Liberty Interactive Corporation Reports Third Quarter 2012 Financial Results

Liberty Interactive Corporation Reports Third Quarter 2012 Financial Results

ENGLEWOOD, Colo.--(BUSINESS WIRE)-- Liberty Interactive Corporation ("Liberty") (Nasdaq: LINTA, LINTB, LVNTA, LVNTB) today reported third quarter results. Highlights include⁽¹⁾:

• Grew consolidated QVC revenue by 2% and adjusted OIBDA⁽²⁾ by 6%

  • Grew QVC US revenue by 3% and adjusted OIBDA by 7%

  • QVC.com revenue as a percent of total US revenue increased to 39%, a 4 point increase

  • Operating income increased 11%

• Recapitalized our common stock into two tracking stocks, Liberty Interactive Group and Liberty Ventures Group

  • Shareholder value creation of $2.6 billion

• Successfully completed rights offering at Liberty Ventures Group, raising $328 million

"QVC continues to produce strong results, especially on a constant currency basis, despite a challenging macroeconomic environment, and we are pleased with the performance of our newest market, China," stated Greg Maffei, Liberty President and CEO. "We successfully completed the recapitalization of the company's common stock into two tracking stocks, which increased shareholder value by $2.6 billion. Our share repurchases were lower this quarter, as we were out of the market for six weeks due to the recapitalization. But, we remain committed to repurchases at the Liberty Interactive Group and the board of directors has increased our repurchase authorization by $1 billion."

LIBERTY INTERACTIVE GROUP - Liberty Interactive Group's revenue increased 3% to $2.2 billion in the third quarter, adjusted OIBDA increased 5% to $397 million and operating income decreased 14% to $193 million. The increase in revenue was due to favorable results at QVC and the eCommerce companies. The increase in adjusted OIBDA for the quarter was due to favorable results at QVC, which was offset by unfavorable results at the eCommerce companies. The decrease in operating income for the quarter was primarily due to unfavorable results at the eCommerce companies and the impairment of goodwill of one of the eCommerce companies during the quarter.

QVC

QVC's consolidated revenue increased 2% in the third quarter to $1.9 billion. During the same period, adjusted OIBDA increased 6% to $397 million and operating income increased 11% to $260 million.

"QVC delivered strong results in the third quarter, with eCommerce continuing its double digit growth - now accounting for 33% of global revenue," said QVC President and CEO, Mike George. "With mobile commerce orders up 96% globally, we see these results as clear confirmation that our strategy to create a highly immersive digital shopping experience, with strong integration across TV, PC, tablet and mobile platforms, is not only succeeding, but significantly outpacing the industry."

QVC's U.S. revenue increased 3% to $1.2 billion in the third quarter as a result of strength in cooking and dining, beauty, apparel and accessories products, partially offset by a decline in electronics. Additionally, average selling price per unit ("ASP") increased 1% from $54.49 to $55.21 and units sold increased 1% compared to the prior year third quarter. Gross product revenue increased 2%; however, U.S. revenue grew 3% overall due to a 14% increase in shipping and handling revenue due, in part, to a price increase implemented in the fourth quarter of 2011. Third quarter returns as a percent of gross product revenue remained relatively flat. In the same period, eCommerce revenue increased 14% to $479 million and grew to 39% from 35% as a percentage of total U.S. revenue. Adjusted OIBDA increased 7% to $278 million and adjusted OIBDA margin⁽²⁾ increased 81 basis points. The increase in adjusted OIBDA margin was primarily due to an improved gross margin as a result of a favorable net shipping and handling position including warehouse productivity, as well as lower commissions, credit card and customer service expenses as a percentage of revenue.

QVC's international revenue decreased 1% in the third quarter to $681 million. The third quarter results included the negative impact of the strengthening U.S. Dollar against the Japanese Yen, Euro and U.K. Pound Sterling. International adjusted OIBDA increased 4% to $119 million and adjusted OIBDA margin increased 95 basis points in the third quarter.

QVC Japan's revenue grew 9% in local currency in the third quarter primarily due to increased sales in home, apparel and accessories. QVC Japan's ASP in local currency decreased 1%, but units sold increased 10% in the third quarter. QVC Japan's third quarter returns as a percent of gross product revenue remained relatively flat. QVC Japan's adjusted OIBDA in local currency increased 12% and adjusted OIBDA margin increased 55 basis points in the third quarter. The increase in adjusted OIBDA margin was due primarily to lower warehouse expenses and fixed cost leverage.

QVC Germany's revenue declined 6% in local currency in the third quarter primarily due to decreased sales in health, apparel and accessories, somewhat offset by increased sales of beauty products. QVC Germany's ASP in local currency decreased 4% and units sold declined 4% in the third quarter. QVC Germany's third quarter returns as a percent of gross product revenue in local currency improved by 201 basis points and was primarily due to a shift in product mix from apparel to beauty. QVC Germany's adjusted OIBDA in local currency increased 2% and adjusted OIBDA margin increased 119 basis points in the third quarter. The improvement in OIBDA margin was driven by warehouse productivity, including the positive impact of lower returns processing, as well as lower commissions and fixed costs.

QVC U.K.'s revenue increased 3% in local currency in the third quarter primarily due to sales increases in home décor and beauty products. QVC U.K.'s ASP in local currency increased 1%, while units sold remained relatively flat for the third quarter. QVC U.K.'s third quarter returns as a percent of gross product revenue in local currency decreased by 78 basis points primarily due to a product mix shift to home and beauty products. QVC U.K.'s adjusted OIBDA in local currency decreased 9% and adjusted OIBDA margin decreased 224 basis points in the third quarter. The decrease in adjusted OIBDA margin was primarily due to lower product margins and higher transition and running costs associated with QVC U.K.'s new headquarters move in June 2012.

QVC Italy continued the trend upward with a 16% sequential revenue growth in local currency over the second quarter of 2012. QVC Italy's sales were primarily from the cooking and dining, beauty and apparel product categories.

On July 4, 2012, QVC entered into a joint venture with China Broadcasting Corporation, a limited liability company, owned by China National Radio ("CNR") for a 49% interest in a CNR subsidiary, CNR Home Shopping Co., Ltd. (''CNRS''). CNRS had an 85% growth in revenue over the prior year third quarter. This joint venture is being accounted for as an equity method investment, and as a result, QVC reported a $3 million reduction in net income for the period.

QVC's outstanding bank and bond debt was $3.4 billion at September 30, 2012. The increase of $1.1 billion from June 30, 2012 was primarily associated with borrowings to fund the Liberty Ventures Group as part of the Liberty Interactive Group's recapitalization of its common stock.

eCommerce Businesses

In the aggregate, Liberty Interactive Group's eCommerce businesses increased revenue 13% to $278 million for the third quarter. Adjusted OIBDA decreased 56% to $4 million for the quarter and operating income decreased to a loss of $56 million. All but one of our eCommerce businesses reported an increase in revenue for the quarter as a result of increased marketing efforts and increased conversion resulting from site optimization and broader inventory offerings. The decrease in adjusted OIBDA was the result of increased spending in paid search as a percentage of revenue, increased promotional activity to move seasonal inventory and lower advertising revenue due to pricing and a shift to mobile applications. The decrease in operating income was primarily due to an impairment of goodwill at Celebrate Interactive as a result of continued declining operating results and disappointing third quarter trends.

Share Repurchases

From August 1, 2012 through October 31, 2012, Liberty repurchased approximately 3.0 million Series A Liberty Interactive shares at an average cost per share of $18.37 for total cash consideration of $55.9 million. Since the creation of the Liberty Interactive stock in May 2006, Liberty has repurchased approximately 175.3 million shares at an average cost per share of $18.98 for aggregate cash consideration of $3.3 billion. These repurchases represent approximately 25.0% of the shares outstanding at the time of creation of the Liberty Interactive stock. On October 30, 2012, the Board of Directors voted to increase the stock repurchase authorization for the Liberty Interactive Group by an additional $1.0 billion. Including the newly authorized amount, the total current repurchase authorization for Liberty Interactive Group stock is approximately $1.4 billion.

Liberty Interactive Group holds controlling interests in companies that are engaged in digital commerce, including QVC, Provide Commerce, Backcountry.com, Bodybuilding.com, Celebrate Interactive, CommerceHub, MotoSport and Right Start, and also owns interests in HSN and Lockerz.

LIBERTY VENTURES GROUP - As of September 30, 2012 the fair value of the equity method securities and non-strategic AFS securities attributed to the Liberty Ventures Group was $3.2 billion and $1.6 billion, respectively. When compared to the prior quarter, the fair value of Liberty Ventures Group's equity method securities increased 1% and AFS securities increased 19%.

Share Repurchases

There were no repurchases of Liberty Ventures Group stock from August 10, 2012 through October 31, 2012. The Liberty Ventures Group does not have an outstanding stock repurchase authorization at this time.

The businesses and assets attributed to the Liberty Ventures Group are all of Liberty's businesses and assets other than those attributed to the Liberty Interactive Group and include its interests in TripAdvisor, Expedia, and minority interests in Time Warner and Time Warner Cable.

FOOTNOTES

NOTES

Unless otherwise noted, the foregoing discussion compares financial information for the three months ended September 30, 2012 to the same period in 2011.

On September 23, 2011, Liberty completed the split-off of a wholly owned subsidiary, Liberty Media Corporation ("LMC") (formerly known as Liberty CapStarz, Inc. and Liberty Splitco, Inc.) (the "Split-Off"). At the time of the Split-Off, LMC owned all the assets, businesses and liabilities attributed to the Liberty Capital and Liberty Starz tracking stock groups immediately prior to the Split-Off. The Split-Off was effected by means of redemption of all of the Liberty Capital common stock and Liberty Starz common stock of Liberty for all of the common stock of LMC. This transaction was accounted for at historical cost due to the pro rata nature of the distribution. The financial information provided reflects LMC as discontinued operations. Accordingly, the relevant financial statement balances and activities of the businesses, assets and liabilities owned by LMC at the time of the Split-off (for periods prior to the Split-Off) have been excluded from the included financial information.

Following the Split-Off, Liberty and LMC operate as separate, publicly traded companies, and neither has any stock ownership, beneficial or otherwise, in the other. In connection with the Split-Off, Liberty and LMC entered into certain agreements in order to govern certain of the ongoing relationships between the two companies after the Split-Off and to provide for an orderly transition. These agreements include a Reorganization Agreement, a Services Agreement, a Facilities Sharing Agreement and a Tax Sharing Agreement. Certain prior period amounts have been reclassified for comparability with the current presentation.

On August 9, 2012 Liberty Interactive completed the approved recapitalization of its common stock through the creation of the Liberty Interactive common stock and Liberty Ventures common stock as tracking stocks. In the recapitalization, each holder of Liberty Interactive common stock remained a holder of the same amount and series of Liberty Interactive common stock and received 0.05 of a share of the corresponding series of Liberty Ventures common stock, by means of a dividend, with cash issued in lieu of fractional shares of Liberty Ventures common stock.

In connection with the creation of the Liberty Ventures tracking stock, Liberty distributed subscription rights to purchase shares of Series A Liberty Ventures common stock at a per share subscription price of $35.99 for one share of Series A Liberty Ventures common stock pursuant to a basic subscription privilege and also entitled the holder to subscribe for additional shares pursuant to an oversubscription privilege. The rights offering commenced on September 12, 2012 and expired on October 9, 2012. In the fourth quarter, approximately 9 million Series A Liberty Ventures shares were issued in connection with the rights offering resulting in approximately $328 million of cash proceeds.

The following financial information is intended to supplement Liberty's condensed consolidated statements of operations which are included in its Form 10-Q.

Fair Value of Public Holdings