QVC Group Inc (QVCGA) 2009 Q1 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.

These forward-looking statements speak only as of the date of the presentation and Liberty 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'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 for Liberty, including the most recently filed Forms 10-Q and 10-K for additional information about Liberty and about their risks and uncertainties related to Liberty'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, which is posted on our Web site.

At this time for opening remarks and introductions, I would like to turn the call over to the President and Chief Executive Officer, Mr. Greg Maffei. Please go ahead, sir.

Good morning. Thank you for joining us today and for your continued interest in Liberty. Today we'll review our performance in the first quarter and discuss operating performance at our controlled subsidiaries.

Speaking on the call in addition to myself, we have Liberty Controller Chris Shean, who will discuss attributed businesses, financial results and the liquidity picture at each of our trackers; QVC CEO Mike George; Starz President and COO Bill Myers; and a host and cadre of other Liberty, QVC and Starz Executives who will all be available to answer your questions.

We have been busy since our last quarterly call and made progress in a number of areas. Big news, I suspect you all heard earlier this week, was we reached agreement with DIRECTV to merge LEI, the majority of our Liberty Entertainment tracking stock, into DIRECTV.

The deal highlights including eliminate the trading discount in our tracking stock, allowing Liberty shareholders to become direct holders of DIRECTV and continue to participate in its strong operating results. The new structure will allow increased strategic and other flexibility for DIRECTV in which we hope to participate. And the DIRECTV shares held by Liberty will be receiving a premium.

I'd like to point out one thing that I mentioned on the Monday call about the deal, is that we're going to be left with a new tracker, Liberty Starz, which I think will be a very interesting operating business. Strong adjusted OIBDA, you're going to hear some of those results for Q1 from Bill. Plus over $650 million of cash.

Our profits around the deal is -- are in -- we have an intention to have a simultaneous split and merge of LEI into DIRECTV and we'll need to file new documents or amended documents with the SEC, FCC and IRS. Our hope is to have a shareholder vote in the third quarter and simultaneously DIRECTV's process to get their shareholder approval for the merger and have all final and approvals and complete the split and merge before the end of the calendar year.

Other highlights to note at Liberty Entertainment, as I mentioned, Starz Entertainment continues to have very strong operating results.

Turning now to Liberty Capital. We completed our transaction with SIRIUS XM, which is at least on paper today, turned out to be a very attractive investment. The more we learned about the business, the more competence I think that the Board Members from Liberty on the SIRIUS XM Board, which includes John, myself, and Dave Flowers, the more confidence we have in the business and the more excited we are about our 40% position.

As previously disclosed, we have borrowed against the full value on a present value basis of our Sprint derivative, increasing our cash balance and reducing substantially all of our counterparty exposure in derivatives. We did also voluntarily retire $750 million face amount of exchangeable debt, which we previously had under a swap. We no longer have any swaps on our own or third party debt.

Turning to Liberty Interactive, QVC continued to operate in a challenging retail and economic environment, but we did see signs of stability and Mike George will articulate more of that later in the call.

The e-commerce companies continue to succeed, growing revenue quite substantially and adjusted OIBDA slightly-- at a slightly less aggressive rate, but also quite well.

In this quarter, on this call, we're going to change our format a little. We're going to have fewer prepared comments and allow you, our investors, more time for questions and answers. So with that, let me turn it over to Chris to talk about Liberty Interactive's financial results.

Thanks, Greg. Liberty Interactive Group's revenue decreased 6% to $1.8 billion while adjusted OIBDA declined 15% to $341 million for the quarter. QVC is the primary driver of results amongst the Liberty Interactive attributed assets and, as Greg mentioned, it continues to operate in a challenging retail environment, and its total revenue decreased 10% to $1.6 billion while adjusted OIBDA decreased 18% to $319 million.

The e-commerce group of companies at Liberty Interactive, which include Provide Commerce, Backcountry.com, Bodybuilding.com and BUYSEASONS, again posted positive financial results. In total, the e-commerce group experienced revenue growth of 29% in the first quarter and adjusted OIBDA grew 14%.

The increase in revenue for the quarter was driven by strong organic growth, all the e-commerce companies, combined with two small fold-in acquisitions made in 2008. The increase in adjusted OIBDA was primarily driven by the revenue growth. Now we'll have Mike George provide some additional comments on QVC.

Thanks, Chris. QVC's business continued to be challenged in Q1 by the global economic downturn. Although we are confident that the actions we're taking are helping us slow the declines and position ourselves for growth and margin expansion, as consumer spending rebounds.

In the US, our sales declined 10%. Now while this was clearly a disappointing performance, it does represent a modest improvement over the 12% decline in Q4. More importantly, normalizing for changes in the timing of shipments between quarters and for the impact of Leap Day, we had about a four to five point improvement in the underlying consumer demand trend line relative to Q4.

We saw continued strong growth in our computer and consumer electronics businesses, with particular strength in net books, in innovative new products like the HP TouchSmart PC and large screen TVs. We also saw strength in kitchen electrics, floor care and cleaning products. We suspect that at least some of the uptick in those categories reflects consumers making choices to eat out less and cut back on discretionary home services, along with our increased focus on these businesses.

We also saw nearly 50% growth, albeit from a relatively low base, in our extended assortments of online-only items, as we put more focus on developing these differentiated assortments for QVC.com.

Jewelry and apparel continued to be our biggest challenges, with consumers less willing to make such discretionary self purchases in this environment. We need to slow the declines in these categories to return to a strong growth mode overall. We've been working diligently to sharpen our assortments and have had some successes, but we have a ways to go to translate these wins into sustained performance.

US adjusted OIBDA declined 21% due primarily to a 220 basis point decline in gross margins, driven by the same factors we have discussed on prior calls, a mix shift to lower margin categories like electronics, a higher take rate on our promotional items like the today's special value, and a higher markdown rate, although as I've stressed before, total markdowns remain quite low relative to the industry.

While we've seen these same trends for the last 18 months, they were much more pronounced in the back half of 2008. So we expect by Q3 of this year, we'll see some moderating of the margin declines as we anniversary these impacts.

Our costs were also impacted by a 70 basis point increase in bad debt expenses, although this increase was lower than the increase in Q4. The QCard write-off rate increased to 6.7%, up from 6% in the prior quarter, although this is still favorable to the experiences of most proprietary card programs. We remain confident that we are staying in front of this issue and we do not anticipate that these bad debt trends will materially worsen.

Partially offsetting this increase in bad debt were reductions in other elements of our cost structure as we continue to focus on driving productivity gains and managing our costs carefully. We also continue to focus on tight inventory management and we were very pleased that we achieved a 7% reduction in net inventory from December, despite the sale shortfall.

We remain focused throughout this downturn on our efforts to make QVC one of the premier multi-media lifestyle retailers. We continue to build an assortment of distinctive world class brands, including premiering in Q1 Yves Saint Laurent beauty, Laura Mercier beauty, stylist Lori Goldstein and Ellen Degeneres for HALO Pet Foods.

We did engaging remotes from Vienna, the Presidential Inaugural, and Fashion Week and launched programming partnerships with Celebrity Apprentice and The Biggest Loser. And we launched the final phase of our extensive set redesign initiative.

We also continue to focus on the quality of our carriage and we're pleased to conclude a five-year agreement with DIRECTV for improved channel positioning. In the next few months, we will move from our current position in the middle of a shopping tier to a stronger position in the general entertainment tier, positioned near several high-traffic cable channels.

In addition, earlier this week we launched our native high-definition broadcast to 6 million subscribers and we're confident that we'll be able to significantly expand this carriage over the course of the year. QVC is clearly the leader in high-def shopping and with most of our affiliates, this will also provide the added benefit of a second channel location for our programming.

Now turning to international. In the UK, revenue declined 6% and adjusted OIBDA declined 9% in local currency. Disappointing results in jewelry and consumer electronics and weaknesses in our TSC items were the primary drivers of the sales decline. We are now seeing the economic challenges that first hit the US, dampening sales in the UK for the last couple of quarters.

OIBDA margins in the UK were down about 50 basis points, with about half of the decline driven by the impact of lower sales on our fixed DTT agreement and anniversaried an affiliate credit from last year. This is a significant improvement over the profit erosion we experienced in Q4, driven in part by the stabilization of FX rates, which puts less pressure on our gross margins.

In Germany, revenue increased 3% and adjusted OIBDA increased 9% in local currency. We've now posted sales increases in four of the last five quarters in Germany, albeit off of somewhat depressed results in the prior periods. Our revenue growth was largely driven by a strong acceleration of our beauty business. We have shifted significant air time and resources from fashion and jewelry to beauty and health, which we believe we can grow at accelerated rates and with better profitability than other categories.

We also saw an approximate 100-basis point increase in adjusted OIBDA margins in Germany, driven by lower inventory obsolescence, lower returns and strong cost management.

While we're pleased with the positive performance in Germany, we still have some challenges in front of us to sustain the beauty growth, stabilize other categories and continue cleaning up inventory. However, we do feel we're on the right track.

In Japan, revenue increased 6% and adjusted OIBDA declined 2% in local currency. After seeing accelerating growth in Japan every quarter of last year, the business softened in Q1 as the economic crisis hit full force, although we still managed to post positive growth. Adjusted OIBDA margins fell 150 basis points due to lower initial product margins in some categories, the increased cost of select carriage contracts, and to a lesser extent, employee expenses related to filling a few critical positions.

With that, I'll wrap up by saying that while we continued to face challenges in Q1, we also recognize that the pace of economic recovery is uncertain and will likely vary from market-to-market. I do feel much more confident today about the business outlook than I did on the Q3 and Q4 calls. It appears that we are seeing some stability in consumer spend in the US and an improving sales trend line relative to last year as our actions take hold.

We're gaining access to world class products and brands at a faster rate than ever given the challenges facing the rest of retail.

In addition, we continue to tightly control costs, lower return rates and bring down inventory levels Company-wide while also investing strategically in the business. From improved carriage, the new e-commerce, CRM and media asset platforms and a transformation of our distribution network, all of these are investments that will increase productivity and improve the customer experience over time.

As we look at the back half of the year, the sales and margin comparisons will get significantly easier in the US and the FX comparisons should get easier for the international businesses. And with that, I'll turn it back to Chris.

Let's take a look at Liberty Entertainment. Revenue grew 19% in the first quarter to $369 million while adjusted OIBDA increased 63% to $132 million. The increase in revenue was primarily due to the addition of the Liberty Sports Group, which was acquired in March of 2008. And adjusted OIBDA growth was due to increases at Starz Entertainment and the addition -- along with the addition of the Liberty Sports Group.

Starz Entertainment revenue increased 8% to $296 million. The increase in revenue resulted from an increase in rates and the growth in the average number of subscription units. Starz adjusted OIBDA increased 46% to $108 million. Now with that, we'll have Bill Myers comment in more depth on the event at Starz Entertainment as well as Starz Media.

Thank you, Chris. Starz had another strong quarter. Starz subscribers increased by 8% over the first quarter of 2008 to a total of 18.1 million and Encore grew by 2% to 31.9 million.

These results demonstrate the continued value of the Starz services to our affiliates and our customers. In the first quarter, we worked to enhance that value by adding more exclusive original programming and additional services.

In March, we launched a second season of Head Case and the premier season of the critically-acclaimed Party Down. Each is a half-hour comedy. We also announced plans to air a second season of the hour-long dramatic series, Crash, this fall, co-produced with Lions Gate. And we began production of our second hour-long series, Spartacus, which will air early next year. Spartacus is the first hour-long dramatic series produced by Starz Media for Starz Entertainment, which will hold all rights international and domestic.

We expect to benefit from our original programming in a number of ways, increasing our existing customer satisfaction, attracting new subscribers, increasing the value of our services to our affiliates, expanding our brand, reducing our dependence on third parties for content, earning revenue from syndication of the programming and creating a library of proprietary programming, which we can monetize over multiple platforms for many years to come.

At this year's NCTA convention in April, we unveiled a new application that will make it much easier for consumers to access our vast array of on-demand programming. A viewer who tunes in to one of our linear channels in the middle of a program can, with just two clicks of the remote, start the show over from the beginning in either standard or high-definition.

The application won praise from top executives at Comcast and Cablelabs. Reporting on the cable convention, the New York Times said the interactive application generating the biggest buzz at the show is a widget from Starz.

Under our new affiliation agreement signed last year, Time Warner and Brighthouse have nearly completed rolling out our on-demand services to all their cable systems. Starz on-demand services are now available to all consumers through all the major cable companies nationwide.

As discussed on the call Monday, we reached an agreement with DIRECTV to expand our affiliation agreement through June 30, 2013 with substantially the same economic terms as the existing agreement.

On the Starz Media side, revenue grew 64.7% to $102 million, generating OIBDA of $5 million versus a loss of $24 million posted in the first quarter of 2008. This improvement was primarily due to the release of movies from Overture Films on DVD in late 2008 and early 2009.

In addition, Anchor Bay Entertainment posted positive OIBDA even without the Overture Films. Overture Films released the indy hit Sunshine Cleaning, which continues to perform solidly in over 400 screens nationwide. On September 4, Overture will release the sci-fi thriller Pandorum starring Dennis Quaid and Ben Foster.

In closing, we continue to monitor the challenges posted -- posed by the economic downturn and the potential impact on all of our Starz units. So with that, I will turn it back to Chris.

Thanks, Bill. Let's now look at Liberty Capital. During the quarter, Liberty Capital revenue increased 37% to $125 million, while the adjusted OIBDA deficit decreased by $27 million or 46%. The increase in revenue was primarily due to an increase in home video revenue of the Overture Film releases at Starz Media. The decrease in the adjusted OIBDA deficit was due primarily to the difference in theatrical and home video revenue and related expenses associated with films released by Overture Films.

In the first quarter, Liberty Capital borrowed an additional $1.6 billion against derivative positions related to its Sprint Nextel Embarq equity positions. Total outstanding debt against these equity positions is now $2.3 billion, and as these derivative positions mature in 2009 and 2010, Liberty will use these proceeds to offset these borrowings.

Additional sources of cash came from the unwind of the derivative position related to our LodgeNet interactive holdings for proceeds of $41.4 million and a distribution from the primary reserve fund in the amount of $35.1 million. Liberty Capital has now eliminated almost all of its derivative counter party risk.

In April, Liberty Capital used some of this cash for the voluntary early retirement of $750 million face amount of its exchangeable debentures at a significant discount to their face value. Since this transaction occurred after quarter end, this reduction in debt and cash is not reflected in our Q1 financial statements.

From January 31st through April 30th, 2009, Liberty repurchased 556,000 shares of Series A Liberty Capital common stock at an average price of $6.05 for total cash consideration of $3.4 million. Since the reclassification of Liberty Capital tracking stock on March 4th, 2008 through April 30, 2009, Liberty has repurchased 33.8 million shares at an average cost per share of $14.25 for total cash consideration of $481 million, which represents 26.1% of the shares outstanding.

We have approximately $119 million remaining under the stock repurchase authorization. Now with that, we'll turn the call back over to Greg for closing comments.

Thank you, Chris, and thank you also to Mike and Bill for your respective updates.

We expect the pace of activity moving our businesses forward in Q2 to continue. Our major priorities are as follows. At Liberty Entertainment obviously first job is focused on completing the split of LEI and the subsequent merger into DIRECTV. We also plan obviously to reclassify the new tracker, Liberty Starz. At the businesses, as you've heard, Starz will be very focused on new exclusive programming and continue to innovate with new services.

At Liberty Interactive first and foremost we're going to continue to focus on improving the operating performance at QVC, which is the main driver of that business. We also continue to explore options for restructuring the debt at QVC and extending its term.

We'll also hope to continue the excellent operating performance and innovation that our e-commerce companies are experiencing.

And at Liberty Capital, we will continue to evaluate opportunities for cash as [well] capital, including debt buybacks, additional investment options and stock buybacks. And we will also focus on continuing to rationalize our investments in third parties.

We're working on the factors that are under our control. Obviously there are still lots of challenges in the financing markets and the operating businesses are experiencing in the economy, despite all the talk of green shoots. We do see market opportunities and we will continue to try and capitalize on those, but first and foremost, we want to secure our own businesses and finances.

I would note Liberty's structure has allowed us some flexibility to do certain things to capitalize on these opportunities and hopefully still provide value to our shareholders in the form of transactions like the LEI DIRECTV merger.

We appreciate your continued interest and support in Liberty Media and let's hope our shares perform as well in Q2 as they have year-to-date. Thanks. With that, operator, we'll take some questions.

(Operator Instructions) We will take our first question from Doug Mitchelson from Deutsche Bank.

Thanks very much, a couple questions. If I'm doing the math right on LCAPA, Greg, you now have $16 a share of value in SIRIUS XM debt in equity and LCAPA is only trading at $12 despite having a lot of other net asset value. Any thoughts on how you can sort of convince the public market that LCAPA has got a lot more intrinsic value there?

Well obviously I think that people in -- I'm not sure your math is wrong, but I think the people are putting a higher discount on the tracking stock and strobe structure, potential tax liabilities and taking relatively negative scenarios. I think Liberty Capital is probably attractively priced at today's numbers, I agree.

Given you've been pretty successful moving the News Corp stock into DIRECTV stock and now with the split off into DIRECTV is there anything similar that can be conceived with the SIRIUS stake?

You know us, we're always thinking of new and creative ways to create new stocks, have a -- do something different and I think at some point the value at Liberty Capital will be further exposed. It's had a nice run from sub three or threeish up to I guess a 13 and backed off for 14, it backed off a little here. But I'm confident that we will find ways to highlight the value.

And then the last question, is just any kind of -- if you could walk us through your philosophy at all from the Liberty point of view as to the right financial leverage for DIRECTV given the current environment, that would be helpful. I mean once upon a time we were talking about three to four times EBITDA and then the credit market deteriorated and we were talking about two to three times EBITDA. What are you and John thinking about of leverage at DIRECTV?

Well, and that's a question that I think Chase Carey is asking himself, his Management team has been kind enough to ask us as well. And one of the issues is we would normally be running higher leverage, I think, or targeting higher leverage. One of these questions would be in this environment, particularly where you don't have as many uses for cash immediately and there may be a larger gap or cost to being non-investment grade, do you pursue a different leverage ratio? I think that's an open question. It's one that we're debating.

In a way, it's somewhat academic. The leverage at DIRECTV is -- net leverage is approaching post our deal about a turn, so it's well below the numbers that have been discussed of two to three times.

Given that EBITDA is between $5.5 billion and $6 billion on a next 12-month basis from here, they've got a lot of borrowing capacity to get to two times. So in a minute -- for the moment, it's somewhat academic. What I do think they are considering and exploring rightly what is the cost of being non-investment grade versus investment grade.

All right. Thank you very much.

Thank you, Doug.

And we'll take our next question from David Gober from Morgan Stanley.

Good afternoon, guys. Thanks for taking the question. Had a few on the new Liberty Starz tracking stock. First a housekeeping item, I think in the discussion of the, of the LEI spinoff and DTV combination, you guys talked about there being $650 million of cash left at Liberty Starz and $30 million going with DTV. But there's a little bit more than that on the balance sheet as of today and you should be generating some free cash flow over the year. So just curious what the delta is there?

And then more on the operating side, you guys have posted some pretty strong sub growth, and we've been hearing from the distributors that there seems to be the beginnings of some spin down in premium content. Just curious how many of -- how much of that sub growth is coming from subscribers on fixed rate agreements and what the mix is looking like there?

Well, on the first point, I think there are a couple of things here. One is mostly what we've been talking about, these $30 million and $650 million, those are both what we'll call HoldCo cash numbers. And one is the -- the $30 million is the HoldCo cash number that is going, or remaining behind and going -- and effectively going into DIRECTV.

There is also what I'll call OpCo cash, operating company cash at GSN, the 65% owned company or investment or business. And at the RSN, be 100% [owned] businesses. Depending on when you take your time, and DIRECTV will talk about this, you're going to see somewhere between $50 million and $100 million of operating cash at those businesses depending on when the DIRECTV/LEI merger closes.

In addition, there is some operating cash at Starz Entertainment, which is in the range of $50 million. Now, most of that cash I think we've not focused on as much because it's -- they have generally -- had been paying down an inter-company note, they don't have a lot of excess cash. That's effectively what they use to run their business. There may be a little excess there, Glenn but it's not -- Glenn Curtis, their CFO, is here as well. But -- would you add any comment on that?

We'll continue to have cash that we add to that balance as we have free cash flow during the year.

But today that 50 -

But currently that $50 million is what we need for working capital.

It's effective with the working capital number. So we focus on both these cases on what I'll call the HoldCo cash, which would be available for other actions. I'll let Bill Myers comment on the subs.

Yeah, on the sub growth side, we have been very pleased over -- during the first quarter in the sense that a large percentage of our sub growth has come from our consignment customer base and that is that we are well structured and positioned in the DBS world and as DIRECTV continues to expand, so do we and we're well positioned in the Telco space as well.

And so that's, that's been a very big positive for us and you guys are looking at the projections as well as we are and hopefully we'll continue to see those two groups of distributors continue to expand through the rest of the year.

And just a follow-up on margins if I could, you guys cited that programming costs continue to decline at Starz. Was there anything else that -- have there been any SG&A cuts at Starz over the last year?

Yeah -- not significant. I guess the one thing I would say is a year ago we took a very close look at the relationship and overall structure of Starz Media versus Starz Entertainment and brought together a lot of our back office and we're seeing some of that benefit in the first quarter G&A.

But otherwise, a lot of this is timing. We'll be spending more money in marketing over the next three months, or three quarters, as we roll out some of our branding campaigns and launch some of our originals.

But it might be worth commenting and noting, I mean the vast majority of operating expense or expense of any sort at that company is first and foremost, content. Programming costs. That dwarfs marketing, which then is larger than the people coincide --

Then the people, absolutely.

The driving force here in terms of what has been a historical cost and what will be the savings arrives out of savings on content.

So Greg, your comment I think the other day that growth should be, or EBITDA growth should be around 15% to 20% for the year, it sounds like that's -- some of that is front end loaded. To the back end, might be a little bit slower. Is that fair to assume?

Well I think we're -- A, we're conservative forecasters and B I think that, Bill Myers noted, that some of what the strong experience in Q1 is a timing related to marketing. So that's true.

That's why we're normalizing and why we don't like to quarterly forecast, why we don't -- why we're less focused on that and we always have the challenge of renewals with affiliates. We continue to roll MSOs and satellite deals until we lock those down, we're always trying to be conservative.

And David, keep in mind though, just to the timing issue on programming. We have, as we mentioned earlier, we're going to have a lot more programming costs later in the year related to our originals as Crash comes out. We'll start seeing that. And we're going to start seeing more higher priced movie content, because we'll get things like Hancock and The Chronicles of Narnia.

So this is a timing. That's why it's hard to take one quarter and annualize it. So we're really comfortable with that 15% to 20% that Greg had mentioned earlier.

Great. That's very helpful. Thanks, guys.

And we'll take our next question from Jeff Wlodarczak from Hudson Square.

Hey, guys, it's Jeff Wlodarczak. Couple questions for Greg. SIRIUS clearly has been a nice investment out of the gate for you guys. You're sitting on quite a bit of cash. Can you talk about if you're seeing a lot of attractive investment opportunities out there, in what sectors and sort of what's the timeframe on getting your sort of excess cash invested?

And then the second one, any more details on how you're going to avoid a significant tax hit on the $2.4 billion in derivative proceeds you're going to get this year and next? Thank you.

All right. On the -- I think we have tried to be relatively transparent on what we thought the most attractive opportunities were in that they were largely in the debt of some of the media businesses out there. And as some of you are familiar, we have a sub debt investment group or arm or effort, almost exclusively in the TMT space and we also as a part of that went out and arranged, I guess about 18 months ago now, a $750 million facility with a leading institution at very attractive rates. And we need to put up relatively low collateral value to -- that helps increase our return.

That is relatively de minimus on the scale of Liberty Capital or certainly on the scale of Liberty. But what it has allowed us to do is continue to look at investments and continue to look at opportunities. But it's a nice little way to cover the override around here, something we're not completely oblivious to. But more importantly, I don't think we would have done SIRIUS XM personally if we hadn't been looking at these debt opportunities and seeing things that arise.

We've seen a couple of other ones, opportunities out there like that that -- cases where somebody either had covenants [coming in] or potential maturities, not necessarily in 2009, but down the road that might be attractive. And in some cases, those opportunities have faded away as the high yield market has improved, spreads have tightened and the returns have lessened or the potential returns have lessened.

We still look at some of those. We still think there might be some of those out there. That's probably our primary focus. That's not to say we wouldn't think about other equity opportunities, but that's where we think there's the richest harvest at the moment. So that's where we're going to use our cash.

We are also, would -- as we've mentioned, consider repurchasing our own shares, repurchasing our own debt. All of those are opportunities.

On the tax side, Liberty is a sophisticated investor, a sophisticated Company on the tax arena. We will obviously do everything we legally can to minimize that tax. We have ideas. If I disclosed any of them, Albert Rosenthaler would kill me, so we won't be allowed to talk about them any more than that.

All right, thank you.

And we'll take our next question from Jessica Reif Cohen from Merrill Lynch.

Thank you. Greg, I was wondering if you could comment on where you think the natural home will be for the Starz sub co. Is it in LINTA or LCAPA, or do you think it will stand on its own?

Well I think we've announced it will be its own tracker and that's where we intend for the -- it will stay. Obviously our plans could change. Trackers have that flexibility, but that's our current intention.

Then I just want to clarify a point you made in the beginning when you said that the split and merge will be simultaneous. So now that this split will not happen, it's just -- question on the timing?

Well, I -- we'd like to keep those as close together as possible. To some degree that is determined by regulatory issues. We will probably not be able to complete the split-off until there is an effective registration statement at DIRECTV. We might get lucky and be able to do it earlier, but that is likely what our counsel will require and what the FC will require.

So there could be a gap where our proxy is done, their registration is done, our vote is taken, the split is completed, but we have not yet received some regulatory approval to complete the merger. So there could be a gap between the completion of the split and the merger. Our hope would be that that gap is as tight as possible because we have received all approvals as early as possible.

Okay, and then one last one. Can you confirm that the $2 billion collar loan has a change in control provision so that it would either have to be refinanced or taken out by DIRECTV upon the merger?

I think that the collar is something we're discussing with that financial institution. I think there's a very good chance that collar will remain in place, but is somewhat dependent on market conditions at the time. Any costs to the collar obviously is relatively attractive, or less attractive at various stock prices for DIRECTV and relatively attractive or less attractive when tied to the financing, which is somewhat dependent on what's going on in the alternative financing environment for DIRECTV.

So I believe that it is likely that collar will remain in place post the merger, but I think it would be mostly market dependent.

Okay, thanks.

And we'll take our next question from Doug Anmuth from Barclays Capital.

Thanks for taking my question. Greg, I just wanted to ask you about a couple of things that you mentioned towards the end of your script. First one about the debt renegotiations around QVC and in particular if there's any color you can provide there around timing or progress or anything else relevant?

And then also, in terms of IAC share sales, where you were going at a fairly steady rate it looks like over the last six weeks or so. That has essentially stopped, so just trying to get a sense of whether anything's changed there in terms of your thinking around that asset? Thanks.

At QVC, we are in active discussions with the existing bank group about alternatives. We have had active discussions with other institutions within that bank group and outside that bank group about potential ways to raise incremental capital. We are cognizant and watch the tightening of the bond markets for building in long-term capital.

And I think Dave Flowers, our Treasurer and his team, in conjunction with Dan O'Connell from the finance team at QVC, are optimistic that we will be able to extend our maturities there.

As far as IAC, IAC is not a strategic asset for this Company. It's an asset that we have capital trapped in that is not necessarily performing as well as we would like. It is trading for near its cash levels. It has a -- seemingly businesses which are -- have opportunity and upside, but are not performing as well as we would like today, so we continue to monitor that decision to where we put our cash most efficiently.

Okay, thank you.

Thank you.

And we'll take our next question from Jason Bazinet from Citi.

I just had two quick questions and I'm probably not going to be able to ask the first one in an articulate way because there's a lot of asymmetry of information. But as I sort of look at the transaction that you've announced with DIRECTV, at some simple level it becomes unobvious why there's a Starz tracker at all.

In other words from a strategic standpoint, the RSNs can fit in with the transaction, but why not Starz, too? In other words, why go through all the -- all these sort of back flips to keep a Starz tracker out there?

And then my second question is very simple, just a housekeeping one. As we adjust the financials, a pro forma for the -- tender for the exchangeables, how much should we take our cash down? Is it just $150 million, is that the right number? Thanks.

Jason, on the first point, I think when we previously announced the amendment to our planned split-off, one of the things we were interested in was what the support for all of the debt at our other trackers and the fairness to our other trackers of supporting that debt. So that totality led us to amend our planned split-off and I think those conditions remain.

In addition, I would say that we probably -- I don't think I'm giving the store away to say look, we like the asset, we think that the fact that its EBITDA has grown from a bottom of about 175 to, if you do the math on 300 to -- for 302 last year, it's going up 15% to 20% to 350 plus this year, it's at good growth. I'm not sure we would have been paid enough for that growth by DIRECTV.

And so how it stands in the Liberty family as a tracker, as a separate company, whatever, I think that's less relevant than we like the asset, we like its cash flow growth. I think it has good prospects for, as I said, the rest of 2009 and I'll say for 2010 and beyond. So we like the asset and I don't think we would have been paid what we thought full value for the asset was by DIRECTV.

Okay.

And it also, as I mentioned, fit into our larger plans about liquidity and fairness to our other trackers.

Okay, fair enough.

Your math about the retirement of the debt was exactly correct. Our incremental cash expenditure or outlay was $150 million.

Okay, thank you.

And we'll take our next question from Tom Egan from Collins Stewart.

Great, thank you very much. Hey, Greg, any thoughts behind bulking up the assets within the Starz tracker? I guess, for example, could you remind us of the issue surrounding kind of recombining Starz Media with Starz the channel? And then I have a follow-up.

Well, I think the, the ultimate potential is at some point Starz Media and Starz Entertainment might be recombined. They're effectively run today as one. We'll -- I think we'll wait for the moment.

Most likely we wouldn't do that until a moment when Starz Media was probably more closer to cash flow breakeven on its own for the year. It had a good number for Q1 on an operating basis, but as we've been saying, we're in a build mode there, building the library.

We are still feeling the -- when we did that transaction, there was an animation business, which we knew was not going to be a desirable long-term business. We shut that down. We suffered some of the investment loss over that over the last year or two.

We have been scaling up our flow through into Anchor Bay to make it more attractive and we've been investing in library products, really quality library products through Overture. As those things mature, this business will be in a more attractive cash flow position and it probably will make more sense to talk about a merger with entertainment at that time.

And I forget, is there a timing issue, too, though, like -- whether legally or tax wise, is there a timing before which you couldn't have them recombined?

Well, I don't think there's any timing issue legally. Of course Liberty would look to do any combination it did in the most tax efficient manner.

Right. And then just on a follow-up on Starz the channel, in terms of getting the -- you guys obviously benefited from higher rates. When does that lap in terms of into 2009? Is that -- does that higher rate stop to-- stop benefiting in the fourth quarter of this year?

I'm not sure I understand the question.

When you refer to higher rates, what do you mean by that?

Well, you said that you had higher rates for the channel benefiting you by about $13 million. When did the higher rate kick in? Was that in the fourth quarter of 2008 or before that?

No, most of our agreements are structured with CPI adjustments that would take effect on January 1. And then we have other fixed rate deals that have contractual rate increases, which for the most part would be January 1, too, but could be spread throughout the year.

And so --

I would say there are two things that are happen there. One is, as Bill readily points out, you'll get rate increases, but we've also had a shift where the growth has been more amongst consignment players.

Right.

Particularly Telco and DIRECTV who have had faster growth rates, and they are -- we effectively get better flow-through and average pricing because of that rate.

And if you look at the way this splits out, the growth has been more in the Starz units, which are more valuable to us.

Right. Encore units are obviously not -- more of them are under fixed cost deals and they're obviously not as attractively marked --

Because of the content. It's a great service. It gives great flexibility to our affiliates to package that a little bit lower, so that's why we have a larger subscriber base there, but the real content value when you're looking at a premium base is in that Starz.

Right. Okay, thank you.

And we'll take our next question from Matthew Harrigan with Wunderlich Securities.

Well thanks for taking my question. I was just curious, both you and Michael George have frequently had to remind people that QVC's both a retailer and a media company. And you've really made a lot of progress as a media company with the DIRECTV deal and the set repositioning and all of that.

But we've probably gone through -- are going through the biggest generational change in retail in a long time. Mike alluded to getting more access to world class brands and products and I know you've taken equity positions in some of the launch products with certain entrepreneurs. Can you talk a little bit about how you see all of the carnage in retailing affecting QVC and what the opportunities are there?

I know obviously you're not going to take some sort of distressed debt approach on the retailing side, but nonetheless it looks like you've got some tacticals, strategic opportunities you might have to gain some share?

Thank you, Matthew. I have some ideas there, but I think we'll let Mike comment first. If you'd like, Mike. I don't mean to dump it on you if you don't want to answer.

No, I'll take a stab at it and then I'm eager to hear what you have to say. The -- I guess I'd answer it a couple of ways. At a higher level, we do think as we move through the current sort of implosion in retail, the folks that are survivors and innovators during that time period are fundamentally going to be better off because we're going to move into an environment with fewer stores than we have today and certainly fewer than we had last year.

I think we're going to move into an environment where there's somewhat more disciplined behavior in terms of promotional pricing, markdown behavior. I think there's going to be some more rational approaches by internet players who've been able to run for a period of time with fairly low levels of profitability. So I think all of that is good in terms of making the environment a little more rational and controlled for us to succeed in growing our core business.

Couple that with the fact that even relative to a year or two ago, the level of discussions we're having with really exciting people and exciting brands is just far beyond what I could have contemplated. This has been our strategic direction for a few years now and you do it piece-by-piece. But there's some really exciting stuff that we're doing and some exciting stuff that we hope to announce in the next several months in terms of association with great people and great brands.

In terms of actually winning from an investment standpoint in the carnage that's out there, in the short term we have not been actively exploring investments just because our priority has been on cash conservation with an eye towards liquidity and debt. And so we've been deliberately cautious on that front and put in suspension some of the opportunities we were exploring last fall.

We'll see how the business develops and what kind of pricing is out there in the market and we could certainly see at some point reinvigorating that activity in a way that's a win-win for us and various partner brands. But at this moment, it's not a priority because we want to err on the conservative side as we move through, move through the recession.

Yeah, I agree with Mike's comments entirely. I guess I'd emphasize or highlight one or two points that I see. I think you're seeing a continued share shift from -- off offline retailing to online retailing, which QVC is a -- in the full swim of. And you've seen that increase of internet proponent -- or proportion that QVC has experienced year-over-year and on a continuing basis.

And I think that the offline mall retailing experience is going to get less attractive. The devastation that is going on among certain of the REITs and large retailers or large mall owners and among some of the retailers, the shopping experience in the mall and particularly for our customer, she is not going to find as attractive to walk into a mall that is less trafficked, in many cases feeling like a bowling alley and in many cases with stores closed with lower inventory.

I think the experience is a less attractive experience than QVC, with its increasing quality brands and I think a lot of new exciting things being done in merchandising will shine all the more. And so I think that the dynamic is set pretty well for QVC going into the next few years.

Thank you.

And we'll take our next question from Bridget Weishaar from JPMorgan.

Hi. Thanks for taking my question. The first question is on SIRIUS. If you chose at some point to increase your equity interest or do an acquisition, are there any regulations that we should be aware of in terms of the NOLs that SIRIUS possesses or the tax efficiency of a transaction?

Well, there are 382 limitations upon a -- that run for a period of time, which is why SIRIUS XM has put in a appeal. Their current NOLs are roughly $7 billion on their way to $8 billion at SIRIUS XM.

We are cognizant of the value of those, so we would be very careful in any way in which we increased our equity to try not to trigger those 382 limitations.

And how do they get triggered?

Basically 51 -- a change in 51% of the equity within a certain period of time, roughly three years.

Great, thanks. And then on QVC, just to get further clarification, you mentioned that the units shipped were down quite a bit in looking at it from quarter-over-quarter in Japan and Germany. Is this just due to the fact that the economic impact lagged the US and we should expect it to stabilize, or are there other issues there?

A couple thoughts. Kind of separate the discussion into units versus revenue. The unit decline is -- versus revenue decline is largely just product mix driven.

We tend not to focus on units as an important measure because it's really an interplay of what categories are hot, whether it's high ASP/low unit categories or low ASP/high unit categories.

Now, in terms of the overall health of the business on the revenue declines that we're seeing, or the revenue impacts we're seeing, I guess I'd characterize it as following. We do think, as best we can tell, that the economic cycle is lagging in Europe and Asia, the US. So our best guess would be that -- not in terms of necessarily QVC's business, but that in terms of the economics, economic impact, that it'll -- the recovery may be somewhat postponed in Europe and Japan versus the US.

Of the two, quite frankly we're a little more apprehensive about Japan, just to be candid about it. It's -- they've obviously suffered massive declines in GDP and it's clearly come at it -- come later than the US hit. So we suspect, but we're not necessarily experts on this, that the -- Japan will turn around the slowest and therefore certainly has risk to our business.

UK may lag somewhat, but we're less concerned about that on balance. In Germany it doesn't appear to be having the same impact, potentially due to the social safety net in Germany or the higher level of consumer saving. It doesn't feel like we're seeing the same kind of impact.

Great. Thanks so much.

And we'll take our next question from Andy Baker with Jefferies & Company.

Hi. Good afternoon. Just a couple of questions on Starz. Could you talk to us a little bit about how we should be thinking about programming costs beyond this year as we head into 2010, 2011, I think there may be some increases coming there?

And also if you could sort of give a little granularity, I know there's a bunch of contracts as the Comcast, Encore contract expiring, Dish and Time Warner. Any thought -- any sort of granularity on the sort of revenue associated with those contracts in aggregate so we can get a sense of what sort of we're looking at on the margin?

Okay. On the programming side, I -- your comment was that you might see some real increases in some of the programming over the next couple of years and I think that is true. It will increase slightly as we increase our original content.

Keep in mind that our programming is really driven by three things. The number of titles we get, which we're never really quite sure what that is, but we always work with the studios on at least a projection. And how well they do in the box office. And then the last piece is the original. So we are at least looking out a couple of years, seeing that our programming could go up slightly due to our original content.

As you look at the contracts as disclosed in the 10-Q, we do have Comcast that's coming up. It's only a portion of Comcast, which is their EMP piece. The Starz piece is out for another three years. And we have EchoStar that is coming up. And those are two of our larger customers.

I think we disclosed, what that 50-some percent of our revenue comes from our three largest customers. So I really can't give you the -- I'd have to look at the breakdown of how much is coming from the EMPPs and the Encore or the Echo piece there, but we're in discussions with them right now. We're very optimistic that we can move those forward.

Our content is well positioned with both of them and they perform very well. So we just need to work through the process. And as you know, we have contracts that come up for renewal every year and it's just part of the process.

I guess, Greg, when we look at the Starz tracker going forward, it's going be -- Starz throws up a lot of free cash flow and it has the -- you have all of that cash there. I mean should we look at this as a potential levered equity shrink candidate going forward? I mean notwithstanding your earlier comments about wanting to make sure that you had the resources there to help support all the debt.

But assuming that QVC gets around its current issues and you could maybe even buy back some of the other debt at LCAPA at a discount, is this another levered equity shrink candidate for you guys?

I think if you had stability in the capital structure and certainty where it was going and you thought it was trading poorly, I would think that's a great opportunity. Starz is a large free cash flow generator and we'll obviously have low leverage at Liberty Starz so --

Thank you very much.

(multiple speakers) Fine opportunity.

I think that's it for today, Courtney. So thank you very much, operator. And thank you very much to all of those interested in Liberty and for joining us today. See you next quarter.

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