QVC Group Inc (QVCGA) 2008 Q3 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, 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 the market acceptance of new products or services, competitive issues, regulatory issues, continued access to capital on terms acceptable to Liberty Media, and the completion of Liberty's bond tender offer on the terms announced or at all.

These forward-looking statements speak only as of the date of this presentation and Liberty Media expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein to reflect any change in Liberty Media's expectations with regard 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 affect the statements made in this presentation.

On today's call we will discuss certain non-GAAP financial measures, the required definitions, and reconciliations can be found at the end of this presentation. And now for opening remarks and introductions, I would like to turn the call over to the President and Chief Executive Officer, Mr. Greg Maffei. Please go ahead, sir.

Thank you all for joining us this morning and for your interest in Liberty Media. Today we're going to discuss the results of our businesses for the quarter by tracker. We'll review operating performance at our controlled subsidiaries, cover transactions that we have done in other developments. Liberty's controller, Chris Shean, will discuss the attributed business' financial results and the liquidity picture for each of our three-trackers. QVC's CEO, Mike George, will discuss recent events and developments at QVC. And Starz Entertainment President and COO, Bill Myers, will review certain events at Starz. Also on the call today we have QVC's CFO, Dan O'Connell, Starz's CFO, Glenn Curtis, and several other senior Liberty executives. All of us will be available at the end to answer questions.

Before we discuss the specific results for the quarter, I want to provide some perspective on Liberty given recent market conditions. You all know, as well as I or better, that the market and economic climate has been volatile. Liberty's equities have been affected perhaps even disproportionately. We are focusing on those items that are within our control, and there are many, but there are obviously certain elements and factors that are outside our control. And there is much uncertainty as to when, not only the financial markets, but the operating and economic climate will improve.

So concentrating on that which we can change and evaluate and improve, first we're focused on financial management and structural optimization. We accomplished during the quarter or plan to accomplish the following. At Liberty Interactive, we drew down the remaining capacity of our QVC bank facilities. We used that cash to successfully tender for $782 million or about 87% of our 2009 maturities on our straight debt that was coming due in July, 2009. We early tendered for the vast majority of that. Other than the small, roughly $140 million that's due in July, 2009, on that straight debt, we have no Liberty Interactive maturities until 2011.

The Board of Directors approved a change in the attribution of the Viacom exchangeable debt that was previously attributed o Liberty Entertainment, LMDIA, over to Liberty Interactive, along with $380 million in cash to compensate for that reattribution Liberty Interactive intends to use this cash to fund a tender offer for senior debentures of the Company. Through this change in attribution, Liberty Interactive will benefit from incremental liquidity and if the tender is successful, will substantially reduce its ongoing interest charges.

Liberty Entertainment obviously is also affected by the change in attribution of debt. This is a necessary step if we are to complete a split-off of Liberty Entertainment. That having been said, we continue to evaluate the split-off of Liberty Entertainment and its timing given current market conditions. And lastly, at Liberty Capital, we continue to repurchase shares and now bought back $13.6 million shares between August 1 and October 29. Due-to-date, we've reduced the outstanding share count at Liberty Capital by almost a quarter.

Focusing on operations at Liberty Interactive, and you'll hear more about this, first at QVC. The US retail market, no surprise, is extremely challenged. Germany, UK, are facing many of the same economic issues as the United States. Japan has been the bright spot, and we've seen continued strong performance at our Japanese subsidiary, far stronger arguably than what's going on in the economic environment in Japan.

Management at QVC and again you'll hear more about this, is doing all it can to drive revenue while protecting the fundamental value proposition of the business, preserving the business model, and preserving margins. We continue to see strong growth in Liberty interactive at our E-commerce affiliates. We're very happy with their results. We'll see how they are impacted as time goes on.

Given the state of the financial markets, we are withdrawing our Liberty Interactive financial guidance from 2006 Given what's going on, we don't feel comfortable providing any new guidance at this time. Looking again at the operations at LMDIA, we've had continued success at Starz Entertainment, executing on our strategy of audience segregation, providing end-to-end media services with strong revenue growth and strong adjusted OIBDA growth. We are not commenting on DirecTV's results because they do not release until next week.

Liberty Capital - - Overture's third-quarter releases had solid box office performances and we expect to continue that trend in the video market and on our Starz and Encore channels.

With that, let me turn it over to Chris who will talk about first our results at Liberty Interactive.

Thanks, Greg. Liberty Interactive and its attributed businesses grew revenue 2% while adjusted OIBDA declined 14% for the quarter. QVC, which is the primary driver of the results amongst Liberty Interactive's attributed businesses, continues to operate in a challenging retail environment. Its revenue decreased 3%, and adjusted OIBDA decreased 14%. This is on a consolidated basis.

Liberty Interactive's other e-commerce businesses which include provide commerce, Backcountry. com, Bodybuilding. com, and BuySeasons, again, posted strong financial results and continued to grow at a rapid pace. In total, our E-commerce businesses experienced revenue and adjusted OIBDA growth of 112% and 50%, respectively, due to the acquisition of Bodybuilding. com in December, 2007, as well as strong organic growth at all the other E-commerce companies that we've had in both periods.

Turning to QVC, its domestic revenue decreased 9% in the third quarter to $1.07 billion. And the mix of products sold shifted to the accessories, apparel, and home areas from jewelry. The average selling price increased 4% while total units shipped declined 11%. Domestic adjusted OIBDA decreased 21% in the third quarter to $221 million, while the adjusted OIBDA margin decreased 308 basis points to 20.6%, primarily due to lower initial product margins in the home and apparel products areas, a higher inventory obsolescence provision, a higher bad debt provision, and not achieving leverage on its fixed cost base.

QVC.com's sales continued to grow as a percentage of overall domestic sales rising from 21% in the third quarter of last year to 24% this quarter.

International revenue increased 11% to $568 million for the quarter, while adjusted OIBDA grew 6% to $91 million. Revenue growth was due to strong sales in Germany and Japan, in addition to favorable foreign currency exchange rates in those countries. Adjusted OIBDA growth lagged that of revenue as adjusted OIBDA margins declined 78 basis points, principally due to lower initial product margins and higher commission costs as a percentage of net revenue due to new fixed rate agreements in the UK and Japan. Excluding the effect of exchange rates, international revenue increased 7% for the quarter while adjusted OIBDA was essentially flat.

QVC UK's local currency revenue increased 1% on a 3% growth in units. In Japan, QVC experienced 11% local currency revenue growth continuing the double-digit quarterly sales growth from the second quarter of 2008. QVC Japan has continued to successfully show gains in 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 of 2007. In Germany, our business experienced revenue growth of 8% on a local currency basis.

Now I'll hand it over to Mike George for some additional insights on QVC. Mike?

Thanks, Chris. This was obviously a very difficult quarter for our US business at QVC. We experienced significant sales declines in the months of August and September. Part of our August shortfall was driven by calendar shifts and decisions we made to move out poor-performing inventory in our jewelry and apparel business. However, in September, which we felt would be a strong month for us, we felt the deepening impact from the financial crisis.

The sales shortfalls in the quarter were broad-based. Although, as in recent quarters, our computer and consumer electronics businesses remained relatively strong. We're clearly seeing our core customers being more cautious in their spending and holding back on some purchases as they monitor the economic situation. So the good news is we're not seeing an erosion in the retention of those customers, but they are making one or two fewer purchases.

As Chris mentioned our adjusted OIBDA margins are also very challenged with a 308-basis point decline from last year. This was driven by three primary factors. First a decline in our initial product margins which was largely associated with the mix shift to consumer electronics. We have continued to hold the line on increasing our promotional activity.

Second, an increase in obsolescence rates - - that was primarily due to a rise in our September inventory levels due to our sales shortfall from expectations.

And finally, an increase in our expense rates, partially driven by increases necessary bad debt levels and favorable variances in our call centers and distribution centers, as we were unable to reduce staffing levels fast enough to meet the sale shortfall.

We are taking a number of aggressive actions to manage our business. Our first priority, of course, remains bringing the customer fresh, compelling products at great values, supported by engaging programming. As we discussed at the Liberty investor conference, we have launched our Don't Miss A Moment campaign, highlighting the unique people, places, and finds at QVC for the holidays. We have a number of exciting premieres this season from American Girl Dolls to Rachel Ray cookware, Bradley Bayou and Vera Bradley handbags, Mark Cross leather accessories, Q Voyager gemstone jewelry, and Gump's home decor. And we have several strong events in the fourth quarter, including our "12 Days of Christmas" sweepstakes, where we'll be giving away a smart car every day.

We're also making daily adjustments to our product mix and programming. For example, right now we're seeing more strength in gifts for the family and practical problem-solution product lines, and in extreme values like our TSVs. On the other hand, higher price point, self-purchase products in areas like jewelry and accessories are more challenged as is the holiday decorating category. Where we can, we're making adjustments to reflect these trends.

To make sure we're providing particularly strong values in this economy, we launched a new price break program two weeks ago where we're working with our vendors to get better pricing on key items for the holidays that we can pass through to the customer. In the first week of this program, we were able to offer meaningful discounts on about 50 top items. We're also more aggressive this year in promoting the benefits of shopping with QVC for the holidays, including our extended return privileges during the season and our strong, everyday pricing.

In addition to these initiatives to improve the sales line, we are carefully managing our inventory levels and expenses. We are slowing down new purchases, working with vendors to reduce receipt levels of existing orders where appropriate, and exercising our contractual rights to return inventory to vendors when sales don't meet our goals. We'll also continue to move through poor-performing inventory on a timely basis, even though this does dampen sales velocity.

While we recognize this is a challenging time for many vendors, to-date we have not experienced any significant issues with our vendors being able to deliver products, hand over turns, or provide other required support.

We're also carefully monitoring our bad debt levels. As you know, we incur bad debt primarily in two forms. First, but 27% of our sales are on our proprietary QCard. Second, we have an EZ Pay program where we offer customers the option of paying their bills in two to six installments on select products. Over the last three quarters, our bad debt expense has averaged just under 1% of sales versus 0.6% in the prior four quarters. This reflects both an increase in actual write-offs and an increase in our reserves to cover anticipated future write-offs. Fortunately, we have been able to more than offset this increase in bad debt expenses with the increase in the QCard APR's that went into effect in July.

We've taken several actions to further contain bad debt levels including increasing the credit scoring criteria for obtaining a QCard, eliminating the annual credit line increase, reducing credit lines for marginal accounts, and increasing collection activity at earlier delinquency stages. In addition, while our usage of EZ Pay did increase beginning in Q4 of last year in response to the consumer spending slowdown, it has been relatively stable since then, and we do not intend to materially increase our usage of EZ Pay in this environment.

And finally, as we have all year, we are aggressively managing our expenses. We have dramatically reduced our seasonal hiring in the distribution and call centers. We have largely stopped new hiring Company-wide, and we're scrutinizing every element of expenses. We will monitor sales trends carefully and take appropriate expense actions as necessary.

Now turning to international, we are pleased with the continued progress in Japan where we posted good results in the top and bottom line, driven by strong gains in fashion and jewelry.

Germany returned to a solid rate of revenue and OIBDA growth in Q3 with particularly strong sales in the beauty category. While we're pleased with the progress in Germany, we recognize that we are copying relatively weak results from Q3 of last year, and we still have our work cut-out for us to achieve sustained profitable growth. And we've made several leadership changes in that business and remain confident in its long-term potential.

The results in the UK were disappointing. Our sales were below expectations, primarily due to soft TSV results. While the UK economy, as Greg mentioned, is also challenged by the slowdown in consumer spending, we were encouraged by relatively solid growth in our base business in the UK. In addition to the sales softness, we experienced a 240 basis point erosion in our UK gross margins. Nearly half of that erosion was driven by the adverse FX movement as we were unable to adjust our product pricing quickly enough in the face of the sudden erosion in the value of the Pound. Going forward, we will do a better job of moving these impacts into pricing.

We also saw a modest decline in initial product margins due largely to the mix shift to computers. Our OIBDA margins were further impacted by the cost of our new DTT contract, which was 130 basis points unfavorable. We began anniversarying these higher costs at the start of Q4, so they won't be a factor going forward.

Given the economic uncertainty globally, we are maintaining the same focus on expense and inventory management in all of our international markets as we are in the US. We're also taking a cautious stand on capital spending across all markets, although we remain committed to investing in the business where necessary to support future growth. We will likely end 2008 at $120 million to $140 million of capital spend, which is well below the forecast we provided earlier, and we're carefully reviewing capital requirements for next year. While we have not finalized our '09 capital plans, at this point we would anticipate capital spending in the range of $140 million to $170 million. We could pull this number lower or accelerate various investments based on underlying strength of the business.

We also do not intend to incur significant capital or expense charges in 2009 for our Italy startup. We can defer most of these costs to 2010 and still meet our entry timetable, although if the business climate were to materially improve, we might consider accelerating some of the spend into the coming year.

In closing, I would like to just reiterate that we don't view our current performance shortfall as a reflection on the long-term health of our business, but rather, short-term challenges driven by a tough economy. In fact, our performance is consistent with and in many cases better than other leading retailers who operate in similar lines of business. By contrast, we continue to be bullish about our strategy of building a powerful multichannel video platform for the future with attractive, long-term growth prospects. And with that I'll hand it back to Chris.

Thanks, Mike. Let's take a quick look at Liberty Interactive's liquidity picture. The group has attributed cash and public investments of $3.9 billion and has $8.4 billion in attributed debt. The accompanying LINTA balance sheet information that's on the slide, of course, is - - as of September 30, which does not fully reflect the current situation at LINTA.

While we believe LINTA has reasonably solid liquidity and capital resource, the recent downturn in markets had reduced LINTA's flexibility to pursue opportunistic transactions. Accordingly, we're taking the aforementioned action of recontributing the long-term Viacom exchangeable debt in-cash from Liberty Entertainment to LINTA. Moving on to Liberty Entertainment, attributed revenue grew 21% in the third quarter, while adjusted OIBDA declined 15%. The increase in revenue was primarily due to the addition of the Liberty Sports Group, which was acquired in February, 2008. The decrease in adjusted OIBDA was due to one-time factors in 2007 at Starz Entertainment.

Taking a closer look at Starz's result, the revenue decreased 1%. This decrease in revenue was due to the one-time recognition of revenue during the third quarter of 2007 caused by affiliate agreement extensions. Adjusting for this item, Starz's revenue would have increased 5% for the quarter. Starz and Encore average subscribers increased 7% for the quarter when compared to the same period in 2007.

Starz's adjusted OIBDA decreased 11%, which similar to the revenue was impacted by the one-time events in 2007. Again, adjusting for this item, adjusted OIBDA would have increased 22% for the period. Operating expenses increased 4%, principally due to the positive impact recorded in 2007 related to the settlement of a music rights dispute. This increase was partially offset by a 3% decrease in programming expenses.

Taking a closer look at Liberty Entertainment's liquidity - - At quarter end, home media was attributed with approximately $14.2 billion of public investments, although this figure has decreased substantially with the market declines in October.

In addition to its public holdings, Liberty Entertainment had attributed cash and liquid investments of just under $1.1 billion at quarter end. Total cash and public holdings approximated $15.3 billion, well in excess of the $2.6 million face amount of attributed debt. These figures, of course, are prior to the change in attribution in the long-time Viacom exchangeable debt and cash to LINTA.

Now, Bill Myers will comment on some of the exciting events at Starz Entertainment and Starz Media.

Thank you Chris. Let's start with Starz Entertainment.

On the entertainment side, we are pleased with the continued growth and subscribers that our Starz and Encore services with our performance in revenue adjusted and adjusted OIBDA. Although the year-to-year comparisons of the latter two measures were impacted by two, one-time measures that Chris mentioned.

We also made progress in executing our original programming strategy. In October, we premiered our first original dramatic series on Starz which was "Crash," which has been the focus of a nationwide branding campaign and generated widespread media attention. We just announced this week that we will follow this up with another dramatic series, "Spartacus," which will air later next year. "Spartacus" will be the first original series produced for Starz Entertainment by our sister company, Starz Media. The series was developed by "Spider-Man" director, Sam Raimi, "Xena: Warrior Princess," producer Rob Tapert, and the "Quick and the Dead" producer, Josh Donen. Starz will retain all rights for the show which will air on our channels, will be available for distribution through our other home video and international and domestic distribution platforms.

We have renewed our half-hour comedy "Head Case" for another season and will premiere, next year, another half-hour comedy, "Party Down," about a group of unemployed actors who run a Hollywood catering business. And like [Spartacus], "Party Down" is a production of Starz Media, and we will retain all rights for our distribution platforms.

When we think about the platform side, Starz Entertainment continues to lead in the very important high-definition space. Launching Encore HD this quarter, which is the fifth HD channel we offer our affiliates. Our On Demand offering, including three HD On Demand services, continues to rank in top five in terms of usage by consumers among more than 300 other On Demand services. An important distribution development, on October 1 we announced an affiliation agreement with Netflix, allowing it to include Starz Play in the online service it offers to its customers who will now be able to watch, over the internet, streams of the Starz' flagship channel and On Demand streams of movies and other Starz video programming.

On the media side, we were pleased with the box office performance this summer of "Space Chimps," the animated film we produced in partnership with Vanguard Animation for distribution by Fox. It will be released on home video in late November. Our Toronto animation studio continues to work on three animated films for distribution by other studios.

The Emmy-winning hit children's series, "Wow! Wow! Wubbzy" produced by Starz Media's Film Roman studio, began its second season on Nick Jr. and premiered on Canadian and German television outlets, adding to the 60 international markets in which it has been sold. It has also been released on DVD and the licensing and merchandising properties based on Wubbzy have been introduced in the US.

The Starz Media half-hour series "Z Rock" about three musician who lead a double life performing at kids' birthday parties by day and a rock band by night, premiered on IFC to solid ratings and has been renewed for a second season.

Our digital media group has signed domestic and international deals that now make our animated movies and original series available on such platforms as Amazon, Xbox, iTunes, and others.

Overture Films has released six theatrical films so far this year, including in the third quarter "Righteous Kill" and "Traitor," which performed solidly at the box office and will be strong at home video and on the Starz and Encore channels. Two more films which are slated for release before the end of the year. These films are "Nothing like the Holidays" and "Last Chance Harvey.

At one point this summer, Overture Motion Pictures were playing in 5,800 screens in the US, about 15% of the total number of screens in the country. This is a remarkable achievement in our mind for a studio that has still not completed its first full year of releases. And at the Anchor Bay level, which is our home video business, we have announced the launch of its own film studio, Anchor Bay Films, to continue to develop the Company's successful strategy of producing and acquiring movies for limited theatrical release followed by home video distribution.

So I think in summary, the bottom line is that we continue to execute on our strategy to leverage our multiple distribution platforms, which is theatrical, home video, internet, premium channels, and domestic and international syndication, to develop and monetize a growing library of content which we produce and control ourselves. We were very pleased with the quarter, and I will now turn it back to Chris.

Thank, Bill. Let's take a look at Liberty Capital now. During the quarter, Liberty Capital revenue increased 16% to $221 million, while LCAPA's adjusted OIBDA deficit increased to $89 million. LCAPA's increase in revenue was principally due to revenue growth Starz Media. The adjusted OIBDA deficit was principally due to marketing and advertising costs associated with film releases at Overture Films and Starz Animation.

From August 1 through October 29, Liberty repurchased 13.6 million shares of series A Liberty Capital common stock at an average price of $14.19. The total cash consideration of $193 million. Cumulative for 2008, Liberty has repurchased 31.6 million shares, at an average cost of $14.53 for total cash consideration of $460 million, which represent 24.5% of the shares outstanding.

Now let's take a look at Liberty Capital's liquidity. The Liberty Capital group has attributed cash and equivalents of $5.8 billion and attributed debt of $4.9 billion. This cash and public investments figure excludes $523 million of Liberty holdings in the reserve primary fund. We have put in our redemption request for these funds and expect to receive about half this week. But the exact timing of the redemption is uncertain. As such, we have reclassified this amount from cash into short-term investments on our balance sheet.

Subsubsequent to quarter-end, the decline in the market price certain of our exchangeable debentures caused a triggering event on total return swaps on these debentures held by Liberty Capital, allowing the counter party to terminate the swap contract. As a result, we expect to be required to settle the contract by making a payment to the counter party ranging anywhere from $200 million to $250 million. We're currently exploring entering into a new swap agreement at a lower notional amount that could lower the total amount paid to address this obligation. Any payment made will be from available cash or borrowings on equity derivative credit facilities, attributed to Liberty Capital. Despite these events, we remain comfortable with Liberty Capital's liquidity situation. With that said I'll turn it back over to Greg to quickly recap the quarter.

Thanks, Chris. And thank you, Mike and Bob, for your updates on your businesses. Well, as you know, it's an extremely challenging and unpredictable economic environment. Overall, while our subscription and E-commerce businesses continue to perform well, other businesses such as our transaction businesses like QVC have been obviously impacted by the market. It is hard to know when conditions will improve, but we are confident that businesses like QVC are not going away and are not permanently impaired, and have a long-term bright future.

We are managing those factors under our control, and we do see market opportunities caused by the current economic dislocation and we will pursue those opportunities. Liberty structure does provide us increased flexibility to capitalize on some of these opportunities. Let me finish by saying we appreciate your continued interest and support of Liberty Media. As we've noted before we're going to work on maximizing value to you by optimally managing the portfolio of assets among and within the three tracking stocks, supporting our affiliate management teams to produce strong operating results, and, where possible, executing on financially innovative transactions. So stay tuned. Thank you for listening. I'd like to now open it up to questions.

At this time, ladies and gentlemen (OPERATOR INSTRUCTIONS). We'll take our first question from the side of Doug Mitchelson. Go ahead please, your line is open.

Thank you very much. Just two questions - - are there any other derivative transactions nearing any triggering points like you just talked about with Liberty Capital? Then second, Greg, any clarification you can give us on the comment in the press release, maybe I missed it on the call, saying we continue to evaluate the split-off of Liberty Entertainment as timing given market conditions. Thanks.

Yes, Doug. We have one other swap we've done on some exchangeables that we're continuing to evaluate -- straight debt. That we're continuing to look at what that cost is. But I think we're -, we're okay on that. And as far as, more color on the statement - - look, we went out with a certain set of conditions or certain expectations on how the various split companies would look. We certainly did what-ifs and scenario planning. But, in light of what may be unprecedented changes in capital markets, we want to be sure before we proceed that all the businesses are optimally capitalized and set to prosper as separate entities.

I guess I would look at it both defensively and offensively, right? Are you making comments from a defensive standpoint? Or are there opportunities that you think you can just ploy your capital better than a said split-off?

I think there are both defensive issues and offensive issues. You want to make sure that both businesses are properly capitalized to prosper and succeed. And you also want to make sure you're deploying your capital as smartly as possible where it may have the maximum benefit. So I think you're right to note both elements of that.

All right. One last final followup and I'll let it go. Is there anything regarding the QVC balance sheet, the Liberty Interactive balance sheet, that causes any concerns right now?

Well, I don't know if it causes concerns. You'd consider us foolish or foolhardy not to consider all of the opportunities and risks that are out there. As a statement of fact, the Liberty Interactive is probably the business with the nearest term maturities, and the most issues that we want to make sure that it's solvently capitalized and appropriately capitalized. That's just looking at the relative debt load that LMDIA, LCAPA [its long] maturities, and Liberty Interactive. I think your statement recognizes the obvious that that is the most leverage with the shortest maturities. Part of what you're seeing us do today with the reattribution is working to see that Liberty Interactive, that attributed interactive, is in a position to take advantage of market opportunities and be well capitalized.

Great. Thank you very much.

Thank you. We next go to the site of Barton Crockett Go ahead, please.

Great. Thanks for taking the question. A question - - a little bit more about the balance sheet at Liberty Interactive. You can see a scenario potentially if the consumer really suffers next year, where EBITDA could drop to the level where you might be bumping up again the leverage ratio in the QVC attributed debt. And I was wondering if you could tell us how you see managing that. Obviously there's a lot of resources outside of Liberty Interactive. And you attribute some of those to Interactive. Would you see doing more of that, potentially, to pay down the QVC bank debt?

Well, that is the only covenant that is really within the Liberty Family that we need to be aware of. And we're certainly very aware of it. I think we're comfortable that that will not become an issue. But again, given these market conditions and appropriate planning by management, we certainly have considered what to do if that does become an issue.

There are multiple scenarios and multiple opportunities or alternatives. One, there are assets as you note, both the E-commerce businesses and the equities that are in that tracker that are not part of the bank group. You could imagine offing incremental collateral. You could imagine other transactions like the one we did today that provide incremental liquidity and shift assets around. You could imagine looking at potentially in a slightly better capital market, finding other sources of borrowing against either foreign subsidiaries we have opportunities or against some of the assets that are also Liberty Interactive that today are not captured in any [falling] facility. Again, the E-commerce businesses and those equities.

You could imagine a host of other things. The payments that are made by Liberty Interactive to Liberty capital in lieu of tax payments could be deferred or treated as notes. I'm not suggesting that's what's going to happen. I'm just pointing out we have literally tens of opportunities to think about and ways to address the problem.

Finally, and most importantly, if you are a bank and you look at the relative issues - - now, no one wants a covenant break. As I said, I don't anticipate that. But, if you look at the relative issues, the EBITDA has been about $1.7 billion in QVC. The interest on that bank line fully drawn at current market rates is about $250 million a year. We cover that interest dramatically. And we have a business which generates a whole heck of a lot of free cash flow. Even levered. I think to point out this is not something we are not paying attention to, but it's also not something we're sweating, looking at as a dire consequence.

Okay. That's very helpful. And then on the other side of kind of the balance sheet in terms of the shares for Liberty Interactive. With them down at this level, obviously you guys have tons of resource. I know you want to be prudent and conservative, and you've said you don't want to do share repurchase. But would you reconsider it now with the stock where it is?

It's like that old joke about -- Woody Allen said about the food at camp, "It sucks and there's not enough of it." You're kind of giving us both ways because you can't - - you're saying you're worried about the liquidity, you want to go test it by buying more shares. We look at the Liberty Interactive stock as very inexpensive. But we're also trying to be judicious about making sure for the long-term we capitalize (inaudible) on all opportunities. Even though we agree with your proposition, it's cheap,and we are not worried about the balance sheet in terms of breaking the covenant, I'm not sure we want to stress that and test that further today.

Okay. That's great. I appreciate your help. Thanks.

Thank you. (OPERATOR INSTRUCTIONS) We will now go to the site of Tom Egan. Go ahead, please, your line is open.

Great. Thank you very much. Greg, I appreciate the comments on the possible flexibility that you guys are looking for in evaluating the timing of the LMDIA spinoff. Could you maybe give us a little more better sense of the options you have and the flexibility of - - in case you don't spinoff LMDIA, what kind of flexibility does that give you? In terms of the other stocks? Then I have a follow-up, thanks.

Tom, I'm not sure I understand exactly what you're saying on the flexibility of the other stocks. I guess my only - - and I'll try to be as forthcoming as I can in light of what we know about market conditions and what's happening. We could imagine a scenario where LMDIA does not get split -off at all. Or you could imagine scenarios where various assets or liabilities are transferred or moved around to enable a splitoff, again, taking advantage of both offensively and defensively what we see in the market. All of those are out there as possibilities. What I think we've commented most is, we were on a path where we said December or January, we expected that if we proceeded we would be able to get this done. Given that we're sitting here in October, almost Halloween, and we've not formally announced, determined that we're proceeding on what terms, I think we've mostly talked about almost for certain a delay in timing. And the rest of it is still open.

Okay. And then separately, last October 7 when John Malone said the LCAPA shares, obviously there was some concern about margin call. Could you give us some sense of how we should be -- some insight into how we should be thinking about the prospects for any other sale of shares? Thanks.

Well, I think more appropriately we have a guest who might be more able to comment on that than I am. John?

Yes. What a wonderful October. I guess the simple way to say it is that as we said today, my family personally, we have gross indebtedness of about $50 million. We have net indebtedness of about zero if you include government securities and cash. We've never pledged any of our high loading shares of any of the Companies. And we feel that while we hated to do it, we hated to sell down in order to pay-off what was short-term debt. It seemed the prudent thing to do. Since we had a high tax base incentive. And we just got squeezed.

Obviously we had a lot of collateral we could have pledged rather than sell the shares. But when the market is deteriorating the way it seemed to be, it seemed to be the prudent thing to do to lighten the ship. And that's what we did. We really have no other pressures on us. We have substantial liquidity in our (inaudible) remainder trust. A cash liquidity. We're evaluating what the best use of that liquidity is going forward, including, perhaps, acquisition of equities and our related Companies to the degree that the lawyers would let us on a timing basis. As you know, there are all kinds of short swing issues. But that's kind of where we sit. While I hate to see our net worth decline the way it has, we don't feel any real pressure at this point to sell any equities.

Great.

Hope that answers the question.

Yes, thank you.

Thank you, Tom. Next question.

We now go to the site of Benjamin Swinburne. Go ahead, please.

Thanks. Good morning. We know about some of the leverage debt concerns at LINTA. Is there anything we should be looking at at the LMDIA level, with the loan that you used to buy additional DirecTV stock? And I think the first payment kicks in the second half of next year. If the world then is, God forbid, as it is now, do you sell stock to pay or pay it out of cash, or do you still feel like you could roll that into a new facility?

Secondly, for Greg and John, Liberty has always taken advantage of dislocation in the market. I don't know if this is beyond an opportunity. And it's just bad for everybody. As you look over the media landscape, there's going to be a lot of cheap - - there are cheap assets or will be cheaper assets going forward. Especially as companies head into restructurings or bankruptcies. Do you think that part of your decision to re-analyze the spin is because you want to save some dry powder for opportunities whether it's on-line or TV stations or HSN? Anything you can share there in terms of offensive opportunities as you look at the landscape today.

So I'll first want to make a point. I think you mentioned, Ben, the LINTA liquidity concerns, and I want to emphasize one more time, I don't think we have LINTA concerns about liquidity. I think we are doing what is prudent about thinking about every potential scenario and trying to be open with you about the ranges available to us. And I think we'd be less than doing our job as managers if we weren't. But it's just a factual matter, it is the most leveraged probably of the three entities. So that's just looking at the statement.

On the LMDIA put, I feel pretty comfortable for a bunch of reasons. One, that's a borrowing against the put where the counter parties are basically loaning to themselves. It's a pretty safe level of transaction risk for them. And I think there are a bunch of options there potentially, including rolling that facility with that counter party, who is one of the more strongly capitalized banks. And we recently had them in there and they emphasized their openness and willingness to do business, particularly against a transaction which is a relatively secure transaction, since they are loaning to themselves.

Two, I think you readily pointed out there are other alternatives. Other borrowings -- we have quite a bit of stock in LMDIA of DirecTV, which is not pledged, which could be an incremental borrowing facility. We have, even after the reattribution of the cash, to cover the Viacom exchangeables. We have about $600 million in cash which is building because there's no debt other than the one facility which is basically accruing interest at the facility that you mentioned against the put. Starz is in there generating cash flow. Starz could enter into a borrowing facility. We believe we've had that discussion.

So we have a range of possibilities on how to settle that put, roll that put, relever that put, using cash or other borrowings. There's just a whole bunch of choices there. I don't feel particularly worried about that financial scenario. Again, this is a world where you never know. But if you looked at the landscape today, even as ugly as it is, that looks pretty secure.

Yes. We believe that collar is now perhaps $400 million to $450 million in the money. We actually have an implicit gain in the Collar. Then on the question of opportunism, in the short run here, we see the opportunities just in tactics. For instance, the tendering for the straight debt at prices of $0.55 to $0.62 on the dollar is a tactical way of taking opportunity of the liquidity we have without increasing, in fact, decreasing overall risk.

In the short run, I think we all believe that we want to see where this economy's going. We'd like to see some sense that we can predict the bottom before we make any large moves. We're obviously like everybody else, we're hoping the liquidity credit situation, worldwide loosens. We're hoping that the consumer likes the cheap gas prizes and goes back to buying lots of stuff from QVC. But we're just going to have to wait and see until we get comfortable that we can predict where this is going before we would make any large, strategic moves that would try and take up, take advantage of other people's distress. In the short run, it's kind of interesting. If you mark our debt and our equities to market, we look much less leveraged on a market-to-market basis than we do on a face basis. There's good news and there's bad news in all of these disruptions.

If I could just add one more point on the opportunities. I think John is right. I guess you mentioned a couple of opportunities. I think we stood at our investor day, in general, and I'd reaffirm the point and I think, John, you're on the same page. The equities of many of the media companies still look troubling. You mentioned TV stations. I think both the cyclical, because of lack of local advertising from people like car dealers and mortgage companies and you go down that list, cyclical looks poor, but the secular looks bad, as well, for many media places like TV stations. I think where we have been looking at opportunities, we've been more interested in the debt and looking at some of the things that might arise.

And the last one I would comment on is on HSN. You may recall we were allowed to purchase another 5%. But basically for another 20 months, 21 months, something like that. Unless a third party initiates an offer for HSN, we're not allowed to make an offer. It would require the Board to make the offer public. We're basically fairly limited even though we do notice the price being fairly low.

If I could just followup with one thing, and then I'll let it go. On the Liberty Entertainment spin consideration, is there anything you can point to or that we should be looking for that would then signal you're ready to make a decision, or is it just general credit market issues?

As I said, I think it's credit market issues, and actions that we might take to change or amend or confirm our comfort level with the split-off. I don't think you can point to any one thing. LIBOR hits X, treasury rates hit Y, that's going to be the trigger. But we see the benefits for the LMDIA equity of that split-off. We see the trading benefits. We see the ultimate flexibility. We certainly look at that as a positive objective. And we didn't announce it lightly or with no expectation of trying to complete it.

Thank you.

We'll next go to the site of Kit Spring. Go ahead, please.

Did you discuss how you feel about potential counter party risk on derivatives. Looks like I think they're with Deutsche Bank and Bank of America who look to be in pretty good standing. Could you comment on that.

I think you rightly noted those are the two people with whom we have big counter party risk. We have partially drawn on those with some potential offsets. Yes. It's one point. I guess the other larger point is it appears both institutions are both wards of their respective governments. So I feel better about the credit quality of both of them at this point.

Thank you.

We next go to the site of Jason Bazinet. Go ahead, please.

Thanks. Two questions. I think it was as of the second quarter 10-Q filing, the deferred income tax liabilities were about $5.9 billion. I was just wondering if you could give us either an update on where those sit right now, or if you can't do that, if you could just allocate that among the three-trackers for us.

I guess we're going to release the queue early next week - - early next week.

Okay.

Because we moved up the earnings date to try and accelerate on announcing the bond tender, the conspiracy theories abounded I understand about why we moved it up. But basically with the capture market conditions, get that out. We're not quite ready on the queue. The only thing I can say about the $5.9 billion is it's substantially less today.

Understood. Okay. Can you just talk about the mechanics of this $200 million and $250 million outlay at LCAPA. What it was that you entered and what was that caused the triggering event?

Sure. We entered into a total return swap on some of our exchangeable debt where we basically a third party held it without taking risk on declines. It did decline related to the overall market conditions. And we had a collateral call, in effect a margin call, which was large enough that it allowed them to and this financial institution has a desire to get stuff off their books today, allowed them to basically say they want to terminate the transaction. And we owe them the difference between the initial purchase price and the current mark on the bonds. Now one alternative as we've discussed is that we might enter into enter into another swap transaction. With no guarantees, that's probably the most likely outcome.

We enter a swap on the same bonds. We'll have some incremental costs or costs to settle the difference between what we swapped -- went into the total return swap on the bond on and the current mark on the bonds. But we believe the bonds are probably a long-term good value. Obviously the action that's we are taking today about the bond tender affirm that point. That basically we think our credit's pretty good. So we're disappointed about having to put up incremental liquidity on this. But we're reasonably bullish about the long-term prospects for our debt.

Sorry that I'm dumb about this, but if you don't enter into a new swap, does that in-turn increase the liabilities that would be reflected on your balance sheet?

No. What effectively would be happening is -- and because of these exchangeables and the tax consequence, it's likely that we will enter into some agreement because we don't necessarily want to take them in today. What it's basically saying is that we bought these bond at more than the current price. That's the right way to think about it.

Okay. Thank you very much.

Our next question comes from to us from the site of Scott Devitt.

Go ahead, please.

You mentioned the 27% of revenue that's on the QCard. I was wondering what proportion of that is on an installment plan, if it's 100% or something other? And separately, if there's been any change in the installment cycles on the QCard? Thanks.

Mike, maybe you could update on QCard and EZ Pay matters.

Let me let Dan answer this specific question on installment card. Dan?

We have about a $550 million portfolio. And it's hard to say expressly how much is due to EZ Pay versus full pay because people are rolling the balances. But I would say approximately 10% is derived from EZ Pay.

Does that answer your question?

It does. So 10% of the queue card attributed revenue is via EZ Pay. The rest on a traditional cycle?

10% of the $550 million is the EZ Pay. Is that the right way, Dan?

Right.

Got it. Thank you.

Thank you. We now go to the site of David Gober.

Thanks for taking the question, guys. Just had two questions for Mike. You talked about the impact of the financial crisis in September. I was just wondering if you you could update us on how that's looking in October and whether or not some of the actions that you've taken might be able to offset some of the weakness in the fourth quarter and potentially in the last two months. And then also on QVC Germany, you guys talked a little about the shrink there and potentially some easy comps in 3Q '07. But just curious if you could give a little bit more color there in terms of specific actions that the new management team has done there that might have been causing the strength, and whether or not that's what you guys expect from that business going forward.

Sure. On the first question, as you know, we have the practice of not commenting specifically on in-quarter performance. So I won't get too specific with my answer.

I guess I'll frame it in more general terms. If you think about in the middle of September when we were in the first throes of the meltdown in the stock market and the bailout discussions, we clearly saw our customer kind of freeze up at that moment. We had at that first week when the first bailout bill failed Congress, we had a major event in the middle of that week that was probably 40% off its plan. So there was no question that there was a very severe dip for a handful of days as people were absorbing the news and studying their 401K balances on an hourly basis. We were obviously trying to adjust day by day to see what's working and what's not working. Certainly that kind of an extreme disruption in the business we don't anticipate going forward as best we can see at this point.

We do think we're finding some things that are working better than other things and adjusting the business as we can. Consumer spending is clearly going to stay down for a period of time. That will clearly put a drag on us. But we do think we can adjust the business on the margin to try to deal with at least some of the impact of that. Beyond that, I don't want to get too specific about the current quarter's performance just because we don't typically do that.

In terms of Germany - - here's what we feel good about. We've been on, as we've been discussing, on a turnaround program for a year plus. We've made progress in some areas of that program. We've made progress in shifting to more business done at everyday pricing. We've made progress in launching a lot of new programs. We made progress in diversifying our product lines in some categories such as apparel and, in particular, in beauty. And that's where we saw the strongest growth was in beauty. And we think that beauty business has a very high upside for us. And that's encouraging because beauty has high margin, high sales per minute, and low return rates. So it'sby far the most profitable category that we operate in around the world.

So all of that feels good to us. We've also been very, very tough on expense line and kept that low. Probably the area that we continue to struggle with, one of our signature businesses as you may recall in the growth years and in the opposite way a signature business during the decline was our home textiles business. I would tell you that we haven't yet found the right formula in that business, and are still clearing through home textiles inventory and incurring some markdowns in Q3. That's reflected in the Q3 numbers to do that. We're relaunching that business or part of that business with a new brand in Q4.

You know, and it's wait and see. I think the team has a good strategy there. Whether or not it takes off, we have to let the consumer tell us. One way of saying we think we're getting the business on a better footing. We're seeing some success in the turnaround program, but it's not as consistent or as broad-based as I'd like it to be. I feel very good about the new leadership team. They're still in the early days. Combined with a lot of our long-standing leaders. It's a mix. We have a new person in-charge of Germany commerce, but a lot of long-tenured folks under that person. I think it's coming together. I don't want to tell you guys that I know it's fully turned around until we see a few quarters of consistent performance.

Great. Maybe the operator, we can get one last question.

Certainly, sir. We'll take our last question from the site of Mark Todtfeld.

Thanks for taking my question. On QVC, I had a question about how much of the operating and SG&A costs combined are really fixed versus variable? That of the first question. Then secondly, in a negative revenue growth environment, a hiring freeze sound like a good idea, but why not step it up and be more aggressive and cut, say, 5% to 10% of the fixed costs to preserve the profitability cash flow and liquidity at QVC?

Mike or Dan?

Yes. If you look at the P&L, what we call our the departmental fixed costs, in the US they run 5% or 6% of our revenue are in the departmental fixed cost line. It would be a little bit higher internationally. There are some other fixed costs that are in the warehousing space that show up on gross margin as opposed on the expense line. So it might be a little bit higher than that, if you include that.

And then all the rest is and the majority of the costs are variable costs. Either variable or what we call discretionary. Variable being call center, commissions to affiliates. Those sorts of costs. And, as well as, discretionary like marketing spend.

And I guess I would tell you that in terms of future actions, we're committed to managing this business in a very profitable way. So we're watching the situation carefully. We are challenging all the teams for productivity enhancements. We'll take whatever actions we think are appropriate to both deal with the short-term but also not fundamentally impair the business for the long term. We think it would be a mistake - - we want to be prudently aggressive. We want to manage our costs very carefully in this environment, but at the same time, what we don't want to do is cut deeply into muscle in a way that would impair us from growing our business in an attractive way over the long-term. That's the balance. We're looking at every element of the business very carefully. Finding ways to restructure, be more productive. And we'll continue to do that going forward.

Okay. Lastly, can you just update us on the inventory position at QVC? And working capital has been a use of cash last year. About $200 million. Year before about $180 million. How are you managing that in this environment? How should we factor that into our free cash flow of expectations?

Dan, can you comment on that?

Our inventory is roughly $1.1 billion. And our receivables are about $870 million. The receivables associated with our QCard I mentioned before are about $550 million. So they're not turning. We're managing our inventory as best we can under the current circumstances. And we're looking to reduce inventory between now and the end of the year that we don't think is going to be sold under the current environment. So the cash flow, it's stable. It's a function of the inventory sales and - -

We don't have concerns about the cash flow. Again, our inventory is a little bit higher than we'd like it today. We'll try to pull that down through the quarter and into next year. Maybe I could add.

I know inventory build, a product that you don't think is seasonally or in any way permanently impaired, we may have a greater obsolescence factor, as Mike discussed, and inventory build now that we hope to get down by year end. I don't think that's hopefully a fundamental drag on cash flow. That's a temporary drag on cash flow unlike, say, CapEx which is in the ground and done. This stuff hopefully is potentially on the balance sheet for a longer period than we initially would have liked. But eventually out the door and into the cash flow.

Yes. Absolutely. We're fundamentally not concerned about inventory over the long-term. Clearly the sales erosion in August and September which was much faster than we expected and, therefore, the corollary was also true, which is the inventory was higher than expected. Over time, we're very comfortable about being in front of that, our managed inventory so that it isn't a long-term drain on cash flows as Greg described.

And the domestic revenue decline at QVC of 9%. What portion of that was really attributed to the first bailout, the time period when the first bailout plan failed and you saw that 40% falloff? In other words, the 9% revenue decline, QVC domestic x that event. What was the underlying trend there in the quarter?

It would be hard for me to break out it out that precisely. As I said at the outset of the call, we did see revenue drop in both August and September. I don't want to pin it all on that time period. The August drop, while it was certainly greater than we anticipated, to some extent reflected some deliberate moves we made around moving out some inventory - - poor performing product, which means you're going to sell it at a lower velocity. Part of it was not quite as strong a programming calendar as the prior year. So August was a soft month for us. Some of that driven by, I think, the mounting consumer concerns. Some of it driven just by how we built the month.

September was equally soft to August. It wasn't in-total worse than August, but what was different is relative to our expectations for September, relative to what we thought the potential for September was. Given the way we built the calendar, it was more severe. But it was a broad drop through August and September. But again, relative to expectations, we felt September was a much bigger concern for us. Clearly, it was exaggerated in that couple of weeks time period. Beyond that, I don't know that I can get a lot more precise than that.

Okay. Thank you very much.

With that operator, let me finish by saying that I think Q obviously is a concern for all of us. But I would note that the management team there has done an excellent job of maintaining relatively high levels of profitability as compared to the peer groups whether it be HSN or other department store-type retailers. And our stock has been punished far more than the bulk of them. I will leave it to you to judge whether that is opportunity or not. It seems there is somewhat of a mismatch between those two facts. I thank you for your interest this morning, or this afternoon if you're on the east coast now. And look forward to talking to you again.

This concludes today's Liberty Media Corporation quarterly earnings conference call. Thank you for attending, and have a good day.