Liberty Media Corporation (L)
Q4 2005 Earnings Conference Call
March 8th 2006, 11:00 AM

Executives:

John Malone, Chairman
Greg Maffei, President and Chief Executive Officer.
Michael George, President, QVC’s
Bill Costello, COO, CFO and President of International Operations, QVC
Bob Klausen, President and CEO, Starz
Bill Myers, Chief Financial Officer, Starz
Bill Strauss, CEO, Provide Commerce
Chris Sheehan
Morris Mark, Mark Asset Management

Analysts:

Kathy Stephonias, Prudential Equity Group
Bissett Chein,Wacho
Philip Olsen, UBS
Michael Savenor, Bank of America Securities
Tuma Amobi, Standard & Poors Equity Group
Jessica Refillen, Merrill Lynch
Mathew Harrigan, Jankow Partners
Alan Gould, Blythe Schroeder
April Horse, Hoffer & Arnett
Eli Lapp, UBS Principal
David Smith, Western Asset.
Edward Lapadiscano, Sigma Capital Management
Vjay Jhan, Lehman Brothers
Adam Stillman, PPM America
Robert Shiffman, Credit Suisse
Doug Colandrea , Sterns

Operator:

Good morning ladies and gentlemen. Welcome to the Liberty Media Corporation’s fourth quarter 2005 earnings conference call. During this presentation Liberty makes certain forward looking statements about business strategies, market potentials, future financial performance, news service and product launches and other matters. These statements involve many risks and uncertainties that could cause actual results to differ materially from such statements, including without limitations, possible changes in market acceptance of new products and services, competitive issues, regulatory issues and continued access to capital in terms acceptable to Liberty. Please refer to the publicly filed documents of Liberty Media Corporation, including the most recent form 10K filed by Liberty Media Corporation, for additional information about Liberty and for information about the risks and uncertainties related to Liberty’s business. 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, go ahead sir.

Greg Maffei, President and Chief Executive Officer.

Thank you and welcome all of you this morning and thank you for joining us. I’m pleased to be on my first quarterly call as President and CEO of Liberty. And, I’m excited to be part of such a vital organization. Today on the call with me we have Michael George, QVC’s new President and in about a month QVC’s new CEO, upon Doug Briggs’ retirement. Along with Michael, we have Bill Costello, QVC’s COO, CFO and President of International Operations. From Starz we have Bob Klausen, President and CEO and Bill Myers, the Chief Financial Officer. And from our newest subsidiary, Provide Commerce, we are joined by CEO, Bill Strauss.

Along with me here at Liberty, we have our Chairman, John Malone, and many of our other senior executives and we’ll all be available to answer your questions following my prepared remarks.

I want to spend a few minutes discussing our 2005 activity, full year and fourth quarter financial results at Liberty and particularly focus on our two largest controlled subsidiaries, Starz and QVC. I will also discuss our balance sheet and liquidity position before opening up the call for some questions.

2005 was a good year for Liberty in many respects. During the fourth quarter and for the full year, we continued to produce positive financial results. As I will discuss in more detail later, we once again achieved healthy revenue in OCF growth at QVC. And, despite a difficult environment, Starz continued to experience positive subscriber growth trends that, while somewhat offset by declines in effective rates, resulted in year over year revenue growth. In November we announced our plan to create a tracking stock to better follow the performance of our Interactive assets. We believe this transaction will be completed in early May and the tracking stocks will begin trading at that time. Both Liberty Interactive and Liberty Capital are expected to be listed on the NASDAQ. I’ll take a little bit more time to talk about the trackers in a moment. Also in the fourth quarter we announced a new investment and a new acquisition. In November we announced our plan to acquire 51% of Fun Technologies. We expect that transaction to close in a matter of a few short days. Fun Technologies is an industry leader in casual skill and fantasy sport games. With this investment we are getting access to a proven management team; and addressing a demographic we understand through our affiliates QVC, Court TV and GSN. Skill games in particular are rapidly growing in popularity, and participation and we believe through cross promotion on GSN, the network for games, we can leverage the power of video to accelerate Fun’s growth in this industry. Fun will become a part of Liberty Capital. We also recently completed our acquisition of Provide Commerce. Provide will reside in Liberty Interactive and serves as a perfect example of the types of opportunities we believe QVC and our Liberty Interactive vehicle will afford us.

Provide has a strong management team that has created a unique value proposition by re-engineering the flower delivery supply chain in (inaudible). We were able to acquire Provide at a very reasonable valuation and believe that through the power of QVC’s video engine, we can enhance Provide’s already impressive top line growth.

In January of this year, Starz re-launched its IP Contact Delivery Service under the brand name Vongo. This service will initially offer customers unlimited catalogs of movies in the Starz window (basically the pay TV window,) for $9.99 per month. We are in the process of evaluating other digital content opportunities to add to this service. Two weeks ago we announced that we filed for HSR clearance to increase our stakes in IAC and Expedia. We have long been supporters of Interactive and Expedia and believe in these businesses. In particular we believe they are taking appropriate steps at both companies to capitalize themselves efficiently and drive increasing leveraged equity returns. We did not have a current HSR clearance and need to file for clearance to acquire additional cirus, whether third party or through our own preemptive rights. In either case we made this filing to create flexibility, to be opportunistic should the situation merit.

Finally, we announced my transition last week to the President and CEO role. I’m excited to be joining Liberty at such a busy time and I’m enjoying working with the management team. I’d like to take this opportunity to thank Dobb Bennett personally for his assistance in the transition and on behalf of the entire organization for his many years of leadership and dedication to maximizing shareholder value. We’re pleased that Dobb will continue on the Liberty team in a strategic capacity and as a member of our Board; and I and many of us look forward to working with him.

Now let’s take a look at our financial results. Overall operating results in 2005 were good. Liberty reported consolidated revenue of nearly $8 million in consolidated operating cash flow of $1.6 million. Compared to 2004 this represents increases of 13% and 10% respectively. QVC’s performance was particularly impressive; posting 14% revenue growth in 2005 and 16% growth in operating cash flow as the businesses experienced strong performance in all of its markets and across all product categories.

Starz revenue grew 4% in 2005, driven by an increase average subscription unit for SEG services, particularly offset by a reduction, excuse me, partially offset by a reduction in the effective rate charged for such services. Operating cash flow declined within expectations largely due to higher programming costs and increased SG&A expense, primarily related to the develop and launch of the new Vongo service.

Now let’s take a look at our operating results by business unit. QVC had an outstanding quarter and an outstanding year. 2005 revenue and OCF growth of 14% and 16% respectively were driven by strong growth both in domestic and international operations. Domestic revenue was up 14% in the quarter and 12% for the year and was driven by increased sales to existing customers, particularly areas of home, in the quarter, and apparel and accessories for the full year.

QVC.com sales increased a 19% of total revenue for the fourth quarter and 18% for the full year. QVC’s average selling price increased 4% both for the quarter and the year. Domestic operating cash flow increased 8% in the quarter and 11% for the year while OCF margins declined 150 basis points in the quarter and 20 basis points for the full year. This was primarily drive by lower gross margins as a result of an anticipated higher inventory obsolescence provision on the year end inventory balance which was outlined for you on Liberty’s Third Quarter conference call.

International revenue increased 14% for the quarter and 20% for the year; and 24% and 22% respectively excluding unfavorable foreign currency effects. OCF increased 42% for the quarter and 34% for the year; and 53% and 35% excluding the unfavorable foreign currency effects. Very strong cash flow growth. Revenue increases were experienced in all international markets in which QVC operates and were primarily attributable to greater sales in existing customers and strong subscriber growth.

Operating cash flow growth was partly attributable to the revenue growth while cash flow margins also increased from 16% to 20% for the quarter and 16% - 18% for the year; primarily due to a lowered inventory obsolescence requirement.

Needless to say, we are very pleased with QVC’s ongoing strong operational performance, but 2005 was a year that may be hard to repeat. Nonetheless, we do expect continued good performance under the new stewardship of Michael George and the ongoing operational guidance from Phil Costello.

Now let’s turn to Starz results. Starz continued to experience solid subscriber growth in the fourth quarter and for 2005 as a whole. Subscriber growth for the quarter was offset by a decline in the effective rate charged for the Starz and Encore services. For the year, revenue grew 4% as the subscriber growth slightly outpaced the reduction in the effective rate.

As we have mentioned, throughout the year Starz operating expenses have increased in every period due to higher programming costs. For the fourth quarter operating expenses increased 8% while the increase totaled 15% for the full year. This is primarily driven by increased programming costs, as I mentioned. Costs of programming increased 6% in the quarter and 18% for the year, primarily driven by increases in the percentages of first run films and higher costs per title due to new rate cards for movie titles under certain of Starz existing license agreements. However, we are beginning to see a slow down in the rate of programming cost increases and we expect 2006 increases to be in the mid single digits.

Operating costs were also negatively affected by higher SG&A expense associated with the development and launch of Vongo, which was announced in January at CES. These increases were partially offset by a $16 million decrease in sales and marketing as the Starz, Encore group participated in fewer national marketing campaigns and obtained reduced marketing commitments under its Comcast affiliation agreement. An additional cause of Starz increased programming costs has been the acquisition of IT rights to the films that Starz has licensed. As a result of these rights, and based on Starz experience with Starz Ticket, the company re-launched its IP movie service in January, CES. Starz believes this service will be very compelling for subscribers and expects it to drive meaningful revenue growth for the Company.

Finally, the Company has extended its Ecostar agreement under its current terms until March 8th, and continues to negotiate a new affiliation agreement.

In addition to our solid operating performance, we continue to maintain a strong capital structure with over $19 billion in public holdings in just under $10 billion base amount of debt. As we move forward with our structural changes, we believe we have significant financial flexibility to continue to invest in our core assets, make strategic acquisitions of growing assets, and repurchase equity of either Liberty Capital or Liberty Interactive should we believe that either trade at a significant discount to its underlying values.

Going forth we will continue to focus on maintaining operating momentum, converting our non-strategic assets into cash or leveraged growth businesses; using our cash and debt capacity to make leveraged acquisitions of growing assets; disaggregating assets to improve their growth prospects; and using leverage to drive improved equity returns.

Before I turn the call over to questions, let’s review the structural changes we are undertaking to reduce complexity, increase transparency and provide financial flexibility. One quick note, normally we would be providing detailed guidance for QVC and Starz on this call. However, we will not be giving 2006 guidance today as we believe that going forth, guidance will be more meaningful in the context of the two tracking stocks. In fact, providing greater transparency of the leveraged equity story at QVC is one of our key aims for Liberty Interactive. Since there are several open items regarding the structure, composition, accounting treatment and tax rates of the trackers that we do not expect to have fully resolved for a couple of weeks, we intend to give guidance for Liberty Capital and Liberty Interactive next month. In fact, we intend to have a full Road Show introducing those companies to the marketplace ahead of trading. And, at that time we will lay out specifically what the financial reports for those companies will look like and give greater transparency into the holdings of each of those entities.

As we’ve mentioned of late, we’ve been repeatedly reminded of our complexity and the resulting discount in our stock price. We’ve heard this concern and have created tracking stocks that we believe will simplify our structure and provide financial flexibility while highlighting QVC and our other strong Interactive assets. On the Interactive side in particular, our goal is to create a clean E-Commerce company that will trade in line with its peers. The Interactive Company will include our operating companies QVC, and our recently acquired Provide Commerce. In addition it will include our strategic investments in Interactive, Expedia, GSI Commerce and Commerce Hub.

We believe that these dynamic and strong performing assets are undervalued in Liberty portfolio today and should be traded with much stronger multiples. By separating them out, and creating an interactive company, we believe we will achieve this while gaining significant financial flexibility to continue to grow these businesses organically, internally develop new areas of growth, make acquisitions and shrink Liberty Interactive’s equity if we do not believe it’s trading at a valuation consistent with its specialty retail and E-Commerce peers. When trading in line with these peers, we believe Liberty’s equity will serve as a strong currency for additional strategic acquisition opportunities. Specifically, our objectives will be to continue to QVC’s strong operating performance, leverage its powerful video engine to promote brands in E-Commerce businesses, make strategic acquisitions, build new lines of business and drive consistently strong earnings and cash flow growth. We think the market will quickly recognize the value of Liberty Interactive and price it accordingly.

Now let’s take a quick look at Liberty Capital. The remainder of Liberty, including Starz, our large holdings in News Corp, Time Warner, Sprint, Motorola, Viacom and CBS, our private affiliates like True Position and Wild Blue our derivative instruments and exchangeable debts will remain in a entity we are calling Liberty Capital. Our objective will be over time to reduce the complexity of Liberty Capital by tax efficiently transforming many of our non-controlled and non-cash flow generating assets into strategic cash flow producing subsidiaries. It will take some time. But we are confident that we will eventually be successful. Also, if as expected, much of the discount that we see and others see in Liberty is focused on the Liberty Capital entity, we will be in a position to more efficiently target our share repurchase program to shrink the equity of this tracker.

Going forward, our strategy will be to drive growth through exchanging non-strategic, non-cash flow generating assets into controlled free cash flow producing strategic businesses. We are exploring a number of areas of focus, some of which we have initial investments, including skill games, mobile media and IT video as the first areas of interest. As I previously mentioned, we recognize we have some heavy lifting to do here in Liberty Capital, but we also believe that over time, we will have a dynamic growing entity that will give our shareholders strong returns for their positions.

Now let me quickly summarize what has been a busy year for Liberty. As you’ve seen, we continue to produce strong organic growth in our core businesses. We expect that to continue in ’06. As you recall, we are also employing a new strategy which was begun in 2004 of disaggregating businesses by distributing them to our shareholders. In July we completed our second such transaction when we distributed our 50% interest in Discovery Communications and our wholly owned subsidiary Assent Media Group to our shareholders. We believe that this will add value to our shareholders by putting Discovery in a stronger position to take advantage of growth opportunities.

In 2005 we also completed our debt reduction program which was begun in 2003. This further strengthened our balance sheet and enhanced our financial flexibility. We also announced two significant management changes in 2005. First, we announced that Doug Briggs who has so successfully lead QVC for many years, will retire effective the end of the first quarter of 2006. We are very pleased to announce that he will be replaced by Michael George, who through his experience at Dell and McKinsey, shares QVC’s philosophy of customer respect and brings a wealth of internet experience as well. And as I mentioned earlier, Dobb Bennett announced he will step down as President and CEO role from his present CEO role from which he has served Liberty shareholders so well for 9 years; and I was hired to replace Dobb and as of last Wednesday, became President and CEO of Liberty.

Finally, we announced the acquisition of Provide Commerce, a large investment in fund technologies and the roll out of Vongo’s IT content delivery service. These actions were undertaken about the time that we announced our plan to form two tracking stocks to better track the performance of our assets. As I’ve mentioned, we believe this strategy will serve our shareholders well and we will be talking much more about these in the weeks ahead, leading up to our shareholder meeting at which time we expect the tracking stock structure to be approved.

So, thank you for joining us today. And I’d now like to turn the call over to the moderator who will open it up for questions.

Operator

Thank you. The question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key followed by the digit one on your touchtone telephone. If you are using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, please press star one on your touchtone telephone to ask a question.

We’ll go first to Kathy Stephonias, Prudential Equity Group.

Kathy Stephonias

Hi, thanks. My question is regarding QVC. Could you give us a sense of what the margins were both for the quarter as well as for the year for Japan, the UK and Germany? That was something you used to disclose and isn’t in the 10K this time around. Thanks.

Greg Maffei

Bill, are you going to handle that? Bill Costello do you want to handle that?

Bill Costello

Excuse me, I’m here. When you’re talking about the margin, Kathy, I assume you mean the operating margins?

Kathy Stephonias

Yeah.

Bill Costello

Not the gross margins, but the operating margins?

Kathy Stephonias

Correct.

Bill Costello

The highest one is in Japan, because we have the highest average selling price there and the lowest return rate, and Japan’s gross margin is about 21.5%.

Kathy Stephonias

Not for the quarter, the year, Bill.

Bill Costello

I’m giving you for the year. I don’t have the quarter in front of me, so let me just give you the year.

Kathy Stephonias

Okay.

Bill Costello

It’s 21.5%, and Germany is 16.1%, and the UK is 15.5%.

Kathy Stephonias

Okay. Thank you.

Bill Costello

Okay.

Operator

We’ll go next to Bissett Chein with Wachovia.

Bissett Chein

Thanks for taking the call and welcome Greg.

Greg Maffei

Thank you.

Bissett Chein

Let me focus on two things, and I guess I’m looking for more body language than exact answers, because I think much will be explained in May or whenever you do the Road Shows. Two focuses. One: the debt reduction program, the magnitude of debt reduction going forward. In the past two years Liberty was very specific on the amount it wanted to pay down and they did. Second, a little more transparency around the tax impact on the hedges. In other words, will you be providing what it would cost each quarter when you release numbers to unwind the hedges around your specific positions? You used to do that back in the day.

Greg Maffei

Bill on the first one, I don’t believe that we now have an articulated debt reduction strategy or target. In fact we’re holding our powder dry in the event that the equities of either tracker isn’t performing to the level we believe is appropriate and we want to have the flexibility to repurchase those equities. So that’s I think our first priority. And, in addition, we’ve been using some of that capital to do strategic investments or acquisitions like Fun and Provide and we see more of those opportunities ahead - particularly on the interactive side, and we want to keep our powder dry for that. Second, while I don’t know the historical policy that you articulated, it predates my time, I believe that we are not going to give an incremental detail on the cost on line hedges; believing that will not help us if we are out in the marketplace moving on any of those instruments.

Bissett Chein

Okay. Last follow up on this question. The original concept of the tracker in structuring is that all of the assets would still be structurally guaranteed or support the debt. Has there been any change in that approach to how you structure the tracker?

Greg Maffei

Well when you do a tracker, you are just allocating for in effect, accounting purposes, or articulating as a return purpose what will go where. But, you aren’t actually physically changing the legal requirements of any set of assets to support any sort of debt. So, the institution of the tracker itself will not have any change on what assets support what liabilities.

Bissett Chein

That’s very helpful Greg. Thank you.

Operator

We’ll go next to Philip Olsen, with UBS.

Phillip Olsen

Thanks a lot. It’s actually a bit of a follow up to that question. In understanding that the tracker only allocates the debt between the two entities, it was my understanding that it would be your desire ultimately to proceed with a full asset base spin and in that scenario, what is your intention in terms of legally dividing the existing debt between the two entities? I know in the form 10 you already provide how you will allocate it, but what actually happens upon the event of a full asset based spin?

Greg Maffei

Well, I think as we’ve articulated previously, we have no intention of a spin to debt. But were one to complete a spin, you would have to, as you’ve rightly pointed out, physically and legally move the debt over to the various entities. There are several ways in which that could be accomplished. We’re not articulating all those today. But you’re exactly right, they would have to be done before any actual spin could be completed.

Phillip Olsen

And in terms of a gating factor for the, to the extent that you were to pursue an (inaudible) based spin, is it fair to assume that the five year ownership of QVC would kind of be the time frame? That you’d have to hit that anniversary before a spin would be likely or at least feasible?

Greg Maffei

I don’t think I’m going to commit or we’re going to commit that; that’s the gating factor. I think you’re correct in pointing out that you need a five year trader business. Whether QVC would be the qualifying asset or we’d have another means of achieving that, you know, that’s one of the things we are going to maintain flexibility upon. But, obviously we would need - as you rightly point out - a five year trader business.

Phillip Olsen

Are there any other factors in that we’re supposed to be focusing on?

Greg Maffei

Well I think you rightly pointed out you would physically need to do the exchange or the movement of these liabilities. There are some issues around which are not gating issues, but are a factor that would cause us to consider the timing of any spin that might be thought about in the future - including the fact that QVC is a tax-payer. But the Liberty Capital side is likely to generate losses which would be…it would be effective to keep those combined from a tax basis. And obviously, any actual asset spin would lose that opportunity and therefore be taxed in addition. So, at a minimum for some period of time we’re in that position. That would not be particularly attractive and there may be other factors but those would be among the leading factors.

Phillip Owen

Great. Thank you.

Operator

We’ll go next to Michael Savenor with Bank of America Securities.

Michael Savenor

Good morning, thanks. Three quick ones if that’s okay. First, for Starz based on revenue growth over the past few quarters and couple of years, it would seem like mid-single digit growth in programming costs and your continued investments, SG&A would imply that expenses will probably still grow faster than the top line. So I just want to see if that kind of conclusion is directionally accurate? Second, maybe touch on your Time Warner interest. Obviously you’re moving forward to regain control of your voting rights and I was wondering if there are…do you know if there’s a way for you to monetize that interest through an asset swap? If that’s something that you would pursue, and if so, if there’s anything that you could discuss publicly that would interest you? And then third and last, Expedia going into LI, you know operationally is not as synergistic as some of the other businesses. They’re going to be part of the Interactive company; I’m just wondering again the logic behind putting Expedia in there? Is it simply because the growth characteristics match the rest of the assets? Thanks very much.

Greg Maffei

Well, I’ll let Bob Klaussen…do you want to take the one about growth rates of expenses?

Bob Klaussen

Yeah, that will be fine. First of all, programming costs do peak in 2006. So we do expect, as Greg pointed out, that especially early in the year our programming costs will peak and then reach a plateau. And so for the year certainly it will be a growth ahead of our revenue. But perhaps as we look forward to ’07 and ’08, we have a much stronger chance of managing those ...