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LIBERTY INTERACTIVE CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
[November 05, 2014]

LIBERTY INTERACTIVE CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations


(Edgar Glimpses Via Acquire Media NewsEdge) Certain statements in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our business, product and marketing strategies; new service offerings; revenue growth at QVC, Inc. ("QVC"); the recoverability of our goodwill and other long-lived assets; our projected sources and uses of cash; and the anticipated non-material impact of certain contingent liabilities related to legal and tax proceedings and other matters arising in the ordinary course of business. Where, in any forward-looking statement, we express an expectation or belief as to future results or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will result or be achieved or accomplished. The following include some but not all of the factors that could cause actual results or events to differ materially from those anticipated: · customer demand for our products and services and our ability to adapt to changes in demand; · competitor responses to our products and services; · increased digital TV penetration and the impact on channel positioning of our programs; · the levels of online traffic to our businesses' websites and our ability to convert visitors into customers or contributors; · uncertainties inherent in the development and integration of new business lines and business strategies; · our future financial performance, including availability, terms and deployment of capital; · our ability to successfully integrate and recognize anticipated efficiencies and benefits from the businesses we acquire; · the ability of suppliers and vendors to deliver products, equipment, software and services; · the outcome of any pending or threatened litigation; · availability of qualified personnel; · changes in, or failure or inability to comply with, government regulations, including, without limitation, regulations of the Federal Communications Commission, and adverse outcomes from regulatory proceedings; · changes in the nature of key strategic relationships with partners, distributors, suppliers and vendors; · general economic and business conditions and industry trends; · consumer spending levels, including the availability and amount of individual consumer debt; · advertising spending levels; · changes in distribution and viewing of television programming, including the expanded deployment of personal video recorders, video on demand and IP television and their impact on home shopping programs; · rapid technological changes; · failure to protect the security of personal information, subjecting us to potentially costly government enforcement actions and/or private litigation and reputational damage; · the regulatory and competitive environment of the industries in which we operate; · threatened terrorist attacks, political unrest in international markets and ongoing military action around the world; and · fluctuations in foreign currency exchange rates.



For additional risk factors, please see Part I, Item 1 of the Annual Report on Form 10-K for the year ended December 31, 2013. These forward-looking statements and such risks, uncertainties and other factors speak only as of the date of this Quarterly Report, and we expressly disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein, to reflect any change in our expectations with regard thereto, or any other change in events, conditions or circumstances on which any such statement is based.

I-27 -------------------------------------------------------------------------------- Table of Contents The following discussion and analysis provides information concerning our results of operations and financial condition. This discussion should be read in conjunction with our accompanying condensed consolidated financial statements and the notes thereto and our Annual Report on Form 10-K for the year ended December 31, 2013.


Overview We own controlling and non-controlling interests in a broad range of video and on-line commerce companies. Our largest business, which is also our principal reportable segment, is QVC, Inc. ("QVC"). QVC markets and sells a wide variety of consumer products in the United States and several foreign countries, primarily by means of its televised shopping programs and via the Internet through its domestic and international websites and mobile applications.

Additionally, we own entire or majority interests in consolidated subsidiaries which operate on-line commerce businesses in a broad range of retail categories (the "Digital Commerce" busisness). The more significant of these include Backcountry.com, Inc. ("Backcountry"), Bodybuilding.com, LLC ("Bodybuilding"), Provide Commerce, Inc. ("Provide"), Evite, Inc. ("Evite"), LMC Right Start, Inc.

("Right Start") and CommerceHub. Backcountry operates websites offering sports gear and clothing for outdoor and active individuals in a variety of categories.

Bodybuilding manages websites related to sports nutrition, body building and fitness. Provide operates an e-commerce marketplace of websites for perishable goods, including flowers, fruits and desserts, as well as upscale personalized gifts. Evite operates websites that offer invitations. Right Start is a high-quality online and brick-and-mortar retailer of products for infants and toddlers. CommerceHub operates a drop-ship solution which allows different software systems from both sides of the transaction to more easily access the data necessary to fulfill orders.

Our "Corporate and Other" category includes our corporate ownership interests in other unconsolidated businesses and corporate expenses. We hold ownership interests in Expedia, Inc., HSN, Inc., Interval Leisure Group, Inc. and Tree.com, Inc. which we account for as equity method investments; and we continue to maintain investments and related financial instruments in public companies such as Time Warner Inc. and Time Warner Cable Inc., which are accounted for at their respective fair market values and are included in "Corporate and Other." As discussed in note 3 to the accompanying financial statements, on August 27, 2014, Liberty completed the spin-off to holders of its Liberty Ventures common stock shares of its former wholly-owned subsidiary, Liberty TripAdvisor Holdings, Inc. ("TripAdvisor Holdings") (the "TripAdvisor Holdings Spin-Off").

TripAdvisor Holdings is comprised of Liberty's former 22% economic and 57% voting interest in TripAdvisor, Inc., as well as BuySeasons, Liberty's former wholly-owned subsidiary, and a corporate level net debt balance of $350 million.

The accompanying condensed consolidated financial statements of Liberty have been prepared to reflect TripAdvisor Holdings as discontinued operations.

Accordingly, the assets and liabilities, revenue, costs and expenses, and cash flows of the businesses, assets and liabilities owned by TripAdvisor Holdings at the time of the TripAdvisor Holdings Spin-Off have been excluded from the respective captions in the accompanying condensed consolidated balance sheets, statements of operations, comprehensive earnings and cash flows in such condensed consolidated financial statements. Additionally, TripAdvisor, Inc. and BuySeasons are no longer reflected in the segment financial information for all periods presented.

On July 30, 2014, Liberty announced the execution of a definitive agreement under which FTD Companies, Inc. ("FTD") will acquire Provide Commerce, Inc.

("Provide"), which is one of Liberty's Digital Commerce businesses. Under the terms of the $430 million transaction, Liberty will receive 10.2 million shares of FTD common stock representing approximately 35% of the combined company and $121 million in cash. FTD and Liberty expect to complete the transaction by the end of 2014. Upon completion of the transaction, Liberty expects to account for FTD as an equity-method affiliate based on the ownership level and board representation. Given our significant continuing involvement with FTD, Liberty will not present Provide as a discontinued operation upon completion of the transaction.

The term "Ventures Group" does not represent a separate legal entity, rather it represents those businesses, assets and liabilities that have been attributed to that group. As of September 30, 2014, the Ventures Group is comprised of our interests in Expedia, Inc., Interval Leisure Group, Inc., Tree.com, Inc., investments in Time Warner Inc. and Time Warner Cable Inc., as well as cash and cash equivalents in the amount of approximately $873 million. The Ventures Group also has attributed to it certain liabilities related to our corporate level indebtedness (see note 10 in the accompanying financial statements) and certain deferred tax liabilities. The Ventures Group is primarily focused on the maximization of the value of these investments and investing in new business opportunities.

The term "Interactive Group" does not represent a separate legal entity, rather it represents those businesses, assets and liabilities that have been attributed to that group. As of September 30, 2014, the Interactive Group is primarily I-28 -------------------------------------------------------------------------------- Table of Contents focused on our video and Digital Commerce operating businesses and has attributed to it the remainder of our businesses and assets, including our operating subsidiaries QVC, Provide, Backcountry, Bodybuilding, Evite and CommerceHub as well as our interest in HSN, Inc. and cash and cash equivalents of approximately $733 million, including subsidiary cash. The Interactive Group has attributed to it liabilities that reside with QVC and the other entities listed as well certain liabilities related to our corporate level indebtedness (see note 9 in the accompanying financial statements) and certain deferred tax liabilities.

See our discussion in note 2 to the accompanying financial statements for a discussion of the reattribution of certain Digital Commerce businesses and approximately $1 billion in cash from the Interactive Group to the Ventures Group. In return, Interactive Group shareholders received a dividend of approximately 67.67 million shares of Liberty Ventures common stock, or 0.14217 of a Liberty Ventures share for each share of Interactive Group common stock outstanding on October 13, 2014, the record date of the dividend. The distribution date for the dividend was October 20, 2014, and the Liberty Interactive common stock began trading ex-dividend on October 15, 2014.

Following the reattribution, the Interactive Group is now referred to as the QVC Group. Following the reattribution, the QVC Group has attributed to it Liberty's wholly-owned subsidiary QVC, Inc. and its approximate 38% interest in HSN, Inc., along with cash and certain liabilities. Other than the issuance of Liberty Ventures shares in the fourth quarter of 2014, the reattribution had no consolidated impact on Liberty. The reattribution will be reflected in the Liberty financial statements in the fourth quarter on a prospective basis.

I-29 -------------------------------------------------------------------------------- Table of Contents Results of Operations-Consolidated General. We provide in the tables below information regarding our Consolidated Operating Results and Other Income and Expense, as well as information regarding the contribution to those items from our reportable segments and our Digital Commerce businesses. The "corporate and other" category consists of those assets or businesses which we do not disclose separately. For a more detailed discussion and analysis of the financial results of the principal reporting segments, see "Results of Operations-Businesses" below.

Operating Results Three months ended Nine months ended September 30, September 30, 2014 2013 2014 2013 amounts in millions Revenue Interactive Group QVC $ 2,020 1,947 6,020 5,882 Digital Commerce 310 278 1,227 1,144 Total Interactive Group 2,330 2,225 7,247 7,026 Ventures Group Corporate and other - - - - Total Ventures Group - - - - Consolidated Liberty $ 2,330 2,225 7,247 7,026 Adjusted OIBDA Interactive Group QVC $ 439 408 1,290 1,246 Digital Commerce (2) (5) 53 73 Corporate and other (6) (6) (16) (17) Total Interactive Group 431 397 1,327 1,302 Ventures Group Corporate and other (6) (4) (12) (10) Total Ventures Group (6) (4) (12) (10) Consolidated Liberty $ 425 393 1,315 1,292 Operating Income (Loss) Interactive Group QVC $ 276 259 820 804 Digital Commerce (14) (43) (16) (11) Corporate and other (15) (14) (43) (48) Total Interactive Group 247 202 761 745 Ventures Group Corporate and other (8) (5) (17) (15) Total Ventures Group (8) (5) (17) (15) Consolidated Liberty $ 239 197 744 730 Revenue. Our consolidated revenue increased 4.7% or $105 million and increased 3.1% or $221 million for the three and nine months ended September 30, 2014, respectively, as compared to the corresponding periods in the prior year. The three month increase was primarily due to the increased revenue at QVC ($73 million) and the Digital Commerce companies ($32 million). The nine month increase was primarily due to the increased revenue at QVC ($138 million) and the Digital Commerce companies ($83 million). See "Results of Operations-Businesses" below for a more complete discussion of the results of operations of certain of our subsidiaries.

Adjusted OIBDA. We define Adjusted OIBDA as revenue less cost of sales, operating expenses and selling, general and administrative ("SG&A") expenses excluding all stock-based compensation. Our chief operating decision maker and management team use this measure of performance in conjunction with other measures to evaluate our I-30 -------------------------------------------------------------------------------- Table of Contents businesses and make decisions about allocating resources among our businesses.

We believe this is an important indicator of the operational strength and performance of our businesses, including each business's ability to service debt and fund capital expenditures. In addition, this measure allows us to view operating results, perform analytical comparisons and benchmarking between businesses and identify strategies to improve performance. This measure of performance excludes such costs as depreciation and amortization, stock-based compensation and restructuring and impairment charges that are included in the measurement of operating income pursuant to GAAP. Accordingly, Adjusted OIBDA should be considered in addition to, but not as a substitute for, operating income, net income, cash flow provided by operating activities and other measures of financial performance prepared in accordance with GAAP. See note 13 to the accompanying condensed consolidated financial statements for a reconciliation of Adjusted OIBDA to Earnings (loss) from continuing operations before income taxes.

Consolidated Adjusted OIBDA increased 8.1% or $32 million and increased 1.8% or $23 million for the three and nine months ended September 30, 2014, respectively, as compared to the corresponding periods in the prior year. The overall Adjusted OIBDA growth for the three months ended September 30, 2014 was primarily due to the increased operating results at QVC of $31 million and an increase in the Digital Commerce results of $3 million. The overall Adjusted OIBDA growth for the nine months ended September 30, 2014 was primarily due to the increased operating results at QVC of $44 million. These increases were partially offset by a decline in the Digital Commerce results of $20 million. See "Results of Operations-Businesses" below for a more complete discussion of the results of operations of certain of our subsidiaries.

Stock-based compensation. Stock-based compensation includes compensation related to (1) options and stock appreciation rights ("SARs") for shares of our common stock that are granted to certain of our officers and employees, (2) phantom stock appreciation rights ("PSARs") granted to officers and employees of certain of our subsidiaries pursuant to private equity plans and (3) amortization of restricted stock grants.

We recorded $20 million and $23 million of stock-based compensation for the three months ended September 30, 2014 and 2013, respectively. We recorded $71 million and $80 million of stock-based compensation expense for the nine months ended September 30, 2014 and 2013, respectively.

As of September 30, 2014, the total unrecognized compensation cost related to unvested Liberty equity awards was approximately $89 million. Such amount will be recognized in our consolidated statements of operations over a weighted average period of approximately 2.3 years.

Operating income. Our consolidated operating income increased 21.3% or $42 million and increased 1.9% or $14 million for the three and nine months ended September 30, 2014, respectively, as compared to the corresponding periods in the prior year. The overall increase in operating income for the three months ended September 30, 2014 was due to an increase in operating income at QVC of $17 million and the Digital Commerce companies of $29 million offset slightly by corporate and other. The overall increase in operating income for the nine months ended September 30, 2014 was due to an increase in operating income at QVC of $16 million and a decrease at the Digital Commerce companies of $5 million. See "Results of Operations-Businesses" below for a more complete discussion of the results of operations of certain of our subsidiaries.

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