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Edited Transcript of QRTEA earnings conference call or presentation 8-Aug-19 12:30pm GMT

Q2 2019 Qurate Retail Inc Earnings Call

ENGLEWOOD Aug 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Qurate Retail Inc earnings conference call or presentation Thursday, August 8, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Courtnee Alice Chun

Qurate Retail, Inc. - Chief Portfolio Officer & Senior VP of IR

* Gregory B. Maffei

Qurate Retail, Inc. - Chairman

* Jeffrey A. Davis

Qurate Retail Group, Inc. - CFO

* Michael A. George

Qurate Retail, Inc. - President, CEO & Director

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Conference Call Participants

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* Alex Joseph Fuhrman

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* Edward James Yruma

KeyBanc Capital Markets Inc., Research Division - MD & Senior Research Analyst

* Eric James Sheridan

UBS Investment Bank, Research Division - MD and Equity Research Internet Analyst

* Jason B Bazinet

Citigroup Inc, Research Division - MD and U.S. Cable & Satellite Analyst

* Oliver Wintermantel

Evercore ISI Institutional Equities, Research Division - MD & Fundamental Research Analyst

* Thomas Ferris Forte

D.A. Davidson & Co., Research Division - MD & Senior Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Welcome to the Qurate Retail 2019 Q2 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded, August 8. I would now like to turn the conference over to Courtnee Chun, Chief Portfolio Officer and Senior Vice President of Investor Relations. Please go ahead.

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Courtnee Alice Chun, Qurate Retail, Inc. - Chief Portfolio Officer & Senior VP of IR [2]

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Good morning. Before we begin, we'd like to remind everyone that this call includes certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual events or results could differ materially due to a number of risks and uncertainties, including those mentioned in the most recent forms 10-K and 10-Q filed by our company and QVC with the SEC. These forward-looking statements speak only as of the date of this call, and Qurate Retail expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein to reflect any change in Qurate Retail's expectations with regard thereto or any change in events, conditions or circumstances, on which any such statement is based. On today's call, we will discuss certain non-GAAP financial measures, including adjusted OIBDA, adjusted OIBDA margin and constant currency. Information regarding the comparable GAAP metrics along with required definitions and reconciliations, including preliminary notes and schedules 1 through 3 can be found in this earnings press release issued today, which is available on our website. Today speaking on the call, we have Qurate Retail President and CEO, Mike George; Qurate Retail Group CFO, Jeff Davis; Executive Chairman, Greg Maffei. Please note, we published slides to accompany the earnings release. These slides are available on our website. Now I'll hand the call over to Mike George.

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Michael A. George, Qurate Retail, Inc. - President, CEO & Director [3]

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Thank you, Courtnee, and good morning, everyone. We're making good progress against the priorities we outlined on our last call. Our second quarter results were highlighted by improved performance at QxH and QVC International relative to the first quarter, including sequential net revenue and OIBDA margin improvement at QxH, and double digits year-over-year OIBDA growth at QVC International in constant currency. These gains were partially offset by further performance deterioration at zulily. We're working aggressively to address this issue at zu, but we do anticipate that they will persist in the near term. We also improved free cash flow relative to Q1 due to disciplined inventory management and more favorable working capital timing. Additionally, we resumed our share buyback program purchasing nearly 12 million shares of stock for $153 million from May 1 to July 31. While our Q2 results declined year-over-year, I am encouraged by the resiliency of our QxH business, and our ability to generate high levels of OIBDA and free cash flow in a dynamic and highly competitive environment. Going forward, we'll remain focused on evolving the QVC and HSN brands, building on our collective strengths and the power of our model here in the U.S. and globally, capturing our targeted synergies and stabilizing zulily.

I'll focus my comments on strategic and operational execution, and then turn the call over to Jeff for a more detailed financial review.

Starting with QxH. Despite a slight decline year-over-year, we are pleased with the sequential improvement in operating results. The improved sales trend reflected a moderation in the sales decline from on-air products relative to Q1. Please see the definitions of on-air, off-air and digital-only sales in the presentation posted on our website. We drove year-over-year on-air sales gains in several areas. Culinary and garden strengthened due in part to Easter-driven demand shifting out of Q1. Beauty returned to growth although that category remains highly competitive. Accessories growth accelerated while apparel softened and reflected in part a weakening clothing cycle across retail. On the off-air side, we saw growth in categories like home décor and beauty where we feature more curated and differentiated assortments. And in our digital-only business, we pulled back on lower margin national brand offers in areas like household and electronics. As a result of these actions, we saw nice gains in overall off-air and digital-only product margins, highlighting our focus on winning in digital through curation and differentiation. We remain pleased with TV viewership and digital engagement at both QVC and HSN, which speaks to the relevance of our brands. TV viewership grew, driven by enhanced programming, improved channel placement and expanded distribution of our secondary channels, QVC2 and QVC3, each received more than 8 million additional homes as of June 30. And HSN2 reached an additional 19 million homes. While TV viewership doesn't correlate directly with sales, we do see it as a positive indicator of overall engagement with our brands, especially at a time when TV viewership, more broadly, is declining. Our digital engagement also continued to grow as the number of digital visits and sessions across our websites and apps increased, reflecting the power of our TV broadcast to drive traffic to our digital properties, bolstered by continued growth in performance marketing. Particularly encouraging, viewership of our live TV programming on our own web and app platforms continues to grow rapidly. This strong engagement translated into healthy customer activity. On a trailing 12-month basis, our total customer count, retention and number of items purchased remained strong and stable, and we grew the number of new customers in both Q2 and the last 12 months.

Looking forward, we'll continue to focus on bringing together QVC and HSN in ways to capture the best of each brand separately, while harnessing the power of both brands together. And we'll continue to leverage our core differentiators and lean into our strategic priorities, which are first being the best at product curation and discovery, which has always been the core of our success. In today's world, we need to further increase product differentiation, expand variety and be faster to market with new and undiscovered curations, and we continue to strive for the best value while also enhancing our delivery promise to meet customers rising expectations.

Second, winning in digital, which is about delivering our unique value proposition around curated product discovery, storytelling and live experiences across all the platforms consumers engage with today, creating new purchase opportunities and attracting new generations of customers. We've evolved into one of the largest e-commerce and mobile retailers in the U.S., and we're leveraging all of our platforms to grow digital faster by delivering highly engaging, curated video-rich shopping experiences, rather than by competing directly with transactional e-commerce companies on their terms.

Let's take a closer look, starting with being the best at product curation and discovery. We generated strong performance from unique proprietary and limited distribution brands in the second quarter, including AnyBody and Breezies and Intimates; Josie Maran, TATCHA and Beekman 1802 in beauty; Valerie Parr Hill and Northern Nights in home décor; Curtis Stone, Kitchen HQ, Temp-tations, Rastelli Market Fresh and Kansas City Steaks in Culinary; and Diane Gilman in Apparel. We're continuing to expand our proprietary brand capabilities by building out our D3 design, development and discovery organization. We're increasing our offerings from Kitchen HQ, which has become a key contributor to HSN's culinary growth. In beauty, we're excited about the September launch of Carmindy Beauty, our first proprietary beauty brand, which we're developing in coordination with Batallure Beauty. We're establishing strategic vendor partnerships that leverage our integrated merchandising team. We've seen success with brands shared across HSN and QVC, including Beekman 1802, Doll 10 and Tweak'd by Nature in beauty; and Teeter Inversion, Sleep Number, WEN, Fitbit and Bose in Home and Fitness. And we're excited to launch an outerwear line at HSN this fall that [luges] our successor QVC with capital garment. As part of our ongoing commitment to bring customers more discoveries, increase product differentiation and incubate new products, we launched The Big Find, a nationwide search for the next big brands in beauty, fashion and jewelry. This month select groups of entrepreneurs are joining us in 4 cities to pitch their products to panels of merchandise leaders from across our company. We anticipate that chosen entrepreneurs will launch their products in QVC and HSN beginning this Q4 and through 2020. It's one of many ways we can build on our legacy of launching or fostering in many of the most successful entrepreneurial brands in the marketplace, including IT Cosmetics, Philosophy, Bare Essentials, Spanx and Andrew Lessman and Diane Gilman.

We continue to expand our curated digital-only assortments, which complement and extend our current on-air assortments. For example, we've curated a unique assortment of crafting items at qvc.com that appeals to our customers, leveraging the success of HSN's on-air crafting business.

Our second priority is to win in digital. Broadcast TV is an amazing platform to attract viewers, build relationships and inspire immediate purchases. Additionally, it is a powerful marketing vehicle and it drives traffic to our digital properties, where consumers can experience the full range of our offerings and content. We're programming strategically across our 6 networks, our 5 broadcast network and our digital-only Beauty iQ network to maximize both video and digital audiences, creating joint events across H and Q, in categories like culinary and fashion, that deliver -- that traditionally deliver higher viewership and can create a multiplier effect on overall audience size while adopting a counter programming strategy in lower viewership categories like electronics and household. And we now have one QxH leader overseeing the programming and planning teams across QVC and HSN to identify and capture these opportunities. We continue to focus on developing compelling and engaging programming that can draw large audiences. For example, QVC and HSN joined together for the first time this year for our Beauty with Benefits event to support Cancer and Careers. The event, which was aired on both our broadcast and digital platforms and amplified across social media and influencer networks, that collected over 3,000 new customers and exceeded our sales goal. As we've discussed on prior calls, we've been strategically increasing our marketing spend that's totaled 1.3% of QxH's net revenue in Q2. Marketing spend drove approximately 25% of our new customers with the remainder coming in organically. Our business model buoyed by the power of our TV reach, enables us to spend conservatively on targeted marketing initiatives that yield attractive returns. I'd also note that QxH's performance marketing is diversified across a variety of channels, including affiliates, comparison shopping engines, paid social, display and e-mail. This approach reduces our dependency on any one channel and allows for more flexibility in how we target high-value prospects. Additionally, we're focused on building strong niche audiences on social media networks. We now have more than 10 new content series across the QVC and HSN YouTube channels focused on beauty, culinary, fashion and lifestyle. We're also advancing our influencer strategy, leveraging customers, hosts and guests and other proven personalities. In Q2, for example, we introduced QVC's customer advocacy program called QCrew, which is designed to activate our more passionate customers as ambassadors for our brand, leveraging their own social media networks. We're also tapping into the trust and influence of our hosts and other personalities through initiatives like Getting Real, a new YouTube series featuring personal relatable videos about our hosts' lives outside of QVC. The Sloane Series and Beauty iQ and David Venable's Recipes series, Half Homemade are additional examples. Further high-profile guests are attracting audiences across both our social networks and theirs, including Jamie Foxx for Prive Revaux, Ryan Seacrest for POLISHED By Dr. Lancer, Farah Merhi for Inspire Me! and Jill Martin for G.I.L. I. Home. As a result of all of these digital efforts and leveraging our networks as powerful marketing channels, we continue to increase the mix of our revenue generated e-commerce platforms. In Q2, e-commerce revenue was 55.5% of QxH sales, up nearly 200 basis points year-over-year. And our customers are especially gravitating to mobile, which now represents 68% of e-commerce orders, up 400 basis points year-over-year. I do want to take a minute to showcase one recent success story that kind of brings together our ability to execute against both these product curation and digital priorities. Rachel Hollis is a best-selling author, podcaster, social media influencer and motivational speaker.

In May, we launched her exclusive fashion collection with QVC only on digital. The line designed to empower women with beautiful and wearable style for every day was developed by Rachel and our teams leveraging our proprietary D3 capability. The digital first launch included a strong social component, driving impressive new customer acquisition with 80% of new customers in the 25 to 44 demo. We're continuing to launch new Rachel Hollis products digitally and are preparing for an on-air launch later this year. And we're really pleased with this blueprint and see applying it to future brands. And we were excited last week to announce the employment of Leslie Ferraro to the newly created role of President of QxH, effective September 16. Now Leslie brings a really impressive 17-year history with the Walt Disney Company. Most recently as Co-Chair in Disney consumer products and interactive media, and President Disney consumer products where she established a proven track record of driving innovative, customer-centered strategies. Leslie's primary focus would be to advance QXH's growth strategies by leveraging the power of video, storytelling and curated retail experiences across new and next-gen platforms, and as we invite new customers to join QVC and HSN. Leslie will work closely with Mary Campbell, our Chief Merchandise Officer of QRG and our Chief Commerce Officer of Q U.S.; and Mike Fitzharris, our President of HSN. Now to sort of quickly summarize QxH results, our sequential improvement in revenue and OIBDA as well as our strategic and operational progress demonstrates the on-going relevance of the QVC and HSN brands and platforms. We continue to engage viewers and visitors, attract new generations of customers and deliver high levels of OIBDA and free cash flow. That said, we are hesitant to commit to a specific timeline for returning to revenue growth as we're operating in an increasingly uncertain macro-environment, including unknown tariff impacts while also driving at the same time numerous innovations in our business model to enhance product discovery and win in digital. We will remain focused on pursuing these strategic priorities, carefully balancing revenue, OIBDA and cash flow levers to drive meaningful cash flow and delighting current and prospective customers. I'll turn now to QVC International where we saw continued constant currency revenue growth and a double-digit OIBDA gain led by strong performance in Japan. Our European markets were mixed in part due to a challenging macro-environment, although we did see solid growth in Italy. Among the highlights across international were positive results from our product margin improvement efforts, including disciplined promotional and inventory management actions that reduce clearance. We're also seeing improvement from our increased focus on more targeted promotional activity, rebalancing of categories and brands and improved TSV margins. Looking forward, we're focused on building momentum at QVC International through a set of growth priorities that are largely aligned with what I shared for QxH. International is looking to capitalize on successes from the U.S. in areas like performance marketing and expanded digital assortments. We're also being purposeful about where international can take the lead on key innovations in social and in digital discovery, especially as it relates to further elevating our online store experience in customer communities, in addition, while exploring opportunities to evolve the international operating model to pursue growth opportunities in a more leveraged way across markets.

Turning to zulily. Our challenging results reflect further erosion in the acquisition of new and reactivated customers. As marketing costs to acquire new customers continue to rise. We also saw increasing pressure on the existing customer base due to lower purchase frequency from existing customers along with ASP erosion and lower average order value. We're also continuing to see headwinds from sales tax collections and remittance which we expect to continue through most of the year. The zu team is focused on enhancing its core customer promise and is making strategic changes to its customer experience to return to growth. Concerted initiatives are underway to improve the assortment of fresh quality products by launching fewer but more curated events that increase overall customer engagement and conversion. We're also focused on creating a more fun and engaging shopping experience on our website and app, and reducing order to delivery times. As we see these headwinds in marketing spend efficiency, we have chosen to maintain our marketing return requirements. And as a result, overall marketing spend declined 10%, which further compounded our customer acquisition and sales pressures, but we are accelerating experimentation across alternative marketing channels, such as TV marketing, which, while still early, have shown positive indicators. We're also committed to maintaining vigorous cost disciplines to address the lower volumes. In sum, we're diligently focused on key initiatives to reinvigorate the customer experience, and we believe we're taking the right actions at zulily to stabilize the business over time and eventually, return to growth.

At Cornerstone, excluding improvements which we closed in Q4 last year, we realized a modest sequential net revenue improvement. Overall, Cornerstone continues to face a highly competitive environment across home and outdoor as well as pressures from ongoing sales tax collection. Our Frontgate has been most impacted by these challenges, but we are seeing some signs of improvements. Garnet Hill and Grandin Roads showed modest sequential gains, Ballard Design continues to deliver solid growth supported by the success of its retail stores and design studios, and we do see retail expansion remaining an exciting opportunity for us. Near term, Cornerstone is focused on improving its overall assortments, reducing promotional activity and executing expense control. Longer-term initiatives include deploying a new customer journey platform that will enable us to better connect the impact of digital marketing spend and catalog circulation at a customer level, driving the Ballard retail store opportunity and optimizing the distribution network. I'll stop there and turn the call over to Jeff for the financial discussion.

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Jeffrey A. Davis, Qurate Retail Group, Inc. - CFO [4]

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Thank you, Mike, and good morning, everyone. I'll now provide an overview of the second quarter financial results for our business segments beginning with QxH. QXH revenue decreased 1%, led by a 3% decline in ASP, partially offset by a 1% growth in unit volume. The sequential improvement from first quarter results was driven by improved trends in our on-air business. Adjusted OIBDA dollars declined 1% and margin rate was flat versus last year but improved sequentially from Q1. The flat margin rate primarily reflects favorability from reduced TV distribution commissions in part due to the accounting treatment for certain renewed HSN carriage agreements as well as renegotiated rates at HSN and growth in off-air sales offset by warehouse, freight and inventory management expenses.

The warehouse pressures are mainly related to our multiyear, multiphase fulfillment network optimization plan. The initial phase will reduce our U.S. fulfillment center footprint from 9 to 7 facilities. By 2020, we expect to improve customer delivery times and labor productivity and reduce transportation and fixed cost. However, in the short term, we absorbed approximately 15 basis points of [dual] lease in quarterly incentive payments and approximately, 35 basis points from reduced productivity during the ramp up and retrofit of certain facilities. We expect the productivity headwinds to continue through the back half of the year.

Additionally, freight cost reflect higher freight rates, particularly from U.S. Postal Service and unit growth at lower ASPs. While higher freight rates are not anything new, we were less successful offsetting these rate increases with pack factor improvements or the number of items we ship in the same box due to the ongoing fulfillment network optimization plan. We expect these freight pressures to also continue through the year but begin to moderate in 2020 as new fulfillment center begins to realize increased pack factor along with the benefit we'll realize from reduced shipping distances.

And while inventory management reduced overall OIBDA by 25 basis points led by liquidations and costs associated with [clearing] Ingenious Designs brands at HSN, inventory obsolescence was favorable by 20 basis points for the quarter. Finally, on QxH, we realized cumulative run rate cost synergies of $87 million through June 30.

Moving to our international business unit. In constant currency, International delivered another solid quarter with revenue up 1% on a 7% ASP increase, which was counterbalanced by a 5% decline in unit volume. Japan had the strongest performance across the markets with a double-digit growth across 4 key product categories, strong demand generated from its TSV replay and expansion of destination tune-in programming. Italy realized improved results while Germany and the U.K. posted mixed results in the quarter. Adjusted OIBDA was up 10% and margin expanded 140 basis points from gross margin improvement, fulfillment leverage, lower fixed cost and reduced losses associated with our former France operations.

Turning to zulily. Net revenue declined 13% led by the continued challenge in new customer growth, lower spend within existing customer base and lower ASP. Adjusted OIBDA declined 76% and margins compressed 510 basis points versus last year with a topline erosion accounting for 320 basis points of the margin rate decline. While we are encouraged by increased product margins, there were several factors beyond the revenue decline, which more than offset this favorability. First, fixed expenses. Connected with the expansion of a technology-related headcount and a charge for recent workforce reductions, which I'll discuss in a moment. Second is freight cost. Unit economics deleverage when ASP declines and freight rates increase. And finally, warehouse expenses as a percent of net revenue have increased due to increased wages and benefits and the deleverage of fixed cost.

Going back to my earlier mention of the recent workforce reductions, zuly (sic) [zulily] made a strategic decision to reduce the number of daily events from 150 to 100, which will allow better focus on each daily event on the quality, unique product fines and personalized shopping experiences the zu customer expects. As a result, zulily streamlined their operations, eliminating positions, primarily in its merchandise and studio operations but remains focused on increasing their investment in technology, user experience and other areas to help support speed and agility.

Wrapping up with Cornerstone. Excluding the Improvements catalog business that was closed Q4 of 2018, revenue declined 3%, adjusted OIBDA was down $5 million. The OIBDA performance principally reflected the impact of lower revenue and gross margin pressure from promotional activity, partially offset by lower selling, general and administrative costs. Garnet Hill, Grandin Road, and Ballard Designs delivered sequential improvement over Q1. While we've seen improvement in Frontgate, the turnaround is taking longer than anticipated due to ASP deleverage, a soft outdoor furniture season and overall competitive pressures.

Before I discuss CapEx and free cash flow, let me take a moment to address the ongoing tariff situation. The 3 tranches in effect to date cover approximately 10% of Qurate cost of goods sold. Through our mitigation efforts, we believe these tariffs had a limited impact on our results. The recently announced fourth tranche will cover an additional 40% of our cost of goods sold with over 80% from vendor-sourced products and the remainder from direct imports. Of our total exposure, approximately 30% is in electronics with the rest spread fairly evenly across apparel, accessories and the remainder of our home categories. Teams are taking actions to mitigate the cost impact in collaboration with our vendors, including shifting product sourcing from China, sharing the cost burden across supply chain and increasing retail prices where necessary. It's too early to predict accurately what effect the tariffs may have on sales demand. However, this is a dynamic situation we are continuing to monitor, and we hope trade actions between U.S. and China deescalate.

Moving now to capital expenditures and cash flow. Capital expenditures were approximately $106 million on a cash basis in Q2. For the full year, we anticipate CapEx to be approximately $370 million to $390 million, which is below our initial estimate of $410 million to $425 million. As a reminder, the total increase over 2018 is primarily due to the U.S. fulfillment network optimization and continued technology and commerce platform investments. Free cash flow increased modestly versus last year and substantially, recovered versus Q1 from improved working capital, primarily associated with reduced inventory levels and accrued sales return reserves. QVC's total net debt-to-adjusted OIBDA ratio, as defined in our credit agreement, was 2.4x as compared to -- excuse me, maximum allowable leverage ratio of 3.5x. With that, I'll now turn it over to Greg.

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Gregory B. Maffei, Qurate Retail, Inc. - Chairman [5]

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Great. Thanks, Jeff. Looking at the corporate level issues, I wanted to briefly revisit our green energy investments, including wind and solar. These green energy investments are very attractive financially and will continue to be a part of our strategy. The assets we're invested in generate losses, which appear on our PL -- P&L under the share of earnings losses of affiliates. However, we are able to generate material tax benefits, both through these losses and tax credits associated with these investments. Other issues in the quarter, we sold our investment in FTD, resulting in a $34 million booked income tax benefit in Q2 from the tax loss. We expect approximately $100 million tax benefit at the end of 2020 when our long-term tax receivable is collected. From the period of May 1 through July 31, we repurchased 11.9 million shares of Qurate Retail for $153 million. This compares to 9.6 million shares bought in Q2 last year. As a reminder, we will be holding our annual investor meeting on November 21 in New York. The link to register for this event is in our investment page -- our home page of our website. We appreciate your continued interest in Qurate Retail. And with that, operator, I'd like to open it up for questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we will take our first question from Ed Yruma with KeyBanc Capital Markets.

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Edward James Yruma, KeyBanc Capital Markets Inc., Research Division - MD & Senior Research Analyst [2]

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I guess first, last call, you signaled that you were suspending share buybacks given kind of the volatility in the business. Obviously, you restarted that. I guess what changed in terms of the speed by which you were able to inflect the trajectory of the business? Kind of what gives you the confidence to do more share repo's going forward? And then as a follow-up, I know that there were some issues that kind of resulted on the operational side as merging your merchant organizations, I think at the end of the last year, that impacted the first quarter. Are those issues behind you?

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Gregory B. Maffei, Qurate Retail, Inc. - Chairman [3]

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So, Edward, on the first one, I would say we, as we expressed, are going to be opportunistic on our share buybacks. We had increasing confidence during some of the results of the quarter, as Mike and Jeff outlined. And I would note there was a substantial pullback in the share price during the quarter, which made share repurchase a more attractive option. Mike, do you want to handle the second part?

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Michael A. George, Qurate Retail, Inc. - President, CEO & Director [4]

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Yes. on the challenges with integration, especially on the merchant function. I do think we're largely past it and the things have now been working together for several months. There's still some work to do to get all the processes working smoothly, and of course, with fine lead times, it takes a bit of time for all of that the show up in the results. So I was still feeling a little bit of pressure from that in our numbers probably. But I think we're largely past the biggest challenges associated with integration.

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Operator [5]

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We'll take our next question from Oliver Wintermantel with Evercore ISI.

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Oliver Wintermantel, Evercore ISI Institutional Equities, Research Division - MD & Fundamental Research Analyst [6]

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I just had a question regarding zulily. If you could, maybe, walk us through -- I know you provided the details there. But I think it's still a little bit unclear what really drove the deterioration over the last, I would say, 2 or 3 quarters in the zulily business? If you could maybe try to explain what drove that and how you tried to fix that?

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Michael A. George, Qurate Retail, Inc. - President, CEO & Director [7]

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Yes. Thanks, Oliver. I would say, at a high level, I would point to 2 things. Clearly, the most proximate cause was that this is a business that really worked well on bringing in new customers through Facebook marketing. And that was a channel, we were having a huge success with a year ago and drove the kind of strong level of new customer ads and growth we enjoyed last year. We've just seen a dramatic sort of increase in cost or decrease in efficiency of that channel, such that we just have struggled to get the kinds of marketing returns we need. And so we're both bringing in fewer new customers for every dollar spent and spending fewer dollars. And this is a business that still needs to bring in a lot of new customers every year. So a fair amount of pressure on the customer acquisition front. We are obviously working hard to find new acquisition channels that will work for us, some amount of experimentation but haven't yet cracked the code on the operable -- obviously, [stay] after that. We have chosen not to kind of give up on our return on marketing spend requirements to stabilize the sales, we just don't think that, that would be healthy spend. So that's the biggest issue. I think the second issue is that in some ways probably some of the success we had in marketing last year masked the fact that, I think, we haven't made as much progress as we would've liked to make in just continuing to evolve the overall customer experience. So just -- website isn't as fresh as it needs to be. Our team is working on a number of things as we speak, some new innovations on the website store experience. We haven't had as much success bringing in delivery times as we had hoped for. And so we can see when those delivery times are really long, but we get a lot of customer satisfaction at the longtail of those delivery times. And so we need to move faster on some of these more experiential aspects of the brand, which are -- which, I think, are causing a little bit of burnout with existing customers. So I would say those are the 2 big factors, we have to get more effective forms of marketing spend at the front end and just kind of be sensitive to burnout risk with existing customers through freshness in product, freshness in the web experience, better service levels and a number of initiatives underway on all those fronts. The good news is, I do think that the customer base still loves the brand, still purchases frequently, [actually] we have seen a pretty big erosion in that rate of purchase and need to work it aggressively.

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Oliver Wintermantel, Evercore ISI Institutional Equities, Research Division - MD & Fundamental Research Analyst [8]

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Got it. And maybe, as a follow-up to that, maybe, a bigger picture question regarding the portfolio of your brands or businesses. If you look at hurdle rates, in regards to zulily or Cornerstone, is there anything that you would say -- we give that these businesses another year or whatever the hurdle rates are and look for other opportunities then? Or if there's in -- within the portfolio, if you think that there's -- is there any need for further acquisitions in the near term?

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Michael A. George, Qurate Retail, Inc. - President, CEO & Director [9]

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I would say on the acquisition front, we're certainly open to something compelling coming our way. But our view is, we're focused on the businesses we have, and it'll take a really -- just extremely attractive scenario for us to consider acquisitions at this [page]. We'd rather get the current portfolio cleaned up. We're happy with the portfolio of businesses we have. We've got a couple -- both zu and Cornerstone are in different kinds of turnaround, so we need to see that work. Again, we're never going to say never to looking at any opportunity, either acquisition or divestiture, but I would say our focus is on getting these businesses to work and to get back to growth, and I think that is absolutely doable.

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Operator [10]

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And we'll take our next question from Alex Fuhrman with Craig-Hallum Capital Group.

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Alex Joseph Fuhrman, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [11]

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Curious with zulily struggling a little bit here. Is that brand still helping to bring new customers to QVC and HSN? Just curious if you're still getting that strategic value? And then if I remember correctly, I think, you've been doing some Today's Special Values that you've been cross marketing on zulily. Are you still doing that? Are you still seeing any response to that? Just would love some more color on how you're continuing to use the different assets in your portfolio to drive customers to QVC.

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Michael A. George, Qurate Retail, Inc. - President, CEO & Director [12]

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We do think we're getting those strategic benefits, certainly doesn't out-weigh the performance pressures we're seeing but on the customer acquisition front from zulily, we've tried to kind of pivot with where we see the performance. So last year as zulily was really growing, and we were focused on keeping new customers on the zulily platform, less so about trying to get them to migrate to Q and H. A little bit of cross marketing but not heavy. This year, we've -- as zu has struggled, zu still has a lot of traffic and visitors, but as they've struggled more to monetize that, they put a little more focus on that crossover customer so as an example in the daily e-mails that go out to zulily customers, we do feature the QVC Today's Special Value, probably in the future it'd be featuring the HSN Today's Special, and other ways to sort of market the QVC and HSN brands to a very large and engaged zulily customer base. We're also doing more cross marketing with our proprietary card program. So as you may recall, we put the QVC proprietary card and launched a zulily equivalent at zu, and are in the process of converting the HSN card to one on the QVC platform, it's going to enable us to do some interesting cross marketing through our proprietary card programs across the brands. We've done a little bit of that at zu, but I think there's more to be done. So not a massive benefit but certainly additive, lets us speak to a wider range of visitors and potential customers every day.

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Operator [13]

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We'll take our next question from Eric Sheridan with UBS.

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Eric James Sheridan, UBS Investment Bank, Research Division - MD and Equity Research Internet Analyst [14]

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Mike, I wanted to just check in and sort of get a better view of sort of how your own thoughts on digital marketing and performance-based advertising continued to evolve as both a stimulant of individual transactions and at the top of the funnel, as sort of a growth driver for users and buyers coming into the platform broadly. What have you learned since you made some of the changes you did late last year? How those sort of continue to evolve? And then maybe, a second quick one, if I can, just you highlighted mobile shopping and you continued to talk about that in the last couple of earnings calls. What have you seen as the mobile shopper continues to evolve with all of your various properties on a global scale? Thanks so much for the detail.

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Michael A. George, Qurate Retail, Inc. - President, CEO & Director [15]

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Yes. Thanks, Eric. On the first one on performance marketing. We continue to be in this high experimentation mode from the numbers, kind of modestly increasing performance marketing every quarter. I guess it is a pretty tight set of return metrics that say that, that spend has to kind of pay back within a year, and we are focused on the sort of needle in the haystack of how do we find customers that could become really great core QVC customers as opposed to one and done's, which just doesn't fit our model. And so we're kind of [distorting] our return requirements to, in particular, focus on those potential customers who could become super users of the brand. And we are finding that we can do that. That's I think the most encouraging thing to us, we're gating our spend so that we do meet these return requirements but we're finding that, while the overall average value of these customers is a little below our total average, there are pockets of these digital customers, especially those that come in on more engaging platforms like social media, media marketing that are coming into the ecosystem and becoming pretty high-value, pretty high-frequency customers right away. So we think it is working as another way to tell our story to get people into the ecosystem and then get them energized about all the things that we have to offer. So really encouraged by that. Our limitation is really just the fact that if we overspend then we see the returns dropping, and so we're trying to view this as a long-term strategy, be [surgical] like we were going after, bump it up every quarter and help sort of build the customer file, but the fact that 1/4 of our new customers are coming in through paid marketing at pretty good levels of quality, continues to be encouraging for us. In our mobile, I think, we've just been surprised by how much that platform now dominates the consumer experience. So for years now, we've been very much in a mobile-first mode. All of our design work is done for mobile screens. We are kind of continuing to sort of rebuild the whole digital platform to be more mobile-friendly, so we're in the sort of final phase of that work as we speak, which is launching a new checkout platform that's much smoother, faster on digital and especially, on mobile and that's just in kind of rollout phase. We can present her a lot of great video content on the go. And so, I think, we're crossing all the benefits of mobile. And probably, the most important one for us is how we enable that great, high def video experience, so that when she's standing in the Starbucks line, she can not just learn about the TSV but she could watch a couple of minutes of the TSV program live. And so we're quite pleased with the results, both on mobile web and on app and continue to innovate against both. And with our zulily brand, that's also business that's been amazingly successful on mobile and especially, on app then it's another kind of key to winning at zulily is to reduce our dependency on e-mail marketing and to -- the way to get the zulily customer into our ecosystem is to get her using our app. So zulily has a very high app usage rate, relative to almost any other e-commerce brand. And we're going to continue to invest in getting a great app experience in front of more customers and prospects at zu.

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Operator [16]

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Next question comes from Thomas Forte with D.A. Davidson.

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Thomas Ferris Forte, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [17]

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So for Mike, first Leslie sounds like an excellent hire, so congratulations there. I wanted to talk a little about over the top for QVC and HSN. To what extent is it driving viewership? And how should we think about the shopping habits for consumers who are engaging via Roku, Amazon Fire, Apple TV and over-the-top in general?

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Michael A. George, Qurate Retail, Inc. - President, CEO & Director [18]

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Thanks, Tom, and thanks on Leslie. We are thrilled to have her on the team. So really exciting for us. And I would say we're still in a kind of an early learn mode on over-the-top. We've been pleasantly surprised by the amount of viewership we're getting, especially on Roku, and Amazon Fire growing rapidly but Roku continues to be by far the industry leader. What we like about the platform is we can present the full experience. So today, if you have the QVC app on Roku, you'll see all 4 of our networks simultaneously along with a lot of short-form content and long-form content. And we're spending a lot of time trying to figure how to market and push activity to the Roku customer to get her to engage with us. And we expect in the not that distant future, there could be a more video shopping app, generally, that includes not just access to QVC networks but the QVC and HSN networks. So it's a way to get folks into a -- an environment that can be more interactive, have the full experience available. So there's a lot we like about it and as I said, we're pleased with the amount of viewership we're getting. I think we still have a lot to learn about how to convert that viewership into sales, so that's probably earlier going. So we're just really trying to study their viewing patterns, their behaviors and make sure we're getting that to conversion. We think we will because, again, it's essentially a fully featured TV experience. So we believe over time, we should be able to get that to convert to sales at the same rate. But it's a little early to read that. So more to come but happy with where we are. Pleased with the amount of growth and the amount of engagement.

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Operator [19]

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And we'll take our last question from Jason Bazinet with Citi.

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Jason B Bazinet, Citigroup Inc, Research Division - MD and U.S. Cable & Satellite Analyst [20]

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I just had a question on Amazon Prime Day. What impact does that have to your business when that -- I think it rolled out in July. And this move from Amazon to 1-day shipping on Prime customers, has that or do you expect it to have any sort of impact on your customers?

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Michael A. George, Qurate Retail, Inc. - President, CEO & Director [21]

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Yes. Thanks, Jason. So Prime Day is interesting. We see really no impact. We've not -- but generally speaking, have not taken the approach of using it as a day to excessively market or promote to our customers. But there's sort of more people in the e-commerce ecosystem on that day. So typically, you might see a little more traffic. But we've been pleased that we've never seen it hurt our business either sort of immediately on the day of or in the following days. We haven't actually tried to aggressively capitalize on it either. But I would say, it's fairly neutral to us. I don't see their move to 1-day shipping as having much impact on us. We've -- We're very open about the fact that if you need it in 1 day or if you need it in 2 days, we're not the best place to come when getting that impulse purchase. So I mean we're kind of okay with the typical 3- to 5-day delivery times that we have. So we really haven't seen -- what we've learned over the years is that we need to get it to the customer in a reasonable period of time, and we'll see a falloff if we're -- if we have a tail of slow delivery times. But if we're getting it to her in that 3 to 5 days, that seems to be sufficient and that doesn't appear to be changing a whole lot, and I haven't seen any sort of direct impact from the move to 1-day.

So thanks, everyone. I think that was the last question. We continue to appreciate your interest and support in Qurate, and we'll look forward to talking to you on the next call and seeing you at the investor day. Thank you.

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Gregory B. Maffei, Qurate Retail, Inc. - Chairman [22]

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Thank you.

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Operator [23]

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And this concludes today's call. Thank you for your participation. You may now disconnect.