LINTA - Liberty Interactive

[compoundinglife]

Looking around for companies similar to commerce hub and I came across GSI Inc which is now Ebay Enterprises:

 

http://www.ebayenterprise.com/about/our_history.php

 

Ebay paid 2.4B for GSI in 2011 when their revenue was around 1.35B. Although it looks like a decent chunk of that was from their non commerce service divisions which ebay divested to the former the CEO as their reported revenue the year of the divestment was $509M.

 

So I think the next step for me is to track down how much revenue commerce hub is doing. If their customer's did 5.5B in transaction through them in 2012 then obviously their revenue is going to be some fraction of that. It might be broken out in the LINTA/B reports I haven't read them yet.

[Liberty]

Commerce Hub ( http://www.retailsolutionsonline.com/doc/commercehub-reaches-b-in-holiday-retail-gmv-at-record-pace-0001) strikes me an interesting and not so well known part of the Liberty Interactive family. They facilitated around 5.5B of transactions last year and handled a record 1B this holiday season. I find it interesting that their client list includes Costco and Walmart and the fact that is a Malone related investment interests me as well. It seems like there is some massive potential here for them to help traditional retailers level the play field with Amazon.

 

So if anyone has any info on them please post to this thread. I am trying to wrap my head around the possibility of them growing to a complete solution for retail logistics, supply-chain and fulfilment. It appears as though currently they are mainly being used by retailers to increase online product mix without holding additional inventory.

 

I've been trying to learn more about it too. Seems like a brilliant model at first glance; build scale to compete with Amazon by aggregating inventory from a bunch of established retailers that wouldn't be able individually to have enough scale and logistics expertise to compete.

 

Reminds me a bit of some of what UPS did (not sure if they still do -- Thomas Friedman wrote about this a while ago): When you thought you were sending your laptop back to DELL for repairs, it actually went to UPS and they fixed it and shipped it back to you, all transparently to the customer.

 

So if anyone can compete with Amazon online, I think it could be Commerce Hub. Walmart or Costco or Sears or Home Depot or whatever will never get there alone. But all of them together, they could have a shot.

 

And the more Commerce Hub grows, the more its scale allows it to compete with Amazon on price and speed of delivery, which makes its individual partners comparatively less competitive against both Amazon and Commerce Hub. Because of that, the partners should be outsourcing more and more of their inventory to it over time to keep up, making them ever more dependent on Commerce Hub. Retailers won't like someone wedging themselves between them and their customers, but if the choice is that or getting raped by Amazon, they'll probably take Commerce Hub's 'virtual inventory' to beef up their offerings.

[compoundinglife]

 

I've been trying to learn more about it too. Seems like a brilliant model at first glance; build scale to compete with Amazon by aggregating inventory from a bunch of established retailers that wouldn't be able individually to have enough scale and logistics expertise to compete.

 

Reminds me a bit of some of what UPS did (not sure if they still do -- Thomas Friedman was writing about this a while ago): When you thought you were sending your laptop back to DELL for repairs, it actually went to UPS and they fixed it and shipped it back to you, all transparently to the customer.

 

When I worked at Digital Equipment Corp we did warranty laptop repair for Dell, NEC, Toshiba and a few others just as you mention in the UPS situation. When Compaq took over DEC companies like Dell were freaked out because they now had a competitor handling their warranty repair so they started bailing.

 

So if anyone can compete with Amazon online, I think it will be Commerce Hub. Walmart or Costco or Sears or Home Depot or whatever will never get there alone. But all of them together, they could have a shot.

 

Looking at 2012 retailers by sales the top 10 alone are over half a trillion so it does not seem far fetched to me that a company like Commerce Hub could easily rival Amazon's economies of scale if they are handling a % of sales for traditional retailers. The more they grow the more value they provide to their customers because it results in a larger selection of inventory, more distribution locations etc...  Basically network effect.

 

And the more Commerce Hub grows, the more its scale allows it to compete well with Amazon on price and speed of delivery, which makes its individual partners comparatively less competitive against both Amazon and Commerce Hub. Because of that, the partners should be outsourcing more and more of their inventory to it over time to keep up, making them ever more dependent on Commerce Hub. Retailers won't like someone wedging themselves between them and their customers, but if the choice is that or getting raped by Amazon, they'll probably take Commerce Hub's 'virtual inventory' to beef up their offerings.

 

Yeah I can see businesses being reluctant to do it on a large scale. The more business they do through commerce hub the more data they are giving away about their business and the more dependent they are on them.

 

The thing that sort of surprised me was seeing Walmart and Costco on their customer list. Those companies are so focused on cost reduction that commerce hub must provide them with a good value proposition. I keep thinking about when Walmart forced Coke bottlers to change their distribution system just for Walmart as example of how cut throat they are on costs.

 

[investor-man]

The thing that sort of surprised me was seeing Walmart and Costco on their customer list. Those companies are so focused on cost reduction that commerce hub must provide them with a good value proposition. I keep thinking about when Walmart forced Coke bottlers to change their distribution system just for Walmart as example of how cut throat they are on costs.

 

I assume Walmart and Costco only look to CommerceHub for situations when they run out of inventory. The opportunity cost of losing a sale to a competitor due to being out of stock outweighs any margin reduction CommerceHub takes.

 

LINTA is one of my favorite ideas right now, and I love the growth potential QVC provides to CommerceHub. Greg Maffei said they expect QVC to expand into a new country every 18 months. This means that CommerceHub could make the same expansion and have a guaranteed customer in each location. I don't know if CommerceHub gets revenue when it does business with QVC, because this is basically doing business with itself, but one can assume safely that QVC (and backcountry.com, bodybuilding.com, lockerz.com, etc) demands its suppliers work directly with CommerceHub. It's a great business, and I hope it'll eventually get its own tracking stock.

[compoundinglife]

The thing that sort of surprised me was seeing Walmart and Costco on their customer list. Those companies are so focused on cost reduction that commerce hub must provide them with a good value proposition. I keep thinking about when Walmart forced Coke bottlers to change their distribution system just for Walmart as example of how cut throat they are on costs.

 

I assume Walmart and Costco only look to CommerceHub for situations when they run out of inventory. The opportunity cost of losing a sale to a competitor due to being out of stock outweighs any margin reduction CommerceHub takes.

 

LINTA is one of my favorite ideas right now, and I love the growth potential QVC provides to CommerceHub. Greg Maffei said they expect QVC to expand into a new country every 18 months. This means that CommerceHub could make the same expansion and have a guaranteed customer in each location. I don't know if CommerceHub gets revenue when it does business with QVC, because this is basically doing business with itself, but one can assume safely that QVC (and backcountry.com, bodybuilding.com, lockerz.com, etc) demands its suppliers work directly with CommerceHub. It's a great business, and I hope it'll eventually get its own tracking stock.

 

Fair point WRT Costco and Walmart, just because someone is listed as a partner or customer it doesn't mean they are any material source of revenue.

 

I skimmed through the 2012 annual last night and they mention "commerce hub" or "commerce technologies" twice and they do not appear to breakout any info on their revenue, but I will need to go back and double check now that I am more awake. It will be interesting to see if they mention anything more in 2013 AR.

[compoundinglife]

Frank Poore on why he came back to CommerceHub.

 

"CommerceHub CEO discusses return to company"

 

http://www.bizjournals.com/albany/video/xuZ29lZDqnLpMAuHRhk55k890CUtoHuX?autoplay=1

[Liberty]

I assume Walmart and Costco only look to CommerceHub for situations when they run out of inventory. The opportunity cost of losing a sale to a competitor due to being out of stock outweighs any margin reduction CommerceHub takes.

 

That's a good point.

 

Walmart has lots of SKUs, but Costco has a relatively small selection. If I were them, I'd use Commerce Hub to broaden the inventory; much better for someone to find what they're looking for and buy it, even if it really comes from Commerce Hub (still some money for Costco), than to get an empty search result (which pushes them to Amazon and their large selection).

[Guest ajc]

CNR Mall

 

 

"CNR Mall (CNRS) is the Chinese home shopping JV that I mentioned in the LINTA article. I’ve watched almost 30 hours of this stuff and talked to a few people who buy things from them regularly. Here are my observations:

 

1. There are five sizable competitors in the space. I watched all of their programs and found CNRS to be the most QVC-like. The biggest of them all I believe is a channel run by the state TV monopoly CCTV so I was wrong about CNRS being the only brand with a state-media affiliation –  there are two of them (CNRS is owned by QVC and the state radio monopoly). The other home shopping channels are operated by provincial network companies but are usually available in multiple provinces.

 

Home shopping in China accounts for a much smaller % of total retail sales than in the U.S. and the industry is growing at solid double digit rates. Another factor that makes China an interesting market which nobody has mentioned is the fact that women in China retire at the age of 50. They receive reasonably generous pension payments from the state and there is nothing that says they can’t just stay home and watch this stuff all day long.

 

Already a multi-billion dollar industry, I would not be surprised if the Chinese home shopping industry exceeds the size of the US market in ten years.

 

2. At least where I was, the local cable system gave CNRS the best channel placement, even better than the CCTV network.

 

3. Shipping for any order above RMB180 ($30) is free and the service is very good. My mother regularly buys things from them and they usually arrive in two days.

 

4. The home shopping channels provide real savings to consumers. My observation has been that the channels generally price 15 – 30% cheaper than Taobao (Alibaba’s retail site) for identical products.

 

Even foreign vendors wishing to make a marketing push in China are attracted to the home shopping model. I had a conversation with a family friend who runs the Chinese subsidiary of a reputable travelbag brand. He told me that companies willingly offer large discounts to the home shopping networks because the free marketing provided is extremely valuable (perhaps more so in China than in other markets – keep in mind that these networks can reach something like a billion people which is more than the rest of QVC’s markets combined).

 

5. There doesn’t seem to be much differentiation between the five networks and I was very disappointed about that. CNRS is more upscale and sells slightly more expensive things, but most of their products are the same Chinese brands that everybody else is selling. I think the strategy that QVC communicated about bringing CNRS more US brands is key for them to take market share from their competitors.

 

On a side note, the vast majority of high quality content in China is still produced by the state monopoly CCTV (through 31 public broadcast channels and 12 pay TV networks) so cord-cutting is not a very significant threat in that market."

 

 

http://oraclefromomaha.wordpress.com/2014/01/22/china-musings/

 

 

[Liberty]

Recent VIC writeup: http://www.valueinvestorsclub.com/value2/Idea/ViewIdea/111724

[Yours Truly]

Jana Partners takes a 5.5% stake in LINTA

 

http://mobile.nytimes.com/blogs/dealbook/2014/02/14/hedge-fund-takes-stake-in-malones-liberty-interactive/

[Liberty]

http://www.cnbc.com/id/101428116

 

QVC will generate a bit more than $900 million in free cash flow in 2014, estimates Matt Nemer of Wells Fargo. HSN, another TV shopping network, trades at 16.4 times consensus 2014 free cash flow, while Dollar General trades on a multiple of 21 times. Even if QVC trades at a slight discount to those companies, it would cover the entire value of Liberty Interactive today.

[Liberty]

New presentation on Liberty Interactive:

 

http://files.shareholder.com/downloads/AMDA-GY7JI/2847738156x7456752x728802/b3b19443-b6eb-418b-97a8-e2f19efb6156/QVC%20Inc.%20-%20J.P.%20Morgan%20Global%20High%20Yield%20&%20Leveraged%20Finance%20Conference%2002.26.14.pdf

[Yours Truly]

http://www.cnbc.com/id/101428116

 

QVC will generate a bit more than $900 million in free cash flow in 2014, estimates Matt Nemer of Wells Fargo. HSN, another TV shopping network, trades at 16.4 times consensus 2014 free cash flow, while Dollar General trades on a multiple of 21 times. Even if QVC trades at a slight discount to those companies, it would cover the entire value of Liberty Interactive today.

 

Hmm in the PDF that you have attached, it says FCF for 2012 is $1.582 billion whereas the reporter has $900 mil in 2014.  Has FCF really declined that much? or is the reporter wrong in this instance.

[Liberty]

Hmm in the PDF that you have attached, it says FCF for 2012 is $1.582 billion whereas the reporter has $900 mil in 2014.  Has FCF really declined that much? or is the reporter wrong in this instance.

 

According to this:

 

http://files.shareholder.com/downloads/AMDA-GY7JI/2847738156x7456752x639261/e9981740-ba53-457a-92d1-f3fcd1eb9ccf/Q4-12%20Conf%20Call%20Slides%20-%20LIC%20-%20final.pdf

 

QVC had OIBDA of 1,828m in FY2012. Remove maybe 200-250m for capex and you get pretty close to the other presentation's 1,582m.

[Hubris]

http://www.cnbc.com/id/101428116

 

QVC will generate a bit more than $900 million in free cash flow in 2014, estimates Matt Nemer of Wells Fargo. HSN, another TV shopping network, trades at 16.4 times consensus 2014 free cash flow, while Dollar General trades on a multiple of 21 times. Even if QVC trades at a slight discount to those companies, it would cover the entire value of Liberty Interactive today.

 

Hmm in the PDF that you have attached, it says FCF for 2012 is $1.582 billion whereas the reporter has $900 mil in 2014.  Has FCF really declined that much? or is the reporter wrong in this instance.

 

The FCF in the presentation is unleveled fcf while cnbc estimates were after interest and tax fcf.

[Liberty]

Q4:

 

http://files.shareholder.com/downloads/AMDA-GY7JI/2847738156x7456752x729868/6dc59434-81c9-42e5-81d7-da57087c517d/LINTA_News_2014_2_28_General_Releases.pdf

 

● Grew QVC US revenue by 6% and adjusted OIBDA(2) by 2% in the fourth quarter

❍ QVC US operating income increased by 4%

❍ QVC.com revenue as a percent of total US revenue increased to 45%, a 246 bps increase

❍ QVC US mobile penetration was 32% of QVC.com orders

● Grew QVC US revenue by 5% and adjusted OIBDA by 5% in 2013

❍ QVC US operating income increased by 4%

● Achieved revenue growth of 12% for the eCommerce group in 2013

● Repurchased $309 million LINTA shares from November 1, 2013 to January 31, 2014 and $1.1 billion in 2013

❍ On February 27, 2014, the Board of Directors voted to increase the stock repurchase authorization by $1 billion

 

update: Today's price action is funny. Mr. Market has no idea what to think, apparently.

[investor-man]

Q4:

 

http://files.shareholder.com/downloads/AMDA-GY7JI/2847738156x7456752x729868/6dc59434-81c9-42e5-81d7-da57087c517d/LINTA_News_2014_2_28_General_Releases.pdf

 

● Grew QVC US revenue by 6% and adjusted OIBDA(2) by 2% in the fourth quarter

❍ QVC US operating income increased by 4%

❍ QVC.com revenue as a percent of total US revenue increased to 45%, a 246 bps increase

❍ QVC US mobile penetration was 32% of QVC.com orders

● Grew QVC US revenue by 5% and adjusted OIBDA by 5% in 2013

❍ QVC US operating income increased by 4%

● Achieved revenue growth of 12% for the eCommerce group in 2013

● Repurchased $309 million LINTA shares from November 1, 2013 to January 31, 2014 and $1.1 billion in 2013

❍ On February 27, 2014, the Board of Directors voted to increase the stock repurchase authorization by $1 billion

 

update: Today's price action is funny. Mr. Market has no idea what to think, apparently.

 

I'm guessing the price decrease is due to them pushing off the "spin-off" to Q3. I was a bit disappointed with that myself, but yeah overall this was good stuff.

[Liberty]

I'm guessing the price decrease is due to them pushing off the "spin-off" to Q3. I was a bit disappointed with that myself, but yeah overall this was good stuff.

 

I was actually happy with that. Apart from the timing, it doesn't seem anything else has changed, so if the spin-off turns out to be a catalyst to re-price QVC in the market (based on its stronger fundamentals and better capital allocation, it should trade at higher multiples than HSN), the longer the company has to do buybacks at a cheap price, the better for the long-term.

 

In other words, I like knowing that they have that lever available to unlock value, but I'm in no hurry for them to pull it as in the meantime they're creating value in other ways that might then stop being available.

[ItsAValueTrap]

I always thought that HSN was a little better managed than QVC.  QVC is well managed too.  Unfortunately, both QVC and HSN will have difficulty growing earnings.  They will not grow earnings at rates similar to Sirius XM, Charter, Discovery, or Liberty Global.

[Liberty]

I always thought that HSN was a little better managed than QVC.  QVC is well managed too. 

 

Can you elaborate on why you think that about HSN's management?

 

The fact that they have much lower margins than QVC and no international expansion initiatives doesn't make me feel like management is doing the best job they could. They seem under-levered too, and the money they're spending on dividends would probably be better spent on buybacks.

 

Unfortunately, both QVC and HSN will have difficulty growing earnings.  They will not grow earnings at rates similar to Sirius XM, Charter, Discovery, or Liberty Global.

 

That's very likely, but I see it as having a different risk profile too. Unlike everybody else in retail, they are price-competitive with Amazon while having 3x Amazon's EBITDA margins and lots of FCF, they are very very stable (the 2008-2009 crisis barely hurt their revenues compared to most others), and so, as Maffei said in the last CC, they can support a good amount of leverage safely. Levering up a very stable business can lead to the kind of returns that Malone likes over the long term (especially when combined with large buybacks under IV and all his other tricks to minimize tax).

 

It could get even better if they merge with HSN once QVC isn't so undervalued, and then bring HSN's margins and leverage to QVC's level. I also think the Chinese JV could be worth a ton over time, but we'll see, it's more of an option at this point.

 

So it's not a rocket ship, but I think it's undervalued, I trust management will keep creating more value, and it's the kind of business you can sleep well at night owning, IMO.

[Yours Truly]

I'm guessing the price decrease is due to them pushing off the "spin-off" to Q3. I was a bit disappointed with that myself, but yeah overall this was good stuff.

 

I was actually happy with that. Apart from the timing, it doesn't seem anything else has changed, so if the spin-off turns out to be a catalyst to re-price QVC in the market (based on its stronger fundamentals and better capital allocation, it should trade at higher multiples than HSN), the longer the company has to do buybacks at a cheap price, the better for the long-term.

 

In other words, I like knowing that they have that lever available to unlock value, but I'm in no hurry for them to pull it as in the meantime they're creating value in other ways that might then stop being available.

 

I agree, all the more time for them to execute the $1 bilion buyback and hopefully a cheap price for us

 

It's very likely that QVC will have difficulty in growing earnings but I think Malone will juice it up using buybacks or conduct a merger with HSN

 

Personally, I think QVC could be a replay of Starz which was another slow-grower with lots of debt.

[ItsAValueTrap]

I always thought that HSN was a little better managed than QVC.  QVC is well managed too. 

 

Can you elaborate on why you think that about HSN's management?

 

The fact that they have much lower margins than QVC and no international expansion initiatives doesn't make me feel like management is doing the best job they could. They seem under-levered too, and the money they're spending on dividends would probably be better spent on buybacks.

 

Nevermind I think I'm mistaken.

[investor-man]

I always thought that HSN was a little better managed than QVC.  QVC is well managed too.  Unfortunately, both QVC and HSN will have difficulty growing earnings.  They will not grow earnings at rates similar to Sirius XM, Charter, Discovery, or Liberty Global.

 

I think QVC is better managed, but I agree with the growth rates, which is why I am a bit disappointed by them pushing out the "spin-off' until Q3. I'd rather see that value realized sooner rather than later.

 

I do wish they provided more info on the digital companies. CommerceHub is an incredibly interesting business, but the info around it is incredibly opaque and it doesn't feel like the tracker stock for the digital side of things will really provide any more info than is already out there.

[Liberty]

I think QVC is better managed, but I agree with the growth rates, which is why I am a bit disappointed by them pushing out the "spin-off' until Q3. I'd rather see that value realized sooner rather than later.

 

A lot of what Malone has been doing historically is creating structures that create a discount (among other things), then he buys back tons of shares, and then he simplifies things to remove that discount. He's creating value in the meantime, so even if the split was pushed off until 2015, I wouldn't mind. QVC's standalone financials will look better with a smaller share count.

 

I do wish they provided more info on the digital companies. CommerceHub is an incredibly interesting business, but the info around it is incredibly opaque and it doesn't feel like the tracker stock for the digital side of things will really provide any more info than is already out there.

 

I think that's part of the plan I mentioned above. They even hide a lot about QVC in the LINTA filings.. They'll keep being opaque about CommerceHub until they feel it's ready for the spotlight (I've noticed that in presentations they talk a lot more about some of their other ecommerce business.. they must feel there's a competitive advantage in keeping CommerceHub semi-hidden). I know it can be frustrating, but this is definitely a jockey stock that requires a certain level of trust in management's judgement.

[jay21]

I know it can be frustrating, but this is definitely a jockey stock that requires a certain level of trust in management's judgement.

 

I'm fully on board with Malone.  It took me a quite awhile and I do not 100% understand the assets.  However, his style makes a lot of sense to me; he's smart PE.  He looks to gain control in assets that are cheap and have strategic value, and then dials up the leverage to an aggressive but not imprudent amount while employing some other financial engineering and tax efficiency strategies along the way.  My biggest difficulty is figuring out which assets to buy (so far its only been LMCA, which I may make even bigger).