Welcome to the Liberty Media Corporation quarterly earnings conference call. This presentation includes certain forward-looking statements within the meaning of the Private Securities and Litigation Reform Act of 1995 including statements about financial guidance, business strategies, market potential, future financial performance, new service and product launches and other matters that are not historical facts.
These forward-looking statements involved 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 statements contained herein to reflect any change in Liberty Media 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 non-GAAP financial measures included adjusted EIBTDA. The required definitions and reconciliations, preliminary notes and schedules 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.
Good morning and thank you to all out on the call for joining us today and for your continued interest in Liberty Media. Today, we’ll review the year and the quarter by tracker. We’ll discuss the operating performance at our controlled subsidiaries. We’ll cover transactions and other development.
Liberty’s Controller Chris Shean will discuss the attributed businesses financial performance and liquidity picture for each of those and QVC’s CEO Mike George will discuss operating developments and results at QVC. Starz CEO Chris Albrecht will review recent events there at Starz. Also on the call today we have QVC’s CFO Dan O’Connell, Starz Entertainment President, Bill Meyers, Starz’ CFO Glenn Curtis and several other assembled Liberty senior executives. We’ll all be available for questions after the prepared remarks.
Looking at the first quarter, in general we had excellent and continued momentum from what we experienced in Q4. At Liberty Interactive, QVC experienced a good first quarter with top tier retail revenue results and industry-leading revenue results among home shopping networks.
We continued to expand our margins and we continue to drive internet adaptation and evolution of the business with U.S. QVC.com growing about 24% year over year and globally dot com revenue growing about 23% year over year.
Our e-commerce companies posted 10% revenue growth despite a change in our non-transaction revenue programs that reduced revenue and more dramatically, impacted adjusted OIBIDA. Chris Shean will talk a little bit more about that in detail in a moment.
At Liberty Interactive, we continue to clarify the story, continue to enhance liquidity by selling our shares in Via Sat, GSI and our logoed shares in IAC. We also extended maturities with issuances of $500 million tranches of seven-year bonds and ten-year bonds. We used some of that liquidity for our recently announced Dutch Option Tender for $4 million of our senior debt, senior notes maturing in 2013.
At Liberty Starz, we had good revenue and adjusted OIBIDA results despite a lack of significant CPI adjusters and a programming write down that Chris Albrecht will discuss in a little more detail.
We were very pleased with the response to Spartacus throughout the 13 weeks. I think the script got stronger and the audience grew and was strong. It’s a good example of what exclusive, original programming can do, and we see the positive results in the sequential trend in subscribers that is at least partially a result of that.
There’s a virtuous push/pull cycle with our distribution partners being more apt to feature us because of original programming like Spartacus and our end use consumers being more apt to ask for us because of original programming like Spartacus.
We’re working on the development new and exciting series. Perhaps you’ve read or heard about our coming debut of Pillars of the Earth which will be on in July, the gripping historical novel that was an Oprah Book Club selection and sold over 15 million copies. We think it’s going to be a great event for our Starz subscribers this summer.
At Liberty Capital, Sirius XM posted very strong financial results driven by good operating performance including 171,000 net adds, churn falling down to 2%, being reduced to 2%, and increased conversion, particularly at some of our growing partners on the audio side.
Despite the market correction of the last few days, we have very strong gains there and remain very excited about the business and its opportunities going forward.
We’re also excited about the opportunities for and the stock performance of Live Nation. While we had mixed results for our tender, garnering a little less than 1% of the 34 million shares that we sought, it’s a typical Liberty story in that we were somewhat pleased with the 35% to 40% stock price increase because we already own 15% of the stock.
We continued the share repurchase at Liberty Capital, buying back about $87 million worth of stock from January 30 to April 30, and as you may have read in the release, we re-upped for another $500 million of held cap share repurchase authorization approval by our Board.
So with that, let me turn it over to Chris Shean and let him talk first about the financial results.
Liberty Interactive Group’s revenue increased 11% to $2 billion in the first quarter while adjusted OIBIDA increased 12% to $381 million. QVC is the primary driver of results among the Liberty Interactive attributed assets, had a strong quarter and its total revenue increased 11% to $1.8 billion while adjusted OIBIDA increased 15% to $366 million.
Liberty Interactive’s other e-commerce businesses grew 10% for the quarter. Almost each company, posted an increase in revenue. However, overall revenue growth was partially offset by lower commission revenue earned when customers sign up for third party online discount services.
During the quarter, a decision was made to change the way these promotions are offered which reduced the revenue earned in the quarter. These changes are expected to continue to adversely impact commission revenue throughout 2010.
For the year ended December 31, 2009, our e-commerce businesses earned revenue from this commission of approximately $32 million. Adjusted OIBIDA for the e-commerce businesses decreased 33% for the first quarter and represented almost 7% of revenue as compared to 11% in the prior year period.
Revenue earned from the commissions had significantly higher margins than product sales; therefore, the reduction in this revenue more negatively impacted adjusted OIBIDA on a percentage basis.
Additionally in the first quarter, more costs were incurred associated with our two start-ups, Lockers and Rite Start, which had very little related revenue at this point. These negative impacts offset the product related adjusted OIBIDA growth that was achieved by our e-commerce businesses.
Let’s take a quick look at the LINTA liquidity picture. At the end of the first quarter, the group had attributed cash and public investments of $4.6 billion while it had $7.6 billion in attributed debt.
QVC access to the bond market in the first quarter and issued two series of senior notes with a total principal of around $1 billion. They used the net proceeds to purchase and cancel term loans under its senior secured credit facilities that matured in 2010, ’11 and ’14.
Additionally during the first quarter, Liberty Interactive repaid the full intergroup loan balances to both Liberty Capital and Liberty Starz. On April 30, an additional $159 million bank debt due to mature later in June of 2010 was purchased, leaving $16 million of outstanding bank debt due in the second quarter.
Now with that, I’ll hand the call over to Mike George, who will provide more insights into QVC.
Thank you, Chris. We were delighted with our results in the quarter. We were able to drive strong increases in revenues and adjusted OIBIDA as you heard from Chris. We continue gaining share against the broader retail market and sustain the strong momentum we saw in the back half of last year.
We grew revenue 11% companywide with particularly strong performance in the U.S. and Japan. We continue to see outstanding growth in our e-commerce platform with global e-commerce revenues of $476 million, up 23% from Q1 of ’09.
In addition, we continue to add new customers at a strong rate with worldwide new customer count up 10% and revenue growth from new customers up 18%. Our adjusted OIBIDA grew 15% on a 90 basis point improvement in OIBIDA margins, driven by strong gains in overall product margins, and improvement in warehouse and freight productivity. Excluding the impact of our Italy start us, OIBIDA margins were up over 100 basis points.
With that overview, I’ll walk through the results in each market. In the U.S., we increased revenue 10%. Our beauty, accessories, consumer electronics and kitchen and floor care businesses were especially strong. Our initiatives to building the leading e-commerce business continued to pay off with QVC.com hosted 24% revenue growth in the U.S.
In the quarter, e-commerce represented 32% of our U.S. revenue, up three points from Q1 of last year. We also continue to add new customers in the U.S. at a strong pace. In Q1, our new customer count grew 15% and revenue from new customers increased 26%, our second higher quarterly increase in over a decade, topped only by Q4’s strong growth.
Our return rate did increase from 18% to 18.6%, although this is primarily a reflection of adjustments we made in Q1 of last year to true up our accruals with our actual experience. Excluding the impact of those adjustments, our return rate increased just 10 basis points. We grew adjusted OIBIDA 19% driven primarily by 130 basis point improvement in product margins and strong gains in warehouse and freight efficiencies.
Turning to the U.K., revenue growth was flat in local currency, a reversal of the improving sales momentum we have seen through most of 2009. We saw strong growth in our fashion, beauty and arts and crafts businesses, offset by softer results in fine jewelry and consumer electronics.
In hindsight, we were probably too focused on bringing down inventory levels in Q4, and didn’t have enough product and programming ammunition to get our goals in Q1. The team recognized the issue early in the quarter and began taking the necessary steps to improve results and we do expect to see better performance throughout the year.
Adjusted OIBIDA declined 7% in local currency driven by an increase in the obsolescence rate, partially offset by improved operating costs. The increase in the obsolescence provision is largely due to timing issues, which should normalize over the course of the year.
In Germany, growth also slowed with revenue in local currency increasing 2%. Most of our businesses actually performed quite well with particular strength in health and beauty, accessories, consumer electronics, small appliances and home textiles.
However, our jewelry business was difficult. In an effort to turn that business around, we took jewelry off the air completely for the last three weeks of March so that we could r-launch it on April 1 with fresh product, packaging and programming. While this severally impacted results in the month, we thought it was the right move to strengthen our jewelry business for the long term.
Adjusted OIBIDA declined 1% in local currency due to 120 basis point erosion in gross profit driven by a mix shift to consumer electronics and slightly higher liquidation activity, partially offset by strong gains in variable cost center productivity and lower fixed costs.
In Japan, revenue grew 13% in local currency, an outstanding result especially in light of the continued economic challenges in that market. The healthy, beauty and fashion businesses were particularly strong.
Our Japan business has gained momentum for three consecutive quarters and we’re encouraged by both the strong sales growth with existing customers and our success introducing new customers to the business.
E-commerce revenue growth was particularly strong, up 25% to 22% of total sales. We continue to see strong usage of mobile devices in Japan, which now represent close to half of all e-commerce revenue.
Adjusted OIBIDA grew 20% in local currency driven by 100 basis point improvement in product margins and productivity gains in our warehouse and call center.
In Italy, we had a $4 million adjusted OIBIDA loss, as we began to staff up for our launch later this year. As we previously announced, we anticipate an OIBIDA loss in Italy for the full year of $30 million to $40 million.
We continue to make good progress on our start up plans and remain on track for an October launch to roughly 17 million homes in Italy.
Collectively, our international operations grew adjusted OIBIDA 8% in U.S. dollars in the first quarter. If we normalize for the losses associated with the Italy start up costs, international adjusted OIBIDA would have grown 11%, and total company OIBIDA would have increased 16% without Italy versus the 15% we reported.
We believe the strong gains in revenue and OIBIDA and market share and e-commerce penetration and in new customers, reflects the success of our continued efforts to create a new kind of shopping experience founded on exclusive compelling product and programming content, a leading multi-media platform and outstanding customer service.
On the content side, highlights in the U.S. in the quarter included our most expensive fashion week programming to date and a major red carpet event live from Las Angeles in conjunction with the Academy Awards, the rollout of our new Isaac Mizrahi lifestyle brand that premiered in December, several successful brand and product launches including a new Susie Orman product line, Jillian Michaels products for the We Fit, Steve [McKowski] footwear complimenting his highly successful handbag line, Kim Kardasian’s premier fragrance, Vita Mix blenders and Dyson vacuums.
On the platform side, in addition to our strong overall e-commerce growth, we see continued strong interest in our I phone app and over the next six to eight weeks, we will be rolling an enhanced app with live streaming and other features as well as complimentary apps for the Android and Blackberry platforms.
We also launched a desktop widget to alert customers to our today’s special value and other promotions and later this year, we will roll out our new global e-commerce platform to our markets in the U.S., U.K. and Germany, which we expect will further bolster our strong e-commerce performance.
We also continue to strengthen our TV platform. In the U.S. our HD roll out continues and we’re now up to about 32 million homes. And two weeks ago, we announced an exciting partnership with ITV, the U.K.’s largest commercial television network. Beginning in late May, QVC will be simulcast on ITV 1, their flagship channel for 27 minutes segments between midnight and 2:00 a.m. for a total of six hours a week.
Through this partnership, we’ll be able to expose QVC to millions of potential new customers and also create an additional tune in opportunity on a highly trafficked channel for our existing customers.
And with that, I’ll turn it back Chris.
Now we’ll look at Liberty Starz. Liberty Starz attributed revenue grew 3% in the first quarter to $307 million while adjusted OIBIDA decreased 1% to $103 million. At quarter end, Liberty Starz had attributed cash, and public holdings of $1 billion and attributed debt of only $47 million.
From January 30 through April 30, Liberty repurchased 540 thousand shares of Liberty Starz class A common stock at an average price of $47.40 for a total cash consideration of $26 million.
Now with that, Chris Albrecht will comment on events at Starz Entertainment and Media.
Starz had a very solid quarter with three particularly notable achievements. After four quarters of declines, subscriber numbers for both Starz and Encore resumed an upward trajectory in the quarter. Our original series Spartacus Blood and Sand achieved excellent ratings throughout its first season as Greg mentioned and we extended our output agreement with the Walt Disney company for three additional years.
On the financial front, Starz Entertainment posted revenue of $305 million in the quarter, which was an increase of 3% over the same period a year ago. One-third of the revenue increase resulted from higher effective rates and the rest from growth in the weighted average number of subscriptions.
First quarter OIBIDA of $106 million was slightly below the prior year figure, but was impacted by an impairment charge of $4 million related to the second season of Crash and also by a marketing expense of Spartacus in the quarter.
Versus fourth quarter of 2009, subscriber numbers grew among affiliates as the impact of the economic downturn seems to be abating, and while Starz added 168,000 subscribers during the quarter, boosting its total to 17.1 million, Encore also added 565,000 customers to total 31.1 million at the end of March.
Both numbers are still below the comparative figures a year ago, but revenue was not negatively impacted because the decreases were attributable to reduction in subscription units covered by fixed rate agreements, which don’t impact revenue.
Now the success of Spartacus exceeded all of our expectations. Driven by positive critical reviews and effective marketing, weekend audience size increased by 67% from its premier on January 22 all the way through its finale 13 weeks later, and the number of people recording the show on DVR’s for later viewing more than doubled during that time.
As Greg said, the show was the number rated Friday night program in all of cable TV for seven of its final eight weeks. For many people around the country, Spartacus put Starz on the map, and the same is true in other nations, as we’ve experienced strong interest among broadcasters worldwide seeking to bring Spartacus to their viewers.
In March, as many of you might know we received the sad news that our talented young star of Spartacus, Andy Whitfield, had been diagnosed with a treatable form on non-Hodgkin’s Lymphoma, and that would require several months of treatment and recuperation. This has forced us to delay the production of the second season of Spartacus.
With the success of Spartacus, we’ve begun to ramp our original strategy. In the first quarter, we announced the acquisition of U.S. pay TV rights for the eight episode series, Pillars of the Earth based on the worldwide bestselling book by Ken Follett. The series stars Ian McShane, Donald Sutherland, Chris Sewell and will premier on July 23.
And most recently, we announced plans to air a new original series Camelot, for which we will retain all U.S. rights including premium television, digital and home entertainment.
What may be most interesting about these three series is not their similarity in genre, but their difference in financing structure. Spartacus, we produced entirely ourselves and we retain all rights worldwide. Pillars on the other hand, with a simple acquisition of domestic pay TV rights, and Camelot will be a co-production with Graham King’s new production company and the rights will be split between the two of us.
Going forward, we’re looking at several new projects in a variety of different genres and with a variety of different financing models. We’ll be looking for shows that increase the value our customers and affiliates place on Starz and that raise our brand recognition.
Our goal within the next few years will be to have as many as four original series and four miniseries airing on Starz annually.
Finally, the new agreement with Disney, will give us continued to a key ingredient in our content mix. Under the three-year extension, Starz will continue to have exclusive rights to distribute Disney films on all our platforms during the pay TV window through 2015.
On the Starz media front, revenue for the quarter increased to $144 million from $102 million in the same period last year while OIBDA moved from a positive $5 million to a negative $7 million. These shifts were largely due to the timing of the theatrical and home video releases from Overture Films.
We continue to examine strategic alternatives to the ownership structure of Overture Films and other Starz media companies and we will report to you when and if those bear fruit. Thank, and back to you Chris.
Let’s take a quick look at Liberty Capital. During the quarter, Liberty Capital revenue increased 33% to $166 million which adjusted OIBIDA decreased by $11 million. The Liberty Capital Group has attributed cash and public investments of $8.2 billion and attributed debt of $2.4 billion.
From January 30 through April 30, 2010, Liberty repurchased 2.2 million shares of L Cap A common stock at an average price of $40.18 for a total cash consideration of $87 million. Cumulative repurchased since the reclassification of the tracker represent 28% of the shares outstanding.
With that said, I’ll turn the call back over to Greg for closing remarks.
Thank you, Chris and thank you to Mike and Chris for updates on your respective businesses. As I think I noted earlier, we feel good about our Q1 results. All of our businesses with a few minor challenges here and there are performing well.
The major priorities for the rest of the year as we look forward are; at Liberty Interactive to maintain the strong operating performance at QVC and drive revenue at the e-commerce companies, to provide increased clarity and visibility around these good businesses by rationalizing our non consolidated assets efficiently and aiding the market’s understanding how strong the fundamentals are at QVC compared to peer company’s ability to carry both unmatched adjured OIBIDA margins, have very low capital intensity and high return on net assets and to generate very strong cash flow conversion from its OIBIDA.
At Liberty Starz, we want to focus on operational execution and building cost effective original programming to differentiate our channels for the benefit of our distribution partners and our consumers. You’ll see us build excitement for the channel like this summer’s Pillars of the Earth.
And finally, we want to figure out an effective way to use our capital, both the cash we have on hand and the borrowing capacity that is at that business.
At Liberty Capital, we hope to identify effective uses for the large cash that we have, whether it be shrinking equities you saw us do this quarter, reducing debt as we have done or opportunistic investments in debt and equity of others.
We are going to benefit from the continued growth at Sirius XM and Live Nation and we will also continue to rationalize the non-core holdings that we have at Liberty Capital.
We appreciate you continued interest in and support for Liberty Media. Stay tuned over the balance of the year, and with that, we’d be happy to answer some questions.
(Operator Instructions) Your first question comes from James Ratcliffe – Barclays Capital.
James Ratcliffe – Barclays Capital
Greg, one of the rationales for the tracking stock structure was to both give the market clarity about the various assets and at the same time, retain the flexibility to mix and match tax assets with gains in the background since everything remains within the Liberty Media Corporate structure. Where are we in terms of those assets and the continuing need to have matching across various tracers for tax assets?
A you’ve noted, that has been one of the benefits, has been improved tax posture. We have as you noted, continued to reduce the number of non-core assets to realize on some of our investments, hopefully in an efficient manner. That process continues. We are part of the way through there.
We’ve done substantially by dollar value, much of the work, but there are still non-core assets in the trackers, in all three trackers candidly that we are going to realize on and we expect to realize on over the next several years and to refocus our capital on our efforts on our core holdings.
By dollar value, we’re a long way down the road, but there are still several assets in there to be worked on.
James Ratcliffe – Barclays Capital
For Spartacus, do you have any feedback on the level of viewership you say via Netflix streaming and how do you think about that, quite apart from the Starz play or Starz original content the degree to which Netflix is a marketing platform for the Starz network and the Starz channels versus cannibalizing potential subscribers for those channels.
I don’t have right Netflix viewing on Spartacus. I don’t know if Bill Myers, who’s in the room in Denver has any available. With regard to your question, Netflix is an interesting opportunity and challenge for Starz.
Obviously, it’s very important for us to manage those relationships across the board with new distributors like Netflix along with our traditional historical distributors. It certainly is a marketing opportunity and we’re looking at ways to be able to maximize the ability to increase the awareness and hopefully the subscribership of the Starz products while still being able to enhance our value to all of the distributors.
So it’s an interesting and complicated relationship and one that we continue to explore how we can maximize the opportunities that it presents.
You're next question comes from Barton Crockett – Lazard Capital Markets.
Barton Crockett – Lazard Capital Markets
On the interactive on QVC, I know you’re normally reluctant to go too far into talking about the current trends, but given that, we just had a whole slate of retail comp reports yesterday, and they’re generally regarding as a bit disappointing. I was wondering if you might break with tradition and give us a little bit of a sense of what you’ve seen in April and how we should think about the retail trends at Interactive.
We don’t obviously talk about in quarter results. Personally, my view is, people got a little over excited about the March numbers at retail and maybe a little overly concerned about the April numbers. It was to me, somewhat predictable between the Easter pull in which people understood, but also just the acceleration of sales you get in traditional brick and mortar when you have an early onslaught of warm weather, which tends to bring people into the stores for immediate gratification of getting their warm weather gear.
We’ve maintained all along that we expect the economic recovery to be slow and bumpy and that we’re going to win by gaining share and benefiting from the secular move to our kind of format, and that’s still our view. Our view is that the recovery is going to be slow and up and down and we’ll win through share gain.
Barton Crockett – Lazard Capital Markets
If we could switch to Starz, can you provide us any update on where you are with talks with Comcast and Time Warner and also tell us a little bit about how you’re thinking you might handle some of the questions around season two for Spartacus.
We are in continued discussions with Comcast and Time Warner and as we’re in constant contact with all our distributors, not just with regard to our contract but with regard to in contract marketing opportunities. We are actually doing good business with both those major distributors and we expect to continue to do so.
With regard to Spartacus, we’ve got unofficial hopeful news about Andy’s recovery, and we’re making plans right now to be able to continue with the franchise in innovative ways to keep the fans happy while we get him into shape to participate in a full second season. So we think we have the situation relatively in hand given the obviously unexpected news of his health situation.
Barton Crockett – Lazard Capital Markets
This e-commerce hub transition, can you size that either online or offline what that meant in terms of impact on QVC versus e-commerce?
The commerce hub business is a small business, not material, but it’s one that we believe has great prospects and so we want to have it benefit from the internet DNA and broaden the great parenting from QVC. We want to broaden it out. We think the opportunity to do so will align it more with the e-commerce companies. It makes more sense. But its results are not material today.
In the ballpark, roughly $20 million of revenue and eight to ten of EBITDA.
You're next question comes from Doug Mitchelson – Deutsche Bank.
Doug Mitchelson – Deutsche Bank
Could you offer any comment on whether investors should expect a pretty serious impact to EBITDA at Starz this year or next year as a result of ramping TV programming. I know you mentioned Pillars and Camelot, but you’re also working on Men of the Dusk and William the Conqueror and World Without End. Chris, you’ve been pretty busy and you hinted at cost efficiency, but could you give us a clear understanding of the bottom line impact from ramping TV.
We have said, when we made our announcement, when we put the Liberty Starz tracker in place at the closing of the Direct TV deal, and we made our announcement about expected growth in the 5% to 10% range, and we have no reason, despite the economy and despite challenges out there and things like unexpected write downs, we’re still holding to that forecast today to that range.
Doug Mitchelson – Deutsche Bank
Have you been seeing any impact in Europe the past few weeks from what’s been happening over there and do you see the potential for any major shift in European spending?
Again, I can’t comment on our own results. It doesn’t appear to me to have had a meaningful impact on the consumer yet, but I can’t say that I’m a student of all the things that are happening at retail. So it’s certainly an area we’ve got to watch out for everyone to see it how it unfolds and the impact it could have on consumer confidence, but I can’t say a lot more beyond that at this point.
Doug Mitchelson – Deutsche Bank
John, I was hoping given your expertise, you would give us your view on the likelihood of the SEC being successful reclassifying ISP services you’re entitled to and if they are, what you believe the impact will be broadly on the telecom sectors.
I really don’t have a lot of insight on whether the SEC will succeed in imposing their authority. Clearly the guidelines they’ve given for the future of set top boxes is heavily influence by Silicon Valley and the internet group, I would say. How that will come out politically, you can take odds on.
Obviously the unbundling, if that’s the direction it takes of terrestrial broadband could be beneficial to companies like Direct TV and EchoStar by giving them the opportunity to bundle with cable broadband. But that would really take – I’m not enough of a profit to figure out where this is all going. It’s too speculative I think for anybody to bet on at this point.
You're next question comes from Doug Anmuth – Barclays Capital.
Doug Anmuth – Barclays Capital
Can you talk about the softness in the U.K. and Germany that you saw in 1Q in particular just providing a little bit more color there especially around the jewelry dynamic in Germany. It sounds like you don’t really think that was really macro impacted, but what else was playing into that?
Candidly, I think the softness in both Germany and U.K. was to some degree self-inflicted. The good news is that I think we can get on it and get better results. In Germany, it was somewhat isolated to our jewelry business. We had pretty strong performance across most categories so I think fundamentally the German business is reasonably healthy.
We’ve been working to fine tune that business for a couple of years now as you know, so I’m always cautious when I talk about it because you need to see several quarters of sustained results to have high confidence, but generally we’re on a good path in Germany, but we have concluded that we need to fundamentally change our jewelry business so we sort of decided to give us a high short term pain for hopefully good long term gain and we took the business totally off the air for a few weeks, and there’s no way you can fill all that air time at the same level of productivity.
So we had especially tough business in March when we took jewelry off the air that suppressed the overall quarter’s results. Since we launched that business, and its early days in the re-launch, but it’s looking better. I wouldn’t say it’s perfect, but certainly we’re pleased with the early results, some gains, some misses, but generally pleased with the jewelry re-launch. But again, very early days to say much about it.
So for us, in Germany it’s about getting jewelry on a reasonable track. We don’t need a lot of growth out of it, but we need to stabilize it and that’s what the re-launch was about, and then just continuing to focus on our other businesses that are successful and continue to build them.
U.K. was a little bit different. It wasn’t as focused in a single category, but I would say that fine jewelry in the U.K. and consumer electronics were both very difficult. The U.K. is really the only market where our electronics business is challenged. The other markets are fairly healthy, but it’s a very competitive price driven market in the U.K. so we haven’t found exactly the right formula, although we think we will. But we’re not quite there yet.
So in the U.K. we need to see a little bit performance out of fine jewelry and electronics and then just get the whole business moving at a better rate. As I mentioned in my comments, the good news last year is that we worked really hard on getting our inventory very tight in the U.K. I think we were down over 30% in our inventory levels at year-end.
So we tightened things down and candidly, maybe we over tightened them, but I think we were left a little bit light in product in Q1. Once you realize that, it takes a few months to respond to it. So we started to see that issue early in January, but it does take a few months to meaningfully impact levels.
But in hindsight, I think we over steered a little bit in our caution to make sure we kept our inventories clean around the world given the economic uncertainty. So some different challenges in each business. I think we’ll get them on track.
I don’t think we’ll get a boost from the economy in either market, but I think we can right the issues we saw in Q1 and get to a better level of performance.
Doug Anmuth – Barclays Capital
On the e-commerce business, the loss of the third party revenue, do you foresee any way of potentially making that revenue up with another advertising source or lead referral or are you pretty much focused on the user experience and we’ll let that go at this point.
I think that we will over time find ways to utilize the value of those third party services to our customers and realize on some of that, but we have been very sensitive about creating undue coercion or even negative reputational risk around that.
As you may know, there were Senate hearings last month on these kind of services. We were certainly not in the group identified as violators, but we were worried about being tarred by the same brush, and we were worried about reputational risk even though we went out of our way to do things like offer full refunds to anybody who complained or had an issue.
It wasn’t about the customer experience, it was about the reputational risk that caused us to back off this. It was something that had become a major source not necessarily high quality revenue, because it had an upfront aspect versus a subscription that you’re likely to correct. So we collected our money on it and we tried very hard to make sure it didn’t hurt our customers in any way, shape or form. But the reputational risk around it has caused us to pull back and be very cautious.
Will we be able to replace elements of it? I think we’ll find as I started out saying, we’ll find to monetize the value of our customer base, but we’re going to be very cautious in light of how some others have been viewed.
You're next question comes from Jason Bazinet – Citygroup.
Jason Bazinet – Citygroup
Just building of James’ question earlier, can you give us a few concrete examples of what would prevent you from moving to hard spends on the various trackers? On the re-upping of the Disney agreement and Starz, I wasn’t quite clear from the press release that came out what happened with the Digital rights. Can you elaborate on any of that?
I’ll start by saying, if you look at our annual report that just went out, we outlined this. We know that our tracking stock structure is probably not one that gives us the highest current value for our equity. We think that is a somewhat transitory condition. It’s not likely that you’ll have 100 years of being in the tracking stock structure.
But it has benefits particularly for a company, which like ourselves, has tax complexities and quite a lot of moving parts that need to be rationalized and focused. Is there anything that would prevent us from doing a hard spend on those? I suspect we have enough ATV’s, that if we set out as an absolute goal of getting a hard spend done in a hurry, we could probably do it in some reasonable time frame.
I’m not sure that would be optimizing what we believe the long term value of the corporation is, which is to focus those businesses over time in the best way and to the degree that there’s an interim discount to take advantage of that by purchasing stock, virtually all of our businesses are either cash positive or cash generators or under levered or some combination of the three, that we can take advantage of that discount and realize on it.
So some of our shareholders, and we recognize different constituencies may wish to see realization in a quarter or two, that may or may not happen. We’re trying to look for long-term growth and capitalize on that benefit.
It’s not that there’s anything wrong with trying to do it in a hurry, it’s that we think we don’t want do that to the cost of long term benefit.
On the Disney deal, I would say in the main, rights are largely the same as the rights we’ve had before.
We have digital rights during our window, so I think that’s consistent with what we’ve had historically.
You're next question comes from David Gober – Morgan Stanley.
David Gober – Morgan Stanley
Just elaborating on the last comment about trying to take advantage of mis pricings or discounts and in the near term, I was just curious on LINTA, looking at the capital structure for QVC and overall the LINTA tracking stock, you pushed out maturities quite a bit. The business seems to have stabilized considerably. I’m just curious if you would reconsider starting to buy back stock again. I know you felt that you’ve been more successful with the Alcapa buy backs, but there was a time when you were clearly pretty aggressive on LINTA as well.
I think that’s probably part of why we are cautious because there was a time when we were arguable too aggressive. With our tender, I think $647 million and 24/75 or something like that, we’re still scarred in Englewood, Colorado perhaps.
But I also think if you look, we have done a bunch of things to stabilize the capital structure and put ourselves in a position to consider things like debt reduction which we’ve done and share repurchase.
One of the things that we obviously went out of our way to do is to try and address the negative arbitrage on that debt that we have outstanding the $400 million that we are tendering for out of the $800 million maturity in 2013.
I would say once that’s done, as that’s done, even if it’s not done, this capital structure is very solid and the opportunity to do either more share repurchase, more just debt pay down or acquisitions of attractive synergistic, well priced assets, remains, and certainly we have a big authorization and we’ll look hard at perhaps not a tender, but at a systematic share reduction.
David Gober – Morgan Stanley
Just looking at the funnel of business at QVC, the one business that we didn’t talk a ton about is QVC Japan which clearly that business has had its fits and starts over the last three or four years, but it seems to be performing extraordinarily well in the first quarter. I was wondering if you could talk about what’s driving the strength in 1Q and whether or not you really see that as fundamentally sustainable particularly given the lumpiness that business has had.
Let me answer in two ways. Over a long period of time, we continue to believe that Japan has the highest growth potential of all our businesses. It’s fundamentally a very attractive market for what we do, and given that we are in less than half of all the households in terms of subscribers that can receive our signal, there’s a lot of business to grow into. You can also look at our spend as a percent of GDP and see that clearly it has enormous upside on that metric as well.
The fits and starts that we’ve had over the last few years to a large extent have been fairly isolated and focused on some substantial changes in the regulatory environment that have impacted us substantially in 2007 and then some secondary issues that impacted us over time.
That, and obviously the depth of the economic recession in Japan, which was the most severe of all markets we operate into. So we’ve had these two really strong headwinds, though we’ve always believed in the fundamental potential of this business in the long trajectory of this business.
So I think in Q1 the team has done a fabulous job. I think the economic situation is not great, but they’ve been able to power through that. They have some businesses that are really working well for them that I mentioned in my comments. I think they’ve largely gotten past the regulatory challenges and have found a way to fill in around those issues.
So I think the long-term future is bright. Do I think every quarter will be at this level? Not necessarily. I think this was a particularly strong quarter, but I do like our prospects for long-term growth in Japan.
David Gober – Morgan Stanley
On Starz, we kind of talked about a couple of different issues in separate contexts, and I was wondering if you could clarify a little bit how inter-related they really are. I think you have the Netflix deal and the relationship with your other distributors. I’m just wondering how upset do you think other distributors are with the Netflix relationship and is that something that’s going to play significantly into whether or not Starz decides to re-up on the Netflix deal when that comes up whenever it’s set to expire.
I think that the Netflix situation is one that is a great opportunity for Starz, and as I said before, it’s one that needs to be managed within the context of our relationships of the distributors, and there’s lots of different ways that we can do that.
I fully expect that we’ll be able to continue with a Netflix relationship and continue to maintain successful and growing relationships with our traditional distribution partners. This is an opportunity and every opportunity needs to be carefully examined, but we feel like we know a lot more about how to understand the needs and the differences in the distribution opportunities, and I think we’ll be in good shape moving forward.
You're next question comes from Matthew Harrigan – Wunderlich Securities.
Matthew Harrigan – Wunderlich Securities
What’s happening on the Skunk Works basis. You’ve seen what happened in the U.S. with [inaudible] shop by remote, are you increasingly looking at some of the interactive opportunities for Q within that regard? And Chris, when you look at your assets, is Anchor Bay potentially a little bit more strategic over time even if you don’t go to a full-blown HBO incarnation on original programming, there’s clearly some upside there. I know you like to keep things integrated, and I’m sure you’ll take an incremental approach to that, but if you really do get a hot hand on the programming side, what would be the bogey for a percentage of revenues and percentage of cash flow that you might get on the ancillary side, on video and all that over at Starz. It seems like that would be a somewhat material business if you’re able to replicate some of the successes you’ve had in the past.
I think you can look at them as two separate issues. Certainly the DVD revenue has been historically important ancillary stream on original programming coming off of premium and the kinds of programs that we’re looking to do on Starz will be ones we hope will maximize ancillary revenue, our series, mini-series, the kinds of things we spoke about.
So to the extent that we can take advantage of controlling those rights, and seeing the benefit of those revenue streams, we’ll certainly look at that as an investment opportunity.
With regard to Anchor Bay with system Starz media, we’re looking at all the possible opportunities for growing that business and seeing what the proper resolution for the Starz media asset. So while Anchor Bay sits there, we’ll look at that separately from what it may or may not do to Starz entertainment and look at the opportunities for retaining rights and exploiting those off of our original programming as an issue unto itself.
Matthew Harrigan – Wunderlich Securities
Without divulging too much to HBO, can you give any approximation for the how the curve could move on the percentage of ancillary revenues on the overall top line over a period of time if you get to some trigger points where you gain some traction as you’ve gotten with Spartacus on the original programming side?
That would be really speculating especially as we haven’t even really released the first season of Spartacus on DVD so I really couldn’t speculate on that right now.
You're next question comes from Jeffrey Wlodarczak – Pivotal Research.
Jeffrey Wlodarczak – Pivotal Research
The turning results at Starz in the first quarter, how much of that can you attribute to seasonality and then looking forward, how sustainable do you think those gains are?
As I said in the comments, I think we’re seeing the economic turn down abating a bit and hopefully that will continue so that should have a positive impact, and we’re looking forward to that. I think certainly the increase in original programming that we’re planning will continue to give us marketing opportunities with our distributors and we expect to see positive results from that.
I think there is opportunity for Starz given the new strategies and obviously given the economic climate. So we’re feeling pretty good about growth opportunities and our ability to invest sensibly in order to achieve them.
Jeffrey Wlodarczak – Pivotal Research
John, I wanted to get your take on how the situation in Europe will resolve itself, at least from your point of view. Obviously it’s important given Liberty’s exposure to Europe and I just wanted to get your take on it.
John is not available for that comment.
Jeffrey Wlodarczak – Pivotal Research
It’s hurting Liberty Global so it would help to get his take on it. Is there any update on true position and the revenue recognition issue? Is there any way you can give us some visibility on how much EBITDA that business in generating annually and realistically is that more?
I think courtesy of some changes in the accounting regulations the POTB treatment, probably led by our friends at Apple, that’s going to look a lot better for us in the near term. How we take that revenue in, is it a restatement, is it a realization on one time, how that exactly plays out, we’ll know over the coming quarters, and the magnitude of that EBITDA business, it’s less than $50 million of EBITDA kind of business but it’s recorded on a more traditional GAAP like basis with shipment equaling Reg.
Where we go with that business, I don’t think it’s not necessarily a core business but a long term for liberty given what our portfolio looks like. It’s a business that’s performed well, performing very well now, and it’s a business that has lots of interesting opportunities, perhaps better served in the hands of another partner.
Of course Liberty has another attribute. It’s another ATV. But we weigh all those things and we’ll see how it goes.
That concludes the question and answer session today. Mr. Maffei.
Thank you very much for you interest in Liberty Media and we’ll look forward to speaking with you next quarter.
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