QVC Group Inc (QVCGA) 2015 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Liberty Interactive Corporation 2015 first-quarter earnings call.

(Operator Instructions)

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

Thank you. Before we begin, we would 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, 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 accessible to Liberty Interactive.

These forward-looking statements speak only as of the date of this call and Liberty Interactive expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein to reflect any change in Liberty Interactive's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

On today's call we will discuss certain non-GAAP financial measures including adjusted OIBDA and adjusted net income. The required definitions and reconciliations, preliminary note and schedules 1 through 5 can be found at the end of the presentation for today's call, which is available on our website. This call may also include certain forward-looking statements within the meaning of the Private Securities litigation Reform Act of 1995 regarding Liberty TripAdvisor Holdings. These forward-looking statements involve many risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements.

These forward-looking statements speak only as 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's President and CEO.

Thank you, Courtnee. Good day to all of you out there. Today speaking on the call we will have besides myself, Liberty Interactive's CFO, Chris Shean and QVC's CEO, Mike George. During the Q&A portion of the call, we will also be available to answer questions about Liberty TripAdvisor Holdings, if you have any.

On to some of the highlights. At QVC Group, US revenue grew 3% and adjusted OIBDA grew 2% in the first quarter. Pro forma for an $8 million increase in severance, US OIBDA would have been up a larger amount. We had phenomenal growth in mobile and that now represents 52% of QVC.com's orders both in the US and on a consolidated basis. We had very strong adjusted OIBDA growth in local currency in the UK and particularly even more so in Germany. We did face foreign-exchange headwinds for the US dollar denominated results and we would expect this to continue as the dollar remains higher than the year-ago periods.

We repurchased $101 million of QVCA shares from the 1st of February until the end of April. We were a little light on repurchases this quarter, as the stock traded at the higher end of our repurchase grid. We expect to be opportunistic in purchase of our stock going forward. It is part of our long-term strategy, though results may vary from quarter to quarter.

At Liberty Ventures, the digital commerce company has turned in a very strong performance. Revenue was up 10%. Adjusted OIBDA was up 29% and the adjusted OIBDA margin increased to 8%. Looking at some of the major holdings also in Ventures, Expedia posted very solid first-quarter results driven by strength both in the core OTA business and strength in the advertising and media business. With that short summary, let me turn it over to Chris Shean to discuss our financial results in more detail.

Thanks, Greg. QVC Group's revenue decreased 2% in the first quarter while adjusted OIBDA decreased 2% as well. Taking a quick look at liquidity, at the end of the quarter the QVC Group had attributed cash and liquid investment of $539 million and $5.7 billion in principal amount of attributed debt. QVC's total debt to adjusted OIBDA ratio as is defined in QVC's credit agreement was approximately 2.4 times as compared to our stated target of 2.5 times. Mike George will now provide additional color on QVC.

Thank you, Chris. We saw strong balanced performance in Q1 with good results across most markets, product categories, platforms and customer segments. We achieved constant currency growth of 2% with solid gains in the US and Europe and rebounding results in Japan. Most product categories performed well with particular strength across our fashion and home businesses. However, these gains were partially offset by continued softness in consumer electronics, which declined at double-digit rates globally. We remain disciplined about not chasing electronics at low margin rates and we continue to shift resources to more profitable categories.

ECommerce grew 9% in constant currency to 41.4% of revenues, up 2.4 points from a year ago. Our mobile platforms, as Greg mentioned, continued to perform strongly, up 55% in constant currency to represent 52% of all eCommerce orders. As I discussed on the last call, we are working on the first full redesign of our website since 2007 to bring our core brand attributes of discovery, storytelling, social and service to the web in new and compelling ways.

We delivered a number of enhancements in Q1 and we look forward to sharing more advancements on the redesign with you as we move through the year. And we remain committed to staying at the forefront of mobile innovation, including recently launching our Apple watch app simultaneously in the US, UK and Germany. You can now get push notifications of your favorite QVC products and offers on your Apple watch and you can see the item on air and today's special value with just a quick glance at your wrist.

We continue to see good growth in our customer base, up nearly 6% including our China joint venture, with relatively consistent growth across new, reactivated and existing customer segments. And we achieved a big milestone in the US with our customer base exceeding 8 million customers on a rolling 12-month basis for the first time. And globally, including our China JV, we served 13.7 million customers over the last 12 months, also a record for us. We are well underway with a significant internal initiative called 1Q, which involves developing a more global approach to operating the business so that we can leverage our worldwide strengths and capabilities more effectively across markets. We will be sharing more on this key initiative in the coming months.

On a constant currency basis, our adjusted OIBDA margin was flat versus prior year with the negative impact of lower S&H rates in the US largely offset by improved product margins due in part to the mix shift away from consumer electronics. We also incurred an $8 million year-over-year increase in severance costs, primarily in the US associated with ongoing restructuring initiatives and a $3 million increase in expenses associated with our France start-up. Our strong OIBDA margin gains in our existing European markets are especially encouraging in light of our efforts to carefully manage the impact of FX movements and ensure that they don't materially erode margins.

Now turning to the results by market. The US team delivered a solid quarter. Revenue grew 3%, driven by 3% unit volume growth and a 1% increase in average selling price. These gains were partially offset by a slightly higher return rate and a $9 million decline in shipping and handling revenue.

ECommerce revenue increased 7% and was 47% of total US revenue, up from 45% in the prior period. Mobile commerce was particularly strong this quarter. Mobile commerce in the US grew 68% and it now represents 52% of eCommerce orders, up from 37% last year. We achieved revenue growth in the US across all categories except electronics, with particular strength in home, apparel, accessories and beauty.

Within home, our growth was driven by food, which benefited from an earlier Easter, cookware, garden and live plants as well as strong gains in fitness from brands such as Fitbit and Total Gym. In apparel and accessories, leading brands LOGO by Lori Goldstein, Isaac Mizrahi Live, Dooney & Bourke, Clarks and Vionic were top contributors. In beauty, top-selling brands included Wen, Calista and IT Cosmetics.

In March we introduced a new Monday evening line-up to anchor our fashion business. We debuted Fashion's Night In, a five-hour programming block that features different points of view on fashion and style. The new lineup includes fashion stylist Lori Goldstein, program hosts Amy Stran and Shawn Killinger and style icon Isaac Mizrahi. Initial viewership and sales results have been very strong.

We also premiered a new outdoor living program featuring Jonathan and Drew Scott, stars of several hit HGTV programs including Property Brothers. And we expanded our Ellen Degeneres home decor programming. Both are driving nice viewership gains and bringing new fans to QVC. Our marketing team has worked closely with Ellen to leverage her enormous social media fan base and integrate QVC into the fabric of her syndicated show in fun and interesting ways.

We are also benefiting from our second channel, Q Plus. Year to date we have added nearly 3 million homes to our Q Plus distribution, bringing the total to 57 million homes and driving incremental viewership and sales through original content and innovative counter-programming on the second channel.

In early February, we unveiled new shipping and handling rates and policies to further strengthen the value equation for our US customers. The initial response has been generally as expected. While our shipping and handling revenue declined in the quarter, we have seen strong growth in new customer acquisition. In February and March, the categories that were most impacted by the new policies, apparel, beauty and jewelry generated collective new customer growth in the low teens. And in total we increased the number of new customers in the US by 9% in the quarter. We believe all of these initiatives contribute to the high levels of customer satisfaction and loyalty that we continue to enjoy, as evidenced by Forrester's recently released Customer Experience Index, where QVC achieved the number one customer experience rating among all retailers, topping leading brands like Amazon and Zappos.

Adjusted OIBDA in the US increased 2% in the quarter. OIBDA margin declined 26 basis points, primarily due to lower shipping and handling revenue and the increase in severance expenses, partially offset by improved product margins and higher income from our proprietary QCard program. As Greg mentioned, on a pro forma basis OIBDA was up 4%, excluding the impact of those one-time severance charges.

Turning to Germany, they really had a terrific quarter with revenue growth of 3% and adjusted OIBDA growth of 20% in local currency. Revenue growth was driven by strong gains in home and fashion and a 28% growth in eCommerce in local currency, partially offset by softness in electronics and about a 200 basis point increase in return rates, about half of that increase reflecting a net estimate true-up from prior periods and the remainder driven by product mix shifts to apparel. The 255 basis point increase in OIBDA margins was driven by strong gains in product margins due to the mix shift and reduced promotional activity coupled with strong expense management and improved bad debt experience.

Looking at Japan, revenue declined slightly in local currency as we continue to experience the negative impact of last year's consumption tax increase. Looking forward, we anticipate the business returning to positive growth in Q2 as we anniversary the tax increase, although we will be adversely impacted by the shut off of analog television, which went into effect at the start of Q2. We continue to invest in ways to improve our carriage position as we navigate this changing TV landscape in Japan, including launching 30 minute programs on additional channels to attract new customers. We think this strategy is working and contributed to the 3% gain in new customer count in Japan. That is our second consecutive quarter of new customer growth after several quarters of declines. In local currency, adjusted OIBDA margins declined 75 basis points, due largely to some modest erosion in product margins as a result of the mix shift from fashion to home and electronics, as well as higher information technology costs and lack of fixed cost leverage.

The UK continued its strong momentum with revenue up 4% and adjusted OIBDA up 13% in local currency. We saw good gains across most product categories except electronics and 24% growth in eCommerce in local currency with mobile now 65% of total eCommerce orders. OIBDA gains were driven by expanding product margins, warehouse efficiencies, favorable inventory obsolescence expense and fixed cost leverage.

Italy achieved net revenue growth of 9% in local currency, with particular strength in beauty and apparel. The adjusted OIBDA loss narrowed 20% to just over EUR1 million. We continue to see strong retention and repeat purchase rates from our existing customers in Italy, although new customer acquisition was below our expectations. We are testing a variety of marketing and promotional strategies to get new customer growth on a better track and that's a significant focus for us through the rest of the year.

In our China joint venture, revenue increased 5% in local currency and that is below the growth rate we have been seeing the last couple of years. While our unit growth was solid at 11%, our average selling price declined 9%. We think this lower growth rate reflects a combination of the softening Chinese economy and an increased number of competitors on each local TV affiliate as well as internal opportunities we think we have to tighten up the product mix and slow this erosion in ASPs. We are moving away deliberately from high price-point jewelry and high price-point collectibles. These businesses don't support repeat purchase activity and don't align with our long-term strategy. We just need to manage through that in a careful way that minimizes the overall impact on revenue growth.

Finally, we remain on track to launch France this summer and we incurred EUR3 million loss as we ramp up our staffing in France. And with that, I will turn it back to Chris.

Thanks, Mike. Moving onto Liberty Ventures, the continuing consolidated digital commerce business' revenue increased 10% in the first quarter, while adjusted OIBDA increased 29%. Each of these significant continuing digital commerce businesses experienced revenue growth. The growth in adjusted OIBDA was primarily a result of increased revenue, with the most noticeable increase being at backcountry.com.

Now let's take a look at the liquidity picture at Liberty Ventures. At the end of the quarter, the group had attributed cash and liquid investments of $2.7 billion and $2.1 billion in principal amount of attributed debt. The value of the public equity method securities and other public holdings attributed to the group was $3.1 billion and $1.2 billion, respectively, at the end of the quarter. And now with that, I will hand the call back to Greg for Q&A.

Thank you, Mike and Chris and to the audience, we appreciate your continued interest in Liberty Interactive. And with that, operator, I would like to open it for questions.

Matt Nemer, Wells Fargo Securities

My question is first on the QVC US business. I realize that the shift away from the CE is somewhat planned, consumer electronics is somewhat planned. But I'm wondering if, when we will anniversary that shift and when will we see that start to dissipate and whether you think you're also potentially losing some share in certain CE categories.

Thanks, Matt. It's a little bit hard to say when that trend will moderate. It's somewhat purposeful, but I would tell you that the category has clearly been weaker than we anticipated. And so we've been rapidly kind of taking air time away so that it moderates the impact on our productivity of our air time by stripping it out and putting it into other categories. That helps us sort of stay okay on the bottom line, but it clearly -- you're shifting into categories with lower sales per minute, so it clearly hurts the top line.

We've seen softness for probably a year plus and that softness has somewhat accelerated recently. I think we probably have a bit of pressure over the next couple of quarters before we start to anniversary that. A lot of it depends on the overall health of the category and new what new innovations come to bear this holiday season that we can take advantage of. And we are looking to get more creative about ways to drive some better business there.

We may be losing some share. We are okay with that because we just don't want to -- we have a certain minimum margin threshold that we just don't want to go below. And if we have to give up share to stay above it, we will. That does not take us off the hook for continuing to try to find creative ways to, at minimum slow the declines and hopefully at some point get back to growth and that's our mission. I think we will see softness for at least another quarter or two.

And sticking with QVC US, if I assume that most of the severance was in that segment, your expense growth is running up call it 5.5% versus 7.5% last quarter. Should we expect to see that type of mid single-digit expense growth rate for the rest of the year if the top line is running a little lower than that or is that a lever that you could potentially pull and take that down.

Long term we do not want to expense growth faster than revenue growth. There is a lot of volatility in timing of issues from quarter to quarter. I would not want to make any specific comment on out quarter expense growth rate. But at a high level we continue to stick to this formula of expecting about a, on average over long periods of time, about a 20 basis point improvement in OIBDA margins over time.

We've generally been able to achieve that. We warned on the last call that that might be harder to do this year, given the reduction in shipping and handling revenue. That is one offset that we face. In general, I think you're going to see expense in line with revenue.

Mike, if I could just sneak one more in. There is this huge shift to mobile, which seems to be accelerating and you guys have highlighted that. I am just wondering if you could talk to what the financial implications of that are. Are those orders different in terms of frequency or magnitude or more or less profitable? I realize it's early, but what you think that means for the business longer term.

A couple of thoughts and let me just also, because my controller pointed out to me something I'd overlooked. Part of the expense grow in Q1 is really anniversarying the release of a benefit accrual last year. So I do think it's a little bit inflated versus our kind of run rate of expense growth. I think we will see expense growth largely in line. In terms of mobile, I don't know that I think it has any sort of particular impact on the shape of the P&L other than the broad trend of when we can shift to off-air sales.

We avoid the commission we pay our TV affiliates, same as with a desk top order. And we avoid a live operator call if they were using that prior to shifting to mobile. In terms of -- its an attractive customer base, it's younger than our average customer base. There's a fairly high number of new customers that come through mobile.

In terms of the characteristics of the orders themselves, they're largely consistent with what we would see on other platforms. So we view mobile as really critical to increasing relevancy of the brand, attracting new customers, having a platform on which those folks want to interact, being able to access QVC in more places and extend purchase occasions. In terms of the shape of the P&L, probably not meaningful.

Okay. Thank you.

Eric Sheridan, UBS

Thanks for taking my question. Mike, in terms of the shipping incentives and you highlighted the new customer growth you are seeing because of those incentives and I appreciated that color. Any sense, along similar lines of the mobile question, how those customers are acting, the velocity of their shopping, the size of their check-out basket, whether the different type of customer that's coming to QVC because those incentives have been put in place, so we can understand what that might do sort of longer term to the platform.

That is a great question. It's a little early to tell, but I would say in terms of the metrics we look at as new customers join QVC, there's nothing about the new customers that have joined in the last couple of months that would make us think that it's kind of materially different, either better or worse, than our overall base of new customers that we bring in. Just to pick on the semantics for a second, I wouldn't call these shipping and handling incentives as much as kind of true rollback in our shipping and handling prices.

We've deliberately tried not to be promotional with shipping and handling and so we went the route of just lowering the average price we charge for S&H. So what we think that's done, we could clearly tell in the past that there was some set of new customers just got turned off by that sticker shock of the S&H price more so than existing customers. So we think for that new customer it just reduces one of the barriers to trying this very different shopping format we have. And we do think it has therefore helped accelerate that rate of growth. But the quality and characteristics of the new names feel pretty comparable to past quarters.

Thanks.

James Ratcliffe, Buckingham Research Group

Thank you for taking the question. Two on Ventures, if I could. First of all, on Backcountry, can you give more color about what was driving the improving sales trends? Is this taking share in the outdoor space or a general improvement in the environment, weather and the like? And secondly, if you could you talk about your appetite for any sort of transaction involving Ventures that would also involve any of the other Liberty cousins, for lack of a better word, if you need additional financial or operational scale.

On Backcountry, I think they have taken what is a great service and a great product set and I think honed it and in addition, they were helped by cold weather, particularly on the East Coast that many of you experienced that obviously was the right kind of climate to drive sales. They have also done a great job of moderating their expenses, which is why they have been able to grow EBITDA so much faster. So full credit to that team.

As far as using capital from ventures in other companies, look we are running ventures to generate the highest possible returns over an extended period of time. That is our first and foremost goal. If that was to involve a funding another one of the Liberty portfolio, we would need to make sure that was first and foremost in Ventures' interest. But I'm also not going to say we would not do it. Our biggest pile of cash in the Liberty family today sits at Ventures and we are aware that that could be a great source for the right transaction.

Thank you.

Barton Crockett, FBR Capital Markets

Thank you for taking the question. I wanted to probe a little bit more about the sales trend at QVC Domestic relative to HSN, where you obviously have an ownership stake and some watch it competitively. What do you think explains the big delta there? They have been growing double digits at HSN for a couple of quarters. You have gone from mid-single to a little under 3%.

Are they doing something there, some innovation that could be incorporated within QVC? And more broadly, does that delta performance prompt any rethink of the status right now where they are both separate? Is there any advantage maybe to -- potential to rethink that and think about advantages of having those two as part of one company?

Mike, I will let you talk about, if you like, the operating results and I will handle the second part.

Impressive performance at HSN for a couple of quarters in a row, to your point, really nice increases. We love it as a shareholder and it gets our competitive juices going as a competitor. We can learn from everyone and try to study what everyone else does. In terms of how I think about the QVC trend overall, we have always been pretty transparent with our investors that we think this is a business that we strive to grow at 4% to 5% rate, sometimes we are in the 3% to 4% rate, this quarter clearly a little bit off the top-line trend.

Depending on how you exactly measure positive effect of different activities, the delta between this quarter's growth rate and that kind of 4% to 5% that we'd like to be at and that we've been at in the past, I think the electronics story and it probably the shipping and handling revenue rollback creates that 1 to 2 point delta to trend. I would love to tell you that I think there is a formula to have QVC growing at 10%, but the great strength of our business, but also occasionally a challenge is when you're dealing with extraordinarily high levels of customer loyalty, a very large, established customer base that is purchasing on average 24 to 25 products a year.

When 95% of revenue comes from that install base, you are just not going to typically see big swings in the top-line sales numbers. The positive of that, as we have always said is there is a lot of characteristics of this company that almost feel like a subscription business and that, at least in our biggest market in the US, we have been able to achieve pretty constant kind of growth rate and push that through to high stable levels of free cash flow. That is the positive.

The negative is, I think it would take a lot of distortion in our model, in our business to hit a double-digit kind of growth rate, so you are not likely to see that from us. We certainly want to be in that 4% to 5% range and that's kind of where we strive to be and I think that there's are a couple of things that impacted us to put us a little below that for the quarter. Some of which are more top-line oriented like the decline in CE and some of which are more bottom-line impacted like the S&H rollback.

As far as the relative [appeal] of a transaction, I think our thoughts remain pretty much the same. We are, as Mike noted, happy shareholders of HSN and let 1,000 flowers bloom. But it is still more expensive on a free cash flow basis and particularly if one were to imagine a required merger premium chasing that last share and we think our deploying our capital repurchasing QVC stock is on the margins today more attractive and I think that remains true.

Great. Thank you.

Alex Fuhrman, Craig-Hallum Capital Group

Thank you for taking my question. I wanted to ask a little bit about your channel positioning and thoughts with cable and satellite operators. It seems like just really just the last two quarters, there's been a particularly high shift in your business towards mobile and would have to imagine that your commissionable sales base as far as the TV operators keeps moving a little bit smaller, especially as that trend has accelerated.

What has the reaction been from your partners on the TV side? Are they eager to slot you into more channels or better channels to try to get the on air business up as well? And any thoughts on what those rates might look like over the next few years would be helpful.

Mike, why don't you take that?

Couple of thoughts, Alex. We definitely are seeing a pretty consistent decline in commission rates in the US, I should say the net commission expense in the US, as more business shifts to that off-air bucket that does not have a commission associated with it. And we continue to believe that with all the growth of mobile and e-commerce, there is still a lot of power in TV and in improving quality of channel positioning, number of channels, having second channels.

And so you have seen us kind of invest in obviously the expansion of our second channel. We have, on many systems today, we have two or three channel locations for the main channel in addition to the second channel. So I think both we and our partners see mutual benefit in getting QVC distributed as broadly as possible and so on. DirecTV is an example. I think we are in three channel locations right now. Those things do make a difference.

And as we watch how the world is evolving, even as we are starting to see people experiment with unbundling, like the Verizon announcement, we're always in every tier. We, selfishly at QVC, love the concept of a 50 channel Verizon line-up where QVC has two of the 50 channels. In general, we think those trends are favorable to us.

That is helpful.

Thank you.

Tom Forte, Brean Capital

Thank you for taking my questions. I had three. I will ask them all at once. The first question I had is on shipping and handling. I'm trying to understand kind of the puts and takes. You had suggested going into the quarter that it would be revenue neutral. When you think about the direct loss of shipping and handling revenue, but the addition of new customers, do you still feel like it's revenue neutral?

On the consumer electronics side, I had hoped that 4K and Ultra High Def TVs would be a compelling enough product and QVC is so good at telling stories, that you would do well there. Is that category I guess underperforming my optimistic expectations? And lastly, are there scale opportunities for you to go back to your shippers and maybe get better rates to offset some of the reduction in shipping and handling revenue to lighten the impact on EBITDA?

Let me take each of those, Tom. Great questions. On whether the S&H change is revenue neutral, it is hard for us to answer that with precision because we actually don't know what would have happened had we not made the rate changes. I do think on balance, the rate change has helped fuel growth in our fashion business in particular. Did that fully offset the revenue hit from the S&H? I think it probably largely offset it, but again, it's a little hard to know that for sure.

We always thought it would have a bigger bottom-line impact than top-line impact and I think the first few months would suggest that is true. I think the top-line pressure was more driven by consumer electronics when you think about a business with a pretty substantial part of the mix declining at a 20% rate. We can probably offset that on a margin basis, but not on a top-line basis. As best we can tell, I think it is probably close to revenue neutral, but hard to know with a great degree of confidence.

On consumer electronics, we will keep swinging. We haven't seen great uptake in that category yet. But I think that category is coming on strong. Hopefully, as we look towards the back half we can see more growth out of it. I think our biggest challenge in consumer electronics is there are some categories that are working, but at the end of the day our biggest challenge is we have built a really monster computer business.

And as that business shrinks and other things up from tablets to high-end cameras to 4K TVs come online, it's such an anchor relative to those other categories that the net is negative. But I do think that starts to moderate over time and I think in some of these categories we can probably get better growth than we have been seeing. We are not giving up on consumer electronics for the long term, although it is also something that if you had to have one category struggling, this is not a bad one to have a struggle relative to some of our other businesses.

But we still believe in the category and hope to get it back to healthier performance ever time. In terms of going back to our shippers, we have a very complex, as you can imagine, both inbound and outbound with this [fixed] network, we are working closely with our partners on our agreements. We have a number of things that we're working on that we think over time will, at a minimum, moderate freight inflation and keep us in a pretty good position.

I don't know that you'll see any sort of radical reduction in freight cost. But we are a big shipper and we are committed to working with our partners in creative ways to get very attractive rates and create a very efficient supply chain network. I think we have some things coming up that we're encouraged by along those lines.

Great. Thanks, Mike.

Matthew Harrigan, Wunderlich Securities.

Firstly, on C&R, nobody expects the numbers to look like Alibaba, but lots of interesting things are going on over there. I know you are trying to port the more traditional QVC model and exploit some of the global brand relationships that you have. I thought there was kind of an emphasis on market share and top-line growth versus profitability. Could you give a little more detail on what is going on there?

And secondly, on social media is there anything more you can do to kind of reduce the friction coefficient on the buy behavior on things like Instagram. That seems like a real natural for you across social media and mobile.

Thanks, Matthew. On China, as I mentioned in my comments, we're disappointed with that 5% growth. We should be certainly growing this business at stronger rates and we do want to continue to expand our [carriage] footprint and grow our customer base and grow our revenues. We believe this business can and should be a healthy grower for the long term, but definitely a tougher quarter than we anticipated. And as you try to really get behind what is driving it, I do think it is a combination of factors that I touched on.

This is circa US in 1987 when there were 20 home shopping competitors or whatever the number was when we started. We have upwards of 40 competitors in the market. Because a lot of folks have been doing what we have been doing, which is kind of a land grab to get carriage, I think the average affiliate that might have been carrying 3 or 4 channels in the past might now be carrying 6, 8, even 10 channels. I think there is a bit of an overloading on the TV dial of competitors. And those kinds of things do shake out over time.

And we do think we have a differentiated strategy versus all the other players. But we recognize that this is a long-term proposition and there needs both some degree of market shake-out and us just continuing to double down on our points of differentiation to push through that. I think that's part of it. Part of it is trying to right-size the product mix. As I've shared on past calls, when we entered into our joint venture that business had an average selling price that was almost 2x our other markets. And we know that does not work for the long term.

You just can never get repeat purchase rate when you're dealing with these high price-point one-off items. Remixing the business is tricky. And I think we saw probably -- the things we were trying to reduce probably fell at a faster rate than we expected and the things we were trying to grow did not grow quite as quickly as we anticipated in the quarter. So those are all things we are trying to understand. And I do think most retailers are reporting, probably with the exception of the few of the econ players, are reporting some general softening in the retail environment.

All of those are factors. We will keep at it. We believe in this business. We think we can get back to a better growth rate, but we think it will be -- I'm sure there will be bumps as we push through that and get to a leading position in China over the next few years. On your Instagram question, we have got a team that's really doing a lot of great innovation and experimentation in social media. I think it's early days in terms of really trying to generate meaningful commerce out of these off-platforms and find a way, as you said, to kind of reduce the friction.

So probably not a lot I have to share today on that, but it's something we're focused on and I do think Instagram, Pinterest, some of these platforms are naturals for us. And we're seeing some success there, although clearly the Facebook engagement continues to be by far the biggest element of the social equation that's kind of off-platform. More work to do, but I think all of those are opportunities for us over time.

I think we are done. Thank you for your continued interest in Liberty Interactive and we look forward to speaking with you next quarter if not sooner.

Ladies and gentlemen, this does conclude today's conference call. We thank you for your participation and ask that you please disconnect your line.