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Liberty Interactive Inc. (LINTA - Analyst Report) reported solid financial results for the second quarter of 2012, outpacing the Zacks Consensus Estimates. Quarterly net income was $234 million or 42 cents per share compared with $257 million or 30 cents per share in the year-ago quarter.

Second-quarter 2012 earnings per share of 42 cents were significantly higher than the Zacks Consensus Estimate of 23 cents. Quarterly total revenue of $2,365 million was an improvement of 5.3% year over year, surpassing the Zacks Consensus Estimate of $2,290 million.

Second-quarter 2012 gross margin was 37.1% compared with 37.7% in the prior-year quarter. Quarterly total operating income came in at $290 million as opposed to $288 million in the year-ago quarter.

In the reported quarter, consolidated adjusted OIBDA came in at $455 million compared with $450 million in the year-ago quarter. In the previous quarter, Liberty Interactive repurchased approximately 14.7 million Class A shares for a total consideration of $257.4 million.  

In the first half of 2012, Liberty Interactive generated $730 million of cash compared with $332 million in the year-ago period. Free cash flow in the first half of 2012 was $579 million compared with $229 million in the prior-year period.

At the end of the second quarter of 2012, Liberty Interactive had total consolidated cash and marketable securities of $2,174 million compared with $2,015 million at the end of 2011. Liberty Interactive exited the second quarter of 2012 with $6,049 million of outstanding debt compared with $6,039 million at the end of 2011. Debt-to-capitalization ratio was 0.42 at the reported quarter end compared with 0.42 at the end of 2011.

QVC Segment

Quarterly total revenue of QVC segment was $1,974 million, up 4% year over year. Consolidated adjusted OIBDA was $438 million, up 5% year over year. Consolidated operating income was $301 million, up 7% year over year. QVC U.S. quarterly revenue inched up 4% year over year to $1,280 million. Gross margin was 37.2% compared with 37.5% in the year-ago quarter.

Adjusted OIBDA was $315 million, up 3% year over year. Operating income was $214 million, up 5% year over year. QVC International quarterly revenue grew 4% year over year to $694 million. Gross margin was 38.1% compared with 38% in the year-ago quarter. Adjusted OIBDA was $123 million, up 9% year over year. Operating income was $87 million, up 13% year over year.

eCommerce Segment

Quarterly revenue of eCommerce Business segment was $391 million, up 13% year over year. Quarterly adjusted OIBDA was $23 million, down 36% year over year. Operating loss was $1 million compared with an operating income of $19 million in the prior-year quarter.

Formation of Tracking Stocks

Yesterday, the Board of Directors of Liberty Interactive has received its shareholders’ approval to split the company’s shares into two tracking stock, viz., Liberty Interactive and Liberty Ventures. The Liberty Interactive tracking stocks will follow QVC, the eCommerce companies, a 34% stake in HSN Inc. (HSNI - Snapshot Report), approximately $500 million of cash and $5 billion of debt and other liabilities.

Liberty Venture will look after minority interests of Expedia Inc. (EXPE - Analyst Report), Time Warner Inc. (TWX - Analyst Report), Time Warner Cable Inc. (TWC - Analyst Report), AOL, Interval Leisure Group, Tree.com and Liberty’s green-energy investments. Liberty Venture will be assigned around $1.25 billion of cash and $3 billion principal amount of Liberty Interactive’s publicly traded exchangeable debentures.

Recommendation

We maintain our long-term Neutral recommendation on Liberty Interactive. Currently, the stock holds a short-term Zacks #3 Rank (Hold).

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