Courtnee Chun Ulrich - Liberty Interactive Corp. Gregory B. Maffei - Liberty Interactive Corp. Mark D. Carleton - Liberty Interactive Corp. Michael A. George - QVC, Inc. Darrell Cavens - zulily LLC John C. Malone - Liberty Interactive Corp..

Eric J. Sheridan - UBS Securities LLC Heather N. Balsky - Bank of America Merrill Lynch Alex Joseph Fuhrman - Craig-Hallum Capital Group LLC Tom Forte - Maxim Group LLC Barton E. Crockett - FBR Capital Markets & Co. Jason Boisvert Bazinet - Citigroup Global Markets, Inc. Matthew J. Harrigan - Wunderlich Securities, Inc..

Ladies and gentlemen, thank you for standing by. Welcome to the Liberty Interactive Corporation 2016 Fourth Quarter Earnings Call. As a reminder, this conference is being recorded, Tuesday, February 28, 2017. I would now like to turn the conference over to Courtnee Chun, Senior Vice President of Investor Relations. Please go ahead..

Thank you, Tammy.

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, international regulatory matters, the expected benefits and synergies resulting from the acquisition of zulily, the implementation of new marketing and fulfillment processes at zulily, 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 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, preliminary note and schedules 1 through 5 can be found at the end of the earnings press release issued today, which is available on our website.

This call also may 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 introduce Greg Maffei, Liberty Interactive's President and CEO..

Thank you, Courtnee, and good morning to all of you out there. Today speaking on the call, we will also have Liberty Interactive's CFO, Mark Carleton; QVC's President and CEO, Mike George; and the President and CEO of zulily, Darrell Cavens. During Q&A, we will also be available to answer questions related to Liberty TripAdvisor.

So with that on to the operating highlights. As we previously spoke to you to expect, QVC U.S. posted negative results this quarter. Mike will discuss the whys in more detail. We did generate local currency sales gains in all consolidated international markets.

In the fourth quarter, consolidated mobile penetration rose to 60% of QVC.com's orders; zulily also posted strong results with revenue growing 14% to $1.5 billion. During the period of November 1, 2016 to January 31, 2017, we repurchased $255 million of QVCA stock.

And for the year 2016, we repurchased $799 million of QVCA stock, right in line with our $800 million target. As we've discussed, our ongoing buyback strategy is to target buybacks in the range to match free cash flow at QVC. Turning to Liberty Ventures. Most notably, we saw continued appreciation in our holdings of Liberty Broadband and Charter.

We also saw a good growth at Lending Tree. And briefly on to Liberty TripAdvisor. TripAdvisor continued its transition. In 2016 IB was rolled out globally. We look forward to lapping the rollout in the quarters ahead region-by-region. We continue to work on improving and raising consumer awareness of TripAdvisor as a place to book and not only look.

We expect to see product changes, hotel supply increase and marketing messages in the coming months that reinforce this in a uniform and united way. The growth rates that we experienced in the fourth quarter did improve.

And in 2017, we expect to prioritize revenue growth and make necessary improvements to drive monetization, growth, profitability on our platform. With that, let me turn it over to Mark Carleton to discuss the financials in more detail..

Thanks, Greg. Let's take a quick look at the liquidity picture. At the end of the quarter, QVC Group had attributed cash and liquid investments of around $400 million and $6.4 billion in principal amount of attributed debt.

QVC's total debt to adjusted OIBDA ratio, defined in QVC's credit agreement was around 2.8, which includes zulily's adjusted OIBDA as compared to a maximum allowable leverage ratio of 3.5. We have talked about our target at being around 2.5, but we're pretty comfortable with where it's at at 2.8 now.

So with that, I'll hand it to over to Mike George for additional comments on QVC..

Thank you, Mark. And while we were pleased with the outstanding results in our international division in Q4, with broad-based sales gains and margin enhancements across markets along with good growth at zulily, our U.S. business continued to underperform. We have a strong sense of urgency and a high degree of confidence in our ability to get the U.S.

back to growth, which I'll discuss momentarily. Despite the recent soft result in the U.S., we do remain in a position of strength, serving a large and highly engaged customer base, and having demonstrated the ability to extend our shopping experience across digital platforms.

At year-end, our consolidated total customer base was about 12.7 million on a trailing 12-month basis. That's up slightly from a year ago, and including our China joint venture, we serve more than 14 million customers. Our existing customers purchased 24 items in the year and the retention remains strong at 89%.

Both those numbers are unchanged from a year ago. Our TV broadcast reached 362 million homes, a 1% increase from the prior year and our customers remain highly engaged on digital platforms as well, as digital sessions grew 9% in 2016. In the U.S., e-commerce sales were well over half of total revenue.

And mobile now represents 58% of all e-commerce orders globally. Together with zulily, the QVC Group is the third largest multi-category mobile retailer in the U.S. according to Internet Retailer. Now I'll turn to segment performance starting with the continued sales erosion in the U.S.

I shared at Liberty's November Investor Day the five highly challenged businesses representing about a third of our mix, grow the sales erosion in Q3, namely jewelry, electronics, kitchen, handbags and hair care. The story was similar in Q4.

Those five businesses represented 40% of the shipped sales mix in the quarter and declined 19% year-over-year, while the rest of the businesses grew 3%. These down trending businesses also carry our highest average selling prices and the resulting erosion in our average selling price drove all the sales reduction.

Our units actually increased in the quarter. It has also put incremental pressure on our profit margins due to the negative impact of ASPP leverage. We also experienced volatility month-by-month.

October was the strongest month in the quarter as we launched the gift giving season; however sales in the second half of November and especially during the heavily promotional Black Friday period were weak. December sales returned to a level consistent with the overall quarterly trend.

We're focused on four key priorities that we're confident, we'll need to improve sales trend as we move through 2017. First, achieving more consistent and balanced growth across categories through a more diverse mix of exclusive and proprietary brands and key items at great values along with compelling and entertaining programming.

Second, re-accelerating new customer acquisition. Third, extending the ways we reach and serve both current and prospective customers on broadcast and digital platforms. And fourth continuing to reduce costs to fund innovation.

Let me update you on these critical priorities and starting with our actions to bring compelling product discoveries to our customers and get back to more consistent growth across categories.

Our apparel business rebounded and delivered good year-over-year growth in Q4, led by well established brands, Lori Goldstein and Dennis Basso as well as newer brands like Peace Love World and Belle by Kim Gravel.

In the first half of 2017, we're focused on sustaining this momentum with our portfolio of strong lifestyle brands and continuing to fill in assortment gaps to capitalize on key trends.

Given for example the strong response to December's launch of Peace Love World, we've been able to quickly expand airtime for this new brand and add new TSVs to the calendar over the next several months.

In accessories, we saw strong gains in comfort sleepwear and lounge wear with growth from Cuddl Duds, Barefoot Dreams and our new proprietary brand AnyBody.

Our footwear business remains healthy as well and this year, we'll be introducing a new footwear launch from Ellen DeGeneres and expanding our recent launches in casual athletic and outdoor footwear from Miz Mooz, Puma and Merrell. However, handbags remains a challenge.

And over the next few months, we'll be further diversifying our handbag line and with a larger assortment (11:14) and benefiting from our one queue structure and global curation, the introduction of Tripoli in the U.S.

That's our largest handbag brand in our European business, and we are expanding in the packable luggage through our emerging relationship with Charming Charlie's. Jewelry continued to be a soft spot in Q4, as we've reduced airtime and focused on clearing inventory.

Our inventories are now much bigger than they were a year ago and as a result, we expect clearance activity in 2017 to be well below 2016 levels.

While it's premature, I think to say that we'll get back to growth in jewelry, we are excited about the upcoming launches, new brands, such as Grace Kelly, Lola Rose which is a successful brand in our UK business, DeLatori and Fossil watches and also reenergizing our proprietary Diamonique business.

In beauty, hair care remained under significant pressure, we do begin anniversarying the erosion in hair care this quarter and we anticipate that the sales pressures will substantially moderate through the year.

In Q4, the decline in hair care was partially offset by gains in Bath & Body from Josie Maran, color cosmetics from IT Cosmetics, and beauty devices, including the introduction of the new Dyson Supersonic hair dryer. It was Dyson's best single item launch on QVC ever.

We see strong growth potential in beauty and we are introducing more than 40 brands in the first half of this year. In January, we were thrilled to reintroduce Bobbi Brown, which sold out in minutes, and launched Kristofer Buckle which doubled its sales goals and sold out in a matter of minutes as well.

In hair care, we're launching several new brands, including Living Proof, (13:10), Madam C.J. Walker, René Furterer, and Julien Farel. In skin care, new launches include Crepe Erase, Meaningful Beauty and Phace Bioactive. In home, we saw strong gains in household led by Dyson and Lori Greiner.

Our kitchen and cook business remained difficult, due largely to continued challenges in the kitchen electrics category.

We do believe we can moderate the declines in kitchen and cook this year as we begin to stabilize the electrics business and grow newer or expanding businesses like air fryers, copper cookware, kitchen organization and premium cookware.

We have a strong home line-up in the first half in 2017, including Le Creuset, All-Clad and Copper Chef in cookware, new brands in espresso, DeLonghi and Krups in kitchen electrics, iRobot in household and in home decor, Sealy mattresses and our first TSVs with the Scott Brothers in garden and lighting and home textiles.

Electronics continued to underperform in Q4, due primarily to poor sales in computers, partially offset by gains in Bose, HP printing and Amazon. In fact Amazon was one of our highest growth vendors last year due to the strength of our Echo and Fire businesses.

This year, we're focused on moderating declines in computers by getting more growth from the strong all-in-one PC segment and the two-in-one, that's the laptop tablet combo segments, expanding our Fitbit offerings and capitalizing on the trend toward home automation, including Nest thermostats, Ring video doorbell, Google Home and products that interact with home automation hubs, such as electric socket controllers.

Our demonstration and discovery format is especially powerful to capitalize on this new trend. In addition to our merchandizing actions, we're focused on delivering compelling and entertaining programming through remote events, expansion of favorite shows and special month-long events.

Tonight, we will broadcast the live red carpet beauty show from Los Angeles to recap beauty trends from Hollywood's awards season and inspire beauty lovers. We'll broadcast two hours on the main channel and then two more hours on Beauty iQ.

Later this year, we're planning a red carpet event following the Emmy Awards, a fashion show from New York during Fashion Week. And In the Kitchen with David will have a remote from San Francisco.

We're also expanding the In the Kitchen franchise as In the Kitchen with favorite co-host and customer favorite Mary DeAngelis will start the 3 hour In the Kitchen with Mary on our second channel, QVC Plus.

In June, we'll celebrate QVC's 31st birthday with a month-long event between the live studio audience shows, special authors, new products, and expanded editions of your favorite static shows. Accelerating new customer growth is another key priority for the U.S. I should emphasize that our overall customer flow in the U.S. remains quite strong.

Looking at existing customers, we increased both the count of customers and the units purchased per customer on a rolling 12-month basis. In addition, we added 2.1 million new customers in the U.S. in 2016. However, this was modestly below the prior year, largely because our weaker categories are also our top customer acquisition drivers.

And we were pleased to see this decline substantially moderate in Q4 and we're focused on reestablishing growth in new customers in 2017 as we reinvigorate the kitchen and electronics categories, expand our beauty business and capitalize on new ways to reach potential customers, including our new Beauty iQ network and Facebook Live.

And leveraging the success we've had in Germany and Italy, we've rolled out a promotional campaign to incent new customers with a first purchase discount. A third priority to return the U.S.

to growth is to continue extending the ways in which we reach and serve existing and potential customers, while innovating and advancing next generation shopping experiences. This starts with growing our secondary networks.

We're upping our investment in Q Plus, which reaches 60 million homes with an increase in live hours, more destination to main programming, more dedicated product lines and more cross network promotion, with the goal of providing more diversity and choice across our networks to capture incremental purchased occasions.

In October, we launched our third network in the U.S., Beauty iQ, which currently reaches nearly 40 million homes through broadcast TV, but it's accessible everywhere through live streaming simulcasts on Facebook Live. We've integrated real-time viewer interaction, creating a truly social experience.

We're innovating new selling styles, using the trend of online tutorials and tip videos that you're seeing on YouTube and other social sites, new graphics, new sets, and dedicated hosts.

And while it's still early, we're encouraged that the Beauty iQ customers are about six years younger than our average customer, more heavily skewed to the West Coast, more engaged on digital platforms, have higher purchase frequency, are more educated and have higher incomes.

Additionally, we're finding that the vendors are looking at Beauty iQ as an attractive platform to showcase their stores and we anticipate further accelerating the introduction of new beauty brands through this network. In addition to increased investments in our secondary networks, we continue to invest in alternate distribution platforms.

We've been a lead adopter of the Facebook Live platforms. Since we started the live stream, we've reached Facebook users more than 52 million times with live video, executing 500 individual streams across 30 Facebook pages in the U.S.

with significant opportunities going forward that leverage Facebook's capability to identify interested viewers and expand our reach. Our goal is to expand distribution of our live content for both customer acquisition and for commerce.

By incorporating a social interaction, we're able to deliver a relevant and engaging customer experience which creates deeper engagement with the brand for both new and existing customers.

Using Facebook's algorithms and our personalization strategies and tools, moving segment or content and deliver it to the most relevant audience, enhancing our ability to bring our live broadcast experience with real-time interaction and storytelling on our mobile platforms.

In November, we launched a new ad for Roku, featured all three of our linear channels as well as short and long form video-on-demand. Roku has the largest penetration of OTT streaming devices in the U.S. with more than 14 million monthly users. Since the launch of our new app, we've brought our active downloads from 170,000 to nearly 500,000.

With ongoing marketing support from Roku, we expect that number will continue to grow. Our digital strategies continue to maintain a mobile-first approach.

As mobile continues to be the fastest growing part of our business, we're leveraging our multi-year investment in both talent and technology by continuing to increase the amount of personalized content our customer sees to ensure providing the most relevant shopping experience we can, even on the smallest screen.

In Q4, we deployed our enhanced customer recognition capability globally. This is core of our personalization strategy. We also revamped our search and navigation areas across our responsive web platforms focused on optimal mobile experience.

We're beta testing a new iPhone experience, which we expect to rollout broadly in the first half of the year, and we anticipate introducing a completely redesigned video commerce experience across our platforms this year as well.

Lastly, we'll continue leveraging our proprietary real-time digital analytics command center to optimize our content and product assortments in real-time to drive material increases and conversion across platforms.

Our final priority is to continue driving down the cost of our core business, allowing us to reinvest and enhance customer value in the various growth initiatives I've just described.

We're driving improvements in fulfillment costs as we ramp our West Coast DC, leverage the combined shipping volume of QVC and zulily and launch new capabilities that enable us to consolidate shipments from multiple orders.

While we expect fulfillment costs to remain under pressure in the first part of the year due to the West Coast DC ramp and carrier price increases, along with the ASP deleverage that I mentioned, we do anticipate these cost saving initiatives will begin to lessen margin pressure in the second quarter and have a more significant positive impact in the second half of this year.

We successfully launched our global business service center late last year. We incurred about $8 million of costs associated with the launch in 2016. We expected it to be cost neutral in 2017 and generate about $10 million of annual savings once fully operational.

And we introduced some difficult head count reductions last fall, which along with other expense initiatives will reduce our fixed costs on a global basis by an additional $35 million to $40 million per year. However, I should note that since we did not pay any compensation in 2016 associated with our U.S.

and global incentive pay programs, if we achieve our targeted result in 2017, increases in incentive compensation will largely offset these savings on a year-over-year basis. Now let's shift to the international segment. QVC International delivered a very solid 2016 and a strong Q4.

In Q4, we generated local currency gains in all markets led by double-digit growth in Italy. The UK and German businesses continue to generate solid top-line growth. And Japan produced its strongest revenue growth of any quarter of 2016 and we also had double-digit growth in our adjusted OIBDA.

And we're also delighted to announce that in January, QVC Japan was awarded a license for 24-hour shopping in 4K on broadcast satellites. As you may know, the Japanese government actively promoted the deployment of 4K technology with the global broadcasters to produce and distribute 4K content in advance of the 2019 Rugby World Cup and 2020 Olympics.

By securing a 4K license, QVC Japan will have control of full-time broadcast satellite carriage for the first time, providing a hedge against viewership declines from older platforms. We currently expect to incur about $10 million in capital expenditures in 2017 and $25 million in 2018 for the 4K deployment.

We anticipate beginning to broadcast in 4K in 2018, although we don't expect sales from that platform to be material for several years. We were also encouraged by China's sales rebound in Q4. Local currency revenue grew 4%, with especially strong results in the back half of the quarter.

We launched a new web platform in China at the end of October, which allowed us to increase the number of online product offerings more than five-fold by the end of the year. Finally, looking at our capital expenditures. In 2016, our CapEx was $179 million.

That's down from our initial guidance of $210 million to $220 million, as we pull back on discretionary spend in the wake of the U.S. slowdown. We'll continue to tightly manage capital and we currently expect expenditures of $180 million to $190 million in 2017. That includes the CapEx I mentioned with the 4K rollout in Japan.

Before I turn the call over to Darrell, let me just share a few thoughts on zulily. We have been delighted with zulily's performance since joining the QVC Group. Darrell and team's delivered double-digit revenue growth and strong margin expansion in 2016. And our two teams have developed a strong operating rhythm.

In 2016, zulily started its Deal of the Day, which is similar to our TSV, created more than 550 events in which zulily accessed our inventory, delivered 165 TSVs that redirect zulily visitors to QVC, and launched more than 150 brands from the QVC portfolio. In addition, we're leveraging zulily operational expertise and technology and supply chain.

We've transferred top talent from zulily to QVC and we'll be experimenting with more zulily-like offerings on the QVC platforms. And now I'll turn the call over to Darrell to discuss zulily in more detail..

Thanks, Mike, and thanks everyone for joining today's call. Our fourth quarter results were solid and I'm pleased with our team's strong execution this year. Mobile continued to be a key driver for the business with 66% of orders in Q4 coming from a mobile device, up from 59% a year ago.

In Q4, we continued to see high repeat customer rates with 92% of our orders coming from repeat customers, up from 90% a year ago. Today, I'd like to spend some time on a few key areas, marketing and our plans for new customer growth, our operational execution, additional opportunities with QVC and our outlook for 2017. First on marketing.

In 2016, we continued to focus on enhancing our customer experience, which drove a 14% increase in the number of orders placed per active customer, resulting in an increase in net revenue for the year.

Our passionate and loyal customers are engaging with us more and buying more frequently as we continue to innovate in new marketing channels such as Facebook Messenger. Our customers continue to find great products at great prices.

In Q4, we made a large number of site and customer experience changes that helped us drive the cost of acquiring members down, such as enhancements to our website functionality, search engine optimization and our new member experience.

Additionally, while TV is still a smaller piece of our marketing spend, we continue to test into TV and we have contracted with a new TV agency to help us maximize the channel to build brand awareness and grow our active customer base. Second, our operations team continues to improve our customer experience and drive efficiencies.

Our cost discipline and long-term investments in supply chain technologies continue to drive improved efficiency with scale.

The growth in volume of our ready-to-ship and vendor-owned inventory through programs such as consignment and our vendor fulfillment service program enabled us to significantly increase our offering of items available to ship in one to two days to approximately 25% of units shipped in the month of December.

During the holidays, we also tested geographic-based shipping, which allowed us to show products in the fulfillment center closest to our customer, extending our guaranteed Christmas delivery offering by several days compared to prior years.

In Q4, we also rolled out cross shipping capabilities between our distribution facilities that allowed us to get more items into each box. This reduced the number of to shipments each customer and ultimately saved on shipping costs, allowing us to reinvest those cost savings into our customer experience and pass the value on to our customer.

Third, we continue to make progress in collaborating with QVC and I'm excited about these partnership opportunities as we work together even more in 2017. This past quarter, Bob Spieth, who was zulily's Chief Operating Officer for the past four years, was appointed Executive Vice President of QVC's customer and business services.

In his new role, Bob will lead the customer and business service operations for both QVC and zulily. This change will allow us to leverage best practices from both unique businesses and improve the customer experience.

Since joining the QVC family, we've seen significant expansion and diversification of our product categories and we see strong growth opportunities in categories such as home, health and beauty in the future.

We continue to benefit from new vendor introductions from QVC and we're thrilled to be able to introduce our customer base some great new such as Proactiv, philosophy and Isaac Mizrahi Live!. Moving into 2017, our teams have initiatives underway across the company to drive incremental and profitable growth over time.

We have a company-wide focus on growing our active customer count. To support this effort, we've made changes to our marketing leadership team, devoting some of our best talent to drive results here and invested more in technology to support that.

As we look at the first half of 2017, we know we have tough year-over-year comps, however we remain excited about our great assortment of products and believe our continued investments in merchandizing and marketing will drive innovative experiences in how we acquire and engage with customers.

We're also investing in automation technology at our Pennsylvania fulfillment center, which we believe will deliver operational efficiencies and grow our vendor fulfillment services program.

In addition, while international only comprises a small percentage of our current sales, we plan to continue to invest here, as we believe this represents a significant opportunity for growth for our business long-term.

Our emphasis on delivering unique products and differentiated brands at great values remains the primary thing that attracts customers to our site and keep them coming back again and again. Fresh experiences, great products and great prices is what defines zulily.

I remain excited about the growth we've seen this year and look forward to continuing to update you on our progress in the coming quarters. With that, I'll turn the call back over to Mark..

Thank you, Darrell. Moving on to the Liberty Ventures liquidity. At the end of the quarter, the group had attributed cash and liquid investments of $489 million and $2 billion in principal amount of attributed debt.

The value of the public equity method securities and the other public holdings attributed to the group was $3.7 billion and $1.9 billion respectively at the end of the quarter, so very good liquidity. With that, I'll hand it back over to Greg..

Thank you to Mike, Darrell and Mark. To the listening audience, we appreciate your continued interest in Liberty Interactive. Look forward to seeing you at the upcoming conferences. And with that operator, I will open the floor for questions, please..

Your first question comes from Eric Sheridan with UBS..

Thanks for taking the question. Maybe one for Mike, just broadly to double back to the QVC U.S. business.

I think what a lot of investors are still trying to sort out is how much do you think the impact of the business is external competitive or external consumer choices being made around the platform versus choices that they don't see the right product or maybe credit isn't as available today as it was a year ago.

So just teasing out some of the internal versus external forces you're seeing on the customer base. Thanks so much, Mike..

Thanks, Eric. Certainly there are external pressures in the environment. We talked about the distraction that the consumer is facing and a very kind of distracting year for the consumer, pressures from online, credit pressures. Those are all out there. But we really don't see any of those as the primary driver of our challenges.

We really keep coming back to the fact that we've got a handful of businesses that we think are underperforming. There is some externalities that explain some of that underperformance, some key trends that have changed.

But our confidence in our ability to keep adjusting our mix, keep finding what's working in the marketplace and move into what's working remains high. It's why we're confident we will see certainly an improving trend through the year as we continue to bring in new brands and new subcategories and just kind of move to where the customer is.

We have to be mindful of these externalities, but we don't think those need to kind of define our performance. We think we can outrun those pressures as we have over a number of years..

The next question comes from the line of Heather Balsky with Bank of America..

Hi, good afternoon. Thank you for taking my call. I guess just a follow up on questions on the U.S. business. When you look at what happened during the fourth quarter, how do you diagnose I guess what went wrong, I mean, you had already seen weakness in the third quarter and you have a number of strategies in place.

So, where do you think you missed and how are you adjusting for 2017?.

Yeah. Thanks for the question. Let me start with kind of where was the miss. So, we reported in November that we saw somewhat improving trends in October.

As the season progressed, I would say kind of the highly promotional categories that tend to be bigger categories in Q4 for us, especially in the Black Friday time period, particularly electronics and more specifically computers and kitchen electrics, those businesses continued to underperform.

We just found that we weren't able to kind of get to the floor of those businesses. Well some parts of the business started to respond a little bit better. I mentioned an improvement in apparel as an example. Some of these bigger businesses just, we just weren't able to get the kind of customer response we had hoped for.

And while we continued to bring in new brands and new categories in Q4 to try to offset that, it wasn't enough to kind of overcome the pressures with some of these businesses. But, it still gave us confidence as we brought in new categories and new brands that worked.

It kind of gave us confidence that while none of these were bidding us to get us to a better number in Q4, we could see those numbers of better businesses, but we just have to kind of anniversary some of these bigger down trending businesses.

While we don't like to kind of talk about under normal circumstances the in-quarter performance, I would say that we feel good about how we've launched Q1, certainly not where it needs to be. But we're beginning to see a somewhat better mix of those better performing businesses and worse performing businesses.

We've about cut the sort of rate of decline in half from what we saw in Q4. So actually, won't be satisfied until we get to growth, but internally reduced the degree of decline at least two months in, and no kind of forward predictions.

That tells us that the strategies of diversifying the assortments, bringing in new brands and categories, getting to a healthier balance, that's starting to work.

I would say the other big sort of change we've made or heightened focus we've made as we saw how difficult the business was in Q4, in addition to the fundamentals I just hit on is, how do we kind of keep investing in ways to extend the business. And so I talked a moment ago about really expanding our second and third channel franchises.

We really think we can get some incremental growth as we invest in more live hours, more dedicated programming, more kind of dedicated grand identities for these additional channels, along with all the alternate channels that we're working on. So, fundamentals in the core business, sometimes that takes longer to work than you'd like it to take.

And we've avoided going to overuse of promotions. We're just trying to get the assortment righted. Not as much progress in Q4 as we would have hoped for, but somewhat better trend in Q1 and then add the sort of additional growth lens.

We think the combination of those two things, we just remain very confident will get us to a much better outcome this year..

Your next question comes from Alex Fuhrman with Craig-Hallum Group..

Great. Thank you for taking my question. I was hoping to ask a little bit more about the Deal of the Day that's been launched on zulily. Curious to how that has been adopted relative to the TSV at QVC.

And then more broadly just as the businesses has kind of been in flux this year, I'd be curious to how has the Today's Special Value been trending throughout the year and Q4 relative to the overall business.

Is it fair to assume that was down more or less in line with the rest of the QVC business in Q4?.

Darrell, you want to take the Deal of the Day?.

Sure. Yeah. I'll take the first part and let Mike take the second. Yeah, I think as we look at kind of testing new messaging for our customers, I think we've been pleased to see the performance of the Deal of the Day offering on zulily. It's still a relatively small program for us.

I think you're seeing us kind of gradually ramp that up as we see kind of which product categories, which price points are performing the best there. I think what we're seeing is that generally fairly low price points are working well there to drive units and drive customer acquisition and we feel like there is more legs under there.

But still early, but pleased with what we're seeing..

And on the TSV, I think it's fair to characterize that it's largely performing kind of in line with the other elements of the business. So, nothing really stands out on the QVC side from the TSV. And that's kind of our goal is to keep it about on line with the rest of the business..

Great. That's very helpful. Thank you both..

Your next question comes from Tom Forte with Maxim Group..

Great. Thanks for taking my question and Mike, thanks for your thoughtful comments on the quarter.

Wanted to know what your current thoughts were on shipping and handling and if you felt you needed to make another change to your rate card?.

Yeah. Thanks, Tom. No current plans to make another material change to the rate card. It's certainly something we pay attention to. As you know, our goal is to give an all-in value to the customer that's meaningful inclusive of price and shipping and handling charges.

The changes we made couple of years ago, now about 88% of our sales I believe are with a shipping charge $5 or under and well over half are either $3 or no shipping and handling charge. So we think that gets to a range where it's good as good as an all-free model, but customers understand it.

That said, it's certainly a pressure point and it's something we pay attention to and we do things on the margin. So for example, this quarter we are more actively offering TSVs with shipping and handling included. So, we'll experiment with those things and try to kind of continue to find that right balance.

But don't in the short-term envision any sort of fundamental change in our S&H practices. And we'll say that our fulfillment team under Bob Spieth has the charge of really working to drive down the fulfillment costs as I touched on.

And our intent would be as we find ways to drive down those costs, as much as we can, we'll try to pass those cost savings on to the customer through enhanced value in some form.

So, I would expect S&H will probably lessen over time, S&H charges, but our goal is to try to find enough cost offsets to keep that sort of manageable within the P&L structure..

Great. Thanks..

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

Okay, thanks for taking the question. I was interested in asking about the decision to buy back stock here. At a time of kind of mounting risks, a lot of uncertainty in retail. I know there is a good argument that this is turning around, but there are more risks.

And I was just wondering, under what environment would you consider switching your focus from share repurchase to delevering to kind of de-risk the equity. And kind of on the related topic of risks, I think Greg on CNBC threw out some big numbers about tax risk tied to potential border tax, policy changes from the Trump administration.

I was wondering if you could update us on what your current thinking is about that. The fact that you're buying back stock suggests to me there maybe you're not that worried, but if you could update us on what you think right now, that would be interesting..

So, I'll take a shot at that, and anybody else who'd like to add is free to. Look, I think your fair question, Barton, about rate of repurchase, I think even at the reduced EBITDA levels we are sustaining, we are comfortable with our ability to service the debt handling.

We are as you note of the belief that this will turn around and that we'll be back to more ordinary course, but even at these valuations and at these debt levels, we're comfortable with the purchase price where we've been executing in the market at. We believe long-term value will ultimately out. We have made this a levered free cash flow story.

We have where we've seen other alternatives, for example, moving capital over debentures or using in part to buy zulily, gone out to apply capital allocation to those kind of efforts, but we believe fundamentally this is still a good value story and that's why we repurchase stock.

To the point about the border adjustment tax, I think I sort of gave a worst case scenario about the, when I was on CNBC about the impact if you had the non-deductibility of foreign imports. I think the odds that exactly that tax, because now I've heard about a 20% effect, cost, incremental cost for foreign imports.

And I've heard that maybe it doesn't get done breaking in the house and certainly breaking in the senate and even the White House is uncertain, I think we're more comfortable that whatever impact happens from any border adjustment tax or like will be less than sort of that worst case scenario I outlined..

And Barton, as I said earlier, we're at about 2.8 times under our definition, which we're very comfortable with. We've given 2.5, but we're allowed up to 3.5. So I think we're very comfortable where we're at 2.5 now and it does continue to be a levered cash flow story..

And just to reiterate Mark's point, that 2.8 times really understates it because of the high free cash flow nature of the story. If you looked at our debt to levered free cash flow, we look far more attractive than most similar EBITDA levered credits..

Okay. That's helpful. Thank you..

Great, operator. Next question. Thank you..

Your next question comes from the line of Jason Bazinet with Citi..

I just have a question for Mr. George. Going back to the U.S. business, the last time you guys were putting up numbers like this was sort in the depths of the great recession.

And I think what folks are still struggling with is to try to figure what changed so abruptly, and when you talk about it, it seems to revolve around particular categories or particular products.

And I am just wondering, is the way to sort of square everything up, is the right answer that there's a higher level of product-specific concentration or risk embedded in your business that wasn't there 5 years ago, 7 years ago? Is that what's going on that's not transparent to us?.

Jason, thanks. Quick question, short answer is no on the higher concentration. And I know it's kind of frustrating for those outside the company to kind of get their head around this, but I guess, I'd try to frame it again in a couple of different ways.

So on your question about concentration, typically we measure pretty carefully on all the kind of classic measures of concentration sales by category, sales by top brand, minutes of air time and different promotional vehicles, number of new items introduced per day, per week.

And those are metrics we pay a lot of attention to, and once in a while, one will get a little bit out of whack. But there has been no sort of broad-based material erosion in those metrics over time. That said, as part of our program of getting the business back stronger, we're kind of redoubling our efforts on diversification.

In this environment it just feels like you want to push that to even higher level of diversification than historically we've had. And I think on lots of different metrics the business is as diverse as it's ever been.

So we keep coming back to the somewhat unsatisfactory, but we think accurate answer that, as long as I can remember, you're always struggling with one or two businesses that aren't working for some fairly particular reason.

And to use an overused phrase, we've seemed to have had this perfect storm where a handful of businesses aren't working, usually for probably particular reasons to those businesses and in a way that the normal agility of this model is still there. There just isn't enough kind of strength to lead into to offset the weakness.

I think there is not going to be sort of a deeper or better insight than that one, and everything we've seen since we first started to see the turndown kind of reinforces that.

And I keep going back to some really encouraging facts about the business, not to be Pollyannaish about where we are, but just to be clear and precise in how we're trying to move the business forward with our own team and externally. And that is our customers, our existing customers are up year-over-year.

Our units per customer were up year-over-year and up in Q4. So we are seeing our customers. She is there. She is actually buying at a higher frequency than ever. She just is buying lower average selling price products and we think that's more because of what product categories are struggling than it is some underlying pressure with her wallet.

It's hard for us to know for sure. But we just know that the businesses that are struggling all for kind of different reasons do tend to be some of the higher ASP businesses.

So I think you have this very odd situation – admittedly we haven't seen it before – where customer growth is good, customer engagement is good, customer frequency is good, units purchased per customer are good. But we got this massive trade down in ASP that equates to a massive trade down in sales.

So everything we've seen kind of continues to point to that as the core challenge. It's frustrating I know. But we're also confident that because of that, we can fix it. That's not something that gets fixed overnight.

We fix it in a methodical way, kind of true to the core of the model, as I said encouraged that we're seeing a better trend in Q1, not where it needs to be, but a better trend. It tells us we're on the right path with that direction..

Thank you very much..

Your last question comes from the line of Matthew Harrigan with Wunderlich..

Thank you. PricewaterhouseCoopers of Best Picture envelope fame came out with their global retailing survey last week. I thought a lot of the conclusions on mobile and social incidentally were pretty good for QVC as well as, I am really highlighting the Amazon competitive intensity which is as high in Germany and Japan.

You have two markets where you had good numbers as well as the U.S. But they also talked about as far as mobile goes, there is more of a concentration away from apps and more toward website development, consumer usage trends and kind of overloaded apps.

I know you've got a lot of things in the hopper developmentally, but I was curious, if you could comment on that. And then second, really big picture question. Your Chairman commented at the Lionsgate meeting that the market really can't value declining businesses.

I'm sure you don't think QVC is a declining business, but the market seems to be approaching it that way. And I know the question was directed to our cable networks and John kind of disagreed with that. But are there any strategic levers? You've shown that you can do things with Facebook and Amazon and all that, that are very high value added.

And I know you are not going to sell yourself tomorrow to Facebook or Amazon, but it just feels like the market perception cued is just really out of whack, and when you put up bad numbers in this retail environment, you have to deal with the world as it is.

But is there anything you could do to flash value other than the buybacks, that look, they look great on the back of an envelope. But it's just such a rough reception from the market right now. I apologize for being so long winded. I'm sort of the anti-Mark Carleton I guess on brevity..

So maybe let me try to answer at least the first part, and I don't know if Greg wants to kind of jump in on any observations on the second part. But broadly we would agree I think with your thesis and with the PwC thesis, that a lot of these trends we think can be favorable to QVC, showing some pressures there as well for Amazon and others.

But as you know, even where Amazon is growing, for all of our challenge in the U.S. is a fairly short-term, it's been for a fairly short period of time.

It seems like a lot of time, Offset by really good performance in our other markets which are facing, if anything, probably a higher delta of increased competitive activity, as Amazon and others and local competitors really accelerating those international markets.

That all points to the fact that the model isn't broken and we've got five or six really good examples outside the U.S. where that model's working pretty darn well. On this sort of web versus app debate, for us it's a little bit of all the above. We are redesigning both the mobile experience, web experience and the app experience.

We're roughly two-thirds web, one-third app on mobile, but we think both are important. Both play somewhat different roles in the portfolio and we're trying to just continue to learn from consumer behavior and refine both in ways that are relevant to them.

But I think one of the things that has enabled us to be a leading player in mobile is that I think we've been able to make both the app and the web experience work pretty well for us. But a lot more we could talk about there. I'll kind of leave it there at a high level..

I think John, the Chairman, who was quoted like that extensively..

Yeah. I like to defend myself. My comment at the Lionsgate Analyst Meeting really related – I think the question related primarily to ESPN and the difficulty that the public market face has in valuing cash cows, let's call them, businesses that are growing slowly or have modest negative growth but generate an enormous amount of free cash flow.

There are lots of private equity firms who have made lots of money on those kinds of businesses. Now I don't think QVC is in that mode yet. We still think QVC is in the modest growth category, but it is one enormous free cash flow generator.

And we've been able to create incremental assets as Greg mentioned, for instance the investment in Ventures, broadband and so on, were all levered off of the free cash flow generation at QVC. So, beauty is in the eye of beholder.

I think that QVC will be an enormous free cash flow generator, whether it's growing at 3% to 5% or shrinking at 1%, it will be generating an enormous amount of cash. And its debt leverage is modest and its interest cost is low. So the real question is, what's the best use of that free cash flow.

Because we believe what Mike is telling us, that he thinks this is a modest inflection point, and in my own opinion I think the public has been very preoccupied with the election and the Olympics. And so I think while viewership has still been pretty high, people have been preoccupied.

And if I look at the cable networks, I can see that the news networks are still running 50% higher ratings than they had traditionally prior to this period. So, I still think the public, a substantial part of the public is preoccupied.

So and I think in my own mind, that is something that I would want to wait out and see if Mike with managing his product assortment will see a recovery back to what I've always regarded as a slow growth 2% to 5% growing business, domestically in the U.S. Higher growth rates outside the U.S..

And higher growth rate at zulily..

And certainly zulily we bought expecting that there would produce maybe even double-digit sustained growth rates with the synergies and the focus on mobile. So that's kind of my look at it and frankly, if the public doesn't believe in the business and prices it cheaply, it makes a case for shrinking the equity even stronger..

So on that good note, thank you, John. Thank you to all of our listeners and questioners and thank you to all the participants who spoke on the call. As we said, thank you for your interest in Liberty and we look forward to seeing you in many upcoming conferences..

Ladies and gentlemen, that does conclude today's call. You may now disconnect your lines..