2nd UPDATE: Liberty Media Reports Higher Starz Earnings

Liberty Media Corp., the conglomerate controlled by mogul John Malone, reported a slight decline in fourth-quarter operating profit at its interactive division that includes home-shopping network QVC, while its Starz and media-investment divisions showed gains.

The company said it remains on track in its efforts to overhaul its corporate structure, with a shareholder vote scheduled for April where Liberty will seek approval to split off the tracking stocks of Liberty Starz (LSTZA) and Liberty Capital (LCAPA), and convert Liberty Interactive (LINTA) shares into an asset-backed equity.

Liberty Interactive posted a fourth-quarter operating profit of $396 million, down slightly from year-earlier earnings of $397 million. Liberty Starz, which includes premium cable network business Starz Entertainment, posted operating profit for the quarter of $62 million, up 26.5%, while Liberty Capital--a collection of investments in media companies such as Time Warner Inc. (TWX) and Sirius XM Radio Inc. (SIRI)--swung to an operating profit of $24 million from a year-earlier loss of $97 million.

Shares of Liberty Interactive recently slid 4.3% to $16.10 following the earnings release. Liberty Starz shares rose 2.6% to $70.67, while shares of Liberty Capital added 1.9% to $70.20.

As a collection of tracking stocks that don't provide investors with any legal claim on their underlying assets, Liberty doesn't follow the reporting practices required of most public companies. Instead of releasing consolidated earnings results based on generally accepted accounting principles, the company details the results of its individual businesses.

QVC, Liberty's largest business, posted fourth-quarter revenue of $2.52 billion, up 4%, while QVC's operating profit edged up 1.3% to $393 million. The business has rebounded recently after slumping when consumer spending slowed in 2008, but the sustainability of its latest growth streak remains a concern for investors.

Benjamin Swinburne, an analyst with Morgan Stanley, said QVC's revenue gains in North America and overseas fell below expectations, due in part to disappointing results in Italy.

Starz's revenue jumped 33% to $405 million, helped by the shift in the attribution of the Starz Media business to the Liberty Starz division from Liberty Capital. Excluding the change, revenue rose 5%. Operating income climbed 27% to $62 million. Subscriptions to Starz rose 8% and subscriptions to Encore rose 7%.

Thomas Eagan, an analyst with Collins Stewart LLC, said Starz's subscription gains were "surprisingly strong," adding that the performance could tamp down concerns that the company's distribution deal with Netflix Inc. (NFLX) poses a competitive risk to its pay-TV business.

Liberty's chief executive, Greg Maffei, acknowledged on a conference call Monday that Starz's partnership with Netflix has caused "friction" between Starz and its traditional distributors, like cable and satellite companies. Maffei said he thinks Starz's Netflix business doesn't compete with its traditional pay-TV business, but he's mindful of the controversy generated by the company's Netflix deal and the possibility that it could be damaging to its other distribution partners.

The pay-TV industry has been hit by a wave of fear that consumers may begin dropping their traditional TV subscriptions from cable and satellite providers as cheaper, online alternatives arise. Netflix recently reported that its subscriber count surpassed 20 million, ahead of Starz's year-end tally of 17.2 million.

Starz's distribution agreement with Netflix, considered a key source of content for Netflix's streaming video service, expires early next year, and the two companies are discussing a potential renewal on terms likely to be more favorable to Starz. Investors view the outcome of that negotiation as a key indicator of the direction of the emerging online video business, which could become a more disruptive force in the media and entertainment industry in the years ahead.

"We think there's a great opportunity to work with Netflix and other [online video distributors], but it can only be on terms that work for Starz in terms of our existing content and distributor relationships," Maffei said. "That's the only way it's going to happen."

He added that the company has no update on its plans for deploying Liberty Starz's $1.2 billion cash pile, which is being watched closely by investors.

Liberty Capital group's revenue declined 41% in the quarter to $91 million, mainly due to the reattribution of Starz Media to Liberty Starz. The company repurchased three million Liberty Capital shares in the quarter for $185 million.

-By Nat Worden, Dow Jones Newswires; 212-416-2472; nat.worden@dowjones.com

--Matt Jarzemsky contributed to this article.

Liberty Media Corp. - Liberty Starz Class B Common Stock (MM) (NASDAQ:LSTZB)
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