LINTA INVESTOR DAY UPDATE

LINTA finally uploaded their Investor Day slides: http://files.shareholder.com/downloads/AMDA-GY7JI/2669697755x7284591x697277/617abaa6-5163-4c52-a70c-de24656b2ac1/Liberty_Interactive_Investor_Day_2013.pdf

Other than the proposed “spin-off”, there are a few other things I find interesting:

1 The e-commerce group, which is a very small asset compared to QVC and generally unnoticed, will actually be one of the largest focused e-commerce companies in the world (slide 8) in revenue. This means as a stand-alone this thing will get a reasonable amount of sell-side attention.

2. Management refused to give a specific FCF guidance for QVC but made some comments on the variables (slide 18): 1) They expect maintenance Capex to be 200 – 230 million (I used 240 mil in my model); 2) working capital is volatile but management pointed out that WC has been on average 10% of revenue in the last five years (I used a 9.3% last three year average); 3) they factored in dividends to the Japanese minority interest as a cash outflow, which I accounted for separately as a reduction in overall enterprise value. So overall if you use these numbers that management provided and model FCF my way (accounting for the minority interest on an enterprise value basis), you end up with roughly the same number that I have, or perhaps slightly higher – about a little over $1 billion TTM.

3. QVC US is now 42% e-commerce. Management’s goal is to bring it to 50% by 2014. Mobile as of Q3 was 30% of total e-commerce sales. QVC was ranked no.3 this year in sales among all mobile services vs no.5 last year; remains no.2 among retail apps after Amazon. Management believes mobile sales will top $1 billion in 2013. 67% of new customers are from digital devices which is helping the average age of the core customer group trend lower.

4. Customer retention has been pretty consistent – a little under 90% per year for the last 20 years. Management highlighted the scalability of the QVC retail model by pointing out that purchase behavior (average no. of purchases, average annual spending) across all of QVC’s markets is nearly identical.

5. Some very interesting comments on the Chinese asset – Basically before QVC made the JV investment CNRS was for two years solely run by China National Radio who did not have a lot of retail experience. QVC’s plan with the JV is to upscale CNRS by bringing in more QVC brands. Recent product launches have already helped drive a 40% sales growth. Under the current JV model the goal is to bring QVC practices and discipline to the business to make it run more like one of QVC’s international businesses rather than a Chinese state-run business.

Top 2 players in the business (far older and more established) did $1 bil and $750 mil in revenue vs. $100 mil + for CNRS on basically the same level of home carriage as CNRS. CNRS is currently ramping sales at the same rate the Big Two were in their growth stage.The big difference is that CNRS is younger.  Imagine CNRS at $500 mil in sales maybe 4 years from now which I think they are perfectly capable of managing. At that stage it will probably do half of QVC Japan’s EBITDA and will have solid double digit growth potential vs. a market that has suffered from chronic deflation. In my model I valued CNRS at the same value as QVC Japan which is doing a little over $1 billion in sales. I think this is still appropriate given how fast the industry is growing and the potential for taking market share. QVC’s CEO seems to believe that their practices are superior to the Chinese incumbents.

6. Management would like to do one new market every 18 – 24 months; hired a new VP to lead the efforts.

7. This is interesting. QVC has been growing on average 4% in its mature markets over the last three years. The CEO’s view is that “there is no reason (they) can’t continue to grow at rates (that) at least look like ’10 to ’12 historic average”. They also expect margins to slightly improve every year as more customers switch to digital. So if you add in growth from their newer markets, and potential international expansions, assuming constant currency, this is basically implying something like a 6 – 7% annual growth rate in EBITDA. This is a little higher than I expected.

8. Malone’s comment on the new split was “you have to look at the trackers as a half-step. I think the right way to think about it. It’s got its own identity but it isn’t totally separated from the mother ship. And there are certainly tax synergies, still, in the combination. So at an appropriate time, it could be separated. But I think it has some more growing up to do as a collection of businesses.”

9. Greg Maffei seemed amused about QVC’s transition from a perceived “Internet roadkill” to today one of the biggest e-commerce businesses.

Disclosure: I am buying more LINTB.

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