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Edited Transcript of QRTEA earnings conference call or presentation 10-May-19 12:30pm GMT

Q1 2019 Qurate Retail Inc Earnings Call

ENGLEWOOD May 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Qurate Retail Inc earnings conference call or presentation Friday, May 10, 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. - IR

* Gregory B. Maffei

Qurate Retail, Inc. - Chairman

* Jeffrey A. Davis

Qurate Retail Group, Inc. - CFO

* Mark David Carleton

Qurate Retail, 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

* Heather Nicole Balsky

BofA Merrill Lynch, Research Division - VP

* 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

* Victor B. Anthony

Aegis Capital Corporation, Research Division - MD of Internet & TMT and Analyst

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Presentation

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Operator [1]

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Welcome to the Qurate Retail, Inc. 2019 Q1 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded today, May 10, 2019. I would now like to turn the conference over to Courtnee Chun, Senior Vice President of Investor Relations. Please go ahead.

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Courtnee Alice Chun, Qurate Retail, Inc. - IR [2]

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Thank you. 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, adjusted EPS 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 the earnings press release issued today, which is available on our website.

Please note, we've also published slides to accompany the earnings release. These slides are also available on our website. Today speaking on the call, we have Qurate Retail President and CEO, Mike George; Qurate Retail Group CFO, Jeff Davis; Qurate Retail, Inc. CFO Mark Carleton; and Executive Chairman, Greg Maffei.

Now I'll turn 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. In Q1, our performance was disappointing, led by sales declines at QXH and zulily, both of which were down significantly. Adjusted OIBDA also declined, but at a reduced rate from Q4 as we continue to focus on improving the flow-through from revenue to profits. I'll focus my comments on QXH and zulily, and Jeff will discuss QVC international and Cornerstone.

So starting with QXH. Across 30-plus years, our business has gone through multiple evolutions as the retail and media landscapes change. We're in the midst of another important evolution. And before I dive into the quarterly results, I thought it would be helpful to reiterate what's changing, what actions we're taking in response and how to think about our current results in that context.

So what's changing? On the media side, we see the continued growth of cord cutting and cord nevers, and the decline of traditional TV viewing partially offset by the explosion of digital media consumption. On the commerce side, we see the continued rapid shift to e-commerce and new types of brick-and-mortar experiences combined with the ease of price comparisons, ever-growing levels of promotional intensity and the rise of digitally native brands and social influencers, all of which contribute to shortening product life cycles.

And of course, we're undergoing our own substantial change, acquiring HSN, creating a new integrated QXH business and aligning our teams, our resources and our strategies to meet both the challenges and the opportunities presented by this changing market landscape. In particular, we're focused on 2 overarching priorities to evolve our business in ways to build on our competitive strengths and our strong customer relationships.

First, we must be the best at product curation and discovery. This has always been at the core of our success. And in today's world, we need to further increase product differentiation, expand variety, be faster to market with the new and the undiscovered, and strive for the best value, all while enhancing our delivery promise to meet customers' rising expectations.

Second, we need to win in digital. We have evolved into one of the largest e-commerce and mobile commerce retailers in the U.S., and now we need to leverage that platform to grow digital faster, giving our customers the opportunity to buy what they want, when they want, creating new purchase occasions and attracting new generations of consumers. Broadcast TV is an amazing platform to attract viewers, build relationships and inspire immediate purchases. Increasingly, we're also leveraging our networks as a uniquely powerful marketing channel to driving consumers to our digital experiences. And we're also supplementing this broadcast marketing channel with online marketing channels to drive non-TV viewers to digital. Once consumers get to our digital properties, we're working hard to deliver compelling storytelling experiences and frictionless shopping.

Now on our last call, we talked about how these changes are impacting our P&L. Quite simply, some changes create pressure on adjusted OIBDA yield, including growing performance marketing, expanding our digital-only assortments, maintaining competitive offers in a more promotional environment, creating more original content for more broadcast and digital platforms, and incurring short-term costs to relocate fulfillment centers as we enhance our service promise. We believe these pressures can be offset by acquisition synergies and other cost actions along with continued reductions in TV commissions and customer service expenses and growth in proprietary products and other higher-margin businesses.

We expect some mismatches in the timing of cost and benefits as we evolve the business, but we can flex many of these costs up and down based on the level of success we're seeing. Through all of these changes, our overarching financial goal remains to drive healthy growth in free cash flow for the long term. We've recognized that our quarterly results have been more volatile of late, and we expect results to remain variable as we navigate these changes. But we are managing the business with a balanced focus on top line growth and tight margin management, and we remain committed to investing in the future. We will not chase unprofitable sales. And we'll prudently reinvest some of the synergies we achieved in areas where we see acceptable returns. And despite the bumpy results, we're encouraged by the traction we've seen on a number of initiatives.

We're now turning to Q1 results. This was our first full quarter operating the QVC U.S. and HSN brands as one QXH business unit. And this integration drove a number of changes to structure and leadership and ongoing work to align processes, metrics and tools, all of which we believe will better position us for the long term. Nonetheless, the significant distraction of these changes, especially integrating our merchandising teams, is also contributing to our short-term challenges. Despite the bumps, the turnaround and integration of HSN is going well, generating the anticipated synergies and delivering strategic benefits for our combined company.

Our sales declined in the quarter as strong growth in our off-air business wasn't sufficient to offset lower sales of on-air items. Now just a reminder on some definitions. On-air sales are sales of products that appear on a QXH TV network that calendar day, regardless of whether the customer orders the product over the phone, on our app or through our website. And on-air sales are about 2/3 of total sales. Off-air sales are sales of products that did not appear on a QXH network that day. And they are about 1/3 of sales and come largely, of course, through our digital platforms. There's a subset of off-air sales called digital-only sales. Those are sales of products that have never appeared on air, and they represent about 5% of total sales and just under 15% of off-air sales.

Our declining trend in the on-air sales was driven by several categories. The seasonal categories we feature in Q1, in particular gardening and fitness, underperformed. Our food and cookware sales slowed significantly, in part because we underestimated the negative impact of the shift in Easter timing. We believe Easter timing also modesty negatively impacted customer readiness for spring fashion.

Finally, our beauty business, which has been a strong source of growth over many years, declined as sales slowed for some of our most popular brands at QVC, partially offset by solid growth at HSN. We believe this reflects a combination of overall softness in prestige beauty, challenges with product innovation and the expanding number of beauty distribution points.

In contrast, we saw growth across a number of our off-air categories. Beauty and apparel are especially strong contributors to off-air sales as customers can take advantage of the wider assortments of proprietary and exclusive items available online, and these categories grew strongly in Q1. Electronics is also an important component of off-air sales, especially among new and occasional customers. And while this business also grew in the quarter, the digital-only electronic sales slowed as we removed lower-margin items from the assortments. Despite the revenue decline, we were encouraged by our margin flow-through as we substantially narrowed adjusted OIBDA margin erosion from Q4 to Q1.

Now with that overview of the quarter, let me further elaborate on how we're tackling the 2 big priorities I mentioned in my opening comments. Again, our first priority is to be the best at product curation and discovery. To achieve this goal, we're making many investments in our organization and capabilities. We combined the QVC U.S. and HSN buying organizations late last year, and we believe our teams are now better positioned to develop compelling company-wide category leadership strategies, source products more efficiently and optimize assortments across the 2 brands. However, due to buying lead times, we're in the very earlier stages of realizing these benefits. We're also working across the supply chain to reduce lead times, simplifying processes to onboard new vendors faster, expanding our proprietary product development and sourcing capabilities through our new Qurate design development and discovery organization, aligning best practices and harmonizing our tools and processes for managing assortments across QVC and HSN.

Through these efforts, we're accelerating the introduction of new brands. In Q1 alone, we launched more than 280 brands, of which over 150 were digital-only brands. Now our strategy with these digital-only brands is to create curated assortments that complement and extend our current categories or enable us to go after niche white spaces that our customers care about, like crafting, baby, pets and men's grooming. We can bring in smaller and more unique brands that can't handle our on-air volumes, like Design Imports' aprons or Bernardo footwear. And we can test ideas that might eventually get to the broadcast, like Nearly Natural faux plants or the Ooni home pizza oven. We're also bring in digital-only items from our on-air brands to extend their product ranges beyond what we can feature on our broadcast.

As we noted on our last call, margins on digital-only assortments lag our overall margins. Currently, categories like electronics and floor care make up about 40% of digital-only sales, and these carry lower margins and face more direct price competition. We're carefully managing this mix ensuring that all items offered make a minimum acceptable margin. And we're rapidly growing our digital-only assortments in more attractive higher-margin businesses like beauty and footwear.

Now I'll comment more specifically on how we're driving our product discovery priority in 3 strategic categories: fashion, beauty and culinary, where the combination of our platforms, products, personalities and storytelling provide substantial differentiation from our competitors. This opportunity is especially significant at HSN where these categories are a smaller portion of our business than at QVC.

In beauty, our initiatives include continuing to bring in exciting new brands to expand customers' choice and help offset declines in more established brands. In the quarter, we saw strong results from newer brands Urban Decay, NuFACE, Tweak'd by Nature, Plexaderm skin cosmetics and Beekman 1802.

We're partnering with Batallure Beauty to create proprietary brands for the first time. Carmindy Beauty, the first exclusive brand from this partnership is expected to launch in September. We're launching a multicity discovery tour starting in June to identify promising entrepreneurial beauty brands, expanding our off-air assortments, including extending the range of core on-air brands like IT Cosmetics, Tarte and Philosophy, and adding digital-only exclusive brands like Origins, Smashbox and GLAMGLOW. Our digital-only beauty business grew at double-digit rates in the quarter.

We're creating engaging community experiences. In June, we'll host the QVC Beauty Bash, an exclusive 3-day event showcasing over 30 of the most prestigious names in beauty, while offering a sneak peek at some of the exciting new products and brands coming to QVC such as Sunday Riley.

Finally, we're investing in new programming such as our recent launch of #DaretoShareBeauty at QVC, which is already proving to be highly popular destination program Thursday evenings. Along with social how-to programming, such as The Sloane Series featured on YouTube and other digital platforms.

In fashion, we're accelerating our investment in proprietary product lines, while also strengthening our position in key national brands. We're launching a number of new and reintroduced fashion brands at HSN, all created in-house by Qurate D3. At QVC, we introduced New Balance x Isaac Mizrahi Live!, an exclusive partnership and collection, those are #2 brand launch of the quarter. In addition, we introduced Jen7, a 7 for All Mankind denim brand with an exclusive range of sizes and the Quilted Koala bag brand, which sold out during its first airing. And we continue to share selectively national fashion brands between QVC and HSN to strong response, including Dooney & Bourke and Patricia Nash.

In culinary, at HSN, we're expanding our exclusive lines with celebrity chefs Curtis Stone and Wolfgang Puck, continuing to expand Kitchen HQ, our new proprietary kitchen brand, and launching -- and leveraging QVC suppliers to develop additional proprietary product lines. At QVC, we're growing our relationship with celebrity chef Geoffrey Zakarian and investing in engaging content, including the new Friday addition of our highly popular In The Kitchen program and our One on Wine social series, which is attracting strong viewership on YouTube.

And we also recognize that we have to get the products to the customer quickly and efficiently. So we're investing in a major transformation of our fulfillment network, combining QVC and HSN centers, moving them closer to the customer and converting them from single category to multiline facilities.

Our second overarching priority is to win in digital, creating more opportunities for customers to buy what they want, when they want on our digital platforms, establishing new purchase occasions and attracting new generations of consumers. Our broadcast networks remain at the center of this since they serves as an immediate sales driver and also as a highly efficient and effective marketing channel for our digital properties. In April, we've relaunched Beauty iQ as our first digital-only network available on our website, apps, YouTube, Facebook, Instagram, Roku, Fire TV and Apple TV. While Beauty iQ remains an integral part of our growth plans for beauty, it was not the best use of our broadcast assets because we couldn't drive sufficient viewership through the day without offering the variety of multiple product categories. So this move to digital positions Beauty iQ to better reach its target audience of millennials. We're focused on delivering a beauty experience that's customized for small screens, featuring click-based beauty shows that align to digital beauty stories such as top beauty finds under $50.

On April 1, we launched a new TV network, QVC3, in place of the Beauty iQ broadcast featuring best of content from our QVC and QVC2 networks. This allows us to offer more variety on air with more effective counterprogramming and we believe will further support driving traffic to our digital properties. This best of approach is also highly efficient, with lower production costs and live content. It's early days, but we're encouraged by initial customer response.

We also increased our TV carriage in April, with another 13 million homes on both QVC2 and QVC3, bringing them up to 67 million and 51 million total homes, respectively, and another 20 million homes for HSN2, which is now in 72 million homes. Along with our continued investments in creating compelling destination programming on these networks, we're also testing ways to get our most productive items like the Today's Special Value exposed for limited times before and after the day of the offering to capture more occasional viewers and drive them to the web to learn more. These and other efforts continue to drive growth in total viewing minutes across our QXH networks, up a strong 4% in Q1, marking our eighth consecutive quarter of viewership growth at QVC and our second quarter of growth at HSN following 3 years of declines. While this viewership growth didn't translate into sales growth this quarter, we believe it is an important indicator of long-term health and engagement.

We're also rapidly scaling online performance marketing as an additional means of driving traffic and new customers to our digital properties and increasing spend of existing customers. We're utilizing a variety of digital marketing channels to reach buyers, browsers, prospects and look-alikes. And performance marketing now brings in a little over 1/4 of new customers. But the large majority of new customers continue to join us organically, primarily going directly to our digital properties, which is why our marketing spend is so low as a percent of net revenue. I'd also note that new customers represent a small part of our sales in any given quarter, just 5% of sales in Q1. So we don't have a significant in-period impact, but of course maintaining new customer growth is critical to long-term business health.

Finally, we're developing an engaging platform-appropriate digital shopping experiences that inspire customers and foster the levels of trust and loyalty we see with our TV broadcast. In April, we introduced a new mobile checkout experience with streamlined flows and other features to reduce friction and increased conversion. And in Q1, we launched our Q Anytime app, a fun, swipeable video streaming service featuring great shopping content.

Through such efforts, our viewership on digital platforms also continues to grow rapidly. On our QVC website and apps, we saw a nearly 20% growth in video on-demand viewing minutes and 90% growth in viewing minutes of the live streams from our broadcast networks. Our digital experiences drive sales of both on-air and off-air items, so we see digital as a complementary platform for attracting new customers and expanding existing customer purchase occasions.

So to wrap up my comments on QXH, I'd reiterate, despite this period of heightened volatility, customer fundamentals of our business remain strong. On a trailing 12-month basis, our QXH customer count is up. Our high retention rates are stable to improving. And our existing customers still demonstrate high engagement, purchasing 28 items on average over the last 12 months. Our goal remains driving healthy free cash flow growth for the long term. We're making decisions daily to carefully balance quality top line growth, margin optimization and appropriate investments in our long-term strategies.

Now turning to zulily. Our Q1 performance was highly challenged. Sales declined significantly among new and occasional customers, while sales from our high-value customers increased modestly. We believe this erosion was driven by 2 factors. First, decreased marketing efficiency. We were able to drive a tremendous success last year by targeting prospects with low-priced items over marketing, largely on social platforms, converting them into customers and then engaging with them through e-mail marketing.

Over the past 2 quarters, our marketing spend to acquire new customers became increasingly inefficient, with returns from social marketing dropping substantially, particularly on Facebook. E-mail marketing also decreased in effectiveness, in part due to promotional filters deployed on Gmail. While we've seen some pressures from less efficient social marketing spend at QXH as well, the impact on zulily is much greater since zulily drives a significantly higher portion of its sales from new and occasional customers, and its marketing is much more concentrated on social platforms. Second, the collection and remittance of state sales tax in many additional states, which began in Q4, dampened down sales, and we expect this to be a headwind through most of the year.

To get zulily back to growth, we're focused in 3 areas. First, we're adjusting our marketing approaches for new and occasional customers. As an example, we're scaling investments in app downloads, since customers who shop on our app tend to be more engaged and valuable, and we're not as dependent on the e-mail channel to communicate and promote to app customers.

Second, to better engage our most valuable customers, we're investing to improve our customer experience. This includes increasing the percentage of fresh products in each event that have not been recently featured on the site, improving the returns experience, and creating a curated shopping experience that complements the daily event model, enabling customers to shop the total assortment, around compelling story modules by category with enhanced video and search, all to make our app and website stickier and better present items that can be shipped immediately.

Third, we continue to push forward on international expansion. We generated at zulily about 6% of sales outside of the U.S. in Q1 shipping to 7 markets. And since the beginning of April, we began shipping to another 20 markets. And this month, we'll add another 46 countries. In this very competitive and dynamic retail environment, we believe we have the right strategy to get zulily back on track, but this will be a multi-quarter process, with tough comps along the way.

And with that, I will turn it over to Jeff.

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

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Thank you, Mike, and good morning, everyone. As Mike mentioned, while our overall Q1 performance was disappointing, we made progress on margin improvement and key long-term growth initiatives across our business segments. As the quarter progressed, we moderated promotional and marketing investments to protect margin and avoid chasing less profitable sales, particularly at QXH and zulily.

We are now -- we have now delivered $67 million of cumulative cost synergies and remain on track to realize total cumulative cost synergies of approximately $165 million to $170 million by the end of 2019. We expect these synergies to be weighted approximately 60% to the second half of the year, and we'll continue to make sensible choices to invest -- reinvest a portion of these savings.

Turning to our business segments starting with QXH. As discussed last earnings call, we are now reporting the combined financial results and metrics for QVC U.S. and HSN as our new QXH segment. QXH revenue decreased 4% led by a 4% decline in unit volume. Adjusted OIBDA margin decreased 20 basis points year-over-year, which is primarily a result of a benefit of 140 basis points from the renegotiated HSN carriage agreements, which includes the change in accounting plus lower commissions from reduced rates and increased digital penetration; an approximately 40 basis point benefit from product mix impact which covers initial margin, shipping, handling revenue, freight associated with dropship vendors and bad debt associated with Easy Pay. Those 2 items were partially offset by 90 basis points from inventory management, including increased obsolescence reserve adjustments from inventory replenishment and liquidation of exited brands, such as Ingenious Designs; 70 basis points from fulfillment, including start-up and duplicative costs associated with the current phase of our network optimization, which we expect to continue to be a headwind through 2020; and then finally, 30 basis points from increased marketing.

We fully recognize that the actions taken to improve the HSN business and execute our network optimization strategy creates near-term profitability pressure. However, as we complete the exit of certain brands, replenish and stabilize inventories to appropriate levels, exit duplicative fulfillment space and ramp up operating efficiencies post the installation of these new technologies, we expect these pressures will diminish.

In comparison to Q4, Q1 adjusted OIBDA margin rate improved sequentially 110 basis points primarily from the improvement in product mix impacts and reduced commissions, partially offset by increases in obsolescence reserves and other inventory liquidation. Mike discussed certain actions that QXH has taken to strengthen our performance in the face of current challenges posed by the retail landscape. I'll provide additional context on how we think about delivering returns on certain initiatives.

Starting with digital-only assortment. Margins on digital-only assortment are lower than our overall margins, primarily due to product mix and to a lesser extent incremental freight expenses associated with dropshipping items directly from this vendor to the customer. To improve product mix, we are thoughtfully managing contribution margins product by product and eliminating items that don't meet a minimum positive return. Additionally, we're focused on increasing the mix in categories like fashion and beauty, which feature more differentiation and higher margins.

Consequently, in Q1, we were able to improve margin rates relative to Q4, although these actions moderated our sales growth of digital-only items. While there remains incremental variable expenses associated with dropship charges, it provides many benefits as well, including shortening the time to product launch, eliminating inventory carrying costs and obsolescence costs, and avoiding incremental investments and fulfillment center capacity. While we plan to continue growing the digital-only business, it will remain a relatively small component of total revenue.

Turning to performance marketing. It is a tool to augment new customer acquisition and drive incremental sales among existing customers. We deployed performance marketing across multiple channels, including affiliate and influencer marketing, paid social, display, search and shopping sites, encouraging current customers and new prospects to each -- at each stage of their buying journeys. We continue to grow our performance marketing spend during Q1 as we lean into this initiative. However, overall QXH marketing spend totals just 1.4% of total net revenue for the quarter. We expect a continuing ramp of spending -- marketing spend while carefully monitoring the quality of new customers acquired.

We take a rigorous and conservative approach to measuring incremental sales performance from marketing actions, which we believe gives us a reasonable picture of which channels and strategies are most efficient. We track incremental sales and contribution margin across different channels and product mix to assess projected lifetime customer value over a 3-year period. We heavily discount incremental sales from existing customers due to their existing awareness and established purchasing propensity. We then set payback and return on investment targets by marketing channel for our marketing investments.

Finally, inclusive of customers acquired organically and through performance marketing, the overall quality and value of our new customers remained strong and stable across all the metrics we track, including first purchase spend, acquisition channel, category, where we're seeing high growth in new customers from our high-value apparel, accessories and footwear categories. And finally, the percentage of new customers who repurchased within the quarter.

Let's now take a look at our fulfillment optimization investment. As previously announced, this multiyear, multiphase initiative will initially reduce our current 9-facility footprint largely concentrated on the East Coast will reduce to 7 facilities that are better distributed to service our national footprint and drive improved delivery speeds, increased pack factors and higher productivity. Work began on this initial phase in 2018, it's not scheduled to be completed until 2020. We anticipate adjusted OIBDA in 2019 will be impacted by $17 million primarily from new site lease, project and implementation costs. We expect positive contributions to adjusted OIBDA in 2020 in addition to significant CapEx avoidance on the facilities we are closing.

Moving now on to QVC international. Unless otherwise noted, all my comments address performance on a constant currency basis. Our international business delivered a 1% positive comp led by Japan, which benefited from improving demand as well as lapping the 2018 Winter Olympics. Germany also delivered improved results driven by better assortment, inventory management and fine-tuning our promotions and pricing. In the U.K., we saw softer demand in a highly promotional environment. We strengthened our product pipeline with 134 new brands launched across all markets and improved our storytelling around value.

Adjusted OIBDA was down 1% with a significant improvement in comparison to the 11% decline in Q4. The year-over-year performance was primarily due to lower inventory provision offset by lower product margins. The sequential improvement compared to Q4 was particularly driven by higher product margins due to category mix and pricing. Across our markets, we are enhancing management process and tools to systematically drive stronger margins and anticipate improving profit flow-through over the course of the year.

As previously announced on March 13, we closed our television network and digital platforms in France. The wind-down of the business is included in our continuing operations, and we realized a modest benefit to net revenue, operating income and adjusted OIBDA in the first quarter. Most of the remaining wind-down costs will be included -- will be recorded, excuse me, as restructuring transaction-related costs and therefore excluded from adjusted OIBDA. We want to thank our QVC France team members for their dedication, commitment and professionalism throughout this period.

Switching over to zulily. zulily's 37% decline in adjusted OIBDA was led by a 60 basis point decline in gross margin, primarily from higher transportation costs and lower ASP, partially offset by favorable product margin. The higher transportation costs are driven in part by zulily's China direct business, which are largely offset by higher associated product margins.

SG&A delevered specifically in head count and marketing. With respect to head count, zulily is strategically investing in technology talent as it focuses on innovating in-store experience on its website and applications. To counterbalance, zulily will moderate head count investment in other areas to protect margin in 2019.

And regarding marketing, we began reallocating dollars from new customer acquisition to driving long-term customer engagement. Important to note that the investments in product freshness in China direct sourcing and technology investment are all a part of zulily's strategy to enhance its overall customer experience and drive customer engagement, acquisition and retention to support profitable growth.

And finally, Cornerstone. Revenue decreased 4% excluding the Improvements business, which was shut down in Q4. Our home brands experienced steady improvement led by Ballard Designs. Gross margins compressed 90 basis points due to stranded fixed costs from the shutdown Improvements, promotional activities at Frontgate and increased free shipping. This was partially offset by improved product margins at Ballard Designs and Garnet Hill. Despite the decline in gross margin, adjusted OIBDA improved sequentially and increased 20 basis points year-over-year due to lower marketing expenses.

Moving now to the balance sheet, cash flow and other capital expenditures. Capital expenditures were approximately $60 million in Q1. For the full year, we anticipate CapEx to be approximately $410 million to $425 million. The increase over 2018 is due to the U.S. fulfillment network optimization and continued information, technology and commerce platform investments. We anticipate CapEx to return to more normalized rates between 1.8% and 2.2% of net revenue over 2020. The swings of free cash flow was primarily related to the timing in payments of accrued payables and other accrued liabilities. We expect these to normalize over the course of the year.

In summary, while Q1 results were disappointing, we are confident that our investments in new products, digital platforms and customer growth position us for improved margins and healthy cash flow conversion over the long term.

With that, I'll now turn the call back over to Mark.

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Mark David Carleton, Qurate Retail, Inc. - CFO [5]

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Thank you, Jeff. Let's take a quick look at the liquidity picture. At the end of the quarter, Qurate Retail have attributed cash and liquid investments of $508 million and $7.5 billion in principal amount of debt. QVC's total net debt to adjusted OIBDA ratio, as defined in our credit agreement, was around 2.3x as compared to a maximum allowable leverage ratio of 3.5x.

And with that, I'll turn it over to Greg Maffei.

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Gregory B. Maffei, Qurate Retail, Inc. - Chairman [6]

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Thanks, Mark. During the quarter, Qurate Retail in the period February 1 to April 30 repurchased $119 million of its stock. As the business evolves and we experience volatility in our results, we will continue to evaluate our buyback strategy for the balance of 2019.

We appreciate your continued interest in Qurate Retail. With that, operator, I'd like to open up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll now take our first question from Oliver Wintermantel of Evercore ISI.

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Oliver Wintermantel, Evercore ISI Institutional Equities, Research Division - MD & Fundamental Research Analyst [2]

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I just had a question regarding the new HSN carriage agreement. If you maybe can speak a little bit more about what the impact was in the first quarter. And then more importantly though, what do you think the impact of that would be for the full year?

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

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Jeff, do you want to cover that?

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

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Sure. So as we had mentioned, the impact of the commissions in the fourth quarter now, once again the commissions not only includes this accounting change, it also includes the synergies we're getting from these renegotiated contracts as well as the additional penetration of digital, which helps us reduce our overall commissions, but as I mentioned, about 140 basis point improvement year-over-year. Of that 140 basis points, about half of that would have been associated with the accounting change. And as we think about the rest of the year, we will continue to have that type of differential as we kind of proceed through the next couple of quarters, and then it will normalize thereafter.

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Oliver Wintermantel, Evercore ISI Institutional Equities, Research Division - MD & Fundamental Research Analyst [5]

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Got it. And then secondly, you mentioned at zulily, there will be a change in the return policy. Could you maybe speak a little bit to that? And what do you think the impact on margins from that would be?

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Michael A. George, Qurate Retail, Inc. - President, CEO & Director [6]

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Thanks, Oliver. I'll take that one. The changes in return policy are largely complete. So over the course of probably the last 18 months, we've been testing various forms of return policies. And sort of beginning middle part of last year, we moved to essentially 100% returns. So that's kind of been baked into the results. So it's hard to break it out specifically as a discrete impact on margins, but we feel there's some margin impact that we started to see middle of last year and would continue through Q2 and then we should largely have anniversaried that change.

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Operator [7]

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Our next question will come from Edward Yruma of KeyBanc Capital Markets.

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Edward James Yruma, KeyBanc Capital Markets Inc., Research Division - MD & Senior Research Analyst [8]

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I guess first going back to Analyst Day, you guys had articulated these new customers, you were seeing nice growth there, and many of them are acquired through digital channels. I know that you've given some color on the performance of new customers. But if you could maybe click down a little bit. Maybe over the past kind of 18 months, those new customers that were acquired through digital channels, did they persist? Did they turn into broadcast customers? And kind of how should we view new customers going forward?

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

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Yes. Thanks, Edward. I would say at a high level, all of our metrics on customers have been stable. So Kind of the value of those new online customers -- those new customers we acquired through online marketing have paid out. They have performed as expected. They don't necessarily become a broadcast customer, although it's hard for us to understand exactly the impact of TV viewing. Their mix certainly skews over time to the off-air side of the business. Whether or not they're still engaging in the TV signal is a little harder to see directly. But they end up being healthy customers, multiple purchases, engaging across a broad array of categories. A marketing acquired customer is less valuable than an organically acquired customer. But what we're seeing is this sort of nice mix impact where organic digital customers are growing. They're the most valuable. Phone customers are shrinking. They're kind of middling in value. And then the online marketing customers are growing to offset the decline in phone customers, a little bit lower value. But as a result of those mix changes, the aggregate new customer value is staying very stable.

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Edward James Yruma, KeyBanc Capital Markets Inc., Research Division - MD & Senior Research Analyst [10]

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Great. And one other follow-up if I may. You guys have historically cited kind of positive trends in kind of minutes viewed as a response to cord cutting. And I know you did cite cord cutting in your opening remarks. I guess, are you starting to see changes in viewership?

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Michael A. George, Qurate Retail, Inc. - President, CEO & Director [11]

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Yes. Interesting. For us, we have continued to be really pleased by our ability to grow viewing minutes. And if anything, that growth rate is maybe getting a little bit stronger. Part of that is because of, I think, a lot of good work on the QVC side with programming and on the HSN side as we work to renegotiate contracts, carriage contracts to both save money but also to get better channel position. And that better channel position is, I think, helping give us a bump in HSN viewership. So we feel good about the viewership. It's true that you have fewer discrete TV homes at any one time that have access to use or total number of pay TV homes we're in has obviously declined as cord cutting has grown. But we're able to offset that with viewership for the time being. That said, again, we recognize it's certainly a long-term risk. And that's part of why we're still focused on creating compelling digital experiences, getting people to digital, ramping up performance marketing with the belief that we can get that performance marketing to offset potential erosion over time in viewership. But again, for now, ours has held up pretty well.

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Operator [12]

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Our next question will come from Heather Balsky of Bank of America.

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Heather Nicole Balsky, BofA Merrill Lynch, Research Division - VP [13]

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I guess, 2 questions. One, can you just comment on QVC US' performance during the quarter? Was it negative? Or was it sort of declining QXH driven just by H? And then second, I think you made a comment when you were talking about zulily about seeing less efficient social media marketing for QXH as well as zulily. I'm curious if you could just talk a little bit more about what you meant.

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Michael A. George, Qurate Retail, Inc. - President, CEO & Director [14]

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Thanks, Heather. In general, regarding your first question of QVC performance versus HSN, generally, we want to get away from talking about the individual brands. Because we really are trying to manage it as a whole and optimize how we're growing across total QXH. So we kind of don't want to get into habit of regular disclosure of the individual channel results because that's not really how we're trying to manage the business. All that said, given the size of the decline and the size of QVC, it's safe to infer that we definitely saw sales erosion at QVC as part of that story and kind of concentrated in those on-air slowdown that I referenced in a few key categories.

On your second question about less efficient social marketing at Q, it's not particularly meaningful at QXH. Social marketing is an important part of our marketing mix, but a minority of our marketing spend. We think it gives a halo to the rest of the marketing spend. So we tend to tolerate somewhat lower direct returns from social marketing because we believe it has an indirect impact on all the other marketing channels we use that tend to have much higher returns.

So for QXH, while we're early in ramping up marketing spend, we feel like we have a nice balanced mix of channels that reduces our risk of erosion in any one channel. And we can -- and we're learning how the different channels interplay with each other. The challenge at zulily is greater, as I mentioned, because social marketing is a much higher part of their mix and because new customers are much higher part of their mix.

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Operator [15]

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Our next question will come from Eric Sheridan of UBS

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Eric James Sheridan, UBS Investment Bank, Research Division - MD and Equity Research Internet Analyst [16]

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In terms of laying out that this is going to take some time, can you give a little bit more granularity on how we should think about the investments that need to be made in the business to realign it against your medium to long-term goals, how we should think about some of the synergies playing out from the transaction? We noticed in the investor presentation it looks like you've given a bit more granularity on the synergy side versus when investors can expect the output, meaning the growth, a positive growth profile and how you're thinking about when you achieve that goal? So sort of a piecing over maybe the next 4 to 8 quarters or just the slope of how we should think about the investments versus the return that's going to come back.

And then the second part of the question just broadly on capital allocation. While we're going through this transition, what could investors expect on capital return versus M&A and any changes in the way you allocate capital against -- to the business versus trying to inorganically reposition the business?

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Michael A. George, Qurate Retail, Inc. - President, CEO & Director [17]

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Thanks, Eric. Let me start and maybe I'll ask Jeff to comment, and Greg can also weigh in on different capital choices. When you think about the synergies, we've been pretty specific about how we see those rolling through the P&L. And again, we're on target for this year's goal of about 60% hitting in the second half. So modestly second half weighted. And as you know, next year's another big step-up in synergies as we start to get some of the benefits from the first of our new fulfillment centers coming online and other initiatives. So those -- that is fairly well laid out.

I would say performance marketing as the second big category of investment is one that we can definitely toggle up or down based on the returns we're seeing. Our goal is to continue to increase it at the kind of rates you've seen. And if we're getting strong returns from it, we could even increase it further. Generally speaking, we feel that the synergy savings can offset the performance marketing increases, but they may not always align perfectly from a timing standpoint.

I think the biggest variable right now for us on the cost side is this margin pressure that Jeff talked about, particularly at HSN, largely related to turning that business around. So you heard a pretty substantial basis point impact from a couple of things. We announced late last year that we were closing our Ingenious Designs' business, which is a wholly-owned HSN business with both wholesale and retail operations. Liquidating that inventory is having a meaningful impact on the P&L. That will continue through the year, although I would say Q1 and Q2 are probably the steepest parts of the curve on that liquidation and gets a little bit lighter in the back half.

We also substantially wrapped -- ramped up our HSN inventory, and we're sort at the peak of that inventory. So we don't -- that will be a year-over-year pressure as we go through the year, but not a sequential pressure, but a year-over-year pressure on obsolescence rates through the year. And then we'll normalize as we get late in the year and into next year. We've also done a lot of change out HSN assortments. That's had some margin pressure. And we're trying to normalize that over the course of the year as well.

So from my vantage point, I think on a structural basis, separate from what sales are and what kind of -- what our product mix is but on these more sort of structural aspects of costs, you certainly see fairly strong pressure continuing in Q2, moderately better in the back half of the year and improving further as we go into next year. Jeff, are there other things you would add on that flow?

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Jeffrey A. Davis, Qurate Retail Group, Inc. - CFO [18]

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I think you just covered everything off that I think is important.

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Gregory B. Maffei, Qurate Retail, Inc. - Chairman [19]

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So I'll comment, Mike and Jeff, to Eric on the -- my view of investments. I think Mike just outlined a series of investments that are, I'll call, expense investments. They're all basically in the P&L on some short-term time frame and relate to the ongoing operations and about synergies, particularly on the QXH combination, reassessment of that -- fulfillment centers, FCs, reworking of many of the internal purchasing processes, all those are things which are critical, obviously, to the ongoing operations and why we saw some of the QXH opportunity and what we can do with it.

There are another series of, what I'll call, nonexpense investments, like acquisitions and share repurchases. And I think I commented earlier, we're going to hold off or be timid at least for a period in trying to gain visibility and certainty around the success of the first set of investments and the ongoing direction before we lean in on some of those things like share repurchases.

I also would note that in the past, we've had some success utilizing the enormous free cash flow that Q has had in other areas. If you look in the main, a good portion of our GCI Liberty investment in Charter, which has been quite successful, really came from allocated or reallocated QVC free cash flow. And so while our first focus is, as Mike and Jeff have outlined, streamlining, fixing, improving the core QXH business. We will continue to look at uses of that outside of those both the investments and the free cash flow and share repurchase, potentially acquisitions and even in third-party things that we find attractive because we've had some success with that.

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Operator [20]

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Our next question will come from Alex Fuhrman of Craig-Hallum Capital Group.

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Alex Joseph Fuhrman, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [21]

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I was interested to hear that you're starting to run some best of content on QVC3. And just curious if you can share with us a little bit about the productivity and cost of running that type of content. And just curious if you see sufficient productivity from those hours, if there are any thoughts in maybe starting to layer in some of that type of content perhaps in some of the overnight hours on the other channels.

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Michael A. George, Qurate Retail, Inc. - President, CEO & Director [22]

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Alex, thanks for the question. It's early days on QVC3. So I don't want to draw too many conclusions at this stage. But we're definitely seeing nice productivity with those hours. I would say less than the live productivity of QVC1 and QVC2, but obviously at a much, much lower cost and better productivity than we were seeing with its predecessor network, Beauty iQ. So we do think it's a good formula. Especially having 2 live networks, you have a lot of content to draw from, and I think this best of approach is going to work nicely for us. We have tested that kind of best of content in the overnights on the main channel. So it's a great question. We still find, even with the lower productivity you have in the overnights, that live trumps taped, even factoring in the variable cost of producing that live content. So we do enough volume on the main channel that we'll stick with live in the overnights. But we'll do the clip-based best of on QVC3 and also in the overnights on QVC2, and I think that's a good formula for us.

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Alex Joseph Fuhrman, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [23]

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Mike, forgive me if I missed this. But you mentioned the timing of Easter and that having an impact on the planning of some of your seasonal assortment. Just curious, I mean, given that shift in the timing, if you feel there was a meaningful amount of revenue that shift from Q1 into Q2? And could you give us a sense of to what extent you think the results that you reported reflect your year-to-date trend? Or how much of that might have been impacted in Q1, just given that shift in the timing?

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Michael A. George, Qurate Retail, Inc. - President, CEO & Director [24]

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We certainly think Easter had some impact. We're hesitant to try to point to it as a big explainer of the quarter. We certainly saw pressure in -- a little heightened pressure in February. As that sort of normal run up to Easter, we weren't seeing that. And again, I don't think we did a great job of really anticipating that maybe as well as we could have. So it had some impact, but I wouldn't want to say that it was a major driver nor would I want to suggest that we get that back in Q2 because in our kind of programming schedule, when you have this kind of a shift and a miss, it's kind of a miss. You don't really get it back unfortunately in the subsequent time period.

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Operator [25]

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Our next question comes from Tom Forte of D.A. Davidson

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Thomas Ferris Forte, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [26]

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Great. I have one question for Greg. So Greg, given the consistent ability for Qurate Retail to generate significant free cash flow and given some of the near-term challenges, what are the thoughts on potentially taking it private as a way to giving an opportunity to work through some of these situations?

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Gregory B. Maffei, Qurate Retail, Inc. - Chairman [27]

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Thank you. That's a good question. I guess I'd say in general, we like the public as our partners. We value the liquidity in terms of use of the currency. And in line with some of my earlier comments about where we are in share repurchase and are evaluating that and what is the right time to think it's value creating, I think the go private scenario would be that on steroids. And we were still evaluating that. We would evaluate that. We're always open to ways to create value, and we're not locked in to any particular format. But in general, I think we favor the public one keeping them as our partners and leaning in with share repurchases. As you have noted, we have large free cash flow. We have balance sheet capacity. So the opportunity to do share repurchase when we see visibility and confidence in the results is there.

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Operator [28]

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Our final question will come from Victor Anthony of Aegis Capital.

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Victor B. Anthony, Aegis Capital Corporation, Research Division - MD of Internet & TMT and Analyst [29]

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Two questions. First one, on the market trends that you cited the growth of cord cutting, cord nevers shift away from traditional media consumption and the shift to digital media consumption, those are trends that have existed at least for the better part of the past decade. So why is it having a more pronounced impact in the first quarter? That's one.

Second, I'm afraid, I'm not sure you've touched upon this in your script, but you cited some unique structural challenges that led you to exit the market. I think that's the first market you've exited since I've been covering the stock. So maybe could you just talk about what challenges -- what those unique challenges are? And are you seeing those challenges in the other European markets like Italy?

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Michael A. George, Qurate Retail, Inc. - President, CEO & Director [30]

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Thanks, Victor. I mean you're right. These trends I referenced are long-term trends. I wasn't trying to point at them as being major specific drivers of Q1, but more an acknowledgment that clearly we've had choppier results over a handful of quarters and choppier than certainly we're accustomed to having. And I think it reflects the fact that we do see the world that's changing. And nothing I talked about was new. Hopefully, it will sound familiar with the past discussions. But it's an acknowledgment that, yes, we're living in a changing world. We need to be bold about evolving our model with this changing world. And the combination of those things coupled with a very large and complicated acquisition and integration, have made for bumpier performance than we want to be delivering and have typically delivered. And that's now a multiquarter trend. And so we're pushing hard to stay committed to do those changes because we believe they're right for the health of the long-term business and trying to drive through those changes as best we can with as much transparency to all of you as we can about where we're seeing those bumps and what that implies in the short-term.

On the question about France, I would say the issues were pretty specific to France. So the biggest challenge in France was just a very unfavorable environment as it related to quality of TV distribution. We could not get TV distribution in -- on the kind of core DTT platform, which is where most people spend their time viewing the sort of 30 networks in France. So we had very distant channel location. It wasn't accessible to all homes. We thought we could improve on that over time, and it ended up being a much more negative impact than we expected. I think there are other softer issues in France. Just the fact that it was the most developed e-commerce market in France when we entered versus Italy, which was a very low developed e-commerce market. So I think the competitive pressures were intrinsically higher in France, but the biggest challenge was a fairly unique situation around TV carriage.

Thanks, Victor. And I think that was your final question?

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Gregory B. Maffei, Qurate Retail, Inc. - Chairman [31]

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I think that's right. Thank you to all of our listeners and frankly for your interest in Qurate. We hope to see you in coming conferences or speak with you again next quarter. Thanks very much, operator.

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Michael A. George, Qurate Retail, Inc. - President, CEO & Director [32]

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Thanks, everyone.

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Operator [33]

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This concludes today's conference. Thank you for your participation. You may now disconnect.