QVC Group Inc (QVCGA) 2008 Q2 法說會逐字稿

Good day, and welcome to the Liberty Media Corporation 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, news 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 under taking to disseminate any updates or revisions to any forward looking statement contained herein to reflect any change in Liberty Media's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. Please refer to the publicly filed documents of Liberty Media including the most recent Forms 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 effect the statements made in this presentation.

On today's call we will discuss certain non-GAAP financial measures. The required reconciliations, 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. Gregory Maffei. Please go ahead, sir.

Good morning, and thank you and thank you all for joining us today and for your continued interest in Liberty. We are pleased with this quarters continued progress, on our operational and structural goals and today we will review the quarter attributed tracker, we will discuss operating performance at our controlled subsidiaries, we will cover some of the transactions we under took during the quarter and other key developments and Liberty controller Chris Shean is going to start after my remarks by discussing the attributed businesses financial results on liquidity picture for each of the tracker. QVC CEO, Mike George will join us to discuss developments at QVC, Star CEO, Bob Clasen will review recent events at Starz, also on the call I have with us today, QVC CFO, Dan O'Connell, Star's President and COO, Bill Meyers, and EVP and CFO, Glenn Curtis and several Senior Liberty Executives, including our Chairman, John Malone. All will be available to answer questions after our prepared remarks.

Before we discuss the specific results of the quarter, I want to review quarterly highlights and tie them into our overarching strategic direction at Liberty. First, Financial Management, we strongly believe that share repurchases under the right conditions are a very efficient way to return value to shareholders, and we execute on this during the quarter in two ways, first at LCAPA, we repurchased 18.1 million shares through the end of July, reducing our outstanding shares by about 14%, and DIRECTV, continued its buy back, earlier as you may recall we executed a substantial agreement to hold our voting ownership at 47.9%, which enabled DIRECTV to be active in buying back their stock, they have been so and we are now about 49.5 economic interest, 1.5% economic interest, and as they continue their repurchase program, which has been previously announced, obviously our economic ownership will increase. We remain disappointed by the trading discount that LMDIA has to the fair sum of the parts valuation and we are still considering options to create value for shareholders and address that.

Looking at the operations overall, first at Liberty InterActive, QVC had solid results given a very challenging economic environment with international growth led by strong performance in Japan. We had excellent results at Liberty InterActive in the e-commerce affiliates, even excluding the effect of acquisitions and looking on a pro forma basis as if acquired at the beginning of '07, those business truly all performed quite well. We made two commerce acquisitions, e-commerce acquisitions during the quarter, small ones, Red Envelope which we purchased out of bankruptcy and Celebrate Express, which is BUYSEASON largest online competitor. The [OGAP] model, which is the one deal at a time model that has been so successfully employed by Backcountry.com at many sites, including Whiskey Militia, Steep and Cheap, et cetera, is now being looked at and in the process of being deployed not only at new sites at Backcountry.com but also across other companies in the Liberty portfolio, we are excited to see successful synergy at work.

At LMDIA, Liberty Entertainment we had strong operating performance at DIRECTV, and when they reported their numbers last Thursday, especially impress was the results in Latin America, with a business that probably doesn't get the full evaluation in the market place in the DIRECTV stock that it deserves. Starz Entertainment had continuing success, executing on it's strategy of audience agregation, providing end-to-end media services, with good revenue growth and excellent adjusted EBITDA growth. At LCAPA, continued focus on original content at Starz Media was successful and we had planned for numerous new releases in the third quarter. Overture Films is still in it's early stages but we are pleased with the positive results shown to date. Last, we are looking at structural optimization, as I mentioned earlier we continue evaluate ways to try and reduce the discount from our stocks and the underlying values that they have on the sum of the parts basis and they may live to drive further structural efficiencies. With that, let me turn it over to Chris Shean to talk about LINTA financial results.

Thanks, Greg. I guess before I get into that I want to highlight the fact that we have a change in nomenclature with respect to our operating metrics, we now use the term adjusted operating income before depreciation and amortization, which I will refer to as adjusted OIBDA on the call, instead of operating cash flow which is what we have historically called it. We are going to use this terminology in all of our public filings and press releases on perspective basis. It's the same term it's a different way of describing it.

The table that you're looking at for LINTA that shows second quarter revenue and adjusted OIBDA performance. It shows Liberty's InterActive attributed business continued their steady revenue and adjusted OIBDA growth. The business achieved 9% revenue growth while adjusted OIBDA grew 4%. QVC, the primary driver of performance among the Liberty InterActive attributed business, continues to operating in a challenging retail environment. Nonetheless, the business managed 4% consolidated revenue growth and 1% adjusted OIBDA gains. Liberty InterActive's other e-commerce businesses, which include Provide Commerce, Backcountry.com, BodyBuilding.com and BUYSEASON, again post strong financial results and continue to grow at a rapid pace. In the aggregate, the e-commerce businesses, experienced revenue and adjusted OIBDA growth of 97% and 108% respectively due in part to the acquisitions of Backcountry in June of 2007 and BodyBuilding in December of 2007. Now if you look at this on a pro forma basis, revenue and adjusted OIBDA growth of the e-commerce businesses was 41% and 75% respectively. So on an organic basis they had quite impressive growth.

On the next slide, we will go in to further detail on QVC's quarterly results. QVC experienced consolidated revenue growth 4% to 1.76 billion during the quarter, while adjusted OIBDA grew 1% to 387 million. Revenue growth, while slow by QVC's historical standards was achieved without incremental promotional efforts. Consolidated adjusted OIBDA margins dipped by 60 basis points during the quarter, resulting in adjusted OIBDA growth lagging revenue growth. Adjusted OIBDA margin declines were primarily the result of lower gross margins experienced across most product categories.

Domestic revenue decreased slightly in the second quarter to 1.18 billion in the mix of products sold shifted to the accessories areas away from home and jewelry. The average selling price increased 6% while total units shift declined 4%. Domestic adjusted OIBDA decreased 2% in the second quarter to 286 million, while the adjusted OIBDA margin decreased 50 basis points to 24.2%, primarily due to product mix in freight and warehousing costs. QVC.com sales continued to grow as a percentage of over all domestic sales rising from 23% in the second quarter of '07, to 25% this quarter.

International revenue, increased 14% to 580 million for the quarter while adjusted OIBDA grew 11% to 101 million. Revenue growth was due to favorable foreign currency exchange rates and subscriber growth in both the UK and Japan. Adjusted OIBDA growth lagged that of revenue, as adjusted OIBDA margins declined 50 basis points, primarily due to higher commissions, commission costs as a percentage of net revenue, due to new fixed rate affiliation agreements in the UK and Japan. Excluding the effect of exchange rates, international revenue increased 3% for the quarter, while adjusted OIBDA increased 1%. QVC UK local currency revenue increased 3%, on a 4% growth in units.

In Japan, QVC experienced 10% local currency revenue growth, the first double-digit quarter sales increase since the fourth quarter of 2006. QVC Japan has continued to successfully show gains in home, jewelry and fashion and shift away from the health and beauty products due to the heightened regulatory focus on those products that began in March 2007.

In Germany, our business experienced softness in jewelry and apparel, resulting in a 3% decline in net revenue on a local currency basis. Management remains focused on completing the turn around of this business. No w I'll had the call over to Mike George for additional comments on (inaudible - background noise) QVC.

Thanks, Chris. I'll provide a little more background on Q2 results and than talk about the key initiatives we have underway for the back half of the year. In the US, as Chris mentioned we continue to see flat sales results, driven in part by the on going contraction in consumer spending. We are obviously not satisfied with these results, we expect to drive stronger growth with our brand and our business model. So we remain focused on finding new ways to engage our customers and earn a greater share of wallet to overcome the softness in over all consumer spending. We did see double-digit growth in a number of businesses in the US, including cook ware, consumer electronics, health and wellness, garden, beauty, precious gems and handbags. However, these gains were offset by softness in a number of other home, jewelry and apparel categories. So this reconfirms for us that our customers are willing to treat themselves when we provide compelling products and presentation and we need to deliver on that promise more consistently.

Our priorities going forward remain the same. First, we are focused on adding exciting brands and products that will command our customer's attention. In the last few months we launched Cesar Millan, better known as the Dog Whisperer, if you follow his show. Celebrity stylist, Greta Monahan and Clinton Kelly, as well as London Fog and Apparel and Vincent Longo and Beauty. Upcoming launches in the next two to three months include Ann Cline, iZod, Calvin Cline, Summit Intimates and Marc Cross Leather Goods. I will also be entering the wine business, through a partnership with My Wines Direct and launching a new wellness product line with (inaudible) Andrew [Wile].

Second, we are continuing to enhance our multichannel platform to drive incremental revenue growth. For example, we recently launched a concept called private reserve, which features high-end limited quantity products, available exclusively on QVC.com. We had strong early results with the collection of pearl jewelry from Anora, one of our top brands. We will be launching in the next month or two a mobile web site and text messaging features and several other internet and other new media pilots. We are delighted to announce that both Verizon and AT&T, along with several smaller affiliates, plan to distribute QVC in high-definition late this year in addition to our regular broadcast, which will provide us essentially with the second channel position on these affiliates and we believe bring new viewers to QVC. This is the start we expect our HD distribution to expand significantly next year.

Third, we are focused on creating exciting must-see programming and several major events planned for the back half of the year to build consumer excitement and interest in our programming. We will be talking a more about our Fall and holiday campaign in the next few weeks.

We also continue to be disciplined regarding our promotion practices, as Chris mentioned, while gross margins are down slightly in the quarter, this is primarily due to product mix and higher freight expenses, which we will largely anniversary in August. We are also continuing to keep a tight lid on operating expenses.

Turning to the UK, we saw business slowdown somewhat in Q2 following a strong Q1, largely due to softness in our TV and in our crafts and collectibles businesses. The rest of the base business was solid with particular strength in jewelry and beauty. Our OIBDA margins in the UK continue to be challenged due to the cost of our new long-term DDT contract; however, if you exclude those costs OIBDA margins were actually up over 100 basis points from last year and we will anniversary the cost of the new distribution in October.

Germany, slipped back to negative sales growth after a stronger Q1 showing, we are continuing to make progress shifting the business to more every day pricing, reducing the use of promotional tools, diversifying the product and programming mix including introducing over 60 new shows in the quarter and maintaining a discipline stance on cost reduction. At the same time we continue to be challenged by on even sales results and higher opalescent rates as we test new products and reduce the use of promotions. So we will remain very focused on driving this turn around.

We recently announced, in Germany, the hiring of two outstanding executives who will lead our merchandising, planning, broadcast, and Internet operations in Germany. Tim McGuire, who is the Senior Merchandising Executive at Target for 20 years and was also Chief Merchandising Officer of QVC US a few years ago has rejoined us in Germany. Also, [Mateis Bork] who has deep retailing experience in Europe, including leadership roles at [Auto Ferzon] [Herods] and most recently as Chief Merchandising officer at HSE will be joining us in April, of next year. We believe the addition of these two seasoned retail and home shopping executives will provide a significant boost to our business in Germany.

Finally in Japan, we were pleased with the continued acceleration in sales. The Japan team has done a good job growing our fashion and jewelry categories, to offset the erosion in health and beauty and some home business, driven by the changed regulatory environment. Unlike in the UK, the cost of expanded distribution in Japan, in their case, CS Digital is suppressing OIBDA margins. Excluding the impact of these costs, which will anniversary in December, our margin rate was up over 100 basis points in the quarter reflecting our strong focus on expense management.

Finally, in the current environment in addition to managing expenses and gross margins in a diligent manor in all of our markets, we think it's prudent to be cautious in our capital expenditures. We now expect our CapEx for 2008 to be around 150 to 160 million, down from our prior forecast of 190 million, well below our annual expense of our annual CapEx of the prior two years, which is about 250 to 275 million. With that I'll turn it back to Chris.

Thanks, Mike. Let's take a quick look at Liberty InterActive liquidity picture. We continue to maintain a strong capital structure and good liquidity at the businesses attributed to Liberty InterActive. The group has attributed cash and public investments of 3.7 billion and has 7.7 billion in attributed debt. Excluding the value of the positions in Expedia and IAC, which could provide incremental liquidity, Liberty InterActive's quarterly ending attributed net debt of just under 7 billion, equates to a leverage multiple of just over 4 times adjusted OIBDA, which we consider very comfortable for these businesses. We are likely to maintain this level of leverage until we see stronger capital markets and ready access to capital.

Moving on to Liberty Entertainment, attributed revenue grew 32% in the second quarter , while adjusted OIBDA was up 13%. Revenue and adjusted OIBDA growth resulted from growth at Starz Entertainment coupled with the inclusion of the Liberty Sports Group.

Now taking a closer look at Liberty Entertainments principal consolidated subsidiary, Starz Entertainment, its revenue increased 8%. This was driven by an increase in the effective rates for Starz Services and to a lesser extent subscriber growth, mitigated by Starz fixed rate affiliation agreements. Starz subscribers increased 6%, while Encores grew 11%. Starz adjusted OIBDA grew 24%, as operating expenses increased 4%, due to increased SG&A expenses associated with the new Starz branding campaign, programming expenses decreased 4%, as lower bonus payment amortization was offset partially by higher effective rate for the movie titles exhibited in 2008.

Now let's take a look at Liberty Entertainment liquidity picture. Liberty Entertainment businesses are in a position of financial strength. At quarter end, LMDIA was attributed with approximately 14.1 billion of public investments. In addition to its public holdings, Liberty Entertainment had attributed cash and liquidity investments of just over 1 billion at quarter end. Total cash in public holdings approximated 15.1 billion while in excess of the 2.6 billion face amount of attributed debt. Before we turn to Liberty Capital, I will hand it over to Bob Clasen, who would like to say a few words about a number of exciting events at Starz Entertainment and Starz

Thanks, Chris. Starz had another strong quarter of growth, and customers continue to tune in. The Starz flag ship channel finished first in total day ratings among premium networks for ten of the first 26 weeks this year.

Prior to this year, Starz had never finished first in the weekly premium network ratings, we continue to execute on our year long branding campaign, which will be centered around our first original dramatic series, Crash, which will premier on Starz October 17. Our affiliates have responded enthusiastically to our original strategy and we plan to use a variety of platforms to promote the series, including sample episodes via promotional channels, OnDemand and on the Internet and we have a concentrated multimedia advertising campaign set for the end of September. Our affiliates have also embraced our continuingly expanding offerings of HD channels.

In the past view months we have launched Starz HD on DIRECTV, Dish Network, Time Warner, Charter Communications and others. Earlier this month we launched Encore HD, our fifth distinct hi-def channel. Dish Network has already added it to their line up and other distributors including Comcast will follow shortly. The core business of Starz Entertainment has always been to sell our services wholesale to affiliates, who in turn market them to the consumer often in a package which provides much more compelling consumer value. This quarter we announced our first affiliation agreement for StarzPlay with Verizon Communications, which is offering the service to 8.5 million Verizon high-speed data customers. StarzPlay is a subscription based video down load service for delivering movies and other video content over the internet that can be bundled with the subscription to the Starz channels and/or a subscription to high-speed Internet services..

On the Starz Media side revenue for the quarter declined by 13% versus a year ago, while operating income was flat. We continue to expect that the company will generate negative operating results for the coming two to three years as we continue to invest in producing and marketing programming. Overture Films, the Visitor has proven to be the surprise ending hit of the Summer. It opened on April 11 and is still in theaters today finishing in the top 10 or 15 films for many of weeks since it opened. It will be a strong seller on the home video market where we will debut it in October and on the Starz channels.

Mad Money, the first Overture film, which opened in theaters last January hit home entertainment in June through anchor bay Home Video company. The film was the biggest selling new theatrical release the week it debut and has generated about 25 million in gross revenue since then. Mad Money will be on the Starz Channels and StarzPlay later this year, blazing the trails for other Overture films, as we pursue our strategy of aggregating audiences across multiple distribution platforms. Overture shifts into high gear in the coming weeks and [recool] is here staring Luke Wilson open August 15, that's Friday. Traitor, starring Don Cheadle and Guy Pearce opens August 27 and Righteous Kill staring Robert DeNiro and Al Pacino premieres September 12. Anchor Bay Entertainment will handle the home video release of all these films and continue its strategy of acquiring and producing low budget films for limited theatrical and in home video release. The next one, Surfer Dude, starring Matthew McConaughhey with Willie Nelson and Woody Harrelson premieres theatrical in September.

At Film Roman Production is underway on season 20 of the Simpsons and season 13 of King of the Hill, also two marvel series are started in production along with the good family to premier this fall on ABC. Film Roman is also producing prequel movie, Dead Space to coincide with Electronic Arts, highly anticipated game coming out this fall. And our Toronto Studio has three CGI animated features that are in production for other studios.

Finally, we are encouraged that Space Chimps, our animated feature film co-produce with Van Guard Films and distributed by Fox is performing well at the box office, generating over 25 million in revenue through this weekend. These developments in the second quarter and the projects on tap are all designed to help us become a even more fully integrated media company capable of producing all types of programming for distribution on all platforms. Now I'll hand it back to Chris.

These next slides address the Liberty Capital tracking stock group. During the quarter, Liberty Capital revenue increased 33% to $174 million, while LCAPA's adjusted OIBDA loss increased 40 million. LCAPA revenue grow was due to the inclusion of the Atlanta Braves. The adjusted OIBDA loss was primarily due to marketing and advertising costs associated with several Overture Films at Starz Media.

Now let's look at the Liberty Capital liquidity picture. Liberty Capital Group has attributed cash and public investments of 6.8 billion, attributed debt of 4.9 billion. During the second quarter and through July 31, Liberty repurchased 18.1 million shares of its Series A, Liberty Capital common stock at an average price of $14.79, for total cash consideration of 267 million. These repurchases represent 14% of the shares outstanding. With that said, I will now turn the call back to Greg for a quick recap of the quarter.

Thanks Chris and thank you to Mike and Bob for your updates on your respective businesses. These are obviously challenging times, externally but they are exciting times at Liberty. We continue to focus on maximizing shareholder value through driving strong operating results with our management teams. Managing our portfolio of assets among and within each of the tracking stocks and executing on innovative financial transactions. I would say overall we have produced solid results this quarter, we will continue to strive to create better investor options, support, streamline more operations, identify additional strategic transactions, and further refine and simplify our structure.

As always, stay tuned. Thank you for listening today and thank you for your continued interest in Liberty. I would now like to open the call for questions, operator.

(OPERATOR INSTRUCTIONS) First question comes from Kit Spring from Stifel Nicolaus.

Can you comment on what you think the proper leverage ratio is for DIRECTV and then your take on DIRECTV/Dish merger that's remotely possible now or in the future? Thanks.

I will comment briefly and ask John if he has a incremental thought. Leverage I think it's -- the right number today is not a function of what would be optimal in some textbook or theoretical condition its optimal given market conditions of how much you need to or want to chase debt you don't need to execute today in a very ugly environment. DirecTV executed on debt transactions which looked clever and well timed given when they did them. At the time they might have looked expensive but today they look less expensive then if you viewed them today. They have a ton of liquidity, relative to their needs. They are on a measure appropriate buy back, we are enthusiastic about it. Talking about the long-term theoretical leverage, probably not relevant when you are sitting in a market where you don't need to chase the debt.

As far as Dish and DIRECTV, I'm not sure why that got a round of enthusiastic media and slash investor attention over the last two or three weeks, there hasn't been anything that's occurred or changed the market conditions other than potentially some people projecting on the impact or the foretelling of a serious XM merger and what it might mean. I don't know what's changed or whether that could be done. There are a ton of synergies -- (inaudible) in a different environment, I don't know enough about it.

My view would be two and a half to three times leverage for the US entity, because if you look at the tax ability of the current financial statement; however, debt availability and debt cost right now is prohibited and but on the theoretical basis, that would be a pretty stale long-term point and of course one would want to also put leverage in to little Latin American businesses, South America and Mexico to get higher equity returns there, neither of those are currently levered and produce free cash flow at this point. There is quite a opportunity for enhanced shareholder returns through the use of leverage over time once the capital markets return to normal type situation and I agree with Greg, I don't understand why the journalists all of a sudden discovered the potential of a merger of Echo with Direct, we talked about it frequently in the past, it would be synergistic if it were doable; however, we don't see that the regulatory environment has changed since the last time we made comments on the subject and we think it would be problematic to merge to two companies. In the current regulatory environment.

Thank you.

Next question, please.

Andy Baker with Jefferies & Company.

Thank you, can you talk about the InterActive (inaudible) different pieces which you think are interesting, obviously, what you think about HSN going forward. Are there any restrictions to your ability to make a offer , or do they have any shareholder protection? Do you think having seven publicly traded companies now as held by Liberty InterActive as opposed to three, that's sort of bad for the transparency of that

I think we commented before, we are enthusiastic [spence] We believe that they will provide probably increased options and choices, both for the shareholders of those companies including ourselves. We will see how those respected companies trade. Whether value is created, whether some of them are sold and whether we become a potential buyer of them and will really be a function of what their trading and what is going on at the time. The one that has been the most discussed for 10 or 15 years has potential combination with HSN, we previously expressed our interest at the right price. We don't know enough about where we will trade, we probably (inaudible) appears HSN is doing better. We will see how long that trend continues and see where it trades and take a look at the appropriate time.

In terms of their, I'm not that familiar with their sort of structure going forward, there are restrictions to you ability to pursue a control path there?

We have some restrictions shareholder, including roughly 30% of the votes and economics in the (inaudible) company. We have a restriction not to increase our percentage above 35, ultimately whether a friendly deal, on our own in the marketplace, whether a friendly deal could be negotiated with the Board of Directors or shareholders of those remains to be seen.

We basically agreed to no aggressive acts for a period of two years. No public bear hugs, no limitation on private discussions between Liberty and the Boards of Directors of fund companies, we also have certain limitations as Greg said, on increasing our ownership, basically capped at a 5% incremental ownership without making some kind of a deal. On the downside we have certain limitations with respect to the sale of portions of our holdings and the various fund companies. There is no change in our relationship with the core IAC or what they are calling new IAC, that remains as it has in the past with two classes of stock and really no restrictions, no new restrictions relative to Liberty's relationship there.

Your Board representation can be proportionate to your economic interest?

We negotiated for 20% of the Board in each case. However, in order to maintain Sarbanes Oxley requirements, our designers need to be a mix of insider and independent directors.

Thank you very much.

Next question comes from Doug Anmuth from Lehman brothers.

First one on QVC, product mix shifting in the environment with less jewelry and home, are you in the right mix now and continue to hold margins there if you shift further, then couple of questions structurally, what needs to be done to (inaudible) -- in simplify DIRECTV ownership, would you consider creating a tracking stock for DIRECTV latin America, given that you don't believe that its reflected in D-TV shares?

I will comment if I could on QVC, what you're seeing happening is a function of what the consumer is choosing, not necessarily what QVC is pushing or promoting. Much the way that e-Bay sees consumer growth drive their categories, seen a shift in the marketplace where jewelry because of prices, gold increasing dramatically and home products driven by lesser models and the like, seen an overall macroenvironment where those two categories are less attractive and innovation and consumer electronics has driven CE to be a larger share of the retail environment overall. QVC results reflect that. I think they have done a excellent job of giving that the categories are lower gross margin categories, they have done an excellent job of controlling costs to offset the lower initial mark on that they are receiving. Mike you want to add to that?

To second that comment. It is a function of what the consumer is excited about. A challenge that's been on going in the jewelry market and as you all know the apparel industry is in tough shape in general. Our apparel business has been not as bad as what we have seen at retail, but certainly challenged and those tend to be your two higher gross margin categories. Overtime those things ebb and flow and we can over a long period of time maintain relatively stable margins, so consumer electronics is hot right now, it comes at much lower margin rate but I see those as short-term in nature. The one thing that is effecting us in addition to the product mix that Greg described, are today's special value, which is our best deal of the day, and typically about 15% of our business, has been for a long period of time. That's been growing faster than the rest of the business, which I do think again reflects in this environment the customers really interested in the best possible value she can find. While the growth isn't really disproportionate, it's somewhat faster and that also suppresses your total margin but all those are things that I think will ebb and flow and over the longrun we think we can maintain relatively stable margins.

Thanks, Mike. On your second point about a LMDIA spin potential. (inaudible) There are certain time limitations, that would prohibit us from doing that for a period that's not a overwhelmingly long period given the timing of the February close. We are not committed to any course of action but we look at them all and when our contractual restriction are terminated we have more freedom to make decisions. As far as DTV Latin America, I think we will look to the DTV management team, to drive that but I think we are in of like mind that business is not fully reflected in the stock price, whether a tracker or ultimately a spin, makes sense, those are a function of maturity of that business to operate on its own, for what purpose Chase Kerry would say is a corporate finance valuation thing, in the short-term it's not as exciting as it opens up new opportunities, I think it might. I think he and I agree that it might, we will probably look for things to do down the road but we will look for DTV management to drive that.

Next question comes from Jason Bazinet with Citigroup.

One question for Dr. Malone. Most investors seem to understand that LCAPA is trading at a steep discount. The strategic issues you don't have a cash generative asset of size to take advantage of that. In that context, when we speak to LCAPA holders, all of them seem to prefer a cash generative asset even one that's declining like AOL dial to a passive equity stake trix plus cash, so my question is, would you consider doing a transaction that may not necessarily have strategic merits for the rest of the Liberty enterprise but makes financial sense in the context of LCAPA, thanks.

Yes, I think as Greg mentioned LCAPA strategy is a work in process, whether or not a cash regenerative series of investments would take the form of capital investments, debt investments, perhaps, which as you know we are doing some of more whether it would be a operating business is not entirely clear. It's a function of value and price and opportunity. Clearly an exit from the Time Warner equity state in to a cash generating asset would be attractive, but at the current time, none have been proposed that we could take action on. But we would continue to try and maintain the relationship with Jeff and the Time Warner folks in the event that such a transaction would present itself.

Thank you very much.

That would please to see TWX is up. We are happy for Jeff and our shareholders. It might be just to finish on John's point. It might be worth reiterating our view of LCAPA, which is to the fact it is clearly trading a at large discount to the pretax number, a smaller discount to it's liquidated hard after tax number, where we have access liquidity we will try and chip away at the shares, if it's below pretax and after tax liquidation value. Where we see value to do swaps as John pointed out, we certainly will, but in general we see a benefit to delaying recognition of the tax liabilities and to keeping the thing alive because of the shield's generated off of the exchangables. So we are working for ways to find cash generating assets or attractive financial assets and continue to do tax efficient transactions and chip away at the equity as appropriate..

As you know, LCAPA tax posture has been extremely complex and to some degree uncertain. Some of that complexity and uncertainty is being resolved with the passage of time and various settlements with the IRS as they close out prior years, and so to some degree our inability to execute a clear strategy is a function of that uncertainty and complexity. It's the residue company and it is fairly complex and it is tax and capital posture, to me that makes it interesting but creates challenges in terms of a straight forward strategy for it's future.

Our next question is from Benjamin Swinburne from Morgan Stanley.

To take the comments you just made about LCAPA and apply them to the entertainment group where you have cash generation, a lot of cash on hand and a buy back plan, are you restricted from buying back that stock given the comments you made about the news Corp agreement and the LMDIA tracker. Second, if you look long-term at the DIRECTV balance sheet cash flow generation in relationship to Liberty, you got a lot of financial power, they are starting to see real operating leverage from the HD investments they made, where would you like to see the money go outside of equity shrink, given the network DVR decision, there is are fears that the advertising environment or business on TV is going to get tougher taking the cyclical aspect out of it, does that take your view of the where it should be say five years from now in terms of vertical integration or do you se this as a per play subscription business that should stick to its knitting?

On the LMDIA buy back, yes we do have a fine couple of cash flow generating assets in the Liberty Sports Group, obviously Starz the biggest. some out of GSN. But we do have also 550 million of exchangeable debt attributed, plus 1.9 billion we took on in the swap transaction to increase our steak, while we have cash generation we also have a recently high amount of debt and no clear path in a short-term to pay all that off. Before we were aggressive in pursuing a LMDIA buy back, we want to know what the repayment short of share liquidation what the payment methodology is, so that's been constant. The difference of LCAPA is we believe is excess liquidity against long-term debt rather than 1.9 billion of bank debt. On the DTV growth, I think you're increasingly going to see where DIRECTV has the very successful business in the US that will slow over time inevitably and generate a lot more free cash flow. Some of that will be redevoted to share repurchase, and this is probably Liberty's view we are major shareholder (inaudible) -- I think the board -- some of that will be devoted to share repurchase, whether there are vertical integration assets that are worth pursuing I think the marketplace is dubious of those types of transactions and take convincing all the way around to make that happen. Something we will look at in every case.

We have a different situation in the Latin America business, which will grow to be a larger percentage of the business. Growth environment, non-consolidated cash flow in some cases, cash flow that are sometimes difficult to repatriate or get repatriated with less consistency and you will be you will be pursuing a growth strategy there. I would be encouraged to think about other markets for growth that maybe different on subscription businesses outside the US and outside Latin America, those are all potentially there at DTV Lantam, that make more sense than at DTV US.

The reality right now is that DTV is trading at a forward multiple of plus four times. It's pretty hard for them not to think about shrinking their equity, despite the credit situation around the world, similar assets if you want to go buy them seem to be asking prices north of the ten multiple. That's just too large of a discrepancy in valuation expectation for DIRECTV to do much other than shrink equity (inaudible - background noise). Acquisitions, whether horizontal or vertical look to me to be problematic because of valuations, meanwhile DIRECTV, a, is not sensitive to advertising revenue like the rest of the media businesses, and b, has focused heavily on sports, live realtime high-definition sports, which seem to be the least vulnerable to issues of PVRs and other competitive incursion, so you have to say their strategy is dead on, which is equity shrink, continue to look over their shoulder at Greg and try to figure out what the ultimate rationalization between the public shares and Liberty Media, Liberty Entertainment are, which is clearly somewhere the white lines are going to come together and there has to be rationalization of the businesses.

One of the things that a s attractive in this environment about Liberty Media as a whole , compared to pretty much every other major media company, we are the least ad related, least ad sensitive media group out there of the traditional media companies. Subscriptions and transactions are where we are making our money. That's a good place to be

Thank you very much. .

Next question comes from Alan Gould with Natixis Securities.

Thank you, a question for Mike George. Looking at your results versus the HSN results and I recognize it's a difficult environment and you're three times the size of them but for the first time it seems their metrics are growing better than yours, is it easier comps or are they doing something different than you?

It's hard for me to speculate what the competition is doing. They had nice growth in the last few quarters. Their sales per customer and subscriber are obviously well below ours and they have had difficult sales for a few years, comparisons are different. Their profit margins are well below ours, so there is a bigger gap in profit per customer than sales per customer even. That gives you room to do good things. They are doing good things in terms of brands and freshen up their programming, we watch them and as we do all the competition and try to learn where you can, but this is a business that obviously in QVC that has driven strong sales and profit growth overall in a period time and what we don't we don't want to do is knee jerk in the current environment and radically change our programming mix, for example, if we would talk about the fact that consumer electronics is a strong category and it tends to be a high ASP category, it's a category we could grow at a much more rapid weight than we are growing it at. Given the short-term sales boost, we think that comes back to haunt you, when the category slow down and when you start to lack diversity of the programming calendar, those are the things that drive us. (inaudible) We are trying to in this environment still make diverse programming mix, not go too quickly after the hot businesses. We learned in Germany a few years ago that when you do that it comes back to hurt you. Also, again, be careful not to get too aggressive on the promotional front and maintain a steady state. Those are the things that tend to guide our business and we think over time that will continue to pay off in terms of strong results over the long-term, we are frustrated and disappointed by the weaker results in the short-term. It's always motivating for the team to have someone compete against. We are delighted to see the (inaudible) -- gives us another rallying cry .

It's fair to say that you have to compare HSM performance with history, it's really in a turn around mode now. If you look back two or three years, they are still operating substantially below where they were two or three years ago. They had a perhaps problem which they are now fixing, and so it's hard to repair growth from a deteriorated situation with a strongly performing situation. I think that that should be taken in to account. I think they are doing the right things in trying to get back to where they were two or three years ago and beyond at HSM, but still needs to be looked at in the context of a turn around from a deteriorated situation as opposed to growth from a high. Q is operating today at a all time high. IT's growth rate slowed but operating at a all time high. Where a H is operating roughly 50% of where it was at its high performance mark. You have to look at it that way.

Thank you.

Maybe 60%. Give the devil it's due.

Next question from Doug Mitchelson from Deutsche Bank.

Couple of questions for Bob and a couple for Greg and John. Bob, just clarification, Encore subs dropped sequentially, which was the first time we have seen that in a long time. Can you give us under pinning of the economics of the StarzPlay VOD deals and for Greg or John, John you introduced the concept that Time Warner hasn't offered you anything yet that you found interesting for LCAPA swap. Have they introduced a AOL narrow band swap? And then Greg I'm not sure if you can confirm, interested if you can confirm that you're working on hard spin for Liberty Entertainment.

I will take the Time Warner one. We have good dialogue with Jeff and with all, in the strategy group there, we went through a long difficult process on the Braves, we know each other because of that, that was a hard transaction. They would come talk to us given our ability to tax efficient transaction for both parties, we have good dialogue with them. I can't comment on LMDIA spin other than today we have no intention to do that. We look at every opportunity that we can think of, to be clever and smart and efficient for our shareholders but we make no announcement until we made decisions. Laws given that the Starz team could pull their numbers, Bob, do you --

Encore units, June 07 to June 08, were up 10%.

Sequentially.

Sequentially. While we are looking at that, I will comment on the Verizon deal with StarzPlay. The key to this deal is the general approach we are taking with StarzPlay, a value added product. Adds value to the current Starz video customers, and or, for the current Verizon high speed customer, designed to be packaged as a not stands alone product, particularly economics are involved with the whole Verizon deal. Doing good with the video product selling over 45%. So we are pleased with that and we don't make comments specifically on it but StarzPlay is a value ad proposition, not a standalone meant to be packaged with our current stars customers, Verizon or with high speed. Quarterly performance. Why don't we take that offline. We will come back and answer -- or take it offline. (inaudible)

Next from April Horace with Janco Partners.

Couple of quick questions on Liberty Interactive. E-commerce business is now starting to represent 10% of the revenue. Is there a goal in mind as to what kind of ratio you want with respect to Liberty Interactive and how e-commerce should represent of the total and can you give the percentage of internet purchases from the international perspective, whether that's growing or not.

I will hand it will first and Mike if you can cover the second. On the first part I think it's a little bit like theoretical debt levels. No number we can point to. If we can find more businesses like the ones we bought we would buy them. We just don't have that many alternatives to buy well positioned, protected, growing, reasonably priced with strong management teams internet e-commerce businesses, we don't see that many. We bought four that are overall performing very well. Very reasonable multiples, if you look at the growth, against the e commerce universe, they stand out and performing well. Purchased at numbers well below the average multiple at which the e-commerce universe trades. The combination feels very good. We look at anything from 50 million or less because if you look at Celebrate and Red Envelope, which are more like tuck-ins sort of stand alone looking from 50 million to 5 billion, we can't find that many that we can buy at attractive prices. So I don't think we have a theoretical number. First, given the possible of opportunities we first look there and then when we don't see that we are looking at international expansion or opportunities for QVC or share repurchase. That's kind of our three places where free cash flow goes for Liberty Interactive. Mike maybe you can comment on the growth of the internet businesses internationally.

Yes, our- - let me kind you the numbers are US internet business was at 25% of our total sales, in the UK it was 9%, also about 19% in Japan, and 12% in Germany. So that's dot com a percent of our total sales. Smaller internationally, less mature but growing at healthy rates and I think it's fair to say, I don't have the exact growth rate in front of me but in every market that penetration rate has continued to climb. We do look globally at the expectation at our internet business will increase as a percent of our total sales by 2 to 300 basis points per year. Faster in international markets given they start from a lower base and we continue to stay on that trend line.

In line with that, maybe you could comment on the growth in mobile and particularly in Japan which is obviously form of form factor being utilized.

Japan was the first of our markets with a mobile capability, running 8% of total sales on mobile, introduced a couple of years ago, to go from zero to eight is obviously encouraging development. We did launch a mobile platform in the UK last fall. That's 1% of sales range, at an early stage. We will be launching the first phase of a mobile application in the US in the next month or two, I don't think we will see members like the Japan members because that market is custom to doing a lot on the mobile phone. But I do think they suggest that there is potential to have this QVC on the go kind of platform.

I guess in line with that, what you see is the US is the most developed PC traditional internet market. Some are mobile phones, others markets like UK maybe comment briefly as on the buy button on -- because (Inaudible.) -- to new platforms whether internet in the US, which is most mature, mobile in Japan or (inaudible).

On the QVC, we call it QVC active, as you may recall we have had for a number of years, a platform where you could order on your remote control. We recently this year launched a real expanded version of that service. Starting in September, you will now be able to -- (inaudible) four different TV channels by navigating on your remote control. The main channels we are broadcasting live. You can also view the same channel but the programming that was on the previous hour, so if there is a jewelry program on now that you are not interested in, you could pull up the beauty program and watch that from the prior hour. That's first of the additional channels, the second additional channel is a 24 hour channel devoted to our beauty category, the third additional channel is a channel that just focuses on our key promotions of the day. So very excited about that technology. Clearly that's a different video platform and market in the UK than in the US, for example. It speaks to how it's going to evolve over time where between mobile internet and convergence between internet and TV, a lot of choices about how to get rich video content on demand. We are conducting a few minor experiments in The US, not in a position to talk about, looking at various forms of VOD and a buy button kind of test but a much more complex diverse platform in the US which makes it more challenging, but between the Japan mobile learning and UK learning, there is a lot to build on.

Thank you, Mike. I think we have the answer to Doug's question on sequential Encore.

Doug, great pick up, we have 31 billion customers, we were off from the first quarter by 150,000 Encore customers. These customers were from three affiliates who had declined to subscriber during that quarter, or repackaged as one of them did, all three of them are from our so called fixed rate affiliates who pay specific amounts on a analyzed basis. Decline doesn't effect our revenue. And that would be the reason. Good pick up. Only took three of us ten minutes to find that. find that. And operator we are on our last question.

Scott Devitt from Stifel Nicolaus.

Two questions on LINTA, first, if you could talk through the areas of CapEx reduction relative to last year, I think there was a (inaudible) international of last year. Then separately, I believe Amazon in their second quarter did about 4 billion in revenue at a 7% EBITDA margin. QVC did 1 8 at 22% (inaudible) QVC -- Amazon has a presence in all markets now. Given that the infrastructure are similar, I'm interested in your thoughts whether the increase in skew on the internet and in to the lower margins and guaranteed free shipping represents a risk to QVC or skews are protected long-term.

I assume you want to handle this?

And on CapEx-, the primary differences from the last two years, we completed a round of significant infrastructure expansion, (inaudible) distribution centers going up in Japan, and in the US, and significant expansions of our DC's and UK and Germany, and that really grows a bubble in CapEx. We are looking over time we don't see another substantial waive of infrastructure requirements for a number of years, other than a call center in Germany that is underway, we put in place a lot of strategies to try to mitigate the need for infrastructure, for example we are launching in September the use of home agents to representatives at call center, we think changing the technology will enable us to meet our expanding customer service needs, for example, (inaudible) agents rather than through fiscal plant. Those are the kinds of things we are doing. Macro bubble occurred in the evolution of our business and tighter and more productive in how we deploy capital.

On the question about margins and the risk from internet competitors, certainly something we pay a lot of attention to, it is something that causes a great deal of concern, anymore than any form of competition there is always concern. Part of what you see in our, there is are a number of things that drive our superior EBITDA results versus Amazon or those kinds of players, first is product mix. The mix of products we sell tend to be higher margin kinds of products, everything we sell, we sell at a value. Everything we sell has to be sold at a price that is advantageous to the prevail retail price and that advantage ranges from 20 to 50% based on the store audits. Not that we are providing product that aren't already a great value but we have heavy mix towards category like apparel, accessories, beauty and jewelry that are higher margin categories than say books and music. That's part of the difference, par of that is the efficiency of the model. We don't have huge expenses that go towards advertising, which most internet players do. Because of the power of our TV channel has a draw to bring traffic to the internet. For all those reasons we don't see kind of pressure on margins, a factor we pay attention, try to increase our value all the time. Don't see that sort of skewed proliferation as a huge risk. .

Thank you. If I could thank everyone for joining us and make a couple remarks. Liberty is known for financial innovation, increasingly in this difficult environment I'm pleased to say we are seeing strength in our operations as a management team and innovation in things (inaudible) that are showing a another side that gives us way to add value. Hopefully we will able to see that reflective in the share price to shareholders going forward. (inaudible) We look forward to speaking you next quarter if not at our investor day in September.

This concludes the quarter earnings conference call. Thank you for attending. Have a good day