QVC Group Inc (QVCGA) 2009 Q2 法說會逐字稿

Good day, and welcome to the Liberty Media Corporation quarterly earnings conference call. Today's call is being recorded. This presentation includes certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Including statements about financial guidance, business strategies, market potential, future financial performance, new service and product launches and other matters 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 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 statement is based. On today's call we will discuss certain non-GAAP financial measures including adjusted OIBDA and the required definitions and reconciliations, preliminary note and schedules 1 through 3 can be found at the end of this presentation. At this time, for opening remarks and introductions, I would like to turn the call over to the President and Chief Executive Officer, Mr. Greg Maffei. Please go ahead, sir.

Thank you operator, and good morning to all of you. And thank you for joining us, and for your continued interest in Liberty Media. Today we will discuss the performance in Q2 of the Company, and the largest -- the operating results at our largest consolidated subsidiary. Speaking this morning on the call with me we got Liberty controller, Chris Shean who will discuss the attributed businesses financial results and the liquidity picture for each of the tracker, QVC CEO, Mike George, Starz President and COO Bill Myers, and an assortment of other Liberty, QVC and Starz executives who are all available to answer your questions.

During the quarter we continued to see quite strong operating results at Starz, and at our eCommerce companies, and you will hear about that from Chris and Bill. And importantly we saw improving results at QVC, our largest controlled subsidiary, and you will hear more about that from Mike George. Here at corporate, we strengthened the balance sheet considerably, retiring about $1.94 billion face of debt on a corporate wide basis, that included $750 million of bank debt at QVC, and retirement of certain maturities, straight debt and other purchases in the marketplace. All together, we brought that debt in at a discount to face of about $275 million. I think you should expect that you'll see more debt retirement coming in the quarters ahead. Our public equity portfolio grew in the quarter nicely about over $2 billion, that was paced by gains in DIRECTV of almost a $1 billion, Expedia of over $400 million, the IT Spin companies, a substantial gain and of course SIRIUS XM which grew over $200 million in the quarter. Since we struck the Sirius XM deal back in February, March, we are up over $1.3 billion.

I note of course none of those fish in the boat, yet so we are not counting on them but it is nice to see them marked well. At Liberty entertainment, as I mentioned, Starz entertainment had very good results, nice revenue growth and very strong adjusted OIBDA growth. We continue to make progress on the DIRECTV transaction with the IRS, we are awaiting a response on our Private Letter Ruling, but are confident at the FCC, it looks like the transaction will be considered pro forma. And with the SEC, we expect to refile a completed proxy in mid August and expect to vote in early October. I would note during the quarter, driven by the share repurchase at DIRECTV, the Liberty interest exceeded almost -- or reached almost 56%. At Liberty interactive, as I mentioned, QVC had very strong sequential domestic revenue and adjusted OIBDA growth, and the adjusted OIBDA margin increased. The eCommerce companies grew in revenue and adjusted OIBDA, in part due to some acquisitions but on any basis, they're performing quite well. Chris Shean will talk about more about those in a minute.

And importantly let by our Treasurer, Dave Flowers, we extended the QVC debt maturity through 2014, and took a lot of pressure off the balance sheet at QVC. At Liberty Capital, Starz Media revenue and adjusted OIBDA both improved over last year, and we continue to make progress on the debt structure as I noted. A couple of other things before I turn it over to Chris, we established the Media for Liberty Award, to talk about economic freedom. And we added a new independent board member, Ian Gilchrist, late of Citibank, and we are happy to have Ian aboard. So, Chris, let me have you start by having you talk about the (inaudible) financial results.

Thanks, Greg. Liberty Interactive Group's revenue decreased 1% to $1.9 billion, while adjusted OIBDA increased slightly to $412 million for the quarter. QVC, the primary driver of the results amongst Liberty interactive attributed businesses, continues to operate in a challenging retail environment, and QVC's total revenue decreased 4% to $1.7 billion while adjusted OIBDA decreased 4% to $373 million. eCommerce group of companies which include Provide Commerce, Backcountry.com, Bodybuilding.com and BUYSEASONS, again posted positive financial results. In total, the eCommerce group experienced revenue growth of 31% in the second quarter, and adjusted OIBDA grew 56%. The increase in revenue for the quarter was driven by organic growth in all of the eCommerce companies, combined with two small fold in acquisitions made in 2008 which contributed $26 million in revenue during the second quarter.

Included in organic growth for the quarter is about $5 million of commissions earned when customers sign up for a third party online discount program, which is slightly different than the standard revenue stream that these businesses have. The increase in adjusted OIBDA was primarily driven by revenue growth as discussed above. During second quarter, QVC amended their bank credit and extended maturities through 2014. Concurrently QVC retired $750 million in loans at par and canceled another $19 million of unfunded commitments at no cost. The remaining $4.48 billion outstanding principle will mature in six tranches between June 2010 and March 2014. Cash used to retire the $750 million of loans came from a combination of $250 million of cash from QVC, and $500 million in the form of intergroup loans of $250 million from each of the entertainment group and the capital group to the interactive group. The inner group loans are secured by various public stocks attributed to the interactive group accrue interest quarterly at a rate of LIBOR plus 500 basis points, and are due in June of June of 2010.

Additionally, QVC modified their revenue recognition policy to a FOB destination model for this quarter, this model is considered more appropriate given QVC's history of providing replacements for goods damaged in transit. As a result though modification, there has been an immaterial one time adjustment, decreasing revenue by $21 million and adjusted OIBDA by $8 million. Excluding this adjustment, consolidated revenue would have decreased 3% and adjusted OIBDA would have decreased by 2%. With that, I will hand it over to Mike George for additional detailed comments on QVC.

Thank you, Chris. We were very pleased with our Q2 results, which represented a significant improvement over the trends of the last few quarters. We see these results as a positive sign that our actions are paying off, even as underlying consumer spending remains weak. In the US, net revenue fell 2%, a strong improvement from the negative 9% to 12% trend of the prior three quarters. And we were encouraged by the continued strong growth in QVC.com which was up over 10% from last year. As in recent quarters, we saw strong growth in computers and consumer electronics, and to a lesser extent in beauty and handbags. The kitchen and floor care and fashion jewelry businesses also showed some very nice gains over past trend. And while the apparel business remained soft, the declines have moderated from prior quarters, and we increasingly feel that we have real upside in that category as well. In contrast, the fine jewelry business remains very difficult, as it has been for several quarters. We also saw a significant reduction in return rates in the US, from 20% in Q2 in last year to 17%. This Q2 driven by a product mix and other initiatives we are pursuing.

US adjusted OIBDA declined 3% in the quarter, and it was down only 1% prior to the revenue recognition adjustment that Chris mentioned. This is a significant improvement from the double digit declines we experienced in prior quarters. Product margins were down about 60 basis points, due primarily to a shift in mix away from higher margin categories, and to a lesser extent increased markdown use in apparel and jewelry prescribed to keep our inventories clean. Bad debt expense was up about 39 basis points, thats about half of the increase we experienced in Q1. Our QCard bad debt write off rate was 7.5%, up from 6.7% in the prior quarter. These results reflect a moderation of the increases we have seen for several months. And our write off rates remain well below those of other card issuers as we continue to manage credit conservatively. These declines were largely offset by significant improvements in our cost structure, including greater productivity in our distribution and call centers, and lower freight costs as we implemented several initiatives to optimize our freight network. And we continue to tightly manage inventory with our overall inventory level in the US down 10% from last year.

Turning to UK, we saw our sales up 1% in local currency, reversing the negative trend we experienced in Q1. We saw gains in fashion, beauty and computers, offset by some by some weakness in jewelry and consumer electronics. Adjusted OIBDA was down 1% in local currency, driven by decline in initial gross margin, due in part to the impact of foreign exchange movements. This decline was partially offset by significant improvement in our fixed cost structure, as several cost management initiatives began yielding results. We successfully managed down our inventory levels in the quarter, with ending inventories 15% below year-end levels, although inventory remains at about 5% over the same time period last year.

In Germany, net revenue increased 1% in local currency, our fourth consecutive quarterly increase. This largely reflects the strategy of our double the beauty and health business which grew nearly 70% in the quarter, coupled with increase in footwear and home business. These gains were partially offset by jewelry and apparel where we continue to pull back airtime to fund these other up trending categories. Adjusted OIBDA in Germany was up a strong 12% in local currency, driven by a lower on obsolescence rate and improvements in our cost structure. These gains were somewhat offset by reductions in initial product margin, as we cleared out poor performing jewelry items. But while we have some more clean up to do in apparel, we feel that our inventory in Germany is in the best shape we have seen in years. Total inventory levels declined 10% over last year, and are now at their lowest level since 2006.

In Japan, net revenue was down 3% in local currency. Now this is the first negative sales results we have posted in Japan in several quarters/ As I mentioned in the last call, consumer spending in Japan is significantly challenged, impacting our results in the quarter. That said, we continue to take aggressive actions to drive sales. Our fashion and jewelry businesses remain strong, and we believe we have real opportunity to improve our home and health and beauty businesses,which can provide upside to the recent trend. Adjusted OIBDA in Japan was down 4%, largely in line with the revenue decline. We achieved meaningful improvements in our fixed cost structure, offset by the higher cost of television carriage, as our sales decline created negative leverage on contracts to charge a fixed fee per subscriber. Wrapping up, as I mentioned at the outset we are very encouraged by these results, and gratified that our actions are beginning to take hold, offsetting to some degree what continues to be a weak retail environment in all markets we operate in.

We are seeing the positive results of our ongoing efforts to shift sales into higher performing categories, reduce inventory levels, manage down return rates, and cut expenses. At the same time, we are continuing to invest in the business, taking advantage of the current crisis to out-innovate the competition. And we are developing new internet and internet CRM and broadcast management platforms which will roll out over the next six to 12 months. And we are continuing to expand our presence in the high definition tier in the US with QVC HD now available in over 15 million homes in the US, a significant lead over any other shopping channel. We continue to add new features to our mobile platform. And we are on track with Italy, which will be our fifth market, and scheduled to launch in the fall of next year.

And most importantly, we continue to invest in elevating the shopping experience, offering truly distinctive products and programming to our customers, as we strive to make QVC the premier retail destination. For example, in Q2 we premiered Q Picture jewelry direct from Istanbul,, took our viewers to the Aspen Food and Wine Festival, and the Yankees stadium inaugural season, launched run way designer Carman Marc Valvo's home collection, Cindy Crawford's beauty line, Elisabeth Hasselbeck apparel, and featured the CEW Insiders choice beauty finalists. And our customers responded strongly to a number of great TSVs in the quarter, ranging from Dooney & Bourke hand bags to best of Bobby Brown beauty collection, Dell XPS notebooks, and Sharp Aquos high definition TVs.

Our efforts to redefine the shopping experience were perhaps best exemplified by the recent Wall Street journal story featuring our new partnership with Isaac Mizrahi. We will be broadcasting several hours of programming monthly with Isaac, live from his design studios in New York, as we build the life style brand around him, which we expect to become one of our top five brands. This is creating a great deal of interest in the industry and among customers and noncustomers in trying to spotlight on our efforts to move our brand forward and gain market share. And with that, I will turn it back to Chris.

Let's move on to Liberty Entertainment. Revenue grew 2% in the second quarter to $367 million, while adjusted OIBDA increased 44% to $89 million. The increase in revenue was primarily driven by the results of Starz Entertainment. The increase in adjusted OIBDA was due to positive results to Starz Entertainment, partially offset by expenses related to the proposed split off of the businesses, Liberty Entertainment LEI. Now, Bill Myer will comment on the events at Starz Entertainment and media.

Thank you, Chris. Starz had another strong quarter. Starz Entertainment revenue increased 8% to $296 million and adjusted OIBDA increased 54% to $105 million versus the same period of the prior year. The increase in revenue resulted from an increase in rates and the growth in the average number of subscription units. The higher adjusted OIBDA resulted from the increased revenue, and the decrease in operating expenses. The operating expense decrease was due to lower license -- licensing fees for films, somewhat offset by increased expenses for original programming and lower sales and marketing expenses. Versus the first quarter of 2009, Starz subscription units declined 3% and Encore subscriptions unit declined by 1%. This decline in subscriber levels resulted from several factors. Many of our affiliates initiated rate increases in the first half of this year, on both basic and premium tiers, even as the economy caused consumers to tighten their belts.

The pace of new home construction has declined sharply, which has lowered new connections for both basic and premium service. And during is second quarter, we did not have access to national marketing campaigns with several of our affiliates. We are currently working with our affiliates on several marketing campaigns to sign new subs and retain existing subscribers. However given the current economic conditions, we cannot predict whether or not we will experience further subscriber erosion. We continue to work to increase the value of Starz products for our affiliates and consumers. In the past year, we have added such features as more high definition channels, and additional On Demand and HD On Demand programming. And indication that our products can become even more valuable to our affiliates and consumers came this quarter, when Comcast announced the trial of a service that will allow existing Comcast Starz subscribers to access Starz movies and originals over the internet.

During the quarter, we reached new multi-year affiliation with DIRECTV and Dish Network, two of our largest affiliates. We continue to ramp up our original programming which allows us to establish a unique identity with our audiences, gives us a library of proprietary programming to which we have unlimited rights, and provides a new source of income to syndication, home video, internet and other distribution platforms. In the second quarter. we started production on Spartacus, our new action adventure hour long dramatic series from Sam Ramey and Rob Tepper, that will air on Starz early next year, and to which we will hold all rights, international and domestic. The trailer of Spartacus was well received at Com-Con, and the Television Critics Association tour last month.

To depict the world of Roman gladiators, Spartacus employs the cinematic techniques used in the movie 300, and represents a significant departure from any programming ever seen before on television, on either premium or ad supported channels. We started production on the second season of Crash, a co-production with Lionsgate, that will air on Starz this fall. The home video version of the first season will street next month, distributed by in the US by our sister company Anchor Bay Entertainment. We greenlit a second season of Party Down, the critically acclaimed half hour comedy series, and announced that we will air a new comedy next year titled Failure to Fly, from two accomplished writer producers Eric Shaffer and Jill Franklin.

On the Starz Media side, revenue increased by 58% versus the same period in the prior year to $90 million. OIBDA improved from a negative $19 million a year ago to a positive $17 million. The increase in revenue was largely attributable to a $25 million increase in revenue from sales of Starz Media programming to television networks, including $10 million in license fees from the exhibition of Overture films on the Starz entertainment networks. As we continue to execute on our audience segregation strategy, under which we produce our own programming, and distribute it through multiple platforms. The improvement in OIBDA resulted from the increased revenue and the timing and film releases by Overture.

The results for Starz Media may vary widely from quarter to quarter, depending on schedule of the actual releases. For example, with five Overture films slated for release during the remainder of the yea,r versus only one film released in the first half, we can expect an increase in P&A costs in the coming months. The Overture release, Sunshine Cleaning finished the theatrical run in the quarter as the highest grossing independent film so far this year. The next Overture film, Paper Heart opened this week, and will be followed in the next two months by Pandorum, with Dennis Quaid and Ben Foster, the newest Michael Moore film titled Capitalism, a Love Story, Law Abiding Citizen with Gerard Butler and Jamie Foxx, and The Men Who Stares at Goats, with George Clooney. Despite the improved revenue and adjusted OIBDA for the quarter, the general economic conditions have impacted the overall the theatrical and overall home video industries, including our businesses, resulting in lower than projected revenue for many of our individual productions. We expect these businesses to continue to face challenges until the overall economy improves. Now I will hand it back to Chris.

Thanks, Bill. Just to provide top line numbers for Liberty Capital, during the quarter it's revenue increased 14% to $199 million, while adjusted OIBDA deficit decreased by $44 million by the quarter. Increase in revenue principally due to the previously mentioned increase in television revenue from Overture films. The decrease in adjusted OIBDA deficit was due primarily to the difference in theatrical and home video revenue, and related expenses associated with the films released by Overture films. And with all of that said, we will turn the call back to Greg for some concluding remarks.

Thanks Chris, and thank you to Mike and Bill for updates on your respective businesses. To conclude, I would note our priorities include at Liberty entertainment, focusing on completing the split off of LEI, and the merger with DIRECTV, and then reclassifying the new tracker, Liberty Starz. At Liberty Interactive we hope to continue to improve the operating performance at QVC that you saw this quarter, and continue the strong performance at our eCommerce companies. and at Liberty Capital, we hope to continue to evaluate opportunities for cash on the books. We have done some buybacks as you have seen, had good investment opportunities like Sirius XM, and we continue to look at stock buy backs. Candidly, the markets today are not as appealing, in terms of opportunities and the number, as when we did the SIRIUS XM transaction, but nonetheless, we think that there are some and we will be hopefully executing on them. In addition, we look to rationalize some of our investments in nonstrategic assets, nonstrategic third party investments. So, stay tuned for the coming quarters ahead, and thank you for listening. And with that, operator, I would like to open it up to questions.

(Operator Instructions). Our first question will come from Jason Bazinet of Citi.

A quick question on Liberty Capital. When I do my back of the envelope calculation, it seem like the valuation makes sense, if you don't include any equity for the SIRIUS stake that you have, and it seems to not make sense if you include it. And so, I was just wondering --

What do they say Jason -- when I'm not sure I agree with the preface of your question, because I might think there's value in Liberty Capital even without the SIRIUS XM equity attribution, but go ahead with that point, sorry.

And so my questions is, can you just sort of help investors sort of understand how you might help SIRIUS to the extent they need financing and how valuable that asset and their NOLS are to you, it does go bankrupt? In other words it is not, it seems to me the market should be included and I'm a little mystified as why they're not. I guess my hypothesis is -- you sort of have an incentive to sort of make sure that SIRIUS remains viable entity. Any comments would be helpful.

I think when we struck the SIRIUS XM deal, Dave Flowers, our treasurer said to me, this is either a bottom -- or because you don't put senior debt in at a $1 billion valuation, and get 40% of the equity or we're just, it's a fraud, and we have just missed it. I mean we are obviously convinced that was a bottom. And the results of SIRIUS XM since have seemed to demonstrate that. I believe at the time, they were talking about $300 million EBITDA and the market didn't believe it. Now they then they talked about $350 EBITDA as they reported in Q1, now they have reported Q2, and they have raised the numbers I believe to $400 of EBITDA. And frankly, I don't think I am underselling Mel here. I think they're going to significantly exceed $400 million of EBITDA. So I am very comfortable our debt there is money good, and that is equity valuation, while one can argue about how aggressive it is on a multiple basis, you would be hard pressed to find a stale media company out there growing at the rates that this company is growing this year, and I believe will grow the next couple of three years without much improvement, if any in the auto market.

Cost savings around content, around OEM deals, around the merger, and production in operating costs are driving that growth, and will and as our Chairman likes to say, if the auto market comes back stronger than we are anticipating, forget cash for clunkers, but over the next couple of years, that is a lucky strike extra. So I am very comfortable that talking about things like what might happen in a bankruptcy, and how that we might be able to capture the NOLs. Those are all ideas that we might of had this back in February or March but those are very distant ideas today, and we are talking about how much this equity is worth. So I think this is a great business, and they are unfortunately refinancing, did refinance, and I suspect will refinance more of the senior debt than we bought. The good news they will take our money off the table, and validate the equity story, and lower their cost of capital. The bad news is, we were getting high rates of interest paid to us on that senior debt, and no longer will be collecting that. We have mixed motivations on that.

Understood. Very helpful. Thank you.

Our next question will come from Doug Mitchelson of Deutsche Bank.

Thanks very much. Just a few detailed questions. One, Greg you will tell us what the cash balance between Starz and LEI was at quarter-end, you know tying out to what was on the balance sheet?

Sorry, Doug, let me make sure I understand this. You are saying what was in Liberty Entertainment, how much will end up at Liberty Star, and how much will end up at LEI?

Yes.

Is it by --

The aggregate, --

Okay. Okay, let me -- let my able folks in the room do some calculating and make sure we get that right for you -- Okay, lets's go back to that one. Keep going.

The second one, you talked about selling shares in Sprint and Mot. Is that done? Are you fully sold out of those positions? And what does that do in -- with regards to the impact on you derivatives you have -- and the borrowing and the any potential tax liability there would be helpful.

I don't think we are disclosing whether we sold those out, just because we don't want to create any overhang in the market place on that. But it is safe to say we are, at the right price, we are happy to be sellers those assets, and we don't believe it has an impact on the underlying derivatives and our tax position.

And then you talked about an interest in repurchasing more of your debt over the coming quarters, is the thought there, can you be more any specific? Is this an LCAP specific event -- specific event seems to be where it is sourced in terms of over market purchases or tenders or any additional details there

Well if you look at the debt we have -- post a spend merge with DIRECTV, there will be no debt at Liberty Starz -- its only has cash and excluding the -- in effect the fee debt at LCAPA-- because when I talk about the fees -- I am talking about the Sprint collar which are offset by the Sprint borrowing that's really neutral. So we have those exchangeables which we are trading at a discount. And at the right time and place we are evaluating our investment in Liberty Capital, we will look at whether we purchase third-party investments or we are repurchasing debt or equity, which of the three are more attractive. So that's certainly possible.

Liberty Interactive is a little tougher, it does not have -- well it has a great cash flow generating source in QVC, and it has a substantial amount of free cash flow, much of that is going to be devoted to paying down QVC bank debt -- there is certainly the restricted payments that can come up and cover interest and the like -- but how much free cash flow we have to repurchase straight debt -- which has been attributed to Liberty Interactive is a little less flexible so I think we're -- our most likely first case is to look at the stuff that LCAPA which major Starz top line growth, you know how this renewal with DIRECTV how did the renewal go and what's your anticipation.

And then, the question would be on then the Starz renewals, can you just remind us of what -- which major Starz renewals are left and I guess one of the concerns is that renewals won't go well, and that will hamper Starz's top line growth. How's the renewals with Dish and DIRECTV? I guess DIRECTV we know, how did the renewal with Dish go and what's your anticipation for the remaining -- would be helpful, thanks.

I'll just -- in scale the partners that matter the most are DIRECTV, first and foremost, that deal is done, renewed for four years, and then Comcast. By scale, Time Warner cable though it is the third largest, never been a particularly strong contributor to premiums, not just Starz premiums, anybody's premiums. So they're well down the list, in terms of impact on us. And so Dish and Comcast having done DIRECT are the big ones and I will let Bill comment on those.

So Comcast, we are in discussions with them right now. We are pretty much in agreement, and we are just trying to get that deal papered. So we are pretty close. The other deals that are coming up the next several months are Cox and Time Warner. And we have already had preliminary discussion with Cox, on what makes sense for them, and how they can use our product in a broader sense. And those discussions seems to be moving forward in a very positive way. Other than that our, as Greg said, our biggest affiliates are behind us now multiple years.

Just to recap on that, we closed an extension with Cable Vision last year. And the telcos who are out, who have both, they're not enormous today, but over hit because of how their growth is, and frankly where the rates are, they are both behind us too for a period. So we feel very good about the overall relationship with the distributors and where we sit.

Is it fair to say, if we aggregate all those deals, that we should still expect core rate increases in the CPI plus range?

Well, you will -- clearly all of those deals have CPI. We continue to add more products, so yes, our goal is to continue to maintain our rate by the addition of incremental product for those folks.

All right. That's helpful. Any answer on the cash, or should I just --

Doug, Doug, I got that from the home office.

We got the answer for you, this is Chris. Starz had $175 million of cash at quarter-end, the remaining 443 is corporate, and call it other. Of that 30 is on the RSNs, and 30 would go with LEI, 30 of the corporate cash would go to LEI in the spend, leaving 383 back at quote Liberty Starz tracker corporate.

So that 548.

That excludes the 250 loan.

Yes, that excludes the short term loan that was made across groups of 250. So there's a -- call that a place holder for temporarily.

And it is like.

One other thing worth noting Doug, is we have a -- we have the financing that was struck to purchase incremental 78 million shares at Liberty Entertainment -- that had a collar structure and a loan against it, and we are paying down radically on that -- at a small clip -- will be and at the close of deal we will be reimbursed for that by DIRECTV, but the balance in the interim is being paid down by Liberty Entertainment.

Okay. So if I do all of the calculations right, including the 250 loan to LINTA, it sounds like there's $800 million of cash at quarter-end at Starz.

If you value -- treat the loan as cash, yes.

Right, thanks for all your help.

Our next question will come from Ben Swinburne of Morgan Stanley.

Good morning. It is actually Dave Gober. I had a couple for Mike on the QVC business, obviously a major improvement in the trajectory there. And you talked a lot about the cost side, but I just wanted to dig a little deeper particularly domestic business, into the demand side. And trying to figure out, it seemed like both the units and price. Nut could you drill down a little into what the --- whether there's a change in the number of customers, or just spending for customers? I mean -- I guess what drove the improvement in demand, and what drove the -- particularly relative to the broader retail market which did not seem to improve all that much?

I would say -- it was more, more spend per customer than necessarily significantly increasing the customer base. So I think what we saw this quarter is -- we continued to have a very loyal customer who sticks with us -- she is clearly more selective in purchasing than she has been in the past , but she is making trade offs among a multitude of retail outlets. So I think we managed to inspire her a little bit and gained some market share versus the broader retail market. And so for us it is, to me it is really the beginning to see -- I think dividends of things we have been working on for the last 18 months -- which is to really keep upgrading the quality of our assortments, upgrading the programming, bringing in new brands. And so I just think there was enough newness in the quarter, enough compelling programming and marketing, that we were able to push through and get a higher share of her spend. And we are very excited about what we have teed up for the back half.

I think that will be stronger still in terms of quality of the programming and the assortments. And we will see how the customer responds, but certainly are very excited about it. I generally think it is the best line up we have ever had. So ,we just feel good that we think our initiatives are coming together, and presenting a more exciting store front to the customer, and she seems to be

Great. Then just a follow up, on the gross margin side -- it looked like there was a pretty significant improvement from 1Q. HSN had talked a little bit about the fact they saw improvement in gross margins, because of lower shipping and shipping costs, primarily because of the decline in gas prices. Did you guys also see that in the quarter? Or was the gross margin improvement more due to mix shift?

The, for us it was primarily -- it wasn't -- the mix issues have continued to be a negative drag on gross margin. So for -- I think it was a combination of a few things -- we definitely saw improved freight costs. Given the nature of our contracts I wouldn't put that primarily on gas pricing -- but we did a number of things to better optimize our freight network -- we really did some creative initiatives that will have long term benefits in terms of how we distribute our product.

That was part of it. Part of it was our warehousing costs are part of gross margin. And we saw a very nice increase in productivity in the warehouse. We did a much better job of variablizing our labor costs, and tying it more tightly to our shipments, along with other initiatives in warehouse. And part of the improvement reflects the decline in return rates, and the relative margins on returns versus the stuff that went out the door. And just the mix between returns and original shipments also helped lift product margins.

Great. And I just had one follow up on Doug's question on the Starz in terms of the renewal there. Any read through or any change in the structure of most of those deals? In the past there has been a mix of fixed rate agreements versus variable. Has that changed in any of the negotiations? Or do you foresee that changing going forward? Or should the mix be relatively consistent going forward?

The deals we just completed they basically have stayed pretty much the same, so I don't project that mix is going to change significantly.

The only thing I would say is if it is not a change in those deals, but frankly the consignment companies have had faster growth, than the fixed companies. So in that sense, there is a mix change. Not in the structure of any deals.

From structure perspective, we don't see them moving that much, but we are really doing well. And if you actually dug in and see the details of the numbers we are doing very well with our consignment customers today.

Telco. Correct.

We are seeing some softness in the number, and it happens to be in the fixed rate deals, which our deal structure is protecting us and mitigating some of that risk.

Makes sense. Great. Thanks guys.

Our next question will come from Jeff Wlodarczak of Hudson Square Research.

Good morning guys. Two questions for Greg. First, on the potential swap of Starz Media and Liberty Starz. Is the intention to do that fairly quickly after the LEI DTB merger closes, and that's internal swap, so I assume there's no tax ramifications. And then second, any color you can give us on a potential transaction with Time Warner involving AOL and how that could be theoretically be structured? Thanks.

On the first one, we have no current plans to do move Starz Media out of Liberty Capital. I think it was noted by Bill, we have a very consistent growth pattern of earnings which you know as a -- should appeal to a public security at Starz Entertainment. Starz Media has -- was in a start up phase, and has a very bumpy pattern -- depending on how much P&A -- what's released and the like. And it sits today inside Liberty Capital, which is really an asset company, not earnings driven company, not a EBITDA,growth story, the way that we believe Liberty Starz is.

So I think one of the questions is, is how is it best configured. And over the long term, how do we grow that business at Starz Media -- and then at some point -- does it make more sense to combine more with Starz Entertainment. But I don't think stands today as the right strategy. Secondly, we have a lot of basis in that -- to actually how we structured that we might not want to have it be a tax predeal. We will see what time holds. On the AOL deal -- I think I was asked before. We have a productive relationship with Time Warner. We have already done one 355 exchange with them. We hold a bunch -- around $800 million of TWX stock today. If there were an asset that were attractive, that they were a seller of, we would certainly want to look. AOL could be that, but it could be something else too. AOL in particular might have some tax attributes that are attractive as well, being an interesting story.

Thanks. If I can ask one follow up, as much as you can, can you shed any light on the delay in getting the LEI DTV proxy approved to the SEC? Because I think you were supposed to get approval by today. If you have to drop in new numbers, if thats the case.

There are two things. One is just negotiating with them about the structure of the transaction. At some point, your numbers go stale. So the time passed when working through the proxy, we did go to stale numbers, and needed to drop the new ones in. And so in effect there are two sets of delays, right, took longer to get the discussions done with them, and once it took longer, it kicked in the need for new numbers.

Also, there are two proxy statements that are having to get processed through the FCC.

Thanks very much.

Thank you, Jeff.

And of Barclays Capital, Doug Anmuth has our next question.

Thanks for taking the question. A couple of things for Mike. First I want to follow up on the return rate which I think at 17.3% was the lowest it has been in several quarters. Can you tell us more about the keys drivers here beyond just the sales mix? You mentioned. some other initiatives here and I am curious about the sustainability going forward. And also if you can comment on the linearity of the quarter in the US and the international markets, and perhaps what you are seeing here early in 3Q. Thanks.

Sure. On the return rates, I would say that the mix was a large driver, as we shift mix more to electronics, beauty, home categories, which all has a much lower return rate than jewelry. We are also very focused on a corporate wide initiative to continue strengthen product satisfaction and quality. We think it is already quite high, but we are trying to take it another level beyond that, and that is a variety of initiatives in that. Everything from working on apparel sizing and education, to improving jewelry quality a number of things, I won't go through all the details. But we do think that will yield benefits over time.

Now, I would also tell you that to some extent the brief improvement is a little overstated versus what's sort of the underlying business, because as part of the way returns is trying to estimate what returns are going to be going forward, since people months to return the items, and you are making estimate,s and so a little bit of this is also kind of just trueing up of estimates. I think somewhat exaggerated the degree of improvement. But nonetheless, we think do think the improvement is real. And we would expect to see continued improvements in returns going forward, as we look at the mix of business, as well as these quality initiatives, our expectation is -- we will see good (inaudible) in returns going forward. In terms of commenting on Q3, our policy is not to comment on in quarter results. Obviously we find most markets very healthy sequential improvements between Q2 and Q1. So we feel good about the momentum. We feel good about the product mix. And of course, we are coming into much easier comparisons, and that obviously helps on the margin, to be comparing against softer numbers in the back half of last year.

Okay. Great. Thank you.

Our next question will come from Bridget Weishaar of JPMorgan.

Hi. Quick question on Liberty Interactive. Earlier you said most of the growth was coming from existing customers spend more, which I believe has been a trend over the last couple of years. At some point you need the funnel with new customers, and it seems like you have great opportunities with so many businesses having gone bankrupt. What are you doing to drive new customer acquisition growth? And then the second question is, I know you said earlier that you were pushing back many of the costs associated with QVC Italy into 2010. Can you give us anymore detail about when you expect to recognize costs and about how much? Thank you.

On the new customer front, we do think we have a lot of opportunities to grow the customer base. As we have discussed in prior calls and meetings, we focus less on the absolute count of new customers and more focused on quality of customers. So we are kind of very surgical right now about looking at those businesses, those categories that tend to attract new customers,, that are highly profitable customers who are likely to be loyal to QVC, and continue to invest in those kinds of businesses, and continue to invest in creative marketing initiatives, in platform initiatives to reach them. So for example, this major partnership with Isaac Mizrahi who has a very devoted following, who had extraordinary success when he decided to go to Target and make his aspirational products available there. He exited Target a while back. We think there's a whole lot of folks that know Isaac, and will be excited about the things he's going to do for us, which we think are truly breakthrough, and we see that as a great way to get new customers. We are launching a very exciting accessories product line, with Rachel Zoe in September.

She has a very hot reality series on Bravo, she is one of the leading stylist in the country, we think that Bravo audience will be excited to see what we are up to. I am going to give you kind of an immediate example, but it just reflects the things we are trying to do. On Sunday if you tune into VH 1, you will see simulcast of QVC on VH1, as we lead the market in launching the remastered Beatles catalog, as well as Beatles for rock band. Really exciting, really fun, we will get new customers on our channel, but a whole VH 1 audience, that probably isn't buying QVC right now to see what we are up to. We are really focused on social media, continue to do more and more with Facebook, and Twitter in particular. We think that's extending the word of mouth. So for us it is about having the kinds of categories that appeal to new customers, whether it is entertainment or beauty. And its being creative on how to get our word out on other platforms, whether it is the VH1 or social networks, and we have a number of initiatives like that in the works.

I might add -- Mike, I think those are all excellent initiatives. In addition, we have had a case where every few years, we had been introducing a international -- a new international subsidiary, and it has been delayed. Italy will kick in -- Mike is going to talk about the costs in a second -- but in effect adding a new younger mix of business, not necessarily -- I know you were focused on probably within each business -- but adding a new one is a good growth perspective on new customers as well -- because you want to have ones which have not yet reached scale entering into the funnel. We talked about Italy. Obviously we have also talked about trying to do things in places like China. I think that's going to be an important part of the initiative for growth going forward at QVC.

And on the Italy launch, we are beginning to ramp up, and we expect that most of the costs as you mentioned will start to kick in next year. We will have modest costs throughout this year, as we begin to add staff, and build out the facility and so forth -- but they will be immaterial in the scheme of things.. I don't know that we are prepared to talk about a next year number. You could certainly get insight by looking at the year of launch in Japan, which is our most recent market, and what kind of EBITDA, or what kind of expense hit we took in year one. And I would tell you that we don't expect it to be all that meaningful on the total EBITDA base of the Company. We don't see it as something that's going to have a material impact on the total EBITDA delivered in 2010.

Great. Thank you so much.

Our next question will come from James Ratcliffe with Barclays Capital.

Thanks, folks. A couple of questions. First of all on, looking forward to 2010 for Starz, given what you have been seeing in terms of box office performance from your studio providers, any read on what we are likely to see in terms of programming cost growth? And secondly just our, should we still be assuming that you will have to pay out cash taxes when this Sprint hedges mature?

2010 it is a little hard to look at right now because we still have a lot of titles that haven't been released. So its hard for me to give you kind of a view of what that is. We need to wait a couple more months, and just see where we are on those.

As you know James it is not only the scale of the titles, its the numbers of the titles -- and so certain things shift in the quarter -- Q3 -- or slip past Q4 into 2010 will impact -- so there is a bunch of variables.

And so its a little bit early right now, to kind of have a view on that

And on the Sprint collar -- our hope is that we would defer that tax.

Alright, thank you.

Our expectations.

Your expectations.

Yes.

Okay, thanks.

Our next question will come from Matthew Harrigan of Wunderlich Securities.

Good morning. First of all, as far as Overture goes, you have really got a lot of open playing field or playing field now, given everything that has happened in the private equity side, the film financing et cetera. I know the exhibitors are clamoring for more product. Is that something that makes Chris McGurk's life a little bit easier, or is that really funneling into your business plan at this point, given that there's a bit of a gap there. And secondly, on the GSN and fun technology side, are those businesses are subject to a lot of the network effect, that Michael Eisner likes to talk about, and it really helped your eCommerce businesses, and I know you are trying to graft on to QVC. Can you talk a little bit about those businesses? It seems like there -- or GSN -- it seems like they are -- its going to get a little bit lost over at DIRECTV -- and in hindsight -- is that something you almost regret moving over there -- given that it has a nice growth opportunity to bat that and fun.

Sure. So on Overture, I think obviously there are a bunch of factors you noted, the changes in the film financing, and the like which help any entered into the film business. There are also a bunch of factors that make the film business harder these days, and the probably the most prominent of which is the decline of DVD. Particularly anything where you have library, if it doesn't hit it initially out of the blocks, it goes to day and day drop -- it is really not hanging well. And lot of things that have gone on structurally in the channel, the (inaudible) the bins in the Wal-Mart and the like, all of those things have reduced the DVD market, post the initial drop. When you look at market over the world, Overture has got a bunch of advantages because of Starz, and where it is playing, and it's got a bunch of challenges. And I think you have seen that candidly in the first years release, as you are trying to get up to scale, it hasn't necessarily delivered on it as much as we'd like.

On the other hand, it has had some successes and if we look at the line up ahead, there is reason to be optimistic. I would also say that we have a plant there, in terms of our Anchor Bay Distribution, our theatrical distribution at Overture, and the ability to take in the pay slot in Starz which is probably underutilized, and one of our goals in 2010 will be to put more product through there one way or another, not necessarily all of which is ours, but which we can partner with, and probably take less risk on, but feel potential in the plant. At GSM FUN, we are very sad to see it go, because it is a great business. It certainly had its challenges on the GSM side,p and the overall advertising market right now. Ratings are pretty good.

They have done some really innovative stuff, David Goldfield and his team on the programming side. And that's just getting up to speed but there are still exposed to the overall add market, general add market and they have a lot of DR, which may be a little less vulnerable, but they still have challenges. On the internet side they have grown considerably and will, and we love that business and what they're doing. I think you are right to note the potential for network effects. The hope would be, and the expectation will be, since our shareholders will be a significant majority percentage -- in fact a majority of the shares at DIRECTV, that DIRECTV can take that asset, and drive it even further than we could, using some of the distribution strengths.

Thank you.

Our final question is from Murray Arenson with Janco Partners.

Thanks I wanted to follow up on what Matt was asking on the production side. If you can talk a little more maybe, with respect to the original series, and give us context for what look like there, and timing of that. I am particularly interested in the Spartacus piece, since that sounds like it is kind of movie production quality. And secondly, if Greg you can just offer some more color on the tax payments that were referenced relative to Liberty Capital?

Let me if I could -- talk a little bit about the original series first, and let them fill in -- and anyone else fill in -- I think one of the things that has had some beginning critical success with Crash -- the back half of Crash -- how it did through the back half of the first season -- and how Party Down has done -- is we've had some critical success -- but have not necessarily driven as much audience yet as we like. Now this is a learning process -- and this is a process that took HBO probably ten years -- we hope not to be quite as long in the learning style -- but I think Spartacus is going to have some impact -- and someone described it as Gladiator makes 300 --, but you might be able to throw in meets Caligula -- it is going to be very graphic -- in a lot of fashion both violence and sex and I think its going to be -- will be open a lot of eyes -- there are going to be a lot of Lucy Lawless fans who are going to be very excited to see the film -- rather see the series just for that. And I think it will have impact and it is a great learning experience and I think it will be very well received. And those original series are an important part of creating the right mix of movies and originals at Starz which I giver credit to the team for doing. Want to comment on the cost side?

I think your point that looks more like movie kind of quality. Clearly we have pushed ourselves to take a product that we really like, and story we really like, and put the best product on the screen. And Ron Tepper and Sam Ramey are great on that. And the cost of that is kind of on consistent with what you would see with a lot of originals, dramas on kind of that $2 million to $3 million an episode type of world. And we are pleased with that product, as Greg said. It is getting a lot of publicity and notoriety right now, Lucy Lawless has a great following. At Comic-con we couldn't keep enough -- we didn't have enough room -- as she was there. And we think it is a great story, and that's what we have been trying to do is put really high quality stories with the best product we can put on the screen for the money and really drive customers. And its,we have come a long way in two years And I'm with Greg, I hope it is not a ten year, 12 year event, but we are very pleased with it, and it is coming out in January.

The E water cooler buzz about "Spartacus" is enormous.

Not just domestic but internationally. We've had the big broadcasters are interested in buying just off the trailer. So we know we have the right story, and it is something you have not seen on TV before, and we are pleased with it.

And obviously you must be a Lucy Lawless fan for asking. Maybe you could help me understand exactly the nature of the tax question about LCAP , because I'm not sure I followed

I was just referencing on the press release, the tax sharing payments between the intergroup tax sharing payments?

I can handle this.

Okay.

Liberty Capital, of course is the provider of tax shelter to the other two groups, who generate taxable income. And for the six months, the Interactive group paid $138 million to Capital, and the Entertainment group paid $117 million. So, a total of $255 million of cash going back to Capital for their tax shelter.

So in effect, rather than pay the US Government, shelters created by Capital, Interactive and Entertainment, pay Capital and any future liability becomes Capital's.

Understood .Excellent. Thank you.

Great. Thank you, very much, for joining us this morning, and again for your continued interest in Liberty, and thank you to all of the participants.

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