Qurate Retail, Inc.
Q1 2016 Earnings Call Transcript

Published: 10 May 2016

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Liberty Interactive Corp 2016 First Quarter Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. As a reminder, this conference is being recorded, May 9, 2016. I would now like to turn the conference over to Courtnee Chun, Senior Vice President of Investor Relations. Please go ahead.

[Courtnee Chun Ulrich:]

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, including statements about business strategies, market potential, stock repurchases, future financial performance, international expansion, the expected benefits and synergies resulting from the acquisition of zulily, the implementation of new marketing and fulfillment processes at zulily, new services and product launches, the proposed spin-off of CommerceHub and Liberty Expedia Holdings, and other matters that are not historical facts. These forward-looking statements involve many risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements, including without limitation, possible changes in the market acceptance of new products or services, the satisfaction of conditions to each of the proposed spin-offs, market conditions conducive to repurchases, the availability of acquisition opportunities, competitive issues, regulatory issues, and continued access to capital on terms acceptable to Liberty Interactive. These forward-looking statements speak only as of the date of this call, and Liberty Interactive expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein to reflect any change in Liberty Interactive'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 and adjusted net income. The required definitions and reconciliations, preliminary notes and schedules 1 through 4 can be found at the end of the earnings press release issued today, which is available on our website. This call may also include certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding Liberty TripAdvisor Holdings. These forward-looking statements involve many risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. These forward-looking statements speak only as of the date of this call and Liberty TripAdvisor Holdings expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein to reflect any change in Liberty TripAdvisor Holdings' expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. Now I'd like to turn to Greg Maffei, Liberty Interactive President and CEO.

[Gregory B. Maffei:]

Thank you, Courtnee. Good morning out there to our listening audience. Today, speaking on the call besides myself, we will have Liberty Interactive's CFO, Chris Shean; QVC's President and CEO, Mike George; President and CEO of zulily, Darrell Cavens. And during the Q&A portion of the call, we will also be available to answer questions about Liberty TripAdvisor Holdings. So on to the highlights. QVC had a strong quarter with good results, growing U.S. revenue 5% and adjusted OIBDA by 7%. On a consolidated basis, revenue was up 4% with adjusted OIBDA up 3% excluding the start-up cost from relatively new French operation. Also in the first quarter, consolidated mobile penetration was 57% of QVC.com orders, continuing a very positive trend with U.S. mobile penetration at 56%. Gratifyingly, zulily's revenue was up 16% and adjusted OIBDA was up 475%. We also, during the period February 1 to April 30, we repurchased $193 million of QVCA shares. Liberty Ventures, turning now to that. Its anticipated $2.4 billion investment in Liberty Broadband is over $100 million in the money on a market basis using the current price, and about $500 million ahead on a NAV basis if you look through to the value of its Charter shares. We file the S-1s for the spinoffs at CommerceHub and Liberty Expedia. And at Liberty TripAdvisor, we had continued the Instant Book global launch, essentially now complete, enabling TripAdvisor to book you over 500,000 hotels. Instant Book is dilutive in the short-term to revenue growth and profit margins, but over the long-term we believe it's both a revenue opportunity and strategically important. And it will, most importantly of all, create the best user experience. We look forward to seeing many of you on Monday, May 16, at the bi-annual QVC Investor Day in West Chester, Pennsylvania. Please reach out to Courtnee and the IR team for more details if you do not already have them. And with that, let me turn it over to Chris Shean to discuss Liberty Interactive's financials in more detail.

[Christopher W. Shean:]

Thanks Greg. We'd like to call your attention to a figure in the earnings release, adjusted net income for the QVC Group. Here we adjust for the non-tax deductible purchase accounting amortization related or arising from the acquisitions of QVC and zulily. You can find this on Schedule 4 of the press release. Now, let's take a quick look at the liquidity picture. At the end of the quarter, the QVC Group had attributed cash and liquid investments of $440 million and $6.7 billion in principal amount of attributed debt. QVC's total debt to adjusted OIBDA ratio as of March 31, as is defined in its credit agreement, was approximately 2.85 (06

[Michael A. George:]

Thank you, Chris. We generated strong sales growth in the quarter, achieving local currency gains in every market except Japan. We're continuing to benefit, we believe, from our differentiated merchandise offerings, immersive platforms and increasingly personalized customer experiences. We also delivered strong e-commerce and mobile growth in the quarter, and continued to expand our customer base. And zulily had a terrific quarter, driving mid-teen revenue growth and strong margin expansion, and our teams are working together effectively to maximize the potential of both the QVC and zulily brands. Looking now at QVC's consolidated results for the quarter. On a constant currency basis, revenue increased 4%, and excluding France, adjusted OIBDA grew 3%, and adjusted OIBDA margin declined 28 basis points. We did experience some pressure on adjusted OIBDA margins due to higher freight expenses in the U.S. and soft performance in Japan, along with the France start up costs. There was no meaningful spending on our new global business services initiative in the quarter. Following the activation of our new operating model, we began to allocate certain fixed costs for management reporting purposes differently beginning in the first quarter, as we detailed in the press release. Historically, we allocated these costs based on the market from which the services were provided. Now, as more of our costs support initiatives in multiple markets, we're allocating cost to the markets that will benefit from the expenditures. The net impact of this new allocation methodology was a 64 basis point increase to the U.S. segment adjusted OIBDA margins, and a 148 basis point decrease for the international segment. The changes had no impact on consolidated results. In the remainder of my comments, I'll describe year-over-year financial results, excluding the impact of these new allocations, which we believe will provide a more accurate understanding of underlying performance trends. So turning to the segment results. Our U.S. business grew revenue 5% in the quarter, reflecting strong 7% volume gains, which were partially offset by lower average selling prices. We also benefited from a reduction in return rates and the extra leap year day. We were once again pleased with the strong growth in apparel, accessories and the home categories. U.S. adjusted OIBDA increased 4% excluding the cost allocation change, and OIBDA margin declined 27 basis points. Freight expenses increased approximately 70 basis points, more than offsetting strong improvements in initial product margins, lower fixed costs and favorable inventory obsolescence. This jump in U.S. freight expense reflected carrier price increases that went into effect last June, and a 13% jump in USPS rates this January, along with the 7% volume growth. We expect the impact from the freight rate increases to moderate in Q2 and be largely behind us by Q3, as we begin to see offsetting benefits from a number of freight cost reduction initiatives underway, along with the launch of our West Coast DC. I'd also note that while our Easy Pay receivables balance declined 30% from year end, it's up 28% year-over-year; the largest driver of this increase is a new program we launched in the U.S. in Q3 of last year, in which we allow users of our private label QCard to put any purchase on three easy payments. In Q1, we saw our QCard penetration increase 345 basis points to 23% of total net sales. While this new Easy Pay practice hasn't materially impacted our overall sales, it clearly adds value to our profitable QCard program, saves on credit card processing fees, and is an effective tool to help us protect and grow the QCard over time. Looking now at our international segment. On a constant currency basis, international revenue increased 3%. We saw gains in all categories except jewelry, with particular strength in accessories and home. Our European businesses performed particularly well led by the UK and Germany, but Italy also grew local currency revenue at the best rate in the last six quarters. While our France business has started slower than we anticipated, we continue to build brand awareness in the market and are seeing solid repeat buying behavior and remain confident in the long-term potential of the French business. The overall very strong results in Europe were partially offset by softness in Japan, which declined in the low-single digits. On a pre-allocation basis and excluding the France start up, international adjusted OIBDA growth was 1% and OIBDA margin declined 27 basis points. We saw a significant OIBDA margin expansion in Europe, with particular strength in Italy and Germany. But these gains were offset by weak results in Japan, including higher freight expenses due to an increased mix of drop ship, higher commissions and severance costs associated with some leadership restructuring. We're focused on getting our Japan business back to sustainable top and bottom line growth in the face of poor economic conditions and the continued pressures from the rising cost of TV carriage. Our new management team in Japan is focused on better executing the core QVC model by strengthening our TSV lineup, enhancing and broadening our brand and product portfolio, leveraging our new website to drive e-commerce business, and delivering a consistent customer experience. And in our joint venture in China, we saw a strong local currency revenue growth of 21%, and a 24% reduction in adjusted OIBDA losses as we benefited from our expanded TV distribution in Shanghai and strong cost management. Our consolidated total customer base grew 2% on a trailing 12 month basis to 12.7 million customers, with the U.S. customer increasing 2% to 8.2 million. Including our China joint venture, we served 14.2 million customers in the last 12 months, a 4% increase from the prior year. And we experienced improved customer retention in every one of our markets. Our fashion businesses continue to be a key driver of growth globally. We had terrific success with proprietary designer brands such as LOGO by Lori Goldstein, Susan Graver and Lisa Rinna in the U.S. Our strong performance in accessories was driven by footwear including Vionic, Skechers and Clarks, the resurgence of the swimwear business and intimate apparel. We had several successful fashion launches in the quarter, most notably the debut of C. Wonder on an exclusive basis. We launched C. Wonder on zulily first, and then subsequently on QVC in the U.S. and UK, Italy and France, as well as on all of our digital platforms. And in Q2, we have just recently launched AnyBody, a major new proprietary brand focused on the growing trend in loungewear. Our Home businesses also fared well globally. In household we experienced strength in cleaning, storage and organization, as well as from products brought to QVC by Lori Greiner. In fitness, Nutrisystem was a top performer. And in home décor Serta and Select Comfort mattresses, My Pillow, and our proprietary brand, Northern Nights, led the growth. And in Q2, we have a number really exciting launches at home, including Scott Living and Style, Isaac Mizrahi Live! Home and Shark Tank judge Kevin O'Leary's Wonderful Discoveries. And last month, we once again partnered with NBC's TODAY show, to give hopeful inventors the opportunity to earn a spot on QVC. This time, we've focused our attention on mom entrepreneurs, and nine of the best entrants made it to a week-long series on the TODAY show, where viewers picked their favorite products. And the winner, Krista Woods, sold out her product in a few minutes, GloveStix, on our Saturday morning program. Our beauty business remains a strength globally, ELEMIS, our number on beauty brand in the UK, offering anti-aging, skin care and body therapies used in their spas was launched in the U.S. in our March beauty event with a strong customer response. And we were one of the first retailers to debut DERMAFLASH, an innovative skincare device for at-home facial treatments. And again, the customer response has been tremendous. And we also premiered JeNu, another highly innovative beauty device, utilizing ultrasonic technology that increases the absorption rate and effectiveness of the skin care products that our customers use every day. Consumer-electronics declined in the quarter, primarily in the U.S. reflecting our decision to reduce airtime. As a result, we increased productivity and are now transacting more than 60% of our electronics business off air. Jewelry continues to be soft globally. We saw continued declines in the bronze, gold and silver categories, and we continue to refocus assets into better performing categories such as our proprietary Diamonique and Affinity brands. And we'll be adding a number of new designer brands later this year such as Stella & Dot, Mario Buccellati, Jane Taylor and Franco P (17

[Darrell Cavens:]

Thanks, Mike. And thanks everyone for joining today's call. I'm pleased with our first quarter performance and our momentum so far in 2016. First quarter revenue came in at $355 million, up 16% year-over-year, and adjusted OIBDA came in at $23 million, up 475% year-over-year. Our strategic efforts last year to get back to an amazing daily customer experience and strong operational execution are paying off, and I'm excited about the outlook for the rest of the year. First, I'll provide an update on our efforts with QVC. Second, I'll give an update on what's driving stronger growth, including our significant profitability expansion this quarter. And lastly, I'll walk through my thoughts on the rest of 2016. First, we continue to make some great progress in partnering with QVC. We've put a team in place that is solely working on identifying new opportunities, including cross-selling key brands, targeting new customers and sharing insights around our technologies to help us both think about our commerce businesses. We've made good progress here, and we'll share more detail around this at the QVC Investor Day next week. Now an update on our core business. Our efforts over the last year in marketing, merchandising, technology and operational execution are all contributing to an improved customer experience, resulting in stronger growth. First, on marketing. As you may recall, we made a shift early last year into broad-based marketing channels, with a focus on acquiring customers with a higher lifetime value. Since then, we continue to see the quality of our acquired customers improve, and saw Q1 orders increase 18% year-over-year, up from 16% growth in Q4 and 8% in Q3. Repeat is a key component of this sustained growth, with 90% of our total orders in Q1 coming from repeat customers, up from 86% a year ago and flat from the fourth quarter. Second, we put a considerable amount of investment into improving our daily site experience. Our focus on fresh themes and new brands at great values everyday remains the primary reason for why our customers come back to us again and again. In the first quarter, we rolled out new technology, which allows us to release more distinctive creative themes across all our platforms on a daily basis. The new technology allows us to make sure each day is special and highly differentiated from other retail experiences. Mobile also continues to be a key driver for our business. In the first quarter, we released new layouts in our apps, which include both more and larger images of our daily events. In Q1, 62% of orders came from mobile devices, up from 55% a year ago and 59% in the fourth quarter. Lastly, regarding our customer experience, we continue to see improvements in our operational execution. We reduced our average delivery times in Q1, both compared to the fourth quarter and the same period a year ago. We also continue to grow our vendor fulfillment services business, bringing more of our repeat vendors onto our third party fulfillment platform. As a reminder, this program allows vendors to pays zulily to store their inventory in our warehouses for our events or other retail channels without bringing inventory onto our balance sheet. By being readily available in our warehouses, we're able to ship the units significantly faster than waiting for the vendor to ship to our warehouses after the orders are placed. For the customer, this can help reduce ship times and canceled orders. We believe that this in turn results in a higher likelihood that you'll shop with us again. Next, we saw significant improvement in our profitability. Our adjusted OIBDA margin expanded from 1% to 7% as a percentage of net sales, driven by strong supply chain execution as well as operating improvements. Our gross margin improved as a result of operational efficiency from our transportation and fulfillment center automation investments. Our SG&A costs, excluding stock-based compensation, came down as a result of leverage across the business as we continue to grow our top line, including some corporate cost efficiencies with QVC and Liberty, as well as higher capitalized costs for software development. Note that in Q1 of 2015 was included $1.2 million in restructuring expenses related to the closure of our UK office. Lastly, I'm pleased with how we started 2016 and our opportunity for this year and beyond. Right now, our team is doing well and we're experiencing some of our strongest operational execution ever across merchandising, technology and our supply chain. We remain incredibly focused on maintaining our great execution and accelerating our new customer acquisition to drive continued strong growth in 2016 and beyond. As a result, we remain opportunistic in our marketing investments throughout 2016. With a strong foundation, we must focus on ramping up new customer acquisition. At just five million active customers, I firmly believe there is significant more opportunity for us to expand our brand and market presence in the U.S. and internationally. I look forward to sharing more with you about our opportunities to drive long-term growth at the QVC Investor Day next week. With that, let me turn the call back over to Chris.

[Christopher W. Shean:]

Thanks, Darrell. Moving on to Liberty Ventures, let's take a quick look at their liquidity picture. At the end of the quarter, the group had attributed cash and liquid investments of $2.9 billion and $2.1 billion in principal amount of attributed debt. The value of the public equity method securities and other public holdings attributed to the Group was $3.3 billion and $1.4 billion respectively at the end of the quarter. Now I'll hand the call to Greg for Q&A.

[Gregory B. Maffei:]

Thank you. Thanks Mike, Darrell and Chris. And to our listening audience, we appreciate your continued interest in Liberty Interactive including QVC and Liberty Ventures. With that, I'd like to open the call up for questions. Operator?

[Operator:]

Thank you. Your first question comes from the line of Rick Patel of Stephens.

[Rick Patel:]

Thank you. Good morning, everyone. Can you provide some color on QVC's new customer growth? I'm curious how many of those customers came from e-commerce versus television, and anything to call out in terms of international new customer acquisition and perhaps your confidence in being able to turn around the Japan business?

[Michael A. George:]

So on new customer acquisition, I would say – I don't have the exact numbers for Q1 in front of me, but we've been fully consistently driving about 70% of new customers coming into our digital platforms. So we've been – and it s might even be slightly over 70% now. So generally have been pleased to see new customers really adopting the digital platforms, and I think that's enabled us to continue to sustain a pretty attractive rate of new customer growth over the last couple of years. In terms of Japan, we feel really good about the team in place. We see lots of opportunities, quite frankly, to execute better and not feel totally dependent on teams, some big turnaround in the economy. So the negative in Japan is I do worry about the economic outlook. Certainly, the news there continues to be challenging. But we believe in the model and we think we can get to a more consistent level of execution and are modestly optimistic about turning that into positive growth over the coming quarters. But I hate the error kind of – commit to those kinds of things until we really see it and see it on a sustained basis, but I would hope that Q1 is a bit of low watermark for us, especially as it relates to the OIBDA performance which was very challenging and an unusual combination of events to make some modest top line pressure really hurt the bottom line. I think we can do better there.

[Rick Patel:]

And can you also talk about the timing of expenses associated with the business services center? I am just curious when the majority of that will hit. And secondly, can you also speak to any expenses that may be associated with the new West Coast DC that we should be keeping in mind from a modeling perspective as the year progresses?

[Michael A. George:]

So at a high level, we, I think, have shared that there's about $11 million in GPS costs to be incurred in this year – we hit less than a $1 million of that in Q1. We haven't given kind of precise quarterly sequencing, but it'll be more evenly spread over the next three quarters slightly weighted towards Q3 and Q4. And the West Coast DC, again, I don't know if you've given any specific numbers. There will be some amount of incremental fixed costs that we'll start to see hit us a little bit in Q2, but more Q3. It's in the range of a few millions. And if you think about the benefit we're getting from the closure of the contact center in Florida, those things roughly neutralize each other in the year.

[Rick Patel:]

Great. Thank you very much.

[Operator:]

Your next question is from the line of Ed Yruma with Pacific Crest Securities.

[Edward J. Yruma:]

Hi. Good afternoon. Thanks for taking my questions. I guess first, can you kind of contextualize, very impressive performance at zulily, kind of – in terms of profitability, how much of the improvement is due to kind of initiatives you had in place prior to the acquisition? How much of it is due to maybe some of the synergies you're getting as being part of QVC?

[Gregory B. Maffei:]

Darrell and Mike, you each want to take a cut at that?

[Darrell Cavens:]

Sure, Mike. Yeah. Hi, this is Darrell. I can take a first stab and then kind of – Mike can jump in. But I think if you look at our kind of profitability, it can vary – kind of pleased with what we saw in Q1, most of that coming from just our strong kind of operational execution. As I said on the script, we put a pretty significant set of investments in 2014 and in the early 2015 to our fulfillment and logistics network, expanding that and putting in place the sort of processes that allows us to shift from those centers geographically. And I think what we're seeing now is that's really starting to pay off. At the same time, we are seeing some savings from the consolidation with QVC and being able to pull out some public company costs there. But I think overall, it's just really coming from strong execution. And then Mike, you want to add anything?

[Michael A. George:]

Yeah, I would just underscore that. I think both on the revenue side and the OIBDA side, it's largely about strong execution at zulily. We believe strongly when we made this acquisition last year that the company had lots of upside independent of any synergy benefits, and I would say that the zulily team is over delivering on our expectations and just a stellar, stellar job on the operating side. And so the good news is as we begin to see a more material level of benefits from both revenue synergies and cost synergies, I think that that benefit is yet to come in the results.

[Edward J. Yruma:]

Great. And one follow-up if I may. I'm not sure if I missed it, but did you quantify the amount of volume you're now doing on the TSV that is appearing on the zulily daily deals e-mail? And then, I guess, conversely kind of any idea of how much pick-up you're getting by advertising on QVC? Thank you.

[Michael A. George:]

So let me take a cut at that and Darrell can jump in. So we haven't quantified any numbers on the TSVs. We've just recently moved to a more frequent schedule of the TSVs. And that benefit, to make sure everyone is clear, kind of comes to QVC because they have to come to QVC to make the purchase. It's certainly not material in the scheme of opportunities at QVC, but what we especially like about it is that it's – there has been a nice flow of new customers from zulily to QVC through this program. Again, I wouldn't say highly material yet, but a meaningful number. And those customers – the quality of those customers as we measure customer quality is probably as good and actually probably better than any other marketing acquisition channel. So we do think early results would say that we are clearly proving out the theory that there's a lot of really wonderful customers on the zulily platform that would be engaged by QVC and could become good QVC customers if we can expose them 2Q. We're doing it at a very measured pace, we don't want to over script either brand, but we feel good about the direction. Anything else, Darrell, on that?

[Darrell Cavens:]

No, I think that's right. I think, we – we were kind of cautiously watching those numbers, but feeling good about the trends we're seeing. And I think the second part of your question was around any zulily mentions on QVC. And I think it's a little early to say we've seen much there, but I think we're feeling – like we understand the opportunity more and more. I think what I'm really excited at seeing is just on getting a set the – of kind of high quality QVC brands that over the years we've not been able to run here at zulily, and starting to bring those brands on to zulily platform and seeing good momentum with that expansion, and so I think there's opportunity there. Again, still early, but very pleased by the trends that we're seeing there.

[Edward J. Yruma:]

Great. Thanks so much.

[Operator:]

Your next question comes from the line of Alex Fuhrman with Craig-Hallum Capital.

[Alex Joseph Fuhrman:]

Great. Thanks for taking my question. I was curious, what you were mentioning about re-launching the websites in certain markets. Was wondering if you could give us a little bit of a history just when you have re-launched the interface for a website in any particular country? What is typically the experience of that? Does that tend to grow revenues over time? And then how should we think about typically the first three months or six months after a redesign like that? I mean, do you tend to lose revenue over the first couple of months as people get used to the new site, or is there really no short-term impact?

[Michael A. George:]

I would say it's a general statement. We haven't been seeing a lot of negative short-term impact, and partly because we've been trying to do this on a much more continuous basis. So rather than a complete re-launch of the whole site, typically we're kind of re-architecting it part-by-part, testing very carefully to see the customer reaction and going slower or going faster based on how customers respond. The one exception is Japan, which was a more comprehensive redesign, but even that was only some of the – the most front-facing pieces initially, we'll go deeper into the site in the coming months. And so generally speaking, I would look at all of these as a way to continue to make these platforms more relevant, hopefully to drive a somewhat better conversion over time, but probably not highly material in the sort of immediate financial results either positive or negative. That said, in Japan, our e-commerce business had been slowing down substantially over the last few years. The only market where we weren't seeing healthy growth – and we do think that was in large part due to a very outdated site. And so I'm hopeful this will be another nice accelerant to get the Japan business moving in a better direction.

[Alex Joseph Fuhrman:]

Great. That's really helpful. Thank you, Mike.

[Michael A. George:]

Thanks.

[Operator:]

Your next question comes from the line of James Ratcliffe of Buckingham Research.

[James M. Ratcliffe:]

Hi. Thanks for taking the question. Two on Ventures if I could. First of all, the $850 million in cash that's coming out for the $500 million in debt conversion and the $350 paid out to TWC holders, where is that coming from? Because in my math, you have about $500 million left after you paid the $2.4 billion to Broadband. And secondly, for the publically traded stuff that's going to be in Ventures post the split off, so think other than Broadband and Charter, so Interval FTD, the tweaks in time (39

[Gregory B. Maffei:]

So on the first part, I think we'll have some short term borrowings which will cover the cash needs. In the longer term, we'll have a bunch of – an opportunity to refinance some of the securities that were put back to us, so we'll see how that plays out, but we're comfortable we have an adequate liquidity to finance all our capital, or the cash needs we have here in the short term. On the second question – you know Liberty, we're always a little flexible, so something can be strategic today and non-strategic tomorrow or vice versa. And I think it'll a little bit depend on how some of the things happen. Both companies have gone through relatively major transactions, FTD in its combination to begin with with Provide and Interval and its combination as well with the Starwood properties. So we'll see how those play and whether there's a larger role or whether they become sources of capital.

[James M. Ratcliffe:]

Great. Thank you.

[Operator:]

Your next question comes from the line of Barton Crockett with FBR Capital Markets.

[Barton Crockett:]

Okay. Great. Thanks for taking the question. I just wanted first a quick update on the spins of Liberty, Expedia and CommerceHub, in that – how confident are you that those still could get done by the second quarter, and they haven't been completed yet. I'm just wondering what remains to be done for those to actually take effect.

[Gregory B. Maffei:]

Well I think, as I'd noted, we filed the S-1s. We have no announcement to make about change in timing. I will give the general comment that CommerceHub is probably easier out of the chute just because it's a less complicated transaction where we own 100%; fewer regulatory issues.

[Barton Crockett:]

Okay. And then, if I could switch gears a little bit on the QVC side. I think you made the comment that internationally everything grew on the top line except for Japan, and I was wondering if you can make the same comment about OIBDA. And then you had some foreign exchange pressures in currencies that have been changing. At this point, based on what we see of currencies, would you see less kind of foreign-exchange headwinds in the second quarter than you saw coming out of the first?

[Michael A. George:]

Yes. All markets in Europe had expanding – had healthy growth in OIBDA, particularly strong in Germany and Italy in terms of OIBDA margin expansion. But all had healthy OIBDA improvements. And on foreign-exchange, yes, it should, generally speaking, lessen over the course of the year. I'm hesitant about predicting anything right now with the volatility we've seen, but generally speaking, I think just looking at the comps, it should certainly lessen.

[Barton Crockett:]

Okay. Great. Thank you.

[Operator:]

Our next question comes from the line of Victor Anthony with Axiom Capital.

[Victor Anthony:]

Thanks. Thanks for putting me on. A quick question on – maybe you'll address this next week. I was just wondering about the roadmap on country launches beyond France. Second question is really on just the change in media landscape with regards to over-the-top. I know in the past you've talked about there's a natural incentive for these over-the-top offerings to carry QVC programming. Has that changed or how do you see that changing in the future?

[Gregory B. Maffei:]

I'm sorry, I didn't hear the last part. The change in over-the-top – there's something about over-the-top for women, or I didn't...

[Victor Anthony:]

No, no, no. Sorry. I'll say it a bit louder. So the media consumption pattern, the change to over-the-top offering. I know in the past you've said there's a natural incentive to carry QVC programming. Just wanted to see whether or not that statement you made in the past has changed?

[Gregory B. Maffei:]

Great. Mike, do you want to comment on the international roadmap? I think we've generally given the sense that it's important before... (43

[Michael A. George:]

No news to share on country launches. We've clearly put more focus on getting France started, and then certainly the zulily partnership. We're taking a pretty careful look at other opportunities, and against a high bar just because we see the number of things we can do kind of within the family before we add in the expensive additional markets. So we'll talk a little more about that at Investor Day, but I would say it's – we're still optimistic, we're still looking at a number of markets, but nothing is kind of far down the path at this stage. And in terms of over-the-top, we do see over-the-top as a good distribution platform for us that can, we think, over time, cover any erosion we might see in pay TV, and hopefully give us some additional opportunities beyond that. So not a lot of new news on that front, I would say, probably our most important over-the-top partner at this point is Roku. Apple TV also meaningful, and we're continuing to enhance our Apple TV application as some pay-TV providers try to get subscription-based OTT services going. We think that will be a good opportunity for us. Having said all that, I would say that none of these matter today. They're just not where the eyeballs are, at least for our demo. But as the eyeballs shift to those kinds of formats, we think we will be there.

[Victor Anthony:]

Okay. Thank you.

[Operator:]

Your next question comes from the line of Michael Weisberg with Crestwood Capital.

[Michael Roy Weisberg:]

Good afternoon, everyone. A couple of things. I noticed the return rate was lower, I assume that was just on the core business, that didn't relate to zulily?

[Michael A. George:]

That's correct, just QVC.

[Michael Roy Weisberg:]

Yeah. How does that working into the numbers? What kind of margin benefit do you get from that?

[Michael A. George:]

It's really hard to say it because it just depends on the mix of returns and the kinds of returns, if they're returning consumer-electronics items or apparel items. So our P&L is pretty well architected to handle kind of ups and downs in return rates if we sell – for selling products that return at a higher rate where these products typically have a higher built in margin. So absent big swings, we don't see it as a key driver of impact on the P&L.

[Michael Roy Weisberg:]

Okay. And then, speaking of margins, freight rates have been a headwind since the third quarter, and I guess shipping and handling since basically the second quarter of last year. Do you see opportunity to get back to expanding OIBDA margins in the United States and when might that occur?

[Michael A. George:]

Yeah. So we're happy to have the worst of the pressure behind us with this call, with the caveat that we don't make any kind of specific forward-looking guidance. Clearly, we have now anniversaried the S&H impact and so we would expect shipping and handling revenue to more closely track overall sales, essentially beginning late in Q1, and then obviously extending beyond. And in terms of freight pressures, as best we can tell, we think that Q1 is certainly the worst spot for freight pressure. As I mentioned, I think we'll still see some in Q2, but at a moderated rate. And then we believe that the initiatives we have in place to reduce freight costs will get us back to a point of rate being neutral at worst to the P&L in the back half of the year. Lots of caveats about exactly how the business mixes out, but basically we see freight as a modest pressure in Q2 and not beyond that. And so overall, we do think we're at that place where we should start to the return to OIBDA margin expansion, or at least I can say that in terms of kind of structural pressures on the P&L, there aren't any that we're looking at going forward that would be so maternal that they would suggest that as long as the business is healthy and sales are healthy, that you wouldn't see a corresponding sort of improvement in OIBDA margins. But again, a little bit of pressure still to be pushed through in the Q2 on the freight side.

[Michael Roy Weisberg:]

Great. Thanks a lot.

[Operator:]

Thank you. Our last question comes from the line of Matthew Harrigan with Wunderlich Securities.

[Matthew J. Harrigan:]

Thanks for taking my question. I was curious, Facebook Live has some wonderful attributes it seems for you, streaming new actions (49

[Gregory B. Maffei:]

I'll let – Mike, you comment on the Facebook stuff and I'll talk about Bodybuilding.

[Michael A. George:]

Yeah, so on Facebook live, I mean, we think this is a powerhouse new service and really pleased with how the teams are trying to innovate around it and find different ways to engage our customers. It's such a perfect platform for us, the combination of live and the kind of community and engagement we enjoy. So I think we're in early days of figuring out what it could mean for us. In terms of trying to do something like that internally, that does feel like a high wire act. I'm not sure I see it's this going that far, but we just see that the opportunities in front of us to leverage other people's platforms, the kind of performance we're seeing on Instagram as another example, and I could pick out many. I just think there is a lot there for us to capture. We have an enhanced YouTube channel, are getting more aggressive with our YouTube offering. So, I think a lot of opportunity is there. And behind that is actually a fairly heavy lift internally to develop the kinds of media management capabilities tool sets to be able to repurpose content quickly in addition to having multiple live streams. So there is a fair amount that we need to do internally to really take advantage of all those platforms and to do it in a scaled and automated way. And we think there's a lot of opportunity in front us.

[Gregory B. Maffei:]

As far as Bodybuilding, you may understand what the – maybe you can refresh the question. I'm not sure why you're asking about the strategic nature of it?

[Matthew J. Harrigan:]

I mean, is it something that you're almost inevitably going to dispose of. I think a few years ago, it looked like there were some incremental opportunities with branding (51

[Gregory B. Maffei:]

Well, I think it's interesting for us for several reasons. First, it will be part of the Lexus spend and is an important element that Lexus spend and as we filed it out the S-1. Secondly, you're right to note business has slowed over the last few years, partly due to some international challenges, partly due to, I'd say, more competition in the U.S. But we have brought in a new CEO about five months ago not even, and – RJ, and we're very excited about what he and his team are doing. So, I remain very bullish in the business, and I think we already see – beginning to see some positive results.

[Matthew J. Harrigan:]

Thanks, Greg. Thanks, Mike.

[Gregory B. Maffei:]

Thank you.

[Gregory B. Maffei:]

Thanks to all of you who listened today. And as I said, we know we'll see some of you at the QVC Investor Day next week. And for the rest of you, I hope to see you or hear from you on our next quarter's conference call. And thank you for your continued interest in Liberty Interactive.

[Operator:]

Thank you. Ladies and gentlemen, that does conclude today's conference call. You may now disconnect.