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

Eric J. Sheridan - UBS Securities LLC Edward J. Yruma - KeyBanc Capital Markets, Inc. Heather Balsky - Bank of America Merrill Lynch Alex Joseph Fuhrman - Craig-Hallum Capital Group LLC James Ratcliffe - Evercore ISI Barton Crockett - B. Riley FBR Jason Boisvert Bazinet - Citigroup Global Markets, Inc. Victor Anthony - Aegis Capital Corp.

Matthew Harrigan - Buckingham Research Group Inc..

Ladies and gentlemen, thank you for standing by. Welcome to the Liberty Interactive Corporation 2017 Third Quarter Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. As a reminder, this conference is being recorded, November 9, 2017.

I would now like to turn the conference over to Courtnee Chun, Senior Vice President of Investor Relations. Please go ahead..

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, customer growth, 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 benefits and synergies of these proposed transactions with GCI and HSN, organizational structure and senior executive team changes following the closing of the proposed acquisition of HSN, 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 involving 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 notes and schedules 1 through 4, can be found in 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 any 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 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's President and CEO..

Thank you, Courtnee. Good morning to all of you out there on the line. 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. During Q&A, we'll be available also to answer questions related to Liberty TripAdvisor.

On to the highlights. We continue to make progress on our pending acquisitions. We expect to close the HSN deal in Q4, but it looks like the GCI deal has moved back into Q1. I'll talk a little bit more about where we are in that in a moment.

Therefore, the split-off and creation of the two asset-backed stocks which we began early this year is most likely to be completed in Q1. I would note, we've made a modest change regarding the treatment of the 1.75% Charter exchangeable as a part of the split-off. Mark Carleton will go into that in a little more detail in a minute.

QVC, I'm going to talk about them now. Onto the highlights there, QVC grew operating income, constant currency revenue, and adjusted OIBDA in all of its markets. Importantly, U.S. revenue was up 3%. For the quarter, both the U.S. gross margin improved and the primary drag on OIBDA margins was higher incentive comp, which Mike will talk about in a moment.

The consolidated mobile penetration reached 64% of all the QVC.com orders, up 530 basis points, confirming our good positions with respect to mobile and mobile phones. Mike will go into that into further detail rather on our holiday plans for Q4 as well. And I'd note, from August 1 through October 31, we repurchased $477 million of QVC shares.

Please do recall that once the HSN proxy is mailed and effective, we will not be able to repurchase shares until after their shareholder vote. Onto zulily. zulily's results were challenging as we expected during the quarter, but the shape of their revenue growth during the quarter was positive.

And Darrell will discuss the progress we're making there to get back to growth and we're excited about the impact we're seeing from the initiatives he will outline. At Liberty Ventures, GCI's results rather were negatively impacted by weakness in the Alaskan economy, but the business remained sound.

Our deal there, as I've noted, has been pushed back but is on track. We have received approval in the last few days both from the FCC and the Alaskan regulators. As I noted, we expect to close in the first quarter. TripAdvisor.

Certainly, experienced a trough quarter for online travel in general and TripAdvisor in particular, with headwinds from Google and mobile. We understand it's been frustrating to all involved, including me.

We continue to improve our hotel shopping experience and continue with our advertising campaign and beginning, we believe, to see traction with that. Our community and content importantly continue to grow at a healthy pace, and we are developing a strong position in the related attraction and restaurant markets.

With that, let me turn it over to Mark Carleton to talk about our financials..

Thank you, Greg.

And as Greg mentioned earlier, in the proposed split-off, the 1.75% of Charter exchangeables will now be reattributed to QVC Group at the time of the split-off, along with approximately $590 million in cash and an indemnity for any payments in excess of principal and interest, which would be partially offset by any tax benefits associated with an early extinguishment of debt.

QVC group will also have a negative pledged reference Charter shares at GCI Liberty. So, Liberty Interactive will use commercially reasonable efforts to repurchase this debt within six months of closing and get this cleaned up.

Secondly, we made this change because the combination of the increased price in Charter and our initially proposed exchange offer would have impaired our ability to deduct the interest. And you guys know how we value our tax deductions. So, certainly, we'll talk about that a little more at our Investor Meeting next week, but that's that.

Now, let's take a quick look at the liquidity picture. At the end of the quarter, the QVC Group had attributed cash and liquid investments of $383 million and $6.2 billion in principal amount of attributed debt.

QVC's total debt to adjusted OIBDA ratio, as defined in QVC's credit agreement, was approximately 2.7 times, which includes zulily's adjusted OIBDA, as compared to a maximum allowable leverage ratio of 3.5. Now, I'll hand it over to Mike George for some additional comments on QVC.

Mike?.

Thank you, Mark. We're very encouraged by the positive results in the quarter and the traction we're seeing on some of the major strategic initiatives we've been pursuing.

Every segment, QVC U.S., QVC International, our China joint venture and zulily, generated year-over-year revenue growth, and the rate of growth across every segment accelerated relative to Q2. We delivered strong operating margin expansion at QVC and achieved our first profitable quarter in China on an adjusted OIBDA basis.

And we're seeing a healthy growth in new customers across QVC U.S., QVC International, and zulily. We also made good progress on our integration planning with HSNi and were delighted to announce a few weeks ago the new leadership team that will take us back to the transaction closes expected later this quarter.

QVC's consolidated revenue grew 4%, operating income increased 19% and adjusted OIBDA grew 5% on a constant currency basis. Digital penetration rose sharply, with global e-commerce and mobile penetration growing 310 and 530 basis points, respectively. In the U.S., revenue increased 3%, reflecting 9% higher unit volume.

That's our highest unit growth in nearly three years. Average selling price declined 4% and largely reflecting mix shift, including in electronics where sales moved from higher price point computers to smartphone products.

As we discussed on the prior call, approximately 1% of the revenue reflected shipments that were delayed from Q2 into Q3 as a result of a systems outage in June. Operating income increased 14% and adjusted OIBDA increased 2% in the U.S.

OIBDA margin declined 20 basis points, driven by personnel-related expenses that had a net $11 million negative impact. That's $19 million in higher incentive compensation expenses in the quarter, since we did not pay a management bonus in the U.S. in 2016, partially offset by $8 million in lower severance costs from the prior year.

Normalizing for these impacts, adjusted OIBDA would have increased 80 basis points or 5% over last year, due to higher product margins and lower bad debt expenses, which were partially offset by marketing investments, higher inventory obsolescence and initial HSNi integration consulting costs. In Q4, we anticipate incentive compensation in the U.S.

will increase year-over-year by $5 million to $10 million, and we'll recognize the majority of our HSNi integration consulting costs estimated to be about $5 million. A year ago, we told you that the uncharacteristic sales decline we were experiencing in the U. S.

reflected a number of, we believe, largely independent factors across a handful of challenged businesses, and we detailed the actions we were taking to improve results.

I'm proud of how well our team has executed against those actions, staying focused on our goals of returning the business to what we believe is healthy, sustainable growth and building strong, long-term customer relationships, all while taking on the added challenge of the HSNi integration.

I'd note six particular highlights this quarter as we return to growth in the U.S. First, we drove balanced growth across most categories, while keeping our commitment to increase newness and diversity in our assortments.

Second, every important measure of consumer engagement increased, viewing minutes on broadcast TV, viewing minutes of our live steams on OTT platforms and digital sessions.

Third, we successfully deployed a heavier level of marketing spend to profitably acquire high-quality new customers on digital platforms, which leads to the fourth point, we brought in an outstanding new customer class, our second largest third quarter class in 15 years.

Fifth, we grew sales without being excessively promotional or harming our financials. Clearance sales were down, bad debt expenses declined for the third consecutive quarter, and we continued to purposely lower S&H fees in ways that would get absorbed into our P&L.

And finally, we remain focused on disciplined cost management to fund growth investments and strengthen OIBDA margins when adjusted for the incentive compensation impact. So, with that overview, I'll touch on a few of these topics in greater depth.

I stressed on prior calls that category balance is important to our business health and so we were pleased to see sales gains across most categories. Looking more specifically at the five challenged businesses that drove our downturn over the prior year, three returned to strong growth.

Kitchen and cook saw solid gains as we expanded our food category, grew premium cookware and the new Copper Chef brand and returned to growth in kitchen electrics, as we worked closely with our major partners like Keurig, KitchenAid and Vitamix to present more compelling offers to our customers.

Handbags came back strong on great new products and values from Dooney & Bourke and growth in newer brands like Kipling and Lug. Electronics enjoyed strong growth in smart home and security assortments from Ring and Blink, along with products from Amazon, (13:40) Fitbit and HP. Hair care and jewelry continued to decline.

However, the rate of decline slowed, despite substantially reducing airtime in both categories. And in addition, our apparel, our accessories and our beauty businesses all achieved strong results.

We continue to lean into freshness and discovery across categories, introducing over 2,400 new items and 133 new brands in Q3, both significant increases from a year ago.

Particularly strong introductions included Catherine Zeta-Jones' home line, Inspire Me! Home Decor, Charisma in home textiles, the Grace Kelly jewelry collection, and several brands we brought in from our international markets including Radley London handbags, The Real Pie Company, and Charlie Bears décor.

We're also extremely pleased with the introduction of Martha Stewart's Signature collection. We launched with a cookbook in August, which quickly sold out. In September, her fashion collection had an outstanding debut and her gardening tools delivered strong results as well, both with many sell-outs.

In October, her holiday planning and gourmet food line debuted to strong demand. And this month, we'll introduce her new skincare line.

This multi-category lifestyle launch is a perfect example of the combined power of great products that can't be found elsewhere, a compelling and highly credible personality like Martha, and the platform we have to showcase both. We're increasing consumers' engagement with our brand.

For QVC and QVC2, total viewing minutes on broadcast TV platforms increased in the mid-single-digits. This reinforces our belief that our target viewers are the least likely to engage in cord cutting. And if they do cut the cord, they're likely to shift to free over-the-air viewing where we also have a strong presence.

And when we offer compelling products and inspiring programming, they tune in. Our Christmas in July programming and high profile events related to Fashion Week and the Emmys generated strong viewership, as did celebrity shows with the Scott brothers, Lisa Rinna, Marie Osmond, Martha Stewart, Catherine Zeta-Jones and Dale Earnhardt Jr.

In addition, this viewing increase actually understates total viewership growth because it doesn't include our Beauty iQ network now available in 46 million homes and it doesn't include viewing on any over-the-top platform where we're seeing dramatic growth, albeit from a small base.

On Roku, the number of devices on which content was streamed and the average number of minutes streamed per player, each more than doubled in Q3 from a year ago. On Facebook Live, where we simulcast 100 hours per week of programming from our three U.S.

networks, along with specially created Facebook programming, video views and minutes viewed increased 407% and 185% respectively. And our own Web and app platforms' live streaming grew fourfold. We're also seeing consistent increases in visitors to our digital platforms, up 4% and sessions up 6%.

As a result, e-commerce grew 300 basis points to 54% of the U.S. revenue. And mobile grew 490 basis points to 63% of the e-commerce orders. As I mentioned on the last call, we recently created dedicated teams focused on enhancing our digital-only product assortments to drive discovery and additional purchase occasions.

They've made great strides expanding our digital offerings, with approximately 50 new brands introduced exclusively on our Web platforms, including Nine West and Hamilton Beach, as well as extending the product range of existing on-air brands.

One of the drivers of our improved electronics growth, for example, was expanding product offerings online and ensuring competitive pricing and S&H practices. I'll also share that we will be investing in additional online marketing and we're encouraged to see early success driving new customer acquisition.

Recent marketing initiatives include improving the visibility and relevancy of the products that appear in Google product listing ads; refocusing our affiliate marketing programs on new and less-engaged customers by bringing them partners who are focused on apps and mobile to areas where we've been very successful reaching new customers; and expanding our presence on social platforms where we can leverage our ability to create and deliver highly-relevant content, including live video through an increasing number of viewers.

The result of all these efforts, growing broadcast viewing minutes, making our programming accessible across a broad range of OTA and OTT alternatives, enhancing assortments, and increasing our marketing investments, enabled us to add nearly 417,000 new customers in the quarter, our second largest third quarter new customer class in 15 years, up 7% over the prior year.

Nearly 80% of these new customers purchased through digital channels, 44% through mobile alone. And perhaps most encouraging, these new customers acquired through mobile and e-commerce are demonstrating some of the best retention rates we've ever seen, which we know indicates strong lifetime value.

We achieved these new customer gains, along with top-line growth, without being excessively promotional in ways that would damage our financials or erode customer trust. We continued, as we have in prior quarters, to purposely reduce shipping and handling revenues to mitigate long-term risk, while still increasing gross margins.

Our Easy Pay program remains an important competitive advantage, which we continue to leverage, while at the same time improving our credit profile, with bad debt expense declining every quarter this year. Finally, we remain focused on disciplined cost management.

Over the past year, we ramped up our global business service center in Poland, reduced corporate head count and drove several freight reduction initiatives, which we believe will result in long-term benefits, including consolidating orders, leveraging the combined volume of QVC and zulily to negotiate new carrier agreements, and opening up our new DC in California.

Turning now to our International segment. Our team delivered an outstanding quarter on the top line, on the bottom line and in new customer growth. Revenue grew 5% with unit volume up 10% and ASP down 5% on a constant currency basis. We saw gains in apparel, accessories, beauty and home.

Further, we achieved top-line gains in every market, with particular strength in Japan and the UK. Operating income grew 36% and adjusted OIBDA was up 18% in constant currency.

OIBDA growth was driven primarily by higher product margins, lower inventory obsolescence expense, volume leverage on fixed expenses and anniversarying the cancelation of our stadium naming rights in Japan a year ago, which provided 55 basis points of benefit in the quarter. While the U.S.

has been our focus on recent earnings calls, our International segment should not be overlooked. It is a highly profitable business with last 12-month revenue of $2.6 billion, and Q3 represented the 13th consecutive quarter of constant currency revenue growth.

And in our joint venture in China, we continued the sales rebound with local currency revenue up 11% in Q3. And we were delighted, as I noted earlier, to generate our first-ever OIBDA-positive quarter in China.

In closing, we're pleased with the momentum across our QVC markets and with zulily, and we're encouraged by our progress with HSNi integration planning.

And last month, we announced the new organizational and leadership structure for the future company, and we'll be sharing more details on our plans for the combined business at next week's Investor Day. And with that, I will turn it over to Darrell to cover zulily results..

Thanks, Mike, and thanks, everybody, for joining today's call. We're excited by the momentum we saw in Q3 as we head into holiday. We built particular momentum in August and finished strong in September. Our acceleration, in part, is being driven by our success in growing active customers, which began to accelerate in Q3.

After a two-year period of relatively flat customer growth, we added 300,000 net active customers in Q3, bringing us to an all-time high of 5.3 million at quarter-end. This growth is a result of the reorientation of our marketing efforts.

We're expanding the reach of our marketing dollars by exploring new channels with more targeted and diversified advertising.

We continue to innovate and invest in technology in order to provide each customer with a more personalized site experience, while using urgency drivers such as Deal of the Day and midday marketing pushes to drive shoppers from consideration to purchase.

As we continue to innovate on our customer experience, I expect to see our active customers continue to grow. Revenue in the third quarter grew 2% year-over-year. Our momentum picked up in the second half of the quarter, with September growing about 8%.

Revenue growth was primarily attributed to a 6% increase in total orders placed, driven by an increase in active customers, partially offset by increased backlog due to the timing of orders within the quarter. In addition, units per order increased, offset by lower ASP.

In Q3, our operating loss decreased by 15% year-over-year, with the improvement driven by decelerating amortization of our intangible assets related to purchase accounting. Adjusted OIBDA decreased 33% year-over-year to $12 million, driven by a 250-basis-point reduction in gross margin rate.

The decline in gross margin rate was primarily due to higher fulfillment and shipping costs associated with more units sold at a lower ASP, and increase in promotional tasks, and higher supply chain expenses from increased international shipping, and the ramping of our Pennsylvania fulfillment center.

We expect to see some of these drivers continue to exert pressure on margin performance through year-end. Now, I'll highlight some of the investments in Q3, which I believe will help drive our growth for holiday and into and through 2018. We successfully executed several key supply chain initiatives.

We completed the automation of our Pennsylvania fulfillment center, which provides capacity for holiday and allows us to deliver products one to two days faster for our customers in the Northeast.

This also provides more storage for zulily Partner Services, our third-party fulfillment program which gives us the ability to ship those units the same day. We also continued to see significant growth from our cross-border program, which includes sourcing and fulfillment directly from China to our U.S. customers.

In Q4, we'll expand this program to customers in our two largest international markets, Canada and Australia. Additionally, our merchandising team continues to build a pipeline of new, large national brands and source unique products for our customers to discover. In Q3, we launched Jones New York in women's and LORAC in the beauty category.

We continue to see growth in our women's footwear and home categories. Additionally, we've seen strong growth in the men's business. We continue to leverage our QVC vendor introductions, and in Q3, we launched Dell with great success. Lastly, we continue to focus on customer programs to provide added value to the overall customer experience.

Together with Synchrony Bank, we executed a successful launch of the zulily credit card, which is off to a great start. We exceeded expectations with over 60,000 new credit card accounts opened to-date. We're seeing a meaningful lift in average order value when compared to non-zulily credit card purchasers.

The net economics in the credit card program will allow us to further invest in additional customer rewards, with the goal of driving higher customer retention and increased spend. The zulily credit cards are great example of leveraging the QVC relationships to improve the customer experience, while also adding value to the group.

I'm thrilled to see the growth in active customers and the opportunities ahead for zulily in Q4 and beyond. While I would be transitioning from my role as President and CEO of zulily to lead the New Ventures division for the QVC Group once the acquisition of HSNi is complete, I still care deeply about the zulily team and the brand we built.

I will stay based in Seattle and involved in strategic direction for zulily, while shifting my focus to drive innovation, invention and to help redefine the shopping experience for the larger enterprise.

Looking forward, I'm confident the business will continue to thrive in the hands of our Chief Merchant, Lori Twomey, who assumed the role as President during the interim period. Lori has been an incredible business partner, driving the business with me and the whole executive leadership team since we launched in 2010.

She's helped materially define zulily and differentiate us amongst our competition. Her customer obsession is unparalleled, and she's a champion for innovation and a proven leader. I can't imagine a better person to help steward the business and continue to drive towards our goals. With that, let me 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 $512 million and $1.9 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 $5 billion and $2.4 billion, respectively, at the end of the quarter. And now, I'll hand it back to Greg..

Thanks, Mike, Darrell and Mark, and to the listening audience. We appreciate your continued interest in Liberty Interactive. And with that, operator, I'd now like to open the call for questions..

Thank you. Your first question comes from the line of Eric Sheridan with UBS..

Thanks for taking the questions. And, Mike, thanks for all the color in terms of the transition over the last 12 months. I want to focus in on digital and mobile.

As these new sort of digital-first and mobile-first customers come on to the QVC platform, I want to understand if there's anything new you're calling out for folks in terms of categories they're focused on or shopping tendency of those customers that might be different from the typical QVC customer.

And then, second, can you characterize where you are in your digital and mobile efforts in the U.S. versus internationally for folks? Thanks..

Yeah. Thanks, Eric, for the question. What's I think most encouraging about the customers we're acquiring on the digital platforms is, broadly speaking, they look like any QVC customers. So there are certain set of product categories that tend to do a better job of attracting new customers in general.

Electronics is a better category, some of the lower priced home products, well-known national brands. And I would say, broadly, the folks joining on mobile or digital platforms are coming in on the same kinds of product categories.

And again, the most encouraging part is we just seem to be attracting a high-quality customer with a higher level of average retention. Our retention for many years ran at the 35% to 36% rate, meaning we kept 35% to 36% to get to a second purchase. Now, that's edged up over a couple of years to 40%. It tends to be a leading indicator of lifetime value.

So, a healthy, diverse mix of customers we're bringing in on digital platforms, broadly performing the same as the traditional QVC customer. In terms of where we are on our digital efforts, I would say, the U.S. has generally been our lead market both in adoption of digital platforms and in where we tend to deploy innovation first.

But we've been doing a lot of work over the last few years to globalize our digital platforms. We're not completely there, but we're probably 80% there, and that enables us to take something like a new mobile app and launch it simultaneously in multiple markets. So we're able to get innovation to the international markets faster.

And so, generally speaking, they are kind of keeping up with or even somewhat ahead of the growth that the U.S. has seen on digital platforms, but they do start at a lower base. So their overall e-commerce penetration tends to be lower in the international markets. Within that, their mobile penetration tends to be same or higher than the U.S.

So they're fully embracing the mobile platforms..

Thanks..

Next question..

Thank you. Your next question is from the line of Ed Yruma, KeyBanc Capital Markets..

Hey, guys. Thanks for taking my questions. I guess, first on the total customer count at QVC, it does seem like it's ticking down a little bit or has for the last two quarters.

You gave some great color on the new customers, but are you seeing any change of behavior at the tail end? And then I guess, second, it sounds like you made some adjustment to shipping and handling.

Could you just give us an update on kind of what's free shipping and what's not? And kind of how that progression could change the financials going forward? Thanks..

Sure. Thanks, Ed. So, on total customers, the number we typically report is a rolling 12-month customer count. So how many customers we've brought in – how many customers were active in the business in the last 12 months versus the prior period. So, that is slightly down.

That really reflects history, right? That reflects kind of the weakness we had in the business in end of last year, start of this year. If you were to just isolate active customer count in the U.S.

in Q3 only, there's how many customers were active in the business in Q3 of this year versus Q3 of last year, that more narrow window, you would actually see a modest growth in total customer count. It's up a couple of percent.

So we'll still report on a rolling basis some weakness that reflects kind of the reality of the business 6, 12 months ago, though we were pleased in the current period to actually see overall customer count grow.

And that's because we are bringing in the new customers and the retention metrics on the existing customers are absolutely stable, see no erosion at all. So, really happy with the customer picture.

In terms of shipping and handling, as you know, we made a big pricing adjustment a couple of years ago, and since then it's been more about just trying to find the right opportunities where we could kind of strategically spend back some of our expense savings in ways that would be exciting to the customers.

And that could mean things like including S&H on a TSV. And about half of our TSVs go out with no S&H charges. That also may be funded by the vendors, so that doesn't necessarily directly hit our P&L, although we do, between us and the vendors, invest in free shipping on half of the TSVs.

We'll occasionally do an event where we'll have free shipping and handling for a day. We want to do those very rarely because we don't want that to become a norm for how the customer purchases. But we find that we can do those a few times a year and get a lot of customer excitement without cannibalizing other times of the year.

So those are the kinds of initiatives. I would say the other big thing we took on in Q3 is we launched free exchanges, because we felt we could again fund that program. And so, clearly, some of the feedback report from our customers is they appreciated the lowering of our S&H charges that we did a couple of years ago.

But one of the things they don't like is that, if they buy a size or a color and decide they don't like it and want to get a different size, they had to incur the cost of shipping that product. So, now that's free. A new program for us, well received by the customer, a fairly manageable investment in the P&L.

So, at this point, we don't anticipate any sort of radical changes.

It's just sort of continuing to find the right ways to invest in lowering S&H charges where we think there's either a sales benefit or just a real customer value that is meaningful, like free exchanges, and to do that in a way where we can hopefully continue to drive efficiencies in freight and other aspects of the P&L and/or get support from our vendor partners, so that it doesn't have to erode our OIBDA margins..

Great. Thanks so much..

Your next question comes from the line of Heather Balsky, Bank of America..

Hi. Thank you for taking my question. The first is housekeeping. Did you see any impacts from the hurricane? And then, second, can you just talk about trends in shipping costs? It seems like there's inflationary pressures going into 4Q. How are you managing those? Thank you..

Thanks, Heather. I'll make a couple of comments and, Darrell, if you want to add anything. Hurricane impact was very modest for us, so probably a few million in lost sales at QVC and a few million at the zulily. So, not a material impact on the quarter. A tough week in a few locations and then a fairly quick bounce back.

In terms of trends in shipping cost, clearly it's an inflationary shipping environment in all markets, including the U.S., Japan. It depends on a fair amount of inflationary pressure, but certainly it's around the world. We do all we can to offset that.

And because of our size and scale and leveraging the combined scope of QVC and zulily and soon HSNi, we're able to create pretty strong partnerships with our freight carriers and manage that inflationary impact reasonably well. We tend not to be subjected to some of the same kind of Q4 surcharges and other pressures that other retailers are.

So it's a constant focus. It's both about continuing to try to find win-win ways to lower freight costs between us and our carriers, as well as take on initiatives that we can control.

For example, a big focus that zulily championed for a number of years and now QVC is really trying to catch up with of getting multiple items across multiple orders the customer places in the same day and in the same box. So, as we increase our pack factor, that will improve our efficiency.

Clearly, as we ramp up our West Coast DC, that will lower our freight cost to ship product to West Coast customers. So our goal is always have enough initiatives in the hopper to try to offset as much of that inflation as we can.

Darrell, anything else you would add?.

No. I think that's right. I mean, on the hurricanes, we also saw a fairly modest impact there. I mean, we definitely saw it, but it's not a big driver of the quarter. And then, in shipping, I would reiterate what Mike said and say that we have our teams working very closely.

I think it's one of the areas from the acquisition side, a synergy perspective, our operations team is working very closely together and really working to drive those networks and technology together that I think over the next couple of years is going to provide us more opportunity there.

I mean, just as we've renegotiated our carrier contracts this year, being able to bring those together has been some great long-term savings. And then, I think through the technology platforms, there's a lot more to come I think. But it's going to take us a while to get there, but I feel good we're not going to see big changes here..

Thank you..

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

Great. Thank you for taking my question. I wanted to talk a little bit about your integration plans with HSN for after that goes through. First of all, I was a little bit surprised to see just in the leadership team announcement that there's not a lot of the top HSN team is going to be with the company going forward.

I would be curious to get a little bit more color on where a lot of the top leaders at HSN offered the opportunity to stick around, just kind of the decision-making around how that transpired.

And then, just thinking ahead to the deal closing in Q4, do you anticipate that you'll have any ability to direct or coordinate the programming schedules between HSN and QVC in time for some of the peak holiday season days?.

Great, Alex. Thanks for the question. So, a couple of thoughts. Overall, we just feel very good about how the integration process is going.

It has been a highly collaborative process across the QVC and HSNi teams, and we've really just established a strong partnership and a sense of teamwork going through a very robust and methodical process of both thinking through the synergy opportunities, how we want to operate the businesses, then how we architect the organizational design and a leadership team that will let this combined business realize its potential, which we absolutely think is quite extraordinary.

And so I wouldn't want to comment on any individual personnel decision obviously, other than to say we collectively, QVC and HSN, started with a clean sheet of paper and started with how do we want to design this organization to work in the future, and quickly agreed on some core principles of relatively independent business units, but these enterprise-wide growth teams that could add great value and growth potential across all business units, and then bringing together technology and corporate functions and operations in a way that would drive quality, scale, efficiency.

And then, we just looked from there to place kind of the right people in the right roles. Had lots of discussions about aspirations and interests with our HSN team members. And depending on what they wanted to do, kind of ended up with the result that we see today. It's a very strong leadership team.

Thrilled that Mike Fitzharris is going to be leading the HSN business unit. He is a longstanding QVC team member that has just done an extraordinary job turning around the Japan business, which was something we talked about on many calls, the more challenged business. In the last few calls, we've been talking about as our shining star.

Strong leaders in the shared service areas. Bob Spieth, who we acquired through zulily, now running operations for all of these companies and been able to do the kinds of work that Darrell just touched on. Actually, the technology leader from HSNi will be taking on technology for the combined company.

Karen has incredible depth and experience that we think will be meaningful as we bring together this very large technology-driven retail enterprise. So, each decision was its own decision based on optimal design, aspirations of the individuals, what we thought were the skills that were needed, and just feel terrific about where we ended up.

Really excited about the new leader of Cornerstone. Claire has been part of that Cornerstone organization for a few years, an amazing job driving growth in Garnet Hill, which is one of the most shining stars of the Cornerstone portfolio. And now, we'll be able to work her magic across that portfolio. So, really happy with that structure.

We just actually announced on Tuesday to our team the next level of organization design and the second level of the company. And if you wish, we'll be announcing the third level. So, all of that's working really well. On your other question, we'll talk more about synergies and opportunities at the Investor Day next week.

But at a high level, we definitely think there's an opportunity to coordinate programming schedules to make sure that we, across our five U.S.-based networks, can optimize every minute of airtime against every potential viewer and customer.

And a lot to sort through there, but we think there'll be really compelling ways in which we can increase customer choice. And by increasing customer choice in the programming schedule, we think we'll drive viewership and we'll drive sales..

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

Thanks..

Your next question comes from the line of James Ratcliffe, Evercore..

...taking the question. Two, if I could. First of all, it looks like you restructured how you're handling the 1.75% Charter exchangeables as part of the GCI-Liberty transaction. It seems to me like you're basically ending up where you started, except you have the option to not refinancing the mirror notes.

What's the background for the change? And secondly, I hate to jump ahead of a deal that isn't closed yet, but once the GCI-Liberty transaction is done, you're going to have two vehicles with exposure to Charter and one of those vehicles owning a large chunk of the other.

Can you talk about how much of a priority it is to rationalize that situation and what any constraints on doing so would be? Thanks..

So, on the 175 exchangeables, I think your analysis is exactly right.

We're going through a lot of machinations to end up exactly where we started and that was driven by, as Mark Carleton noted, primarily by some IRS regulations and the adaptability of the interest and the premium that's built into those bonds, which we wanted to ensure that we could achieve. You mentioned the optionality to refinance.

It would be our intention to refinance immediately. It's not an obligation but it is our intention. Our goal is to make it as seamless as possible to get back to exactly where we started, but ensure deductibility.

On the GCI, being a second vehicle GCI-Liberty, I think you know correctly that they'll be largely similar with the difference that the GCI-Liberty will also have exposure to GCI. It would probably be nice in the fullness of time to merge those if they are appropriately valued because it would just be simplicity.

We're having two public vehicles which are largely overlapped, if not completely. But it's not a requirement by any means..

Great. Thank you..

Your next question comes from the line of Barton Crockett, B. Riley FBR..

Okay. Thank you for taking the question. And Mike, I was very interested in some of the commentary around QVC.

And I was wondering if you could elaborate a bit on the growth in viewership? What drove that? Was that really just comping kind of all the distractions last year from the political situation or was there some particular programming that really got people excited? And then, I know you guys don't like to guide, but there's been a lot of up-down in the trajectory.

And just in general, can you give us your sense of how things feel heading here into the fourth quarter?.

Yeah. Thanks, Barton. In terms of the viewership, what we're really pleased with is we are seeing this growth in viewing minutes, and it's been probably consistently improving as we've gone through the year. What you see is the sort of person who has tuned in for 30 or 60 seconds is a very low engaged viewer. You're seeing lots of them.

That may be a reflection of cord cutting. Those are folks that probably were never going to make a purchase. So it's sort of artificial viewership. It's someone kind of passing by the network. But folks who are spending any real amount of time on the network are pretty stable and actually spending and are viewing for more minutes than ever before.

So we've really seen a big increase in minutes viewed. So what drives that? Yeah, probably some of it is comping some tougher numbers from a year ago, and as you said, the distractions of Olympics and election and all the rest. Some of that I do think is some really good programming.

We've really tried to lean in as part of the turnaround initiative this year to just create more programming excitement, more remotes, just leaning into events and trying to make them more special, fun events, like a big promotion for Dale Earnhardt Jr.'s new color scheme on his last car that we not only broadcast on the network, but on his Facebook platform and ours.

So, just trying to get creative about ways to get exciting experiences in front of more people. I think all those things are helping.

And then I'd also maybe state kind of the obvious, which is sales growth and viewership growth are a little bit of a chicken-and-egg kind of issue in our company, meaning what drives viewership is people like the product that they're seeing and they stick around to see more of it. And what drives sales is more people viewing.

So we know that if we are doing all the things I talked about that offer diversity and freshness on the calendar, more new brands, more new items, more items per minute, less time spent on the TSV, fewer minutes per item exposed, all those things build excitement, in the short-term can occasionally create pressures because you're trying a lot of things, but generally tend to drive more engaged viewers, and more engaged viewers tend to drive sales.

So I do think easier comparisons certainly help, but I think all those factors are making a difference for us..

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

I know you guys are focused on free cash, as we are. But I did notice that the D&A stepped down quite a bit in the quarter. And I'm assuming that that has to do with the roll-off of the amort (50:15) related to the purchase of QVC from Comcast years ago, but I thought that was happening later.

Did we see part of that in the quarter and it will get bigger as we move into 4Q?.

Yes and yes..

Okay. Thank you very much..

Your next question is from the line of Victor Anthony with Aegis Capital..

Thank you very much. A few questions. One, the 3% growth in the domestic market, I was hoping that you could parse out the growth across the three individual months. Just trying to get a sense of when the growth rate began to accelerate.

And second to that is, I noticed that traffic to your mobile app in the domestic market jumped quite significantly in the month of October. So I was wondering if you could just kind of give us some sort of color into the fourth quarter trends. I think there was a previous question on that.

And third, on zulily, just wanted to get an idea of how zulily is positioned for the fourth quarter, Black Friday, Cyber Monday, and some of the holidays. Thanks..

Thanks, Victor. So I'll kind of dodge on any commentary about Q4. As we have shared, once we kind of got through the early stages of the turnaround, we've reverted back to our traditional policy of just not commenting on the current quarter.

In terms of how Q3 unfolded – and I always like to caution when we talk about growth rate by month that we do move the programming schedule around and so it's not always a perfect indicator of the trend in the business. So, with the caution not to over-interpret it, I would characterize Q3 as a very solid July that we were pleased with.

That's the month we really leaned into all of our Christmas in July programming, and we're very pleased with that programming, which generally exceeded our expectations. That's not only the perfect indicator of how the whole holiday season will go, but certainly you always feel good when you jump into July and have strong Christmas programming.

August was a very disappointing month for us. And in hindsight, I think we probably didn't manage the month right. That obviously is a tricky month in retail. It's a very clearance month. A year ago, we did heavy clearance because we really wanted, as part of our turnaround, to clean our assortments.

This year, we didn't need to do that because the inventories were cleaner. We also didn't think it was necessary because we felt we had a very easy comp in August because of the Olympics a year ago. But I think we misread that and, in hindsight, could have had better programming. So, August underperformed our expectations.

I think some of that is our own execution. And then we had a really terrific September, just a lot of momentum across the business. Felt really good about the health of the business in September.

And Darrell, do you want to talk on zulily?.

Yeah. I mean, I think I talked about it a little in the script. But I think we saw something a little different in that July for us was soft and a little disappointing, and I think we kind of accelerated into August and then much more kind of into September. So I think we felt like we had kind of good momentum coming out of the quarter.

And I think, as we look at this quarter, I think we continue to do all the things that we do every year and we're focused to make sure that Black Friday and Cyber Monday is strong. But, as Mike said, we're not giving kind of guidance or any information about kind of what we're seeing kind of intra-quarter..

Thank you..

Thank you. Your next question is from the line of Matthew Harrigan, Buckingham Research..

Well, thank you. I'll leave the synergy discussion for next week.

But irrespective of any success or progress you're making at QVC France and the merchandising or distribution, how do you feel about your light model evolution? Is that actually getting easier as technology develops and could that prospectively open up some smaller markets? Or is that just kind of an afterthought right now, given everything else you have going on with HSN? Thank you..

Yeah. Thanks, Matthew. I would say it's a bit of an afterthought, honestly. I do think that, over time, that there will be ways we can penetrate more markets with a lighter touch model, as you suggested. It's certainly something we think about.

I wouldn't say it's something we're actively exploring right now just because we do think we've got plenty of other priorities.

In addition to HSN and zulily, we've really put a focus in our bigger markets on sort of taking advantage of some of the disruption in the carriage environment to expand our presence on traditional broadcast platforms and OTT platforms with more networks and more live experiences. And that feels like kind of the right opportunity for now.

But I suspect as we get more experience under our belt with France and continue to look at new ways to extend the model that there will be opportunities that will emerge, but that's probably a little bit down the road..

Thanks, Mike..

Thank you, operator. That was our last question. Thank you all for joining us this morning. And we look forward to seeing many of you next week in New York at our Investor Day. If not, next quarter we'll be on the line again. Thanks very much..

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