QVC Group Inc (QVCGA) 2010 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 call 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, the anticipated split-off of the Liberty Capital and Liberty Starz Groups, and other matters that are not historical facts.

These forward-looking statements involve many risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements, including without limitation, possible changes in market acceptance of new products or services, competitive issues, regulatory issues, continued access to capital on terms acceptable to Liberty Media, and the satisfaction of the conditions to the proposed split-off. These forward-looking statements speak only as of the date of this call, and Liberty Media expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein to reflect any change in Liberty Media's expectations with regard thereto, or any change in events, conditions or circumstances on which any such statement is based.

On today's call, we will discuss certain nonGAAP financial measures, including adjusted OIBDA. The required definitions and reconciliations, preliminary note and schedules one through three, can be found at the end of this presentation.

And 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, good morning to all of you, and thank you for your continued interest in Liberty Media. Today on the call we have with me our Controller, Chris Shean, QVC CEO, Mike George, Starz CEO, Chris Albrecht, and other executives are available.

I'm going to start on slide three, highlighting our second quarter events that we thought were noteworthy. It was a very solid quarter, driven by strong operating performance across our operating businesses, and good work by our management teams. At Liberty Interactive, QVC again displayed strength in its operations. The US OIBDA margin was 25.4%, the second highest in the Company's history. We continued internet growth at the business, qvc.com revenue grew 21% year-over-year, and makes up now 32% of US sales. We also experienced good international results despite the strength of the US dollar.

Our eCommerce Companies posted 15% revenue growth, which are strong results given the choice we made to change our non-transaction revenue programs, NTR, that those choices reduced the revenue, and more dramatically impacted our adjusted OIBDA. We expect that change will continue to impact revenue, and even more dramatically OIBDA, for the balance of 2010 as we previously have discussed.

We also at Liberty Interactive continue to strengthen the capital structure, reducing debt and extending maturities. We retired $479 million principal amount of our 5.7% 2013 bonds through tender and open market purchases as of July 26.

At Liberty Starz we had solid results despite a substantial programming write-down. We continue to see positive sequential trends in subscribers. In July, we successfully premiered Pillars of the Earth. We've also announced the prequel for Spartacus, and are happy to carry on with this very successful series. And we reached a comprehensive new affiliation agreement with Comcast, our largest distributor.

At Liberty Capital, Sirius XM posted strong financial results driven by good operating performance including 583,000 net adds, improved conversion from [pre it pay] and churn reduction down to 1.8%. We continue to buyback-- a strong buyback program at LCAPA, and repurchased $344 million worth of shares from May 3 to July 30. We applied the proceeds from the settlement of certain of our equity collars to reduce debt by $379 million. As of the end of the quarter, Liberty has no equity derivatives outstanding, and all related equity debt has been repaid.

And lastly at Liberty Corporate, we announced the plan to split-off Liberty Capital and Liberty Starz from Liberty Interactive. Post this split-off, Liberty Interactive will become an asset-backed stock. We continue to make progress on this split-off. We recently submitted our request for a private letter ruling with the IRS.

You may note that we filed a related lawsuit on our debt last Friday. We did this to clarify certain aspects of our indenture position. A bondholder had alleged that the split-off will violate our indenture because the split-off assets are quote, substantially all, unquote, of our assets. We don't agree. We felt, however, that it was important to get this to a swift resolution in order to remove any doubt, therefore we filed suit. The split-off will not happen until we get a successful resolution to that lawsuit. Anticipating a question that might arise from an investor, the lawsuit may affect the timing of the ultimate split-off, but we still are targeting a Q1 completion of the split-off.

With that let me turn it over to Chris Shean, our Controller, to talk about LINTA's financial results.

Thanks, Greg. Liberty Interactive Group's revenue increased 6% to $2.1 billion in the second quarter, while adjusted OIBDA increased 4% to $428 million. QVC, the primary driver of results amongst the Liberty Interactive attributed assets, increased total revenue by 5% to $1.8 billion, while adjusted OIBDA increased 9% to $403 million.

Liberty Interactive's other eCommerce businesses grew revenue 15% for the quarter. Most of the eCommerce companies posted an increase in revenue, however, overall revenue growth was partially offset by lower commission revenue earned when customers sign up for third-party on-line discount services, that's the NTR that Greg was referring to. During the first quarter, we made the decision to change the way we handle those particular promotions. And these changes, as he mentioned, are expected to continue to adversely impact commission revenue throughout 2010.

Adjusted OIBDA for the eCommerce businesses decreased 36% from second quarter, and represented 9% of revenue in 2009 as compared to 17% in-- excuse me, 2010, as compared to 17% in 2009. Revenue earned from the commissions had significantly higher margins than normal product sales, and therefore, the reduction in this revenue more negatively impacted adjusted OIBDA on a percentage basis.

Furthermore, increased marketing expenditures helped grow revenue and new customer names during the quarter, but negatively impacted the adjusted OIBDA margin. In addition, more costs were incurred associated with our two start-ups, and given the stage in their operations, very little revenue at this point. These -- all of these negative impacts offset product-related adjusted OIBDA growth that was achieved by our eCommerce businesses.

Now let's take a quick look at Liberty Interactive's liquidity. At the end of the first quarter, the group had attributed cash and public investments of $3.4 billion, and $7 billion in attributed debt. In the second quarter, Liberty Interactive completed a successful tender of its 5.7% 2013 bonds, and through this tender and subsequent open market purchases through July 26, $479 million principal balance of these bonds had been retired.

QVC's total debt to adjusted OIBDA ratio, as defined in QVC's credit agreement, was approximately 2.4 times, as compared to a maximum allowable leverage of 3.75 times. QVC's gross leverage is down significantly from its peak in 2008.

Now with all of that background, we'll hand it over to Mike George for additional comments specifically on QVC.

Thank you, Chris. I'll provide some additional detail on our results in each market, and then conclude with some general comments about our direction. In the US, we grew revenue 4%, and adjusted OIBDA 10%.

We were very pleased with our revenue growth in light of the more difficult economic environment, and we drove a significant increase in adjusted OIBDA yield. We saw outstanding results in our kitchen, cooking and dining, and household categories, as well as continued strength in accessories. Consumer electronics slowed considerably, consistent with the industry-wide slowdown in the CE sector. Given the slower margins, however, this had a greater impact on the top line than on the bottom line.

Our US eCommerce business continues to outpace overall internet retail sales, with growth of 21%. qvc.com now represents 32% of the US business, up five points from last year. Now that's the second highest quarterly jump in web penetration that we've ever achieved. And products that have not been featured on air recently, are now over half of our eCommerce business, evidence that we are capturing incremental purchase occasions on qvc.com.

We continue to add new customers in the US at a strong pace, and revenue from new customers increased 17% in the quarter, our fourth consecutive quarter of double-digit growth from new customers. We reduced inventory levels 10% from the prior quarter, putting us in a good position to chase hot product categories in the Fall and holiday season. And unlike most other retailers, we did not need to turn to heavy markdowns to bolster the sales line. Our 150 basis-point increase in adjusted OIBDA yield was driven by improvements in initial product margin, reductions in freight and obsolescence, and tight expense control.

We also successfully completed the renegotiation of our agreement with GE Money Bank, the provider of our QVC proprietary credit card. The new agreement is substantially different than our previous deal. Under the prior agreement, QVC received all the income from the card, and incurred all the bad debt expense, and we paid GE a fee per active account for their services.

Under the new agreement, QVC and GE share the card income and bad debt expense, and GE funds the portfolio. On a pro forma basis, if this agreement had been in place over the prior three years, our adjusted OIBDA would have been approximately $20 million to $25 million lower per year. Nonetheless, the overall net economics of the new agreement will not have a material negative impact on our cash flows, since we recovered our non-interest bearing cash deposit with GE of $501 million. Now we're delighted that we've been able to renew this agreement, which runs for five years beginning August 2, at essentially neutral economics and with increased balance sheet flexibility. In this fiscal credit environment, we see this as a strong endorsement of our business and our Q card program.

Turning to international, we saw strong results in our existing markets, with revenue up 8% in local currency, and adjusted OIBDA up 9% excluding our Italy start-up expenses, and 5% including Italy. The UK turned in an outstanding quarter. Revenue increased 8% in local currency, with particular strength in beauty, fashion jewelry, and some areas of home. Adjusted OIBDA grew 16% in local currency, driven principally by strong gains in warehouse and customer service operations, and tight fixed cost management.

Germany posted revenue growth of 7% in local currency, driven by good results in beauty, accessories, consumer electronics and small appliances. Despite the strong revenue growth, adjusted OIBDA yield fell 140 basis points in local currency, driven about equally by a reduction in initial product margins due in part to the mix shift to consumer electronics, and an increase in the obsolescence rate due to unfavorable inventory fluctuations. However, we are very comfortable with our overall inventory levels, which are down from the prior year. The team is focused on improving the product mix for the back half to drive more balanced revenue and profit growth.

Japan had another terrific quarter, with 10% revenue growth in local currency, driven by gains across our health, beauty, fashion and home businesses. Adjusted OIBDA grew 14% in local currency, driven by a reduction in carriage commission expenses as we successfully renegotiated several contracts, along with improvements in customer service and warehouse operations.

In Italy, we incurred a $5 million loss as we prepare for our October launch. We have substantially completed our headquarters facility, recruited a high caliber team, received extensive positive press coverage about our entry, and secured for our launch several prominent local brands, supplemented with powerhouse global brands like Bare Escentuals and L'Occitane in Beauty, and Dell, BOSE, Dyson and Kitchen Aid in home.

And with that background by market, I'll close with some general comments on the business. Now we have said all along that we expect the economic rebound to be slow and uneven, and that we will stay centered on the same core goals through the ups and downs of the recovery. First, to create a highly differentiated destination shopping experience, one that drives loyalty for the long term, founded on compelling exclusive products and entertaining programming, engaging multi-media platforms, and a personalized service experience supported by state of the art technology platform.

Second, to outpace the same-store sales rates of our traditional brick and mortar competitors, and grow eCommerce revenue faster than overall internet retail sales, as we both capture a greater share of spend from existing customers and increased revenue growth from new customers. Third, to maintain tight operating control over expenses and inventories, improve productivity, and respond quickly to what's working in the marketplace.

We achieved each of these goals in Q2 despite the worsening economy, improving our competitive positioning, driving strong profitability, and we achieved a few firsts, including passing the $2 billion revenue mark in worldwide eCommerce revenue on a rolling 12-month basis, and increasing the count of new customers joining QVC in every market we operate in for the first time in at least five years. As we look to the back half of the year, we'll stay focused on these priorities as we strive to gain share and drive profitable growth. We're focused on creating fresh exciting assortments, engaging programming for the Fall and holidays that will create a reason to shop.

In the US, for example, in apparel and accessories we'll be launching several hot new fashion labels including [K-Dash] by the Kardashians, and MOD by Janie Bryant, the well-known costume designer for Mad Men. And as we previously announced, we're premiering Liz Claiborne New York, which QVC will sell exclusively. These additions will complement some of our newer lifestyle brands, including Isaac Mizrahi and Rachel Zoe.

And in September, in a major expansion of our fashion week presence, we will be co-sponsoring fashions night out in partnership with Vogue Magazine, the City of New York, and the Council of Fashion Designers of America. It's one of the biggest global fashion events ever undertaken, and QVC will play a prominent role. As part of the festivities, we will be launching a pop-up store in Rockefeller Center, among other activities to build excitement about our brand.

In beauty, we've just launched a new partnership with Sephora, to introduce and build awareness for exciting new beauty brands like Tarina Tarantino. This complements other planned or recent beauty launches, including Neutrogena skin care, Bliss Spa products and Fresh Beauty.

In jewelry, we recently launched new lines by Hidalgo, Cat Deeley, Melania Trump and Christie Brinkley. And in the Fall, we're launching our national gem gallery in partnership with the Smithsonian, along with a new jewelry line from Priscilla Presley.

In cooking, we'll be launching a new celebrity chef series featuring Gordon Ramsey, well known for both his Hell's Kitchen series and his Master Chef series that premiered this Summer, along with Lidia Bastianich, David Burke and Tyler Florence. These chefs will complement strong programming with our current partners, including Rachael Ray and Paula Dean.

In consumer electronics, we're especially excited about our upcoming launch of Sony's Move and Microsoft's Connect gaming platforms, and we plan to take advantage of the explosion of the tablet category with offerings ranging from the iPad to the upcoming Dell Streak. And we were delighted with the results of our 48-hour Christmas in July event, which we held a couple weeks ago. It was a 14% sales increase over last year, we saw customers respond to new products and innovative designs in several categories, reinforcing our belief that if we focus on newness, innovation and entertaining programming, we can drive sales and gain share this holiday season.

We also continue to enhance our multi-media platforms, and QVC is now available on all three screens. In Q2, we launched the second version of our iPhone app, which provides a high def live stream of our show, and easy click to buy ordering along with our first Android and Blackberry apps. And we have several new apps coming up in the next few months.

On the TV side, we launched our simulcast on ITV in the UK at the midnight hour. And in Japan, we began a simulcast with one of the leading BS digital channels for an hour a day. In the Fall, we'll continue to expand our TV presence, most notably in the UK and Germany, where we will be launching second channels that will feature the best of content, and expose QVC to more consumers.

And with that, I'll turn it back to Chris.

Lets take a look at Liberty Starz. Liberty Starz attributed revenue grew 4% in the second quarter to $311 million while adjusted OIBDA decreased 1% to $103 million. At quarter end, Liberty Starz had attributed cash and public holdings of $1.1 billion, and attributed debt of $46 million.

With that summary, I'll now have Chris Albrecht comment specifically on Starz Entertainment and Media.

Thanks, Chris. Good morning. Starz Entertainment had another strong performance in the second quarter, marked by solid quarterly revenue results, and a second consecutive quarter of subscriber gains on both Starz and Encore. Also, as Greg mentioned, we entered into a new multi-media-- sorry, multi-year affiliation agreement with Comcast. Revenue with Starz Entertainment of $308 million represented an increase of 4% in comparison to the same quarter from a year ago. Adjusted OIBDA grew by 2% in comparison to the second quarter from last year, to $107 million.

The average number of Starz subscription units decreased by 3% from the second quarter of 2009, but increased by 200,000 units for the second quarter of 2010 versus the first quarter of 2010. The average number of Encore subscriptions decreased by 1% in the second quarter of 2009, but increased by 800,000 units for the second quarter of 2010, as compared to the first quarter of 2010. Of this increase, approximately 80% of it comes from fixed rate deals. Despite continued levels of economic uncertainty for consumers, the value proposition of our channels and services has proved resilient in the marketplace, and has driven our business performance.

At the end of the second quarter, we announced a new multi-year agreement with Comcast that consolidates our prior separate Starz and Encore affiliation contracts into one new and more comprehensive arrangement. The new agreement extends and expands our business relationship with Comcast for all of Starz Entertainment's channels and advanced services. Of note, Comcast has introduced all three of our authenticated on-line services, Starz on-line, Encore on-line and the newly launched MoviePlex on-line service. We're actively engaged in discussions with other affiliates regarding similar TV everywhere initiatives.

Shifting over to Starz original programming, we're pleased to note the solid performance of the Pillars of the Earth, which debuted in July. With Pillars, we achieved record levels of participation from Starz affiliates in offering three early sampling of the first two hours of the original series. Robust sampling with our affiliates reflects well on the awareness our originals are receiving with both affiliates and consumers, and ultimately assists in building an audience with existing and prospective Starz customers.

Also just prior to the debut of the Pillars of the Earth, we introduced a landmark iPad app with Penguin Group, publisher of the Follett novel. The first of its kind application integrates video elements from the TV series with other multi-media tools optimized for the popular device. This business extension generated meaningful publicity, and was a very cost effective promotional tool for highlighting interest and awareness in the series.

Now looking at 2011, our Starz original schedule will be the Spartacus prequel, called Spartacus Gods of the Arena, Camelot which is in production and for which we will retain all US pay TV rights including digital, and also the home entertainment rights. Torchwood, a new 10 episode series of the BBC hit franchise, for which we announced acquiring the US pay TV rights, and the second season of Spartacus.

The half-hour comedy series, Party Down and Gravity, will not be returning for additional seasons. With respect to Party Down, we love the show, it had critical support and we were proud to have it on our network. However, it did not find enough of an audience to justify a return for an additional season.

As we have shared with you previously, Starz Entertainment is exploring several different financing models to fund our acceleration into the originals space. We've had meaningful and constructive dialog with potential partners, but please note that this process could take several more months before reaching its ultimate resolution.

Now in the Starz Media front, revenue for the quarter decreased to $84 million from $90 million in the second quarter of last year, while adjusted OIBDA decreased from a positive $17 million last year to a negative $54 million during the second quarter of 2010. Significant portion of the adjusted OIBDA change was due to approximately $42 million in impairments of production costs related to various titles due to lower theatrical, home video and television revenue than had been originally anticipated. The remaining decrease in adjusted OIBDA is due to the number and timing of films released theatrically and on home video and television by Starz Media and Overture Films, and the corresponding fluctuations of theatrical, home video and television revenue and related expenses associated with these films.

Let's move into the conclusion of the second quarter. Starz Media entered into an agreement with Relativity Media, allowing for Relativity to take over the distribution and marketing operations of Overture Films. Two-thirds of Overture's employees transitioned over to Relativity, and Overture will release its remaining three films the renewed distribution services agreement with Relativity.

We also continued to evaluate strategic alternatives for the remainder of Starz Media's businesses, and do not expect it to incur annual operating losses in the future of the same magnitude that it has experienced in recent years given our decision with respect to Overture. We'll certainly keep you apprised as it relates to those efforts.

With that, I will turn the call back over to Chris.

Thanks, Chris. Let's take a quick look at Liberty Capital. During the quarter, Liberty Capital revenue increased 1% to $200 million, while adjusted OIBDA was a negative $59 million. The Liberty Capital Group has attributed cash and public investments of $7.6 billion, and attributed debt of $2 billion. From May 3 through July 30 of 2010, Liberty repurchased 8 million shares of LCAPA common stock at an average price of $43.11 for total cash consideration of $344 million. Cumulative repurchases since the reclassification of this tracker represent 34% of the shares originally outstanding.

Now with that I'll turn the call back over to Greg.

Thank you, Chris, and thank you, Mike and Chris, for your updates on your respective businesses. We feel that our business has posted good operating results in the face of a challenging consumer economy. We don't expect that that uncertain macroeconomic environment is likely to change in the near term, but our management teams will stay focused on the factors under their control. At Liberty Media, we are going to continue to make progress on the split-off of Liberty Capital and Liberty Starz. At Liberty Interactive, we continue to have focus on excellent exclusion at QVC and the eCommerce companies.

I'd note a couple of points. The eCommerce companies continue to gain share in their respective businesses, which may have been masked by the change in the NTR programs, but the underlying strength in the businesses was good. And at QVC, I was pleased with the new name growth, with the progress we're making in QVC Italy, and the continued growth in the internet elements of the business. I'd also note that we will continue to reduce debt at Liberty Interactive, in part because of the program that Mike George outlined regarding our new credit card facility.

At Liberty Starz, we're also going to continue focusing on operational excellence and building cost effective original programming using a strategy to differentiate our channels for the benefit of our distribution partners and the end consumers. We've made tremendous progress regarding the 2011 schedule, as Chris Albrecht noted. And as I mentioned before, we're very focused on what to do with the large cash balances at Liberty Starz, we are determined to come up with an effective use of that capital.

At Liberty Capital, we have the same element, a large cash balance that we're very focused on what is an effective use of capital there. You've seen in part our continued share shrink, as we believe the shares are attractive. We also believe we'll benefit from the continued growth of Sirius XM, and will focus on rationalizing our non-core holdings.

So with that let me thank you for your continued interest in and support for Liberty Media. We hope you'll stay tuned for the next quarter, and we'll open it up for questions, operator.

Thank you. (Operator Instructions) Up first is Barton Crockett, Lazard Capital Markets.

Okay, great. Thank you for taking the question. I was wondering if you could at first address Interactive? And I noted your comment that you're looking to launch second channels in some of the countries abroad and I've also noted that HSN is looking to launch a second channel here in the US. I wondered if you talk a little bit about why you're launching second channels abroad and if there might be an opportunity to do something like that here?

I'll let Mike comment on that but I would note that the structure of many of these other markets in terms of what distribution-- what it takes to get incremental distribution, the cost and the scale is very different. Particularly in the UK, or other markets with DTT, there are lots of more cost effective ways potentially to achieve incremental distribution. But I'll let Mike comment particular on the US market.

Yes, I would just add to that the reason we chose UK and Germany for the second channel is exactly as Greg mentioned, relatively low cost to get incremental distribution. These will be largely recorded -- previously recorded content, some original content, but largely leveraging content off the main channel. UK second channel will focus primarily on beauty and Germany will be more mixed but with a heavy focus on beauty. We think these taped channels provide modest revenue potential so I don't want to overstate the impact, and the key is to be able to do it at very low cost.

In the US we may at some point explore second channel, but I would say it's a little bit lower down on our priority list just because again the equation for us in terms of amount of revenue potential relative to cost and caliber of the distribution is such that it's not a clear cut a case as it is in the UK and Germany. So we'll watch those two markets. We'll learn and optimize in those two markets. And at some point we may consider bringing it to the US but that's unclear at this point.

Barton, I'd add as Mike has noted in his comments, I mean one of the ways that we're trying to grow this business is to extend the franchise and the value of the QVC name across many platforms. That could include incremental channels or it could include increased Internet penetration as you've seen or experiments as we are in the UK with ITV broadcasting us late at night on the segment where we're not launching a new channel but in effect we're getting air time on one a-- one of the traditional main channels, broadcast channels there, and an interesting experiment. So we're always looking for ways to do that, as Mike noted, cost effectively.

Okay, great. And then if I could ask a question about the Starz tracker. the-- I was wondering if you could detail the one-time hit from the shutdown expenses for Party Down and Gravity? And then if you have any comments about your ability going forward to cover your investment in new originals by reduced spend on things like movies from Overture, perhaps a benefit from less fewer films coming out with your big output deals with Disney and Sony.

So I'll let Chris Shean comment first on the write-down.

Yes, the charges for Starz Entertainment for those two series that were shut down, was almost $5 million, close to it, rounds to it.

You want to go ahead, Chris on the--?

Sure. With regard to whether or not we'll be able to fund the accelerated output of original programming, clearly our goal is to drive the value of the Starz businesses and original programming is an important way to create more value doing differentiated brands. And not only do we need to create the programming we need to be able to fund the marketing of those programs. We think that we've come up with some interesting ways to approach how to fund those programs, as I said before, we've talked to potential partners. Climates change with regard to the ancillary value of a lot of that program, so we're focussed on not the programs themselves but how it can continue to drive Starz' growth in the near term as well as the long term.

But I'd add, Barton to Chris' point, you noted that longer term many of these deals, these output deals that we have, have a lower cost structure, and that does create opportunity for us. It's a challenge for us on a revenue side to make sure we are growing both ARPU and subscriber count, but the opportunity on the cost side that's opened up by both lower spot prices, fewer programs or rather films produced by the majors, and the structure of the new deals, creates room to either reinvest in original or bring incremental margin to the bottom line. And that's our goal, Chris' goal, the Management team that started this goal, is to mediate between those two positive attributes.

Okay. That's great. I'll leave it there. Thank you.

Next up we'll hear from James Ratcliffe, Barclays Capital.

Good morning, folks, thanks for taking the questions. One related to Starz and one related to sort of a Liberty overall view question. When you talk about rights and doing collaborative deals, what sort of rights specific are you really targeting, is it just US pay TV or are you interested in say US DVD, later on streaming and the like?

And Greg a more general one, when you look at buybacks, now you clearly were aggressive at LCAPA, not so at Liberty Starz this quarter, how much is Liberty Media overall view that you think this is how much of the say Liberty Media LLC cash we're willing to devote and then you look at which tracker looks cheapest at the moment and how much of it really is a -- do you think of on a cash balance by individual tracker basis?

After you, Chris.

With regard to the rights on the Starz programming, certainly pay television rights are important for the way these services are packaged we need to also retain the digital streaming rights. So those are ones that are crucial to us being able to do our business. With regard to the other rights, we look at them both globally and as a case-by-case basis. As I said, the ancillary markets have changed and we're going to try to make the best decision based on the analysis of the value of those rights with regard to the slate and each individual programming as we go forward.

James, on the second part of the question, regarding cash balances, while there obviously is shared responsibility ultimately for the debt, we're very comfortable with the equity values and that really has become a non-issue. We let each of the trackers ride on its own bottom when thinking about equity repurchase decisions. The Board affirms that thinking with its head as if it were the Board representing Liberty Starz or Liberty Capital or Liberty Interactive. So I think we think of them each individually.

Thank you.

Deutsche Bank's, Doug Mitchelson is up next.

Thanks very much. So Greg, I'm actually not going to ask a Liberty Capital question this course so I guess that's something. But, so on Starz, a couple questions for Chris or Greg. I think one is was the growth the last two quarters, quarter-over-quarter for subscribers coming from your fixed rate contracts or the contracts where you're paid per sub? I know last year you sort of had the positive where it was the fixed rate contracts where you lost subscribers, but what's the net impact in the first two quarters? That's the first one.

Well the growth came from both fixed rate deals and I'll let Bill, who has -- Bill Myers, who's the President over at Starz Entertainment give you the specifics, he's got the numbers in front of him and his glasses on.

Yes, on the Starz side, this is just for the last quarter, we have been growing subs in our consignment side. And, yes so basically what we've done in this last quarter is since we did our Comcast deal, they've taken advantage of the deal, and pretty much all of that growth has come out of fixed rate deals in the last quarter.

Last quarter. Okay, thank you. And then maybe, Chris to help us with this TV budget issue, the way to go about it is can you give us a sense of where the TV programming budget for Starz was in 2009 and where it's coming out in 2010, and then we can sort of make some guesses where you might go in 2011 and beyond on a percentage of programming costs or to dollar basis?

Yes, programming costs percentage. Well we're increasing-- I don't have the numbers, probably easiest to do it by hours.

(Inaudible) isn't it?

Yes, I mean we're ramping up to hopefully around 70 hours of programming a year, that is a significant increase over what Starz has done before. I would say that although that increase is probably a multiple of three or four, it will represent an increase in the original programming spend, probably double to original programming spend, and depending on how we look at the marketing that number will fluctuate.

If I could, if there's reluctance here, Doug, that's exactly why we have been focussed on, as Chris noted, several ways to take some of these costs, share them with partners, look at innovative ways to handle that. So we know what the target of what we want to get done on the amount of original programming we believe is helpful, if not critical to differentiate the channel. How exactly it will be costed out and what we will pay for it and how much will flow through the income statement is still open to question.

Yes and I just want to re-emphasize that we're committed to maintaining the growth at Starz and not having the investment in original programming change the trajectory of that growth.

Got you. And then last question, this one's going to be a little bit dicey. I mean Disney indicated that it's protected on any renewal with Netflix and that it would participate in growth in that digital revenue stream that you might receive at Starz. Can you help us understand, is that a simple revenue share over a certain fixed point or is that a cost per stream? There is a lot of debate about how you might approach the contract. And I know you're not going to give us anticipation of what that contract might be, but the nature of whether it's per stream or just a simple revenue share would be helpful.

Bill, go ahead.

Yes, protected in the sense that we have-- we have structured a deal that kind of maintains the premium nature of the service, and that above a certain number of Internet subscribers, they get an incremental -- they get a license fee above that. So it's -- so there's a -- there's a certain number of subs that we get free and then above that, they can play in on an incremental license fee basis.

Look I'd note the Netflix deal has a relatively short-term deal as we noted. It was a test in the market place and we'll see how that evolves. It's logical that our partners would participate in growth in that Internet business at some point and we structured a deal, we hope it's a good partnership with Disney to do that.

Right. Okay, thank you.

Next we'll take a question from Matt Harrigan, Wunderlich Securities.

Good morning, thanks for taking my question. Firstly, you noted that you had more new customer activity at Q. I did notice that you're a little bit more visible on the image advertising side at the World Cup and Wimbledon, and I'm curious if your thinking is evolving in terms of the efficacy of more marketing for Q to introduce it to new clients?

And then my second question just relates to the deal you announced using Ensequence, your (inaudible) and what the upside for Q is there? And then lastly on Liberty Starz, when you look at -- you mentioned you retained the rights for home entertainment for Camelot, when you look at a fairly successful series, some of the HBO shows over the years, what would be the home entertainment potential for a mild hit or break out hit? I would assume those are real dollars, if you could just put a broad collar in quantifying that?

So Mike, maybe you could comment first on Q.

Sure. On the marketing side, I would say our view that traditional TV and print advertising does not have a strong ROI associated with it, that view still holds. So I'm delighted that you saw the recent advertising, but I would note that all of that came at no cost to QVC and as part of our longstanding affiliate agreements whereby they provide us with some air time. So I think that says we're doing a better job of how we get that air time and the caliber of the advertising, but all of that is at no cost to QVC.

That said, I would say our marketing activities continue to do pick up but generally what we find is most effective is things that drive heavy levels of PR, and we do a lot of event-based activities that draw celebrities, draw PR attention, and we're carefully ramping up our on-line bend as we finetune [online] models for where we can play in Internet-based advertising. So I think it's fair to say you'll see a, I hope you'll see a continued pickup in visibility for QVC, but it will not result in a significant increase in paid marketing, which we continue to believe for the most part is not highly advantageous for us.

On the Ensequence deal, I should note that Ensequence announced-- made an announcement, QVC has not, QVC has not made any announcement about that. But nonetheless, as that announcement indicated, we are looking at launching an interactive shop by remote application in the US. We've had one in the UK for about ten years. And as I've always maintained on these interactive applications, I don't think they drive significant incremental revenue. It's another form of convenience for the customer.

What we've seen, the reason we decided to go forward is that we've seen both the cost of deploying the technology dropped dramatically in the last year, as well obviously a pretty rapid expansion in the number of [ebeth-enabled] homes. So we just felt that the equation, not unlike the second channel discussion we had a minute ago, we thought the equation was good in that the cost to do it had fallen quite a bit and the availability had increased. So we're excited about it. We hope it might drive some incremental revenue. It may create some cost avoidance if it avoids a phone call to our live operators.

But I think what it mainly is, is a way to continue to get consumers-- to continue to make this service available when and how consumers want it and to try to be flexible in terms of providing a variety of devices and platforms from which the consumer can experience the show. So I think all of that just continues to make us more relevant in the marketplace.

If I could add to Mike's point. I mean we're seeing an enormous growth in our interactive revenue called the Internet. And it's the general purpose Internet with people using devices that (inaudible) the growth, and Mike you might comment particular how in (inaudible) we've seen a relative, relative decline in the buy button compared to--

We have. We've clearly seen as the Internet has taken off and mobile has taken off, that in the UK, at least, our interactive -- or the use of the buy button has declined over time. We continue to try to innovate on the buy button to hold those sales, but we're not losing those sales, they're just -- they're going to the Internet. And that's a more, in our view at least for now, that's more natural with our -- we've seen from a very low base extraordinary growth in adoption of our iPhone and other Smartphone apps, and we're now seeing real sales from those apps. And quite frankly if you're sitting on the couch watching TV, it's as quick to pull out your iPhone in about two clicks have ordered the product than it is to try to learn how to use a remote control.

So, again, I don't want to -- we hope we'll find some exciting interactive applications through the remote, I don't want to diminish that, or we wouldn't be doing it. But it is part of this broad line of services, and if you kind of go through our priorities, at the very top of the list would be Internet and mobile, and then interactive and second channels would be a notch lower, but nonetheless something we want to experiment with.

Great. Chris?

Yes, with regard to the DVD, I mean, obviously the DVD business has been declining. And-- but we do believe that those rights on successful series and mini series, are worth real revenue. And unlike the theatrical business where there's has been a target ratio between box office and DVD sales, the TV business has been a lot less of a formulaic business.

And the research that we have been able to get, the information that we have been able to get, shows that box sets of successful series and event type mini series are holding up better than the theatrical marketplace is. And we're going to get some firsthand experience in that, because we're going to [streak] the Spartacus DVD first season in September. So this is a little bit of a new frontier for us. But we do look at these rights, as I said before, as opportunistic on a case-by-case and overall slate basis. And we still think that there's value there with the right projects.

Great, thank you very much.

Great, thanks.

Now we'll hear from Tom Eagan, Collins Stewart.

Super, thank you very much. First question is on Starz Media. I guess I was hoping you could provide some color on what may drive some of the revenue in the second half of this year, was it mostly coming from filmed library? And then in terms of cost with the-- with two-thirds of the over head going over to Relativity, what would make up the cost side of that in the second half? And then I have a follow up. Thanks.

Revenue in Starz Media for the second half of the year will be driven mostly by the library and the current products that are out there on the Overture side, as well as three additional Overture titles, which will be released, as I said before, through our new distribution services agreement with Relativity, which is using the former Overture team, so they're very familiar with the films. We-- with respect to the expenses going forward, as I said, we're evaluating all the strategic options for the Starz Media businesses, and we're committed to trying to get the best result for the Starz Media shareholders as we go forward. But as I mentioned, we're looking at significantly less losses in the Starz Media category given the decision that we made on Overture.

Right. And so -- so is Starz Media getting a distribution fee on the three films that are being released via Relativity?

No, actually we have a distribution services. We-- the ownership structure of those films remains intact. The only thing Relativity is doing is distributing those films for us--

Okay.

Right. So it's actually the reverse of what you said.

Right, okay. And then in terms of the overhead, so now you only-- Starz Media only incurs one-third of the overhead -- one-third of the personnel that were transferred, is that right?

Well actually we're continuing to resolve the staff issues for the rest of Overture's business. Because now that we are not in the business of acquiring and distributing films, there's a lot of cleanup that needs to be done, but the need for that staff going forward is for a very limited time.

Right. Okay. And then on Starz Network , so clearly the margin was under a little bit of pressure in the first half because of higher programming and marketing costs. So what should we expect for the second half?

Well, first, we remain comfortable with the estimates we set forth in I believe it was November. At the time we launched the tracker.

Right.

Our 2010 estimate remains intact and we're-- still think 5% to 10% growth. But we haven't changed that so you can back into where we are.

Okay, great. Thank you.

Our next question today comes from Douglas Anmuth, Barclays Capital.

Great, thanks for taking the question. I wanted to ask a couple things around QVC, Mike, first can you provide some more detail on the drivers on the US EBITDA margins and in particular just trying to figure out how sustainable these are going forward excluding the effect of the GE credit deal? And then secondly can you talk a little bit about trajectory of sales during 2Q and perhaps so far into the third quarter and how you're thinking about the back half? Thanks.

Sure, Doug. On EBITDA, as I mentioned, we saw some enhancement in initial product margins as the mix of the business shifted away from some of the lower margin categories. As you know, I'm always loathe to try to predict product margins because it just really depends on what the consumer is engaged with. And so if we see consumer electronics really explode in the back half of the year, after a bit of a lull in Q2, and we are excited about some of the innovations that are starting to get to market, this is was a very innovation bare period, that would have, one-- make product margin look one way but would also probably help our sales line. So we'd probably be looking at a somewhat lower rate but maybe more attractive sales. And if we're in a heavy apparel cycle, we could see a little bit of the inverse. So I try to shy away from being real predictive around product margins.

The other things that powered the EBITDA, were a nice gain in-- a nice reduction in the obsolescence rate. We'll continue to manage inventories tightly. We probably saw a little bit bigger improvement in Q2 than we might see on an average basis. And then we just had a pretty good leverage of our fixed cost, fixed cost line. So a long way of saying, I don't know that every quarter we could see the kind of improvement in EBITDA rate that we saw in Q2, that's an unusually high rate of improvement, but probably the biggest unknown for us is, what's the product mix look like and how do you sort of trade off sales growth versus product margin rate? And then, as you noted, we do have to kind of adjust EBITDA going forward for the impact of the GE deal.

In terms of sales projectory, I also always hate to talk about sort of sales trends within a quarter because we're so influenced by the programming calendar that's it's a little bit hard to get a read on it. But I think it's fair to say in Q2 April was the toughest month and that we've seen a decent improvement in the business as we went through the quarter. I don't know that that reflects any underlying improvement in the economy. I think it probably reflects more our ability to try to respond to what obviously became a bit of a slowdown in those months and try to adjust our product mix accordingly. So we were pleased with our ability to respond and to see some improving momentum as we went through the quarter. I'll shy away from commenting on in quarter results just given our policy on than that.

Although we did disclose our Christmas in July event, at the end of July, was very strong. How predictive is that of Q4 sales, again, a little bit hard to say, but it did tell me that the consumer was a bit bored with the summer and with all of the sales at traditional retail, and when we put a lot of innovation at Christmas in July, we got a really terrific result with the 14% growth that weekend. So we're going to continue to try to present that sort of innovation, and see if we can't power some sales in the back half.

Great. If I could just follow up real quickly on the GE situation, and obviously I understand the positive effects in terms of cash and everything going forward, but how should we think about this in terms of revenue? That part seems a little cloudier.

There's no material impact but Dan O'Connell, do you want to just comment on that?

Well I think what we can expect going forward is hopefully as the economy recovers, a reduction in the bad debt rate which was about 8% on that portfolio. And we did increase the APR on the card beginning of the year and we're seeing some revenue growth from that. So I don't think we'll see much acceleration in the growth. The portfolio itself has grown by about $20 million from end of the year, average account balances are up slightly and I guess in the current economic environment we're seeing a little bit more in revolving activity on the card. So hard to predict how that will play out for the balance of the year, but I would say the portfolio is performing well right now and will continue to do so.

And, Mike I would add also that the income from the card is not captured as a component of revenue, it's a reduction of SG&A expense. There shouldn't be any impact to revenue on the top line.

If I could add one more thing on the operating margin. If you look historically over the last couple of years, Q2 has tended to been a seasonally high operating margin. I don't know whether that's product mix or what, but we tend to have the highest operating margins, among the highest operating margins in Q2. So not clear when you look sequentially that that's a great-- always the best test.

Yes, I agree with that.

Okay. That's great. Thank you.

And our final question today will come from Douglas Anmuth, Barclays Capital.

Didn't we --

I apologize, our final question today comes from Jason Bazinet, Citi.

Thanks so much. How are you?

Good.

I have a question for Mr. George on QVC. Earlier this year at the Analysts Day you were kind enough to share with us the trends and the bad debt expense and the write-off rates of the Q card as well as easy pay. I think in the release that you issued this morning you said that the bad debt expense did tick up a bit. Is the same thing through fort Q card and easy write-off rates?

Dan, why don't you take that one.

Yes, I mentioned a minute ago that the bad debt rate on the Q card was about 8%, that's up from about 7.4% last year.

Yes.

And I believe for the year-to-date period up about $2.4 million in write-offs on the Q card.

Okay. And can I ask a conceptual question? This is going to sound negative and it's really not meant to be. When I sort of think about the-- how well you guys performed in the downturn and how well you're performing now relative to sort of the buy side's expectations and I listen to the number of new customers that you're getting, is it possible that you all have sort of found a new sweet spot, if you will, by being a bit more flexible in terms of credit you're willing to extend to people, or whatever other screens you use in terms of credit scores? In other words, in an environment where other retailers are being more restrictive and scared you sort of opened up the envelope a little bit, is that a fair characterization or would you say that's a misguided notion?

Well I would say on-- we extended credit in two ways, one in through our Q card and we have not fundamentally changed or loosened up the screening and if anything on the margin it's probably a little tighter as we went through the recession. We were already fairly tight, so we didn't have to respond as aggressively as other people did. And the issues of our Q card has been about stable or even down slightly. So I would say that as a general statement, while people are revolving more to Dan's point, we're not fundamentally increasing the usage of credit on the Q card.

We do-- the other vehicle we use is easy pay where we will offer two to six installments on higher priced point purchases. We have used that a little bit more during the recession and I think that's been an effective tool for us. Although, having said all of that, at the conceptual level do I think credit access is meaningful in the story of our performance? Probably not. I wouldn't put that in my own judgment as a -- as one of the top drivers of getting incremental market share. I really do think at the core the market share is driven more by the fundamentals of, I think, a better level of product innovation, more entertaining programming and really this focus on the Internet. When you look at that 21% growth in revenue from the Internet in the US, that's really a huge number, uniquely different from other people in this space. And I think that just is continuing to entice more people to -- both get incremental purchases from QVC customers but also entice more new customers to the platform.

Okay. Thank you very much.

Well Operator, with that, let me -- let us end the questions and we've gone the hour. Thank you to all who are listening for your interest in Liberty, again. And we look forward to seeing you again next quarter -- hearing from you. Thank you.

And that does conclude today's Liberty Media Corporation quarterly earnings conference call. We thank you so much for attending and have a good day.