Ladies and gentlemen, thank you for standing by. Welcome to the Liberty Interactive Corporation 2017 Second Quarter Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session.

[Operator Instructions] As a reminder, this conference is being recorded, Tuesday, August 8, 2017. I would now like to turn the conference over to Courtnee Chun, Senior Vice President of Investor Relations. Please go ahead..

Hi. 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, market conditions, future expenses at QVC, sales demand, the proposed acquisition of HSN, the proposed acquisition of GCI, the proposed split-off of Liberty Interactive interest in GCI and certain Liberty Ventures Group assets and liabilities and the timing and expected benefit of those proposed transactions with GCI and HSN, the renaming of Liberty Interactive, new service and product launches 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 market acceptance of new products or services, market conditions conducive to repurchases, the satisfaction of conditions to the proposed transactions involved in HSN and GCI, 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, adjusted net income and constant currency. The required definitions and reconciliations, including preliminary note and schedules 1 through 4 can be found in the earnings press release issued today, which is available on our Web site.

And now, I'd like to introduce Greg Maffei, Liberty's President and CEO..

Thank you, Courtnee. Good afternoon to all of you. Today, speaking on the call besides myself, we'll have Liberty Interactive's CFO, Mark Carleton; QVC's President and CEO, Mike George; and the President and CEO of zulily, Darrell Cavens.

Since TripAdvisor doesn't report earnings until tomorrow, we will not be answering questions regarding Liberty TripAdvisor on this call. So on to the highlights. QVC had a solid quarter; revenue was consistent with the trends we've seen over the last several with margins expanding positively, the adjusted OIBDA margin growing during the quarter.

We had a strong performance in QVC International markets growing adjusted OIBDA about 14% in constant currency and consolidated mobile penetration rose to 63% of qvc.com's orders up 520 basis points, so we continue to make good progress there.

We experienced no repurchases of QVCA shares this quarter, as we've discussed, our buyback strategy is to target annual buyback to match the free cash flow of QVC.

And this remains so, but during -- I would note that during the quarter the HSN announcement impacted our ability to repurchase stock as well as the GCI transaction earlier this year, both of those have put a halt to our normal cadence of repurchases. Subject to customary restrictions we will expect, we will be back in the market.

However, I would note that once HSN mails its effective proxy, we will not be able to repurchase shares until after the shareholder vote. zulily had a tough quarter, but most of that was expected and Darrell will discuss the plans to get that back on track for growth.

And finally at Liberty Ventures, we continue to make excellent progress on the GCI acquisition; we still expect to close that in the fourth quarter of this year. And with that let me turn over to Mark Carleton, to discuss the financials a little further..

When we look at the liquidity picture [Technical Difficulty] Liberty Group had attributed cash and liquid investments of $420 million and then $6.1 billion in principal amount of attributed debt.

QVC Inc's total debt to adjusted OIBDA ratio, as defined in the credit agreement was around 2.7x, which includes zulily's adjusted OIBDA, as compared to a maximum allowable leverage ratio of 3.5x. So, good position from a liquidity standpoint. Now I hand it over to Mike George for some comments on QVC..

Thank you, Mark. We made solid progress on our U.S. turnaround efforts in Q2 and remained confident in our direction. We've been highly focused on returning the solid top-line growth in the back half of this year and nothing in our Q2 results, or our Q3 performance to-date has changed our view on this point.

We were delighted with the strong margin gains in the U.S. and we focused on bringing more newness to the assortments, while avoiding excessive promotional activity.

Our ability to expand margins, while testing many new items and brands, diversifying assortments, investing in more live programming and enriching our digital offerings is a testament to the discipline and rigor of our team as we carefully navigate this turnaround in a choppy retail environment.

We also achieved impressive margin growth in our International segment. And while zulily sales were soft, we remain confident in the team's direction and the potential of the business. As we look to the back half of the year, we'll also benefit from easier year-over-year comparisons at both QVC U.S. and zulily.

QVC's consolidated revenue declined 3%, operating income increased 1% and adjusted OIBDA grew 2% on a constant-currency basis. Digital penetration increased sharply with global e-commerce and mobile penetration growing approximately 320 and 520 basis points respectively in Q2.

In the U.S., revenue declined 4%, reflecting 3% lower unit volume and 1% lower ASP. We experienced a disruption in our order processing platform in late June that took about 48 hours to fully restore and we estimate that there was an approximate 1% negative revenue impact from shipments that moved into Q3.

The disruption caused by an issue with our stories platform was the first incident of such magnitude that we've experienced and we believe is unlikely to recur. However, we have mechanisms in place to help prevent a recurrence, as well as mitigation and recovery plans in place to help in the event of one.

While the reported growth did not improve sequentially, I would emphasize that the performance of our U.S. business in the quarter was generally consistent with the Q1 trend even adjusting for a leap year. Once you factor in sort of typical variability in the calendar like the shift in Easter timing and some promotional shifts out of June. U.S.

operating income declined 5% and adjusted OIBDA declined 1%. Operating income margin was flat and adjusted OIBDA margin was up 100 basis points. This strong margin expansion primarily reflects lower bad debt expense and higher product margins and higher credit card income.

These benefits were partially offset by $4 million in higher incentive compensation expense as we did not accrue incentive comp in the second quarter of 2016. And higher warehouse and depreciation expense due to the launch of our Ontario, California distribution center last fall.

Excluding the higher incentive comp, our fixed cost declined in the quarter as the team continues to focus on disciplined cost management. And I would note that our strategy and our actions taken -- are all taken with a sharp focus on the long-term health of the business.

While it would have been easy for us to take the 100 basis points of EBITDA margin expansion and plough it into promotions to boost short-term net revenue that might have satisfied Street estimates that would have been detrimental to the long-term health of QVC. To continue to improve the U.S.

sales trend what we are focused on is driving more balanced performance across our categories by leaning into our core brand values of discovery, freshness and diversity. We introduced 134 new brands in the quarter, that's 34% increase from the prior year and increased the number of new items by 11%.

We've recognized that introducing new brands does create volatility. For example in June, four of our five best TSVs were newer brands, but four of our five lowest producing TSVs were also new brands, but we know that by bringing our customers fresher and more diverse offerings, we will drive long-term business health and growth.

To support the strategy, we recently enhanced our merchandising leadership structure, establishing three senior leadership positions overseeing home and electronics, fashion and jewelry and beauty to put more focus on driving the growth and development of each category across all of our broadcast networks and all of our digital platforms.

In addition, we created a dedicated team to concentrate on our digital assortments with particular focus on high potential growth categories in both home and soft goods.

Looking at our category trends, our most challenged businesses in Q2 were jewelry, hair care and handbags, three of the underperforming categories that we've been discussing on the last few calls.

In jewelry, we continued to reduce airtime in the quarter and we expect to further reduce airtime in the coming quarters until we find the right level to deliver improved productivity.

And we're also continuing to test new product lines, including the successful relaunch of our Imperial Gold brand and we're adding more jewelry events on our second network, QVC2 to satisfy our core jewelry customers. In hair care, we experienced some success adding new brands OUAI, Living Proof, ReTress, Unwash and Rene Furterer.

However, these new brands have not developed the scale to offset declining sales in our largest brand. We expect the pressure in hair care to lessen in the second half based on reorders of some strong core items and our newer brands, for example, Living Proof's Dry Volume Blast.

In handbags, we were encouraged by the successful launch of Kipling, one of our largest brands in Europe, as well as continued growth of Lug and Aimee Kestenberg. However, these gains were not sufficient to overcome continued weakness in more established brands.

We do, however, anticipate improvements in the second half and are excited with our plans for Dooney & Bourke, Lug and Kipling. Electronics was down moderately in the quarter, but the trend improved significantly from what we saw in the back half of last year.

Computer and tablet declines have moderated with success in iPads and we're seeing good growth in smart home with Blink and Ring and wearables from Fitbit. These were offset by challenges in digital photography and prepaid phones.

Our apparel and accessories business excluding handbags was roughly flat with last year, despite difficult comparisons, as sales grew in the low-teens last Q2. In addition, this category was disproportionally impacted by the systems outage and excluding that impact, we would have been up in the quarter.

We're seeing continued strength in our comfort casual brands, including Cuddl Duds, Barefoot Dreams, and our proprietary AnyBody label, new apparel brands Belle by Kim Gravel and Peace Love World and established brands Susan Graver and Women with Control. Intimate apparel and sleepwear had strong results led by Carole Hochman and Spanx.

Our footwear business remained very strong with outstanding growth in Clarks, Skechers, Alegria, Earth brands and FLY London, as well as good results from some of our newer euro brands such as Miz Mooz and now a successful launch of MEPHISTO.

Beauty, excluding hair care, remained solid with good growth from Peter Thomas Roth, TATCHA and NEST Fragrances. Newer brands such as Iluminage, Trophy Skin, Kristofer Buckle, Crepe Erase, Bobbi Brown, Skinfix, Contour and the Dyson Supersonic hair dryer.

We continue to focus on freshness and diversity, introducing 25 new brands in Q2, that's a 150% increase year-over-year. Looking ahead to Q3, we're planning to launch an additional 20 brands including Lollia, EVER skincare and Kim Gravel Beauty. And we anticipate strong reorders from some of the brands that launched in the first half.

And while we're excited about the new in beauty, we're also focused on growing our powerhouse brands such as IT Cosmetics, Josie Maran and Philosophy. We saw modest growth in the home category.

We were especially pleased to get back to positive growth in kitchen and cook, fueled by our focus on expanding our food business, which grew over 25% along with continued success in premium cookware line such as Le Creuset and an improving trend in premium kitchen electrics, largely due to renewed growth in key brands, Vitamix and Keurig.

Other strengths in home included growth in our holiday and décor brands such as Bethlehem Lights and our proprietary Valerie Parr Hill brand, expansion of Scott Living to home textiles, which had an early TSV sell out of the sheet set and growth in floor care and household from Dyson, iRobot and Haier.

Partially offsetting these gains was a pullback in our mattresses and domestics businesses and softness in garden and fit. Looking forward, we are excited to launch a new home line from Catherine Zeta-Jones in September along with launches from Delonghi, Nespresso and more than 20 new food brands.

We're also gearing up the launch of the initial products from our new collaboration with Martha Stewart, which will include a cookbook this month, apparel in early September and gardening products later in September. Expanding our reach and relevance across our broadcast and digital platforms remains a key priority for us.

We expanded our main channels high-definition reach adding 11 million HD households in Q2, bringing us to more than 90 million HD homes. We are encouraged by the performance of our second network, QVC2, which we renamed and re-launched on April 1 as part of our strategy to build that into a destination network.

We now have 40 hours of live programming per week and we're seeing improved productivity, particularly with static shows In the Kitchen with Mary, AM Style and PM Style. We also saw success from our Deal of the Day, the QVC2 Big Deal, with 15 sellouts since the network relaunched on April 1. Beauty iQ, our third U.S.

network, which we launched last fall, we've since expanded distribution to 47 million homes and Beauty iQ plays a key role in our discovery and freshness strategy. We premiered 13 brands on the network in Q2 alone and we're encouraged by increased customer engagement, especially on digital platforms.

Since the start of 2017, viewership of the Beauty iQ web stream has nearly doubled and on the iPhone and Android, it has nearly tripled. Events and special programming are also important to expanding reach and growing viewership. In May, we broadcasted In the Kitchen with David from San Francisco to strong results.

And in September, we'll launch the Martha Stewart line with a live broadcast from New York. We've expanded our presence on new platforms as well. As you may recall, last fall, we launched a significant enhancement of our Roku app, which features all three of our networks as well as previously aired programming and short-form content.

The app has been downloaded more than 750,000 times with the user watching an average of 325 minutes per week, a substantial increase in engagement since launch. At the end of Q2, our app was ranked among Roku's 75 most popular apps out of a total of 4,500 apps.

And this provides us also with great insights about streaming behavior that we use as we develop next-generation TV platforms. We continue to see strong performance across all of our digital platforms. In the U.S., eCommerce grew 370 basis points to 55% of revenue and mobile was up 490 basis points to 62% of eCommerce orders.

We've taken a video first and mobile first design philosophy across all devices. In Q2, we released a new mobile app for iPhone that includes a reimagined home page that for the first time shows our live-stream upon launch of the app.

This video first focus provides the opportunity to leverage our core video competency to create thumb-stopping video content and drive engagement. The app also features redesigned product detail pages and enhanced support for our content and offers across all three networks.

We've been thrilled with the early results, higher customer engagement in the short time since launch. Continued investments like this one have contributed to our strong industry position. Including zulily, we're the third largest multi-category eCommerce retailer in North America and the third largest mobile multi-category mobile retailer in the U.S.

according to Internet Retailer. We continue to innovate with social platforms to increase our distribution and reach, personalized content and increased engagement. Today, we have 36 Facebook pages in the U.S., 4 flagship pages and 32 host pages and we utilize Facebook Live to simulcast our TV broadcast and present original live streams.

We're currently simulcasting 32 hours per week across all three networks on Facebook Live with plans to increase to 70 hours later this year. And we're creating original live streams almost daily to support new brand launches, events and other initiatives.

Turning now to our International segment, revenue grew 2% on a constant-currency basis with unit volume and constant currency ASP each up 1%. We saw gains in fashion and beauty, which were partially offset by the declines in home, jewelry and electronics. QVC International grew operating income 21% and adjusted OIBDA 14% in constant currency.

Operating income and adjusted OIBDA margins increased 200 and 180 basis points respectively, primarily due to higher product margins and lower fixed and freight costs, as well as customer service efficiencies.

We're especially pleased with continued progress turning around our Japan business, that leadership team has really refocused the organization on the QVC fundamentals of discovery through a diversified product assortment and a program and event lineup, everyday value and customer engagement.

We experienced some month-to-month sales volatility in our European businesses, but still managed to achieve strong margin expansion with disciplined cost controls. And in our joint venture in China, we've been encouraged by the strong rebound in sales, with local currency revenue up 10% in the quarter in local currency.

And as a reminder, our China JV is not included in our consolidated results. In closing, we are encouraged by the progress strengthening our U.S. business and driving strong margin expansion across all markets and we are excited about the agreement to acquire HSNi.

Initial integration planning is underway and our leadership teams from both companies see enormous potential to leverage our combined strength to drive long-term growth, better serve our customers and create real value for our shareholders. We believe there are meaningful synergies to be realized from this combination.

We took a conservative approach in the cost synergy estimate that we provided on announcement, including a fairly modest assumption around affiliate fee savings. Also as we note at the time, our estimates do not include revenue synergies or CapEx synergies.

We do expect to begin achieving cost savings to 2018 and additional savings will accrue over time, as we align our processes and various contracts come due.

We certainly hope to beat the synergy estimates we provided, both in number and in timing, but we do want to be methodical and ensure that we're acting in the best long-term interest of both companies. Now, I'll turn it over to Darrell to cover zulily results..

Thanks Mike, and thanks, everyone for joining today's call. As we mentioned on the last quarter's call, we're facing tough comps for the first half of 2017. However, we remain confident in our long-term opportunity, as we continue to focus on the overall customer experience and invest in technology and our team to drive efficiencies.

First, I'll provide an update on our financials, then on the business and lastly on some of our latest efforts with QVC. Revenue was flat for the quarter, driven by a relatively flat active customer base.

Average order value and the number of orders placed per active customer both increased modestly, partially offset by a 1.2% decrease in total orders placed. While we're flat as of quarter end, recent trends show an increase in active customers.

In Q2 2017, our operating loss decreased by 33% year-over-year, with improvement driven by decelerating amortization of intangible assets related to purchase accounting. Adjusted OIBDA decreased 16% to $26 million. The adjusted OIBDA decline was driven by a 200 basis points reduction in gross margin rate.

As we mentioned last quarter, variation in our category mix and continued investment in technology at our Pennsylvania fulfillment center to support our third party fulfillment services and our China direct shipping program will exert margin pressure for the remainder of the year.

We also tested customer free shipping programs, which contributed to gross margin degradation in the quarter. It's worth noting that last year's Q2 profitability was particularly strong, so our two-year adjusted OIBDA growth is still a healthy 86%. Next, some more color on our business.

While we continue to focus on delivering unique product and differentiated brands at great prices, we saw tough comps from few large national brands compared to Q2 of last year. However, we continue to have a solid pipeline in new brands and are investing in driving new selection.

In the quarter, we offered our customers a number of new national brands. And from a category perspective, we saw growth in the women's category specifically in beauty and wellness, one of our fastest-growing categories, along with home, but continue to see weakness in our kids business.

We continue to see about 93% of our orders coming from repeat customers and roughly 67% of total orders through a mobile device. Last quarter, I mentioned the leadership initiative to increase our focus on customer retention based on the evolution of our customers, their behavior and expectations.

I'm pleased to see our active customer and members growing over the past month as we have reoriented our marketing efforts. We've rolled out a clear set of goals across the company with an obsessive focus on customer experience and making it our mission to make every one of our customers a passionate fan of zulily.

I believe with these two efforts of driving active customer growth and ensuring an amazing experience, we can get to the growth levels, where I believe this business should be. We've made significant investments in supply chain and fulfillment.

In Q2, we rolled out a program in our fulfillment centers that allows us to directly ship items such as perfumes and aerosols and more.

As categories continue to grow such as beauty and wellness, the ability to ship these products directly provides further cost savings and revenue growth opportunities, while delivering the products our customers want faster.

In addition, our third party fulfillment services program continues to be vendor-only inventory increase, now up to approximately 20% of total unit sales, an investment which decreases delivery time for the customer.

And in Q2, we enabled international dropship capabilities within Canada and Australia, which opened up significantly more opportunities to work directly with vendors in those countries that can deliver directly to our customers. Marketing continues to be an area of focus and investment.

The team is concentrating on building the zulily brand, driving customer acquisition and retention as well as loyalty. We continue to invest in robust digital ad tests and we're seeing significantly improved customer acquisition costs and new customer growth.

Lastly, we continue to work together with QVC to find opportunities to grow, leverage relationships and drive cost efficiencies. On our last call, we mentioned we've signed an agreement with Synchrony Bank to offer customers revolving credit for purchasing merchandise through zulily branded credit card.

We're ahead of schedule and plan to launch the program this fall. At the time of launch, we will also be able to accept QVC's QCard on zulily.com. This is a great example of how we're leveraging QVC's long-term business partner such as Synchrony to share learnings, efficiencies and drive customer engagement.

Looking forward, I continue to be energized about the near-term opportunities for zulily. And Q3 has kicked off well with a strong assortment of new anchor brands along with well-curated and value-driven boutique brands across all categories.

Long-term, I believe we're focused on the right customer success metrics and the strategy to propel us forward. Now with HSN joining the QVC group, I see even greater possibilities to leverage, learn and grow collectively. And with that, I'll turn the call back over to Mark..

Thank you, Darrell. Moving on to Liberty Ventures liquidity, at the end of the quarter, the group had attributed cash and liquid investments of $485 million and just a short $2 billion in principal amount of attributed debt.

The value of the public equity method securities, including Liberty Broadband and other public holdings attributed to the group was $4.5 billion and $2.3 billion respectively at the end of the quarter and obviously those have gone up nicely since the end of the quarter. Now, I'll hand it back to Greg..

Great, Mark. Thank you and thanks to Mike and Darrel as well. And to the listening audience, we appreciate your continued interest in Liberty Interactive. And with that, operator, I think we're ready to open up to questions..

Thank you. [Operator Instructions] Your first question is from the line of Alex Fuhrman with Craig-Hallum Group..

Great. Thanks for taking my question. One just quick housekeeping on the comment about the systems issue sounds like about a 100 basis points of sales was lost there in the quarter and pushed out.

Am I interpreting that correct that you expect to get all of that back in Q3 or were some of those orders cancelled and just got lost all together?.

Mike?.

No. You're correct. I would say, yes. I would say that we'll get the vast majority of that back. There might have been a few forgone orders, but we would estimate about a point of revenue just kind of -- because of the backlog, didn't flip over -- didn't get in front of the kind of revenue recognition timing, so we'll count it in the Q3 numbers..

Okay. That's helpful, Mike. And then, thinking about your Christmas in July event that you recently had. It sounds like things must have gone pretty well, if you're still looking for solid growth in the back half of the year.

Were there any noticeable takeaways, any obvious trends or hot gifts or categories that you expect to be a theme recurring for the holiday this year?.

I would -- I don't like to point to any specific trend, I would just say broadly, we were really pleased with our Christmas in July programming and last Christmas in July has become the full month. So we're doing an event on July 1 and then a series of kind of bigger and smaller events through the month.

We were really pleased with the performance of those events.

As a general statement, I think it continued to just remind us that the customer is always looking for something new and different and so to kind of take that tough time of the year in terms of sort of the typical sales cycle and inject some newness really worked, but we saw strength in -- a lot of the decorating product was very strong, food product was very strong.

I think, we got out in front of toys with a number of kind of first-to-market toy offerings that were strong. So I would characterize it as fairly broad based..

Okay. That's helpful as well.

And lastly, I just wanted to ask about, Mike, I think, you mentioned TSVs a few times on the conference call and just trying to get a sense of, looking back historically at the performance of your TSVs, is there typically a big impact based on what product you would go up against for HSN's Today's Special and is that something where you think there could be benefits to having a little bit more coordination, whether that's having different categories or different types of personalities.

Just curious if that's ever been a meaningful driver of success or failure of the TSVs looking back historically..

It certainly can have impact and probably given relative sizes even more impact on HSN's results. And so, I think one of the things that we're both excited about, the HSN team and our team is that we can be very focused on strategizing TSV calendars or in their case a TS calendar that really is optimized for the customer.

So, rather than trying to compete with similar offerings at similar times, we can very strategically lay out a roadmap that whether it's TSV or programming in general or brands, you could take this in a lot of different directions, it's all about how to give the customer -- how do you appeal to a wider range of consumers and how do you give all customers kind of more choice throughout the year.

So, while it's hard to quantify that, I'd say as both of our teams have kind of gotten into this opportunity and started to have the sort of initial integration discussions.

We're both enthusiastic about just taking a much more strategic approach to the marketplace that will create in the end more choice for the customer and we firmly believe that more choice creates more sales, I think that's true on the TSV line and I think it will be true in other areas as well..

Thank you very much, Mike..

Welcome..

Thank you. Your next question comes from the line of Heather Balsky with Bank of America..

Hi, good afternoon. Thanks for taking my call. You made a comment or Mike, you made a comment early in the call that if you adjust for some timing shifts, the overarching sales trend in the U.S. was consistent for the first half of the year.

Can you just help us understand a little bit more about the shift so we can get the same perspective because based on the reported results it looks like they decelerated? And are there any events that could create noise in the back half that we should be aware of?.

Yes. Thanks, Heather. So I guess the way I would look at it is, if you sort of normalize for the leap day effect in Q1 and the systems outage in Q2, I think you get the kind of an organic performance of the business. And once you make those adjustments, order of magnitude, Q2 looks around 100 to 150 basis points slower growth than Q1.

So, certainly not a highly material change, but a modest decline. I mentioned on the last call, I was asked about the Easter impact, and I said, look I don't think it's significant, but it will have a -- it had a moderately positive impact on Q1 and probably moderately negative impact on Q2 although not at highly material levels.

But, that shift alone would start to explain a chunk of that fairly modest deceleration or apparent deceleration in Q2. And then we had -- we shifted out an promotional event late in June due to some of these systems challenges we are having, moved that to July.

We have another big promotional event in June that we deliberately tried to lessen and sort of reduce our dependency on that event, and so we had a bigger sales pullback on that particular day. So for us, there were a few bumps that were probably the difference between what would look like a pretty consistent trend of performance Q1 and Q2.

So, I do think it's fair to characterize the quarter as kind of holding on to the step-up that we achieved in Q1, but not going beyond that step-up, it's certainly holding on and sustaining that step-up.

Great. Thank you for the clarity.

And then also can you just talk about the decline in units this quarter? How much of that was related to -- I guess, is it -- do you think of it as a point from the systems issue and what drove that decline other than that?.

Yes. The decline in units was kind of a reversal of where we've been, right, where -- even as we had sales softness in the back half of last year, it was more driven by ASP erosion then unit erosion. Here we were able to keep ASP fairly stable, but then saw a little bit of give up in units. On balance that kind of feels better for us.

First of all, it just is more friendly to the P&L when you're eroded in units rather than eroding in ASP. Ultimately, I am not sure, it matters a lot because we've always believed that it's more about the customers overall kind of spend in units or ASP.

Now to get to your question, though, what was behind ASP or the unit decline? It was really more the fact that we got a few higher price point businesses moving again. So, we got premium kitchen electrics moving again, which is one of our higher average price points. We saw a moderation of the declines in the computer category.

We saw real strength in household, which has been strong in some of the higher price point brands like Dyson and iRobot. So, what happens when we get those brands moving is that usually spells out good things for the business.

But, generally it shows up as, it shows up more on the ASP line than the unit line because it spends on that Vitamix blender, should may fade off a couple of units in another part of the business to step up for that blender. So, it's largely a product mix change that unbalances, we think a very healthy product mix shift..

Great. Thank you very much. Appreciate your help..

Thanks Heather..

Thank you. Your next question is from the line of Eric Sheridan with UBS..

Thanks for taking the question. Mike, as you look out towards the back part of the year, maybe you can give us a little bit of color on spend directly towards customer acquisition that might change some of the customer growth trends we're seeing or customer retention and remarketing that might arch some of the unit or ASP trends as well.

You've laid out a little bit of ground that you might have pushed out some of the marketing and promotional activity from Q2 to Q3, but any color you could give broadly on sort of money spent on evolving the funnel in the second half, I think could be helpful. Thanks Mike..

Yes. Thanks Eric. I would say sort of the primary kind of up and over investment we're looking after the back half is to -- a fairly meaningful acceleration in our online marketing spend. We're going to monitor it carefully and make sure that it's paying off.

But, we've been really working over the last 12 months to 18 months as you've heard me say on prior calls to kind of invest in both talent and tools and online marketing to get to a point where we felt more confident that we could use it profitably to drive new customers.

And in our business kind of the time to really drive new customers is sort of September through December, in terms of when you naturally have a lot of potential new customers in kind of an ecosystem that you can convert. So, we're excited about that spend, we have to see how it plays out.

And we've been careful about architecting our P&L as you saw this quarter such that we think we can fund it and not have a huge pressure on EBITDA margins because we've made enough investments elsewhere in the P&L in areas like more efficient freight rate, so which we'll start to benefit from in July and order consolidation, which will also -- which we've been benefiting from and that benefit will continue to grow through the year.

We'll look at other forms of promotional activity as we get into the year, but by coming about avoiding excessive promotional activity in Q2 is really about, we know we can always layer on a free shipping promotion or some other kind of essentially price reduction tipped to boost sales.

But, those things tend to be detrimental to the business over time, they erode customer confidence in your pricing, they create this kind of death spiral that many other retailers have gone through and we're just resolute about avoiding that.

If we could invest wisely in an area like online marketing that's healthy for the business, we'll do that all day along, or we'd love to get additional carriage for our second and third channels.

I'm not sure we'll be able to pull that off in the back half, based on kind of current state of negotiations, but that's another area that we think is a worthy investment to drive healthy growth and we may not get there in the back half, but I think we'll get there early next year.

And also maybe take the opportunity to comment kind of more broadly on how we see the back half. Some of these investments in online marketing certainly help boost our confidence in what we can get done in the back half.

But I would just say that we also kind of like the direction we're seeing with our turnaround initiatives even if they didn't all materialize at the maximum level in Q2. We know these things take a while. But, I mentioned a couple of times on the call, some of the reorders we're now seeing from all the new brands we seeded in the first half.

So, we stayed committed through Q2 to seed a lot of new brands and items into the market, those are hit and miss by nature, but once the ones hit that hit, we get into reorder flow. And so, we are excited about the kind of reorder flow on newer brands going into the back half of the year, in other way a real experience under our belt.

And we've also been very methodical about building our second and third channels. We kind of stopped doing the easy money stuff, which was kind of replay the TSV on the second channel. That was sort of an easy way to get revenue. Now, we've been focused on live programming and trying to drive organic productivity.

That takes time, it takes time to retrain the customers to find us, takes time to figure out what live programs will work. But now we have a few months of experience under our belt, we'd like what we are seeing, didn't drive a lot of revenue in Q2, but we think we're well set up for the back half.

So, I think there's a number of both investments and initiatives that are maturing in the back half that give us confidence in the direction we're taking..

Great. Thanks..

Thank you. Your next question is from the line of Ed Yruma with KeyBanc..

Hi. Good afternoon. Thanks for taking my question. Mike, just wanted some commentary on Easy Pay, kind of use of Easy Pay and performance and I know that we're going to approach time where you'd kind of ratchet it back.

So you could help us understand the comparison again? And then, maybe as a follow up, in zulily, I know you tested free shipping, I guess what's kind of the postmortem there, should we expect more of that going forward, and how impactful is that to your margin? Thanks so much..

Yes. Thanks Ed. On Easy Pay, I would match as kind of largely the same as it has been the last couple of quarters, which is we're focused on sort of steady state Easy Pay offering.

So, going back to Q3 of last year that was when we said, we really want to moderate, we had a slight pullback, but mainly we were focused on kind of moderating the growth of Easy Pay. And just sort of keep it at a stable level; we've largely stuck to that strategy since Q3 of last year.

So, I continue to characterize Easy Pay as something that is an important part of the value proposition, it's one of the many reasons to buy on QVC. We think it's a very efficient promotional tool, but it's not a tool we really want to grow, so we've been stable.

We chose not to increase it in Q2 again to get more short-term revenue growth and that will most likely maintain that posture to the back half.

The only caveat is, as the business naturally shifts to higher price point, home goods, electronics in particular, kitchen electrics, we might see some up tick in Easy Pay associated with the mix of business, but broadly we're trying to hold it stable. And, Darrell, you can take the shipping question..

Yes. As I mentioned on the script, we did test some free shipping as we continue to test a lot of different programs, be it returns, shipping offers and kind of bundled some products. And I think we're learning some from QVC what our opportunities are there.

I would say that it was a meaningful part of the gross margin and change you saw there, but as I look forward, I think what we see and it's again, we always wanted to cut these things and understand how the market is changing.

But I think, we fundamentally believe customers understand value and that free shipping in most retailers is really just kind of looking at your pricing and shipping together. And I think, I continue to believe that there is a lot of opportunity to try different programs, but I don't envision us moving to a kind of long-term free-shipping model.

I think we just see that customers are willing to pay a reasonable rate there and it allows us to keep our product prices incredibly low and we will continue to test all of these programs, but overall, I think its good learnings, but I don't see a strategic shift from where we've been..

Great. Thanks so much..

Thank you. Your next question is from the line of James Ratcliffe with Evercore ISI..

Good afternoon. A quick one on Ventures if I could. Could you give us some color on the rationale for boosting your stake in Tree, I know, it's emphasized not a big move, but yes, I think, you previously characterized Tree in FTD as non-strategic and central sources of funding. So I'm wondering if this indicates a change in the strategy there. Thanks..

I think -- thanks, James. Couple of things, one is, we do like Tree and if you noticed, it has been a hell of a performer, full credit to Doug Lebda and his team. But secondly, there are some regulatory reasons why having the largest stake is helpful to us. So there was a secondary benefit as well..

Great. Thank you..

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

Okay. Thank you for taking the question. I think the margin improvement was just really impressive in the quarter, particularly in the U.S. down revenues, but up 100 basis points in OIBDA margin, and you also improved nicely internationally.

I was wondering if you could parse a little bit more detail on what you did to improve margins and how sustainable that is as we look over the next few quarters..

Yes. Thanks Barton. It was a handful of things. Just overall solid product margins, really trying to pay attention to making sure we're offering a great value to the customer, but being disciplined in how we mix out our business.

Some of that reflects the fact that last year we were in a -- one of the things we committed to last year was to clear out some slower moving inventory, primarily in jewelry. And so that pressured product margins last year and so we're kind of benefiting from a much lower rate of clearance activity than where we were a year ago.

Some of it's clearly the flip of the pressure we saw last year where we talked mid-year about having -- seeing some warning signs about bad debt and wanting to err on the cautious side. And that caution around bad debt is now kind of manifesting itself in nice improvement in bad debt rates.

And then, just generally tight fixed cost management, we did made some difficult decisions last fall to reduce our head count, very painful set of actions that we took.

But, we're clearly seeing the result of that in lower fixed cost this year, absent the fact that we've had to kind of replenish our bonus pool, since given our performance last year, we didn't pay out a bonus. So those are some of the bigger drivers.

I certainly wouldn't suggest that in a normal quarter, we're going to have a 100 basis point margin improvement, nor is it necessarily the right thing to do for the business as I was mentioning in response to an earlier question.

We want to invest in growth where we believe they are wise investments and that they support long-term health of the business as opposed to short-term kind of deal behavior.

So, I don't know that you could expect 100 basis points going forward, but we think we have a little more benefit to be realized in areas like bad debt and fixed cost management that should carryforward for at least a bit of time..

Okay. That's great to hear. And then one other question if I could, I think that there has been a lot of focus on viewership for anyone who is on the TV bundle and you guys are.

And I think in the past you guys have had experienced disruption when people have been distracted by things like political and political is taking share, there is news networks who are taking share big time right now.

Are you seeing any impact on your viewership or your sales kind of a Trump headwind for the news cycle, is anything like that happening?.

It is certainly true that as we study the viewership data as everyone has seen, the news programming is taking a higher share of viewership than they've historically achieved. That said, as a general statement, our viewership share has been up pretty consistently.

That's share of viewers -- our total viewership has been down modestly, but the most engaged viewer is down less than kind of the unengaged viewers. We measure that by the number of minutes they're viewing us.

So, we do see a broad trend that the rest of the industry is seeing very low engaged viewers, those numbers declining moderately, but much less than for the rest of the TV population. So, we're gaining share.

But certainly the folks who are most likely to be -- either currently be or become QVC customers, there we're not seeing that same kind of viewership impact.

So, I'd characterize it as a modest headwind, part of it may be the news cycle, part of it is clearly the longer-term cord cutting challenges, but we don't think any of that adds up to really substantial impact for our business.

We think that things we've been able to do on Facebook Live, on Roku with these other initiatives to get kind of alternative forms of video distribution, feel like they're able to offset what are kind of fairly modest viewership pressures..

That's great. Thank you..

Thank you. Your next question is from the line of Jason Bazinet with Citi..

George, I think it was January of 2015, you guys put out an 8-K regarding changes to shipping and handling policies at QVC U.S.

And we may be calculating this wrong, but as 2015 unfolded, it seemed like shipping and handling was down mid-teens, and then we moved into the last, I'll call it, five quarters through Q1 of 2017 and it was sort of down low-single-digit. And it seemed like it popped up again where we're back to sort of this mid-teens decline in 2Q 2017.

Has something else changed on the shipping and handling side or would you characterize our calculations as erroneous?.

I would say the one more systemic change, we've done it periodically, but we probably did it at a more sort of in a more consistent way in Q2 this year is to include shipping and handling in our purchase price for TSVs.

So, we sort of made a call to work with our vendor partners to get an all-in price for the TSVs given the visibility of those items and the strength of those items to attract new customers to get to kind of a very attractive all-in price where we could bundle in shipping with the price of the product.

And that's a really healthy strategy for us because since the TSV has to be a new item, we don't have to worry about customer remorse because all of a sudden we are discounting shipping where we used to charge for it. So, that's a strategic move we made and I mentioned that our product margins are up.

So clearly, we're able to net-net do same or better than we were doing before, but it's sort of a shift in on price versus S&H. You probably see us do more that over time. Our general approach has been we don't want to use S&H as a source of growth.

We know that in the short-term if we increase S&H pricing, we can get more revenue than we lose in velocity. But, we share everyone's general concerns about consumers wanting to move away from S&H charges.

So, what we're trying to do is, where we can do it without damaging the P&L, we're trying to modestly pull back in strategic ways on the use of S&H.

So, of the many things we actually feel good about in Q2 is the fact that we pulled back further on our shipping and handling revenue that has some impact on top-line growth, but actually we might end up being product margin positive and reduce the S&H mix in the business, which we think is kind of the right move long-term.

So, you'll see us continue to experiment with those kinds of initiatives going forward..

But you experiment, you would deem successful and therefore as we're sort of modeling this out, you would sort of say that 2Q is indicative of the next year so to speak?.

I think whether the specific numbers in Q2 are indicative of it, a little bit hard to say.

But generally speaking, we would expect shipping and handling revenue to be on average sort of no more than growing at the rate of sales, but probably generally speaking growing slower than the rate of sales so that we can moderately ease the usage of S&H over time, but with strategies that, a, don't create customer remorse, and b, can be hopefully offset in the P&L in various ways.

So, I do think Q2 is reflective of that broad strategy, one that we are likely to continue..

Okay. Thank you..

Thank you. Our last question comes from the line of Victor Anthony with Aegis Capital..

Thanks. Thanks, guys. Maybe I just follow-up with the -- there was a question about macro trends to the viewership, I guess the other one is really just a retail backdrop. And I was wondering how that factored into the performance in the second quarter and we're calling for a resumption of growth in the back half.

And so how do you square that away with the fact that the retail industry is struggling in the U.S.?.

Yes. Victor, I would say the retail industry has been struggling for a while, we expect it to continue to struggle, some sectors are obviously tougher than others. We view all that as noise, we view it as certainly a headwind we have to deal with.

But, as I've said on prior calls, our job is to come up and over any macro pressures and find ways to really excite the customer, which is why when we see the kind of success of our Christmas in July programming, unusual programming, a lot of proprietary products, a lot of newness and innovation were the success of a lot of the other things we've tried.

It's all around trying to offer these really unique assortments that you can't get elsewhere. One of the things I would note that certainly the most struggling sectors of retail right now would be the department stores. They're heavily driven by apparel and fashion more broadly.

Those businesses have typically been some of our stronger businesses over the last couple of years. They were modestly up in Q2 and we're actually trying to some degree to kind of constrain the growth of them. We prefer more balanced business with more home growth.

So again, another thing I like about Q2 is our home kind of come back into a little bit healthier proportion of the mix But, I share the fashion example just to reinforce that, even in a category as tough as fashion, we think if we approach it in a really unique way with proprietary product and really special guests and hosts and programming, we can outrun those pressures and we've now done that for several quarters, including I might add, outrunning the pressure of Amazon now getting more seriously into the fashion business.

So, we look at all of our initiatives, we look at just the benefit of the weak comps we have from the back half of last year. And that combination, a much easier comparison and the maturing of a number of these initiatives that we think together are enough to combat whatever headwind we're likely to face from the tough retail environment..

Thank you..

Great. I guess thank you to our listening audience. We're done with the earnings call for today. We look forward to speaking with you again next quarter if not sooner. And thank you for continuing your interest in Liberty Interactive..

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