QVC Group Inc (QVCGA) 2008 Q1 法說會逐字稿

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

(OPERATOR INSTRUCTIONS)

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 the presentation, and Liberty Media expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statements contained herein to reflect any change in Liberty Media's expectations with regard thereto, or any change in events, conditions or circumstances on any which statement is based. Please refer to the publicly filed documents of Liberty Media, including the most recent Form 10-Q and 10-K 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 reconciliation, preliminary notes 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, and thank you all for joining us this afternoon and for your continued interest in Liberty.

These have been exciting times at Liberty and we're quite pleased with some of the operational and structural progress we have made. There is a lot left to do, but I'm going to talk first about how we're doing by tracker this quarter, discuss some of our operating performance at our businesses that we control, and cover some of the transactions we did and other developments. Liberty's fine Controller, Mr. Chris Shean, will discuss our attributed businesses, financial results and the liquidity picture for each of the trackers. QVC's CEO Mike George will discuss recent developments at QVC, and Starz's CEO Bob Clasen will review recent events at Starz. Also on the call we have the QVC's CFO Dan O'Connell, Starz's President and COO Bill Meyers, and EVP and CEO Don Curtis, and several other senior Liberty executives. All of us will be available to answer questions at the end the prepared remarks.

Before we discuss the specific results of the quarter, I want to review a couple of highlights and how they tie into our overarching strategy and direction. Obviously, the most important news for the quarter was that we closed the long-awaited exchange with News. Obviously, we think that is a great deal for our shareholders. The value has increased significantly since we announced the deal. We're probably up about $4.5 million on the swap, and we like the company so much more that post the swap we have added another 78.3 million shares to our holdings in a creative low-cost transaction via a collar, and borrowing against the collar to purchase the shares. That transaction increased our ownership to about 48% of the company, and we're still working on the best path to unlock additional value there.

We were very pleased as I suspect you were by yesterday's announcements at DIRECTV, the performance in the first quarter. They really had a stupendous quarter on virtually every metric. We're pleased that yesterday DIRECTV announced they were going to increase their share buyback program to $3 billion. We have been working with them on that, and we agreed that we would not tender or sell any shares into that purchase, and we would agree to hold our votes neutral at their current 48%. So we're very supportive of their actions, and think it's the best use for the balance sheet and a great return of capital to shareholders. We're also excited that our economic interest in the business will increase, if not our voting interest. And nothing they doing, we believe, limits our future strategic options, or theirs.

Also this quarter we had some structural optimization, in that we reclassified Liberty Capital, and issued the new Liberty Entertainment tracking stock, providing further refined investment choice and, we believe, increased flexibility and options for the company. New LMDIA is centered around our 48% stake in DIRECTV, but also includes Starz Entertainment, the three regional sports networks, our 100% interest in FUN Technologies, our 50% in GSN, and our roughly 33% interest in Wild Blue. New Liberty Capital is going to be focused on reducing complexity there and continuing to simplify and continuing to isolate the discount from pretax value. We think this tracker structure provides, as I said, new options and flexibility for us, while preserving the efficiencies among all the Liberty assets.

We are disappointed still that LMDIA trades at a discount to what most analysts believe is a fair sum of the parts. After, soon after we initiated trading in the stock, the discount got up to 30%. We recently went on a road show, visiting Boston, Baltimore, New York, Los Angeles, and San Francisco's next and that, and probably some of our actions in conjunction with increasing our stake have had a positive benefit, we would like to think. The discount has narrowed back to the mid-teens. At one point, it actually got to as low as maybe 12%. That is probably now post- the DIRECTV earnings, and the recent increase in their share price and LMDIA's lack of mirroring, that increase is substantially - probably in the 15 to 17% range. We still are looking to increase that discount. We don't believe that discount is probably correct at that width, and we would like to think that by decreasing it we continue to open up our options, as well as providing the current return for our shareholders.

We also had a lot of success operationally this quarter. LINTA had mixed results at QVC, but we're still comfortable with the business fundamentals. The domestic market is difficult, and our analysis shows, not surprisingly, that the states that are most affected foreclosures and recession, our revenue growth is most challenged. But we did considerably better than most of our peer group, and think we're making the right kind of progress. Internationally, we also made excellent progress in the quarter, where you really saw the beginning of turns in several areas, particularly in Japan and beginning in Germany, and the perspective that we had local currency growth, which we hadn't had for awhile, and better yet growth in U.S. dollars.

The E-Commerce businesses performed excellently. We're very excited about those, and excited about their prospects. We did reduce our repurchase activity during the quarter in our shares at LINTA. This speaks less probably to our fundamental view about the stock than the reality of the capital markets. We have about a $900 maturity - debt maturity in July of '09, and we're trying to keep some dry firepower to make sure we can handle that debt maturity. As the capital markets clear up, I think we'll probably look for increased borrowings, and a way to continue our progress at LINTA.

LMDIA, literally all of the businesses performed very well. We had strong operating performance at the assets there at QVC, as I discussed. We had continued success at Starz Entertainment, as Bob Clasen is going to talk about more. FUN Technologies, particularly at one - our subsidiary did very at expanding its Internet offerings, interactive offerings as well. GSN continues to do well. We will talk about mor, I'm sure, in the question and answers, but we continue to work on strategic alternatives there, and hope to have some ideas to [report].

At Liberty Capital, the reclassified Liberty Capital has all the assets that were previously at Liberty Capital that were not otherwise attributed to Liberty Entertainment. And the operating businesses, Starz Media released several films, and continued to focus on building original content for Starz Entertainment and other distribution vehicles.

We modified the returns of our Time Warner exchangeable debt to minimize the impact of the put that the holders had, and were able to have about 72% of the issue or 71% stay outstanding. And at LCAPA, we're continuing to work on a long-term strategy, but the reality is that we're likely looking at a path to a controlled liquidation, not in the near-term but over time to optimize the value there.

So with that, let me turn it to Chris to talk first about the Liberty Interactive results.

Thanks, Greg.

The slide you're looking at is a quick snapshot of first quarter revenue and operating cash flow performance. It shows that Liberty Interactive's [attribute] businesses picked up the pace of revenue and operating cash flow growth. QVC is the primary driver of performance among Liberty Interactive's attributed assets and continues to operate in a challenging retail environment. Nonetheless, the business managed 5% consolidated revenue growth and 3% operating cash flow gains. While this is below the results QVC strifes for, by continuing with a disappointed approach to product selection and pricing, the business remains sound. On the international side, we were aided by foreign currency gains but also saw progress in operations and believe the business is headed in the right direction in all markets. I will talk more about this shortly.

Looking more closely at Liberty Interactive, as just discussed, LINTA'S business achieved 10% revenue growth, while operating cash flow grew 5%. As I will discuss in a bit more detail in a moment, QVC's domestic revenue and OCF were largely flat in the quarter. Meanwhile, international businesses, aided by the FX gains experienced improving performance with over 15% revenue growth and dollars and 10% OCF gains. Liberty Interactive's other E-Commerce businesses, which including Provide Commerce, Backcountry, Body Building and By Seasons, had strong financial results in the first quarter and continue to grow at a rapid pace. In the aggregate, the E-Commerce businesses experienced revenue in operating cash flow growth of 113% and 144% respectively, due to the acquisitions - largely due to the acquisition of the Backcountry in June and Body Building in December of 2007. Revenue and operating cash flow growth of the businesses was 37% and 55% respectively, kind of on a pro forma basis, assuming the businesses were all consolidated at the beginning of '07.

As Greg mentioned earlier, we significantly slowed our share purchase pace in the quarter, as upcoming debt maturities combined with uncertainty in the capital markets led us to conclude that we should cease repurchases and maintain our current capital until we see more stability in the capital markets. During the quarter, we repurchased 4.7 million shares for $83 million. Since inception of the LINTA share repurchase program, we have reacquired 16% of the shares outstanding. We continue to believe in share repurchases as a good means of enhancing shareholder value, and will continue to evaluate opportunities cost-effectively shrink Liberty Interactive equity.

QVC experienced consolidated revenue growth of 5% to $1.77 billion during the quarter, while OCF grew 3% to $387 million. Revenue growth, while somewhat slow by QVC standards, was achieved without promotional efforts. Consolidated OCF margins dipped by 30 basis points during the quarter, resulting in OCF growth slightly lagging revenue growth. OCF margin declines were primarily the result of lower gross margins experienced across most product categories. Domestic revenue was flat for the quarter at $1.18 billion as the mix of products sold shifted from home to the jewelry and accessories areas. The average sells price increased 4% from $46.04 to $48.09, while total units shipped declined to 26.9 million from 27.8 million. Domestic OCF increased 1% in the first quarter to $281 million, while the operating cash flow margin increased 20 basis points to 23.9%, primarily due to lower-fixed costs partially offset by a decline in gross margins. QVC.com sales continue to grow as a percentage of overall domestic sales, rising from 23% in Q1 of '07 to 24% this quarter.

International revenue increased 15% to 589 million for the quarter, while OCF grow 10% to $106 million. Revenue growth was due to favorable foreign currency exchange rates, greater sales to existing subscribers in Germany, and subscriber growth in the U.K. and Japan. OCF growth lagged that of revenue and OCF margins declined 80 basis points, primarily due to lower gross margin and higher commission expense as a percentage of net revenue, due to new fixed rate agreements in the U.K. and Japan. Excluding the effects of exchange rates, international revenue increased 5% for the quarter and OCF was largely flat.

As was mentioned earlier, QVCs international operations appear to be making progress towards returning to prior performing prior levels. QVC U.K. continued its strong local currency performance, as revenue increased 11% on equal growth in units, while operating cash flow was up 6%. In Japan, QVC experienced 4% local currency revenue growth, the first top-line growth it's experienced since the first quarter of 2007. While the change in the enforcement of the health and beauty regulations in Japan dampened growth over the past year, management has done an effective job of changing the product mix and creating productivity gains and alternative product categories in what remains a strong market. In the aggregate over the past two years, even with the changed regulations, QVC Japan experienced 10% top-line growth in the first quarter. In Germany, our operations have faced significant operational challenges over the past few years; however, for the first time in a year, QVC Germany experienced local currency [Indiscernible] of this quarter on ASP and unit growth while operating costs improved to partially offset the decline in gross margins. Management remains focused on completing the turnaround of this business.

Now, I'll hand it over to Mike George for additional QVC comments.

Thanks, Chris.

As Chris mentioned, in the U.S. we were clearly disappointed with our sales results. We saw fairly broad weakness across most of our five categories, and we remain very focused on bringing our customers fresh and innovative product offerings that will capture their attention in a tough climate, and overcome the overall weakness in consumer spending. We are finding that while the customer is being more selective right now, she will respond to new unique exclusive items, and so our focus is on trying to do a better job everyday delivering those kind of items to our customer. When we do, she does respond. Along those lines, we did premier several new brands in the quarter, with good initial results, including new beauty brands Clinique and Kate Somerville, Sony biocomputers, Lucky Brand handbags, London Fog outerwear, and a new bedding line by Whoopi Goldberg.

We also expanded our offerings in categories like big screen TVs and treadmills, by developing new shipping alternatives to lower the end cost to the customer. We have a number of strong brand launches coming up later in the year. A lot of them we can't comment on publicly at this point, but some we have announced include Steve Madden, which premiered this week, Clinton Kelly and Martha Stewart crafts. We're also focused at the same time on continuing our work to build the QVC brand and increase QVCs visibility through other media. In Q1, we were one of the featured tasks on Celebrity Apprentice, and we were featured extensively on a weeklong Wheel of Fortune series. So you are going to see us continue to expand these kinds of media partnerships, to find new ways to draw eyeballs to the channel.

We also began, as we've announced, broadcasting a second signal in hi-definition at the end of Q1, and we're currently in discussions with our major affiliate partners about picking up the signal and carrying a second HD location for QVC. As Chris mentioned, despite the sales weakness, we were pleased with our ability to maintain stable gross margins in a tough environment, reduce our fixed cost and control our variable expenses, all which of resulted in a plat improvement in OCF margin. We were also excited to welcome Claire Watts to her new role as President of U.S. Commerce. Claire has a wealth of experience in retailing across a number of formats, joined us in February, and on May 1st assumed responsibility for our U.S. merchandising, planning, broadcast and Internet activities.

Also joining QVC this week as Senior Vice President of Fashion, Jewelry and Beauty is Jeff Karashi, a traffic merchant with deep experience in electronics retailing at QVC - and as a vendor to QVC and someone who was actually at QVC a number of years ago. So these two strong editions complement what we think is a team of seasoned QVC executives. Together they are very focused on continuing to build the QVC brand experience and expand our customer base as we update our product and programming.

Turning now to our international businesses, we did see improved sales results across all of our markets and the U.K. delivered another good quarter, with particular strength in apparel, electronics and also jewelry, which had been a challenge for them last year. OCF margins, however, were impacted somewhat by the mix shift to electronics, and also by the cost associated with the long-term extension of our preview [DPP] contract. So we're delighted to have the extension, but it did result in some increased costs that we will anniversary over the course of this year.

Germany did show a modest improvement in performance, as Chris said, posting positive sales in local currency for the first time in a year. We saw a good progress on every element of the turnaround program that we established last year. We increased the mix of business at regular pricing, and we added a record number of successful new show concepts to diversify the calendar, and we managed expenses tightly. Despite these positive steps, we're clearly still falling short of our sales goals, and continue to be especially challenged in apparel and jewelry. So fixing those businesses and getting Germany on a sustained path of higher sales growth is obviously a strong remaining priority.

In Japan, we felt very good about the progress we're making offsetting the regulatory issues in health, beauty and fitness. We drove strong double-digit sales gains in apparel, accessories and jewelry, and also achieved our first positive sales growth in that market since Q1 of last year, when the regulations first hit us. So we feel very good about it, and feel we're on the turnaround plan that we shared with all of you several months ago. We also expanded our distribution and our carriage by launching on the BS digital platform in December. We think that will be a great platform for us over time, although it -- there are additional costs associated with that which dampened our OCF rate somewhat and that we will anniversary as we go through the course of this year.

And with that, I will turn it back to Chris.

Thanks, Mike.

Let's take a quick look at the Liberty Interactive liquidity picture. We continue to maintain a strong capital structure and good liquidity at the businesses that attributed to Liberty Interactive. The group has a attributed cash and investments of $4 billion has $7.7 billion in attributed debt. Excluding the value of the positions in Expedia and IEC, LINTA's quarter-ending attributed net [back] of just over $7 billion equates to a multiple at the very low end of our targeted leverage ratio of 4 to 5 times OCF. We're likely to maintain a level at the low end of the range until we see stronger capital markets which would offer more readily accessible capital to us.

Moving on to Liberty Entertainment. The next two slides address our newest track in stock, which I may refer to as L Media during this. The completion of our exchange with News Corp allowed for the reclassification of the old Liberty Capital, and the issuance of a new Liberty Entertainment tracking stock. Liberty Entertainment Group's operating results are comprised of Starz Entertainment, FUN Technologies and the Liberty Sports Group. Attributed revenue grew 11% in the first quarter while OCF was up 17%. Revenue and operating cash growth resulted from modest growth at Starz Entertainment, coupled with the inclusion of the Liberty Sports Group.

Now taking a close look at Liberty Entertainment's consolidated subsidiary, Starz Entertainment, it had another solid quarter of subscriber growth, as Starz's average subscribers increased 6% while Encore's grew 12%. This prescriber growth partially mitigated - was partially mitigated by Starz fixed rate affiliation, which on a combined basis drove 3% revenue growth for the quarter. Starz's operating cash flow growth of 1% slightly lagged revenue growth, as operating expenses increase 4% due to increased marketing expenses associated with new Starz - with Starz new branding campaign. The programming expenses were flat, as lower bonus payment amortization was offset by a higher effective rate for the movie titles exhibited in the first quarter. 2008 programming expenses are expected to be comparable to 2007 levels, as Starz continues to invest in initial programming initiatives with the launch of the series Crash, Head Case and Hollywood Residential.

Now let's look at the L Media liquidity picture. The businesses attributed here are in a position of financial strength. At quarter end, L Media was attributed with approximately 11.7 billion of public investments. In addition to the [ Indiscernible] , Liberty Entertainment had attributed cash and liquid investments of just under 1 billion at quarter end. The total cash and public holdings approximated $12.6 billion, well in excess is of the $605 million space amount of attributed debt. Subsequent to quarter end, we purchased an additional 78.3 million DIRECTV shares, and funded the purchase by borrowing just under $2 billion against a newly-initiated equity collar on 10 million DIRECTV shares. This purchase increased our public holdings and debt equally by $2 billion.

Before we turn to Liberty Capital, I will next turn it over to Bob Clasen, who would like to say a few words about the exciting activities at Starz Entertainment and Starz

Thanks, Chris.

We continue to be pleased with the progress at Starz Entertainment, where subscriber growth continues at a fast pace, now several quaters in a row. As Chris said, cash flow remained flat versus a year ago, as we invested in our Starz branding campaign, and our new original series, Head Case and Hollywood Residential. On the Starz Media side, many of the initiatives we launched last year in both theatrical and television programming began to bear first fruits.

Speaking of firsts, we marked several firsts during the first quarter. Among them, Overture Films released the first theatrical motion pictures, starting with Mad Money in January, which performed well at the Box Office, and will be a stong performer in home video, starting this month, and on our premium channels later this year. "Mad Money" is the first example of our audience aggregation strategy, because it will generate across multiple platforms - theatrical, home video, premium television, internet and broadcast syndication, all through our own in-house distribution businesses. Over also released "The Visitor," which is the best reviewed movie of the year so far, and rolls out to dozens more screens this month. At Starz Media, we began our first collaboration on a television movie, with video game giant Electronic Arts Inc. At Starz Entertainment, we launched our first major branding campaign in six years, including a strong new logo. We premiered our first comedy series, and announced plans to air this fall our first original drama series, Crash, based on the Academy Award-winning Best Picture.

On the ratings front, for the first time ever, Starz in February finished first among premium channels, and the Nielsen ratings will be for total day and prime-time, while Encore continues to rank first among premium channels in terms of subscriber count. As you know, recently Viacom, Paramount, MGM and Lions Gate announced plans to launch a new premium television service late next year. Although the initial impact of this venture will be the deprive Showtime of it's major first-run movie suppliers, we do not take lightly the possibility that it will provide a competitive challenge to us coming years. We intend to press home vigorously the value of our product, both to our affiliates and to our subscribers. We will point out that our ratings and subscriber growth continue to be strong, and that our investment in original programming in Overture Films will provide us two new sources of programming going forward. That Starz has contracts with our major studio partners, Disney and Sony, that extending into the next decade, as well as library deals with Paramount and MGM for exclusive pay TV showing, and we continue to be able to purchase independent films in the open market at attractive prices. I'll now hand it back to Chris.

Thanks, Bob.

The next set of slides addresses the new Liberty Capital track stock group upon the reclassification of the old Liberty Capital and the issuance of the lIberty Entertainment track of stock, new Liberty Capital was issued. This group's results include Starz Media, the Atlanta Braves, True Position, Leisure Arts and our green Bay television stations, [WFRV]. During the quarter, Liberty Capital's revenue increased 26% to $91 million, while LCAPA's operating cash flow loss increased to $59 million. LCAPA's revenue growing was due to the inclusion of the Atlanta Braves, Leisure Arts and WFRV. The operating cash flow loss was primarily due to Starz Media, and the seasonality of the Atlanta Braves, which doesn't really get started with the season until the second quarter. Now let's take a look at LCAPA's liquidity picture. The new Liberty Capital Group has attributed cash and public investment of $6.8 billion, and attributed debt of $4.9 billion. During the quarter, Liberty modified certain terms of it's 3/4% Time Warner exchange senior debentures, to induce holders to not exercise their one-time foot rights. The modifications included deferring Liberty's ability to redeem debentures until April 5, 2013, committing to pay holders in cash upon maturity or redemption rather than in Time Warner stock, and increasing the rate of interest to 3.8% after March 30, 2008. As a result, Liberty limited the repurchase to $486.1 million of the total issue of $1.75 billion, with the residual 1.26 billion debentures remaining outstanding, albeit under the revised terms. This repurchase was funded with cash from an existing borrowing facility that we had in place on different collars.

With that said, I will turn the call back over to Greg, who will quickly recap the quarter.

Thanks, Chris, and thank you to Mike and Bob for the updates on your respective businesses.

As mentioned before, we're excited about what is going on at Liberty and hope you are, too. We remain very much focused on maximizing value to you, our shareholders, through innovative financial transactions, looking for a way to redeploy our capital, including share repurchase, on an attractive basis, the most cost efficient financing available in a tough market, managing our businesses and investments best within each tracking stock, and supporting our management team's to produce the best operating results possible.

We think we accomplished's lot this quarter; there's a lot more to do, and the pace of activity should remain high. Thank you for listening and for your continued interest in Liberty Media.

With that, I would like to open the call for questions, Operator. Thank you.

Thank you.

(OPERATOR INSTRUCTIONS) Our first question comes from Kip Spring with Stifel Nicolaus.

Regarding your investment in DIRECTV, how do you see the video-on-demand product evolving and do you so the need for a broadband partner there? Thanks.

Thank you for the question. I think the video-on-demand product is going to be quite interesting. It highlights the strength of DIRECTV around the total TV experience, and I think the implementation that they have looks quite interesting in beta compared to some of the alternatives in the cable universe. I think the question of how video-on-demand and the broadband partnerships work is, you know, a larger one about our role in broadband. I think we're excited about the partnerships we have in broadband, not only with Verizon and Qwest, but also the opportunities that we've looked at with people like broadband over power line or the alternatives around, things like Clear Wire, but that may now change. Continuing interest in seeing all of those many alternatives bloom, we're sort in the Maoist school of let a thousand flowers bloom in broadband because that helps us. So we're excited how that works for our business overall and not just on video-on-demand, and I think a lot of progress is being made there.

Thanks.

We'll move now to Imran Khan with JPMorgan.

Thank you for taking my questions. Two questions regarding QVC. First - and I was wondering if you can give us some sense how the qvc.com did this quarter? What percentage of your revenue came from qvc.com, and how much is it is up on a year-over-year basis. And the second question is, can you give us a sense the inventory level trending in both the U.S. and international markets? Thank you.

We did about 24% in the quarter, and I think that's up from about 23 or 22 last year, Mike?

That's right, it's up from 23 last year, about a - roughly 1 point increase in penetration and about 5% overall growth, I believe.

You want to talk about the inventories, Mike?

Yes. As a broad statement, our inventories we think are in good shape. They've creeped up somewhat in Germany, as Germany struggled with their sales velocity last year, the inventories ended up Q1 of this year to Q1 of last year up a little bit higher than we would like, so we're focused on that. Our goal is to bring those inventories in line over the course of the year. It's not at a level that gives us a high concern, but it's clearly higher than we would like.

Other than that, we feel good about our inventory position in both the U.K. and the U.S., and we're obviously watching those very closely, and erring on the conservative side in this environment. Our Japan business is primarily a consignment business, so we don't have meaningful levels of inventory in Japan.

Great, thank you.

Thank you.

We'll hear now from Jason Bazinet with Citi.

I think some time last year, maybe earlier this year there was an adverse IRS ruling regarding some of the tax deductibility of the noncash interest related to the exchangeables, and I was just wondering if you could just summarize what that ruling was, and then sort of the implication for cash that would flow from LINTA to LCAPA? Thank you.

Jason, there was a ruling or resolution, I'd more accurately state, with the IRS that we had last quarter. That is with -- quite the opposite. There have been some precedents out there from Comcast and others, that we believe we're very happy with our results compared to theirs, and I will let Albert Rosenthal, our tax expert, and Gloria speak for a moment about it.

Our settlement with the IRS, we basically agreed that we would be able to continue to deduct both the cash and the contingent interest with respect to most of our exchangeable debentures. On two of the series we get to deduct the cash interest but not the contingent interest. That is the settlement going forward.

What was the point of the delineation between the two, where you can on the balance and you can't on the contingent?

On the two, there were two issued post- the issuance of certain proposed regulations by the IRS in 2001.

Okay, all right. And then the net implication for - roughly, in terms of the cash that will flow from LINTA to LCAPA?

That is about 200 - it goes from LINTA to LCAPA and it's - it's 150 issues, I think, is what the right number is. We can confirm that offline for you.

Okay.

Just understand how that works. So that we're deducting, because of the equity feature that is embedded in those exchangeables and the market costs embedded because of that equity feature, we're deducting at an exceedingly higher rate than the cash interest being paid.

Yes.

So that is, let's say, deducting at 9% versus paying at 3, roughly.

Yes.

But that is really a loan from the government, because we are going to eventually have recaptured on some of those pieces. The LINTA pays for that tax shield rather than paying the U.S. government, in the interim pays LCAPA for that tax shield.

Understood. Okay, thank you very much.

Benjamin Swinburne with Morgan Stanley has our next question.

Thanks. Greg on the DIRECTV debt issue yesterday, is this leverage level sort of optimal from your perspective, or is this a function of just the credit markets, and you expect more as the markets get a little bit easier to tap later through this year? And then if I could ask a question on the Starz business, the subscription growth, I think you said 6% at Starz, 12% at Encore? There is obviously a lot going on behind that that leads to a revenue growth number much lower. Can you guys give us a little more color on how we should think about the fixed-rate contracts versus the variable-rate contracts, and what that trend looks like going out over the next couple years, so we can get a better sense for what the organic long-term growth is of this business?

I will comment briefly on the DTV debt and then Bob Clasen talk about Starz. I think if you were - if we were here about a year ago, you would have to get in line while the investment bankers who were throwing us proposals to lend us money at many, many multiples of what the current debt level is. I am not sure we would endorse what they were thinking then; I think the capital markets are constraining me imagining something too much higher than what DIRECTV is thinking right now. I think the optimal level is probably a little higher than the current but not necessarily what people were thinking last spring, and throwing at us, or offering to throw at us. Bob, you have a comment on the...?

Yes. There are a number of moving pieces. Let me summarize a couple of them and tell you the impact. Some of our affiliates have so-called fixed deals where there are, for example, steps and CPI adjustments, adjustments for them acquiring and divesting of subscribers, those kinds of actions, and then there are, of course, the consignment subscribers, which are more on a one-to-one basis. In addition, you have going within this mix situations where sometimes we're accounting for revenue on the cash we receive when we are between contracts and in negotiation, and until we get a settlement or reach some mutual agreement in various steps, it's frankly, I see your problem, hard to understand.

Let me give you a simple example; it's easier to look at us on an annual basis, because some of the deals drag on for a long time. We had transactions in the second and third quarter last year that if you normalize them over the first quarter, we would have, compared to the first quarter in '07, had a 5% revenue growth and 11% cash flow growth. So -- and I don't know how helpful that is, but it's easier to look at us over the period of several running quarters, because there are so many moving pieces, and often they tied to our top 5 or 6 affiliates that have such a big impact on our overall revenue.

That is helpful. Then if I ask one follow-up on the Paramount/Showtime deal or non-deal, what are your thoughts given what you see at Starz in terms of movie costs and the difficulty getting incremental carriage? And you have a relationship with Paramount; any thoughts of working with them on this JV, any partnership opportunities? Would love to hear your thoughts on their outlook?

Well, I think at this point they have made their decision to move in their own direction, and it will be interesting to see if there are other partners; Blockbuster's been mentioned. I don't know what that role would be. The background would be the three existing pay companies all got founded by companies that had massive distribution. Time Warner with HBO, Viacom was a major cable company when they founded Showtime, and Starz is an outgrowth of TCI. I do think that the challenge in the first instance is to what is the box office performance? We're find of saying we can run a 3-year-old movie and beat most original series. HBO, to their credit, with the Sopranos and Sex in the City, two gigantic hits in 35 years. So movies still - uncut movies, in their original screen version, still do drive a premium category, and yet the originals help with branding and identification. Our view would be any new venture, whether it's this new one or any, has to have massive distribution in order to be successful. I'm just quoting what most of you have been saying; at $3, you need 13 to 15 million just to cover your costs, relative to the estimates of where they were with Showtime. So I think it's going to be a challenge, but you know, all you need is a couple of big partners to step up and say they want to do that, and it will happen.

To your final point, we do have what we think are the best MGM and Paramount films under exclusive license for pay that go well into the next decade. So you're not going to be seeing a lot of the favorites from Paramount and MGM showing up on the new channel out of their library, at least.

Thanks a lot.

Our next question comes from Andy Baker with Jefferies & Company.

Thanks a lot. Just two questions. One, I guess, now that you reduced the number of outstanding amount of the Time Warner exchangeables, the -- there is probably 27, if my math is right, 27 million shares of Time Warner that are not under the exchange. I wonder if you have plans to hedge those or maybe look for a transaction with Time Warner where you can give those back and get one of those [inaudible] they're looking to get rid of? And then on to QVC, I wonder if maybe, Mike, you could talk about the gross margin? It's been trickling down a little bit. Not too much but little-by-little. If there is anymore granularity you can give us into how we should think about that over the long-term?

In Time-Warner's exchangeable shares, we have a little less than that that are free and clear, but we'll look to always consider a 355 exchange with the company, if that were available, and we have continuing dialogue with them. I actually talked to Dick Parsons two days ago. I don't think there is anything on the horizon that would be obvious for us to do there. I think we stayed unhedged for that, partly because that effectively says we believe the stock is pretty cheap. As you may recall, we did our deal last Spring, May 16th, that the stock was effectively about 21. So that was a pretty good trade-up, and I think at 16 it probably has some more room to run. The unhinging, for the moment at least, of the Microsoft/Yahoo deal is probably a plus for AOL, and there is other stuff out there. So we'll take our chances for the moment on at least some piece of our Time Warner stock, and will remain open to any interesting transactions with the company. Want to talk about the QVC gross margin, Mike?

Yes. I think at a high level, we continue to view gross margins as -- we would see gross margins largely staying flat over time. So while there have been some bumps recently, there is nothing that we're seeing that would make it kind of an average gross margin level that we have typically run at that will decline on a consistent basis over time. There have been some fairly discrete things that have happened in the gross margin line in the last 12 months, most notably the opening of a major distribution center in Florence and another one in Japan, and expansions in the U.K. and Germany. All of those, the cost of those are warehousing costs or in gross margin, and until you anniversary the opening of a big facility that is under-utilized at the start, you have a hit. So that is sort of a one-off issue. We clearly have had some product margin issues from quarter-to-quarter in different countries, particularly as we have seen electronics grow in the mix in a couple of countries and jewelry decline in the mix. And the combination of those two has caused a modest shift in gross margins. But I view those as things that will ebb and flow over time. I don't think it's any long-term trend in the business. As you know, we continue to avoid a higher level of promotional activity. I don't think it's right for our business model or needed, and so net of all that, we feel pretty good about our margin levels, and that we're not going to face some sort of a sustained secular decline in margins.

Okay. Thanks, guys.

Our next question comes from Doug Mitchelson with Deutsche Bank.

Thanks. A few questions to Greg. I will ask you one and the other two together. It seems like the Discovery spinoff is taking longer than expected. You've got - you're really busy with Interactive Corp. and DIRECTV to be able to finish the advanced [analysis] negotiations. I know this might not obviously be specifically you, but can you give us any update on when we can expect an S-4 filing on Discovery?

I am going to toss that question to our esteemed General Counsel, Charles Tanabe.

First of all, this is not a [DAP] call but I expect that we'll be filing an S-4 in the very near future. I don't think there are any issues remaining with respect to the [roll-up].

And then typically what, four to six weeks at the SEC and then you're good to go?

Yes, I think that is a pretty good guess.

All right, Greg in your [wheelhouse], what was the rationale behind the agreement with DIRECTV to fix your voting power at 48%? I mean, it was nice for DIRECTV of course, but I am not sure how it helps Liberty. And then second, I suspect this is a delicate subject, given tax regulations, but let's take a theoretical scenario by which you wanted to be able to merge LMDIA and DIRECTV. Let's assume DIRECTV's Board would be receptive, even if you're not able to discuss the transaction with them yet. What steps do you need to take at LMDIA, and how long do those steps take, before you can be in a position to begin those talks with DIRECTV?

On the first question about why we agreed to freeze our voting power, I think we have a very positive relationship with the DIRECTV independent Board members, and we thought it was in their interest and ours. We understandably - understand where why they wouldn't want to take an action that would push us into voting hard control. I think that would be difficult for a Board to do that. So they were left with choices, you know, either being suboptimal in the capital structure or paying a dividend, choices which they didn't find preferable and we probably didn't either, because even though we have maybe some tax advantages relative to that, you know, how that income may come in, it was still not tax efficient to us as a repurchase. So it was not a highly controversial thing for us to - internally here to agree to hold our votes flat, and we like owning more of DIRECTV's economics. We're not as adverse to that.

On the second question of what would have to be done to compete a merger, it really depends on what kind of a merger you're thinking of, because you can imagine scenarios in which we offered LMDIA tracking stock to do a - and rolled-up DIRECTV. If that was acceptable to their holders, that would take a certain amount of time, you know, first to get a deal and then to get it through the FCC and the like. To the degree that you first, because they didn't want to receive tracking stock, imagined some kind of a spin transaction, I think that that would be a longer-term timeframe, just in terms of getting a spin done, may be four to six months. I'm not - it's not something that we've agreed to. We certainly thought about all of our options, but it's not our plan today. And if you then had a subsequent merger, there would be tax considerations around [Morris] Trust which would ensure that - would need to ensure that our shareholders were 51% of the combined vote and value on a go-forward basis. But if you look at the assets in LMDIA, including the 48% plus the other assets we have in there, primarily Starz, the [RSNs], et cetera, less the net debt, I think on any reasonable scenario, it's unlikely we would combine in any scenario in which we would be less than 51%. So I don't think there is huge impediments to that; whether you could get a deal done is another matter. But there is no huge impediments on a tax basis. Just need more time involved in the spin.

Right. Thank you.

Yes.

We'll hear next from Evergreen Investments and Chris Taylor.

Thanks, that was my question as well and -- .

Glad we anticipated that.

Thanks.

We'll move now to Lehman Brothers and Vijay Jayant.

Given the recent ruling on the litigation with IAC, can you talk about your options are now? Is there any chance obviously of doing anything before the spins? And also any comments on what may or may not be done with Expedia? Thanks.

I think there is a host of options that are imaginable, you know, with potentially us working with them on the spins on some agreed form going forward. Potentially us still doing a 355 transaction or a - you know, we, I believe, also filed in a time to potentially appeal if they go forward on a basis we don't like. So all options remain open, and that could involve a deal also on Expedia, but I'm not overly optimistic on that prospect.

Following up, I think QVC becomes a [58 fair] business in September or November of this year, so a chance of LINTA being spun off, is that something even on the table?

That is not in our current thinking and plans, in part because - not to sound like we have totally drunken the tracker Kool-Aid just for no reason, but partly because we don't know, for example, if just down the road or think about an LMDIA spin, because that is more attractive way to combine with DIRECTV. Again, we don't - have no current plan for that, but we certainly consider that's an alternative out there, and whether, you know, that might foreclose or cause you to think differently about spending QVC or LMDIA, we'll watch and see.

Thanks.

We'll take a question from April Horace with Janco Partners.

Thanks for taking the question. Greg, I think you mentioned in the beginning of the call something about a controlled liquidation of LCAPA? Could you expand on that?

Well, I think we believe that those exchangeables create a lot of shield, at least on an interim basis, and if we're clever enough to figure out ways to get liquid on some of the investments in LMDIA -- excuse me, in LCAPA rather, on an efficient, tax-efficient basis, we should be able to build some value there. The path is not clear, the obstacles are many, and there is no near-term event or catalyst that is going to get us there. I do think over the long-term you're likely to be trying to get liquidity and, you know, recapture if you can - or capture some of the discount to this present value, some of the parts on a pretax basis to the degree you can get the tax efficiently. But that probably doesn't happen in the long-term - in the short-term, rather, it happens on a long-term basis. You invest in the capital that you have in assets to hopefully - that out-earn what our liabilities are growing at.

One point to note, we have to maintain a fair amount of liquidity at LCAPA. We can't, someone might just look and say, wow, you have a lot of cash you have a relatively low market cap, why aren't you just buying the stock hand over fist? One of the challenges there, there are a lot of our liabilities on the dead end on the tax side which could be accelerated in the event of third-party transactions over which we have no control, and so we need to make a -- maintain a certain amount of liquidity if Sprint were sold or Motorola were sold tomorrow for cash, we need to maintain a certain amount of liquidity to ensure that we would be able to handle our obligations under that circumstance.

So the face value of looking at it and saying, oh there is obviously a huge discount and there is an enormous amount of cash, is not as clear once you start looking at what liabilities could be accelerated. So I go back to my statement about why it's a controlled liquidation; I suspect it's a path where we're trying to get liquidity over time, trying to reduce the size of the equity float, but it's probably something you chip at, and you hope you can do well at, not that - you know, there is no clear path from here.

At one point in time you mentioned you might just some day bite the bullet and pay some tax, and I think that was probably more aimed at Motorola, are you guys still considering that?

I don't it's a broad statement. There have certainly been cases with 20/20 hindsight if which we just sold an asset at some price and paid the tax, it would have been better. That is only with the benefit of 20/20 hindsight. So we'll try to have more foresight, and hopefully decide if there are cases where liquidating is better than holding out for that after-tax assumed value.

Okay. Great. Thanks. That's all I got.

We'll take our next question from Brian [Lorraine] with First Capital Alliance.

My question was just answered.

We're knocking them down here. How many -

Next we go to David Gober with Morgan Stanley.

David, you have a question?

Hearing no response, we'll move on to Andrew Cole with JL Advisors.

Why you weren't back any stock when you thought there was a discount to any - just your thought processes there?

I'm sorry, on which track?

LMDIA. Liberty Media.

At LMDIA the reason why we try and maintain liquidity there is, it sort of goes back to where you think about Liberty Capital. Unlike Liberty Interactive, where we have a big learning asset called QVC, we have relatively smaller earning asset there, and we actually now have a fair amount of debt, given the transaction we did to increase our stake at DIRECTV, and if we were to purchase stock in size, we would be adding to that debt with no clear way to settle it, other than potentially selling off assets, all of which have a relatively low tax basis. In some cases, we're prohibited from selling and in other cases, we think it's strategic to hold more of it. So until you see a clear path to get to an earning asset, I mean if you knew tomorrow you were going to merge with DIRECTV, yes, you would buy the heck out of LMDIA, because it's rating at a discount. But you don't know that you're going to merge with DIRECTV, and you don't know you are going to have access to their relatively larger cash flows to cover any debt that you put up. So until we have a clearer path about what the LMDIA future is, how we would settle that debt, we're probably unlikely to buy back in size.

Okay, thank you.

Our last question comes from Jessica Reif Cohen with Merrill Lynch.

Thank you. I have two questions on LINTA. I think you said on the preview that the cost - well, you did say that the cost increase, because you extended your relationship - can you outline how much it was for the quarter and what we should be should expect for the year? Secondly, would your increased stake in Interactive, could you discuss again, not on this call, but again as you have in the past, how possible or likely it is for you to acquire Home Shopping Network, if that is a possibility, what benefits there are to you, since you have said in the past there are not a lot of cost savings. Thanks.

Mike, you want to talk about the increased cost of carriage?

Yes. The increased cost for Freeview was 120, 127 basis points, and we will anniversary that in the fourth quarter.

And on HSN, we remain open to a transaction if it can be done at an attractive price. I think with the management team and Liberty have thought is, if you look at the operating structures - and we haven't done extensive due diligence on HSN, but if you look at the operating structures, it isn't apparent that there is enormous cost synergies, i.e. items you could knock because -- it's like accounts payable or accounts receivable or other G&A functions. There is some amount but it's not huge. A large portion of what is in there in the cost side relates to variable items that we would probably not be able to - or fixed items you would not be able to eliminate. You would need to have the two broadcast facilities, for example, if you wanted to keep both present. The potential that seems less clear, but you would think given the relative 4.5 billion-ish revenue stream we have in the U.S., and a 2 billion-ish revenue stream that they have in the U.S. you would like to think you would find some synergies, perhaps in purchasing and perhaps in counter-programming, when we ran jewelry, they ran power tools or vice-versa, so that you were not attacking the same audience. Those are harder to capture, harder to know. As I said, we have not done extensive due diligence internally on HSN. Mike, would you add anything?

Nope, nothing else to add.

So, if that's it, Operator, I want to thank everybody for joining us this afternoon and for your interest in Liberty Media.

And this concludes today's Liberty Media Corporation first quarter earnings conference call. Thank you for attending, and have a good day.