UK. That trend started about Q2 of last year. So as you may recall, the UK revenue started to slow down in Q2 of last year, largely on the back of jewelry issues. So the comps get a little bit easier starting in Q2. So we think we'll get through that, but we're certainly not there yet. So we're still in the gold business, but it has the growth rate has slowed down significantly, and that decline in turn was what drove the decline in the ASPs.

Thank you.

Thank you, Jessica.

Next from Deutsche Bank we'll hear from Doug Mitchelson.

Thanks very much, gentlemen. Two questions. One for Greg, one for John. Greg, beyond the News Corp deal that's already been announced and the potential Time Warner deal being pursued, if you look at the value of your remaining for-sale securities, it appears to be mostly offset by exchangeables and derivatives. That would imply, of course, that monetizing those stakes could become less of a priority going forward. Is that a fair statement in the extent that you believe there is meaningful value still to be extracted from those holdings? Can you give us some sense of the potential sources of that value? And then for John, I know you don't own any DirecTV shares yet and you won't have a controlling stake, but I'm sure you're paying close attention to trends in video. To that end, I was hoping you would give your latest thoughts on the competitive landscape in video, in particular the lack of a 2A interactive pipe for satellite as cable ramps to VOD service further with announcements like the ABC-Cox VOD deal today. Thanks.

So on the other holdings, I think one of the key points to point out is -- while those may be offset by exchangeables and that's at face value in terms of the pretax value on the investment side, one of the things that we are constantly striving and we are -- obviously the marketplace pays attention to -- is any tax liabilities that we have and the underlying shares. So we look not only to generate incremental cash by these transactions, but in lots of cases to try and eliminate or reduce tax liability. So certainly while it's not as obvious on these other securities what our path is -- meaning, particularly when you get down to some of them like [moat], it's not clear that there's a business we could exchange for in a 355 or the like. There certainly are in some of the other businesses that are attractive and we have ongoing dialogue with them or about potential swaps or the like. And so, I think there's an opportunity to increase value by smart transactions with those players. John, you want to comment on video?

Even in the case of Motorola where you're talking about two-thirds cash and one-third operating business. And now that we're moving into DirecTV and into the technology sector, there may be elements of Motorola that would fit us. And obviously the logic for those kinds of exchanges is to avoid long-term tax leakage or reduced long-term tax leakage and pick up synergistic assets.

You want to get back into GI, John, for old time's sake?

Absolutely. I made money every time. Those are the best. Anyway, with respect to the video landscape, I think it's our view that if you look at the relative video growth of satellite versus cable -- satellite in '06 did all the growing and cable was effectively flat. So satellite, I think collectively gained about 2 million video subs in '06 and cable was flat. So satellite continues to tick-up growth in the market and cable tends to be flat. Now from a pure video perspective, DirecTV has made a commitment to essentially leapfrog everybody, both EchoStar and cable, by going to a fleet of Ka-band satellites that will allow them to massively increase their high definition downstream firepower. And that combined with large high definition PVRs is believed to hit the sweet spot of what the public's particularly interested in right now, which is the use of a PVR for program storage and replay combined with high definition. That is kind of the hot spot right now in the video business and the combination of superior fire power and ubiquity, which seem to give DirecTV a tactical advantage over the next couple of years while cable does have technologies that it can deploy to expand their capacity. Those will be difficult to do on a ubiquitous basis in a short time frame. So we think that there'll be a tactical advantage that Direc will have in terms of the ability to offer the public what the public seems to really want now, which is high definition content for the big screens and the high definition displays.

With respect to the issue of a broadband compatibility, both DirecTV and EchoStar have bundling arrangements with the telcos and with DSL. Which, if you look at the numbers, DSL is actually gaining market share on the margin against cable in terms of broadband market share, probably as much on price as anything. But as the broad band marketplace saturates, which I think will happen over the next two years, we think that the bundling of satellite with DSL will give satellite a reasonably effective package as compared with what cable can offer. While it's true that cable can increase its bandwidth over time at almost a cable discretion, so speeds faster than DSL will be able to deploy. We think that for practical purposes the bulk of the market will be satisfied for the next few years with a DSL offering. The other problem of course cable has if they go to high speeds, much higher speeds than DSL, they run the risk of content bypass, which I don't believe anybody wants to jump to too fast in the cable industry. And finally, as PVRs become larger and larger and more customer friendly in terms of their interfaces, we think that the flexibility for the public of recording virtually any programming without copyright risk is a superior flexibility to essentially a VOD, which can only be provided on a copyright pay basis since the content would be stored at the head end. So when you look at the whole package, it's going to be a very interesting evolution.

Also, I might point out that as wireless broadband comes along, while it may not have the bit rates that a stationary system has, it will have portability and even mobility. And we think perhaps that video mobility will be as important a bundle as is broadband bundling. So it's still a fairly complicated competitive posture as we go forward. And I think most of all what I haven't addressed is our belief that DSL for IP video is going to be insufficient to satisfy the needs of any meaningful percentage of the public. And so we believe it's kind of a duopoly game -- satellite/cable for video -- as the public wants more and more high definition programming on multiple sets simultaneously. Very difficult for DSL to provide that kind of video load. But if you transfer the video load on to the satellite and use the DSL connectivity for long tail stuff, overnight stuff, internet video of limited quality and capacity and simultaneity also look at it more as a data and IP telephony game, then I think you see a package that's quite competitive for a satellite DSL wireless package versus a terrestrial cable package.

Great answer, John. If I could add one or two points -- John pointed out that you've reached quite a lot of density, 50% plus of homes and particularly cable and satellite homes having high-speed access already. When you think of where that tops out -- 60, 70, 80% -- you're going to reach saturation point. You've already seen a market where, fortunately for us, video ARPUs have been rising and data and voice ARPUs flat to declining. I think that is likely to be more stressed as you get to that saturation point. John made the point about wireless. If you're a consumer and there's an ability to get bundles that are attractive and so far there has not been a compelling reason why the integrated offering of cable has an edge. In fact, in many cases like video quality, it's actually a less attractive offering when what a satellite DSL combo is. You're happy to go out and get that as a consumer. Down the road, if you think about bundles where there is the case more and more wireless, not only wireless voice, but wireless data and wireless video -- let's call them the quad, quintet, and sextet plays. If you think about those down the road, I think those are places where we look forward and think those are bundles where we really do need to have a strong offering. The consumer may be perfectly willing and is perfectly capable today of finding broadband access that matches up with the satellite package, but down the road there's going to be a much more logical offering in the consumer's mind of mobile video from DirecTV than maybe broadband access. And there's probably going to be much tighter integration of that type of service. That's where I think some of those things that we're focused on -- not only the current offering around triple play but where those quad, quin, sextet plays go.

I would add one more ingredient, which is that in cooperation between the two satellite platforms can come substantial improvement in operating performance and financial flexibility as well as an enormous step up in total firepower, in total downstream capacity. So clearly, working relationships to achieve synergies and be more efficient in terms of capital structure between EchoStar and Direc is one of the top things on our list.

Terrific. Thank you very much.

Andy Baker with Cathay Financial has our next question.

Thanks a lot. Good morning. Couple of questions. First, I noticed that the long-term outlook was not provided in the release. I was just wondering if you are still maintaining your long-term outlook for the QVC and the LINTA businesses. And second, maybe this question for Mike. Has there been any further thinking or any changing in thinking about whether or not HSN makes a good addition to the LINTA business directly as opposed just through your controlling stake in Interactive Corp.? I can't help but notice the value of your stake in Interactive Corp is probably about fair value for what the HSN business is currently.

So I'll comment briefly on both and let Mike add what he wishes. On the long-term outlook, we had a big debate about whether we ought to reaffirm the long-term outlook and since this was a quarterly release and that was the long-term outlook, we didn't think we needed to reaffirm it every quarter. We'll be happy to reaffirm as asked, but the assets of a reaffirmation in the quarterly release doesn't speak to our change in outlook, it only speaks to the fact that it's a quarterly release and that's a three to five year outlook. We don't expect to need to set it out every quarter. If we have a change in perspective, we will certainly let you know. On the HSN issue, I think that's a deal that's probably been discussed for 10 or 15 years. It is always discussed, not only by even analysts but by ourselves and considered. We note the performance or relative lack of performance of H compared to Q. And question in all of those kind of things whether -- what it would be worth and do we have not only the capability, but frankly the management bandwidth to go and attack the problem of trying to fix and improve the operations at HSN because they obviously have relative lack of performance? And lastly, I think one point, which is your observation about the value of the IAC stake versus the value of [H], we would fundamentally disagree, particularly given recent performance. The IAC stake is worth a heck of a lot more than H.

Fair enough.

Anything you want to add, Mike?

Nope, I think you got it.

All right. Thanks a lot.

Our next question will come from Robert Peck with Bear Stearns.

Greg, continuing along those lines, can you talk about the long-term strategic value to you of your travel assets? Thanks.

I'll comment and I'm sure John has some views on travel, as well. I think the travel business is one that has had great success in the internet space and Expedia has been a leader. While it has had some relative over the near term lack of performance, it actually in the very near term has accelerated and done better, both as we're seeing in the stock price but also as seen in its operations. That having been said, there are opportunities out there to think about adding leverage to Expedia and/or perhaps consolidating some of the travel assets that are out there. You've seen some of that happen with private equity. The potential to do more of that clearly exists. And we find it an attractive space both for its organic characteristics of how it's coming back and also for some of the potential for those combinations. One of the assets inside Expedia that is quite attractive is it increasingly has a content business and an ad opportunity that I don't think the marketplace fully recognizes. I have some history with Expedia, and one of the challenges of Expedia has always been that 90, 80% or whatever of the visitors who come don't purchase. Ways to monetize the information that you provide them, ways to monetize the eyeballs that come and gain value from you but you don't gain value from them because you don't execute on a transaction. The ability to build an ad strategy around that are very interesting and I think Expedia's making good progress on that point. John, you want to add anything?

Yes, the little business within Expedia's TripAdvisor, which is growing very nicely and is very profitable. It is in fact a Media property, independent really of Expedia, although Expedia is one of its large advertisers. Clearly, consolidation in the internet travel space would be very synergistic and create value. But in the short run, it's a business that generates an enormous amount of free cash flow, has very attractive working capital characteristics. Carries de minimis leverage, would benefit from leverage -- it's fully taxable. Clearly, if we can't do anything else, taking the leverage up, shrinking the equity makes a lot of sense. It makes even more sense to try and find an appropriate consolidation in the space because of what would be very large consolidation synergies. So that's my view of it.

And when you talk about consolidation, do you mean vertical or horizontal?

Horizontal. Primarily horizontal.

But there are vertical opportunities out there as well. Clearly you've seen some of that happen with not only [Captive] once it got created, where GDS has created their own front ends, but you've seen cases where they've come together.

Thanks so much.

Mostly horizontal and geographical.

Thanks, again.

We'll hear next from Imran Khan with J.P. Morgan.

Yes, hi, thank you for taking my questions. Couple of questions. First I was wondering if you could give us a sense how did QVC.com did in the US? What kind of growth rate you're experiencing there? And secondly, on more of a high level, if I look at the household penetration level in the U.S., it's pretty steady between 8 to 8.5% over the last two years. How should we think about that penetration rate increase going forward? How should we think of that as a lever for growth? Thank you.

Thank you. Mike, you want to take those?

Sure. In the U.S., the internet penetration was about 22.5% in the quarter, up from about 19.8% last year. So we see a continued fairly consistent increase in the internet penetration of about 2 to 3 points, typically 2 to 2.5 points a year. And I think we'll see that sort of sustained growth. There are some things on the horizon that can cause that growth to accelerate. We are investing in a major redesign of the site, really the first time we've ever undertaken a comprehensive redesign. The first phase of that launch is in the fall and there'll be a couple subsequent phases next year. That, coupled with the increasing use of video over the internet, which really plays to our strength, are some wild cards that could see us to accelerate beyond our historic trajectory. But at this point, it's been a pretty consistent 2 to 2.5 points a year. And at a minimum, I think we'll see that continue. And in terms of household penetration -- you're right, it's been fairly steady at around 8%. What drives our growth fundamentally is that as we bring new customers into the fold, you certainly have some customers that are primarily one-time purchasers, so the penetration stays somewhat stable, but each class of customers buys more kind of every year. So you see this healthy consistent increase as new classes of customers kind of grow into being core QVC shoppers. And so what we've found is that we can have fairly healthy growth even with penetration being flat. And as we look out, there's nothing structurally that would cause concern for us in terms of being able to maintain consistent growth with fairly flat penetration. Now having said all of that, I would like to see us grow our penetration and really break out of that 8% level that we've been in. We'll be -- we're not ready to talk about now, but we're working on what I think will be some fairly exciting things from a marketing and branding standpoint to try to uplevel the QVC brand and position it with consumers in kind of a new light. We're going to experiment our way into that so it would be premature to predict what the results would be. But the net message is we can grow at a healthy rate with flat penetration, but we're also going to try some new things to try to get that penetration moving up, as well.

Thank you.

Thank you. Next question, please.

We'll take our next question from Jeff Shelton with Bleichroeder.

Thanks. In your prepared remarks, you mentioned some reasons about the Liberty Interactive share repurchase. I didn't fully understand that. Was there a limiting factor involved there? And have you repurchased any shares so far in the second quarter? Thank you.

I think what we said was that we -- during part of the period we were under a 10B5 program, so we were not -- because of blackouts and the like when you operate under a 10B5 -- we were not able to make our own free purchases or executions decisions. We were subject to limitations which we set in place before the blackout period. And as far as the second question -- I'm sorry, could you repeat it?

Have you repurchased any shares?

I think our policy is we don't announce what we have done. What you can do, you can if you're an assiduous reader of the Q will find out what we've -- because it's listed what we've done through the day in the filing of the Q, which will be today. But effectively that won't be radically different just if you think about it. That will be in that same period where we're subject to a 10B5. Blackouts generally extend from beginning of the quarter through the time you announce earnings.

Thank you.

Our next question will come from April Horace with Janco Partners.

Hi, thanks for taking the question. Just a quick question about Time Warner and the potential that they might want to divest some of their interest in Time Warner cable and what your thoughts might be on that, as well as any thoughts you might have on the up and coming auction on the new spectrum?

On Time Warner cable, that's obviously not an asset that we probably could play with. It's not only got scale issues, but given what we're doing with Direc, I think it would probably cause some media consolidation issues. Got a nice business, they're growing well, doing lots of positive things. I think the only reason they think about divesting is they wanted financial flexibility to do some other things while keeping tax and accounting consolidation. And I think they're still only relatively small amount of that stock trading because it's all of the stuff they gave the Adelphia holders and got the Adelphia purchase. They've not actually generated any cash up to the parent company through the offering that they did. As far as the spectrum for the 700 -- great spectrum, waterfront property, will go priced accordingly. I don't think it's something we're likely to bid on as Liberty independently or even directly (inaudible), although I wouldn't want to speak this positively for their actions. I think it's something you do more in conjunction with a partner or in conjunction with -- if we did something, which I'm not suggesting we would -- but the raw spectrum on its own is probably less valuable than working with somebody. So unless we had a plan, which we might bid and then come up and think about the partner, you probably want to do somebody to help us execute on the strategy around the 700.

Okay. Thanks. That's all I got.

Maybe last question, operator?

Certainly, our final question will come from Scott Devitt with Stifel Nicolaus.

Great. Thanks for taking my question. First one is on the international business at LINTA. I was wondering if you could break out the revenue by country -- UK, Germany, and Japan? And secondly, on this HSN discussion, I'm going to take the opposite view on it and was wondering, given the differing growth rates and operating income levels and return on invested capital of the two businesses, why if you could divest of that stake without tax leakage, you actually wouldn't have an interest in doing something of that nature to recapitalize the higher return business at LINTA? Thanks.

Sure. On the first point about the LINTA international businesses, I think they will be in the Q, which is going to be filed later today. So you'll have that information in a matter of hours. And on H -- at some value H is a good deal for us. Even despite the issues that I spoke about of the declining profitability and the management bandwidth it would take. It's just that what price we would find attractive to purchase, IAC would find attractive to sell.

H has basically been flat for a number of years. And as they try and step on the accelerated they depress the results. That's the nature of the business. There's a cost trying to change your model.

They've added costs so far, but not results.

And this quarter we saw the effects of their efforts to change the model. That said, it is a big free cash flow generator, and could sustain very high leverage. And therefore one could kind of contemplate owning H, applying investment management practices to it to grow it, and at the same time, liberating the capital tax efficiently to shrink the LINTA equity. So you can basically -- presumably if you believe you could fix H and accelerate its growth rate and use high leverage in the process, one could have one's cake and eat it too. And that's really the question. The real question is how much synergy will there be? How much could Q contribute to future growth at H? And therefore, how much leverage and releverage could H experience in Q's hands? And that's the intellectual challenge.

And Scott, to form it another way. You know that we've stated our goal in all of this is to try to get operating assets. John has rightly pointed out, it is a synergistic operating asset. You would like to do it -- and to have access to cash flow, add leverage, consolidate, all of those positive things. The net of it is, I think if you looked over the last 3 years or so and certainly during my tenure during Liberty, I'm not sure at any point in time if we'd done the exchange we'd be any better off. I.e., so far, holding the stock has been a better economic proposition than likely holding H. Stock has generally been rising, certainly recently declined a little, but has had a general rise. And H has generally been declining -- flat to declining and declining more recently. So are we going to catch a falling knife is the question and do we need to fix it? We weigh all those things and we certainly hear the intellectual argument and believe the intellectual argument about at what time owning the operating business would be better. It's a question of when and at what price.

We're waiting to hear the management at Q say they're ready to throw their body in front of the train.

May I just follow-up on a separate subject? On the ecommerce strategy of the businesses that you're purchasing -- I'm just wondering if this is about building a portfolio of independent brands or if there's some longer term synergy between QVC and what you're building on the ecommerce side. And if there is a synergy, maybe if you could just highlight some of the benefits that you've attained from owning Provide Commerce? Thanks.

So, on the question of whether these are portfolio or there's some integrated strategy, I think first and foremost, we need to show that they're good businesses with strong management teams that we'd like to own for the long-term. There are clearly we believe best practices over time that will work. And if you buy relatively smaller ecommerce businesses at attractive multiples compared to what they can get on their own or because of their lack of scale, there's some value arbitrage over time. But more importantly, you can bring best practices search, an area where best practice can work because it's such a large component of many businesses where best practice can work across these ecommerce businesses. But many other areas around procurement and the like, we'd like to think we can ship that and add value. Is that going to be many multiple points of value? No, I think it's operating, it's sweat equity, but it gets you value over time. The question of what value we can get from QVC -- clearly the opportunity to use the video promotion to get exposure to the strong and loyal customer base that Q has is one of the attractive opportunities that's out there. We already have that happening on the website well with Provide and BUYSEASONS. I expect we'll see even though it's somewhat of a different demographic, we'll see linkages between that country and Q. The larger question of how much we can get on air promotion to benefit -- so far we've seen some success at that, but I would describe it as modest. And we look to find new ways to think about how to market, for example, flowers as your example to market that on air. And I think there are a lot of creative ideas and a lot of energy that's going on. But I would say the opportunity has been -- or the success has been modest and the opportunity remains large. Mike, you want to add anything?

I think that's fair. As you mentioned, I think there's a real opportunity to leverage the collective internet traffic kind of both ways -- Provide and BUYSEASONS. You can buy those products and complete your transaction at QVC.com. As an example right now, we're featuring Provide, featuring ProFlowers pretty aggressively for Mother's Day. So there are those kinds of internet to internet opportunities. And then as Greg said, we'll continue to experiment on the video side. A lot of ideas, things we've tried today haven't been home runs. But we'll keep experimenting with that. At a minimum, the leveraging of the collective internet traffic we think is a win.

I'd also add that Liberty as a company has a lot of great assets, but we didn't have a lot of internet strategy or capability. We added a lot of Internet genius and strength in those management teams and I think there's going to be cross pollination benefits. And in a way, the entry price of getting into those and the opportunities that it will open up -- I think there are consolidation opportunities within the categories that they're in that are Direc related. So we not only have the opportunity to have positive synergies between Q and Provide, for example, but in some of the categories that they're in, I think there are opportunities where to use the platform we have and the management teams we have to extend those businesses and add synergistic assets on top. And so there's an entry price of getting into that. I think we paid that entry price. Provide was probably the most expensive of the acquisitions that we've done. We got a great business and a great team out of it and we're amortizing that price down. And I think we'll see opportunities arise out of that going forward.

Great. Thank you for the detail.

Thank you. And with that, operator, I think we'll close the call. And let me say thank you to everyone on the call from the Liberty side and thank you to all of you out there for your interest in Liberty, your shareholdings, and your questions today.

And that does conclude our conference. Again, thank you all for your participation. We do hope you enjoy the rest of your day.