QVC Group Inc (QVCGA) 2017 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Liberty Interactive Corporation 2017 Year-end Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded, March 1, 2018. I would now like to turn the conference over to Courtnee Chun, Senior Vice President of Investor Relations. Please go ahead.

Good morning. 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, the renaming of Liberty Interactive to Qurate, changes in senior management, the integration of HSN and expected benefits and synergies, future impact of accounting changes and the impact of recent tax reform, future expenses at QVC, sales demand, customer growth, the proposed transactions involving GCI Liberty and the timing and expected benefits and synergies of these proposed transactions, new service and product launches and other matters that are not historical facts. These forward-looking statements involve many risks and certainties that could cause actual results to differ materially than 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 GCI Liberty, the availability of acquisition opportunities, competitive issues, regulatory issues, 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 statements contained herein to reflect any change in Liberty Interactive's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

On today's call, we will discuss certain non-GAAP financial measures, including adjusted OIBDA, adjusted net income and constant currency. The required definitions and reconciliations including Preliminary Note in Schedules 1 through 4 can be found in 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 certain 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 date of this call, and Liberty TripAdvisor Holdings expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statements 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; and QVC's President and CEO, Mike George.

During the Q&A, we'll also be available to answer questions related to Liberty TripAdvisor.

So we've got a lot to cover this morning. So let's get started with some of the structural highlights. This morning, we introduced our future name, the Qurate Retail Group, the next generation of the QVC Group. Mike George will go into more detail, but we're excited to have a brand that encompasses its unique set of businesses. Mike, as is well deserved, will become the CEO of this company. He's done a tremendous job driving QVC, managing company through a challenging retail environment and transitioning into the digital mobile era. Congratulations to Mike on his new job as CEO of this public company.

We closed the HSN acquisition on December 29, and we do anticipate closing the GCI acquisition on March 9. Upon closing, we'll complete the reattribution of certain assets and liabilities expected to be valued as of the market close on March 8, and we will provide all those values post close. I'd note that we expect to reattribute the FTD asset or investment we have to the QVC Group, which is a slight change. We will complete the split-off also at that time and result in 2 asset-backed stocks, Qurate, as we said the renamed QVC Group, and GCI Liberty.

So on to the operating businesses themselves. At the QVC Group, we had good success. QVC grew revenue in all of its markets. Probably, most importantly, to this group, QVC U.S. revenue was up 4%. zulily also posted an impressive 11% revenue growth in the fourth quarter and for the year increased active customers by 16%.

Looking at repurchases in that group, the QVC Group. From November 1 through January 31, 2018, we repurchased $209 million of QVC Group shares. And for the 12 months ended 12/31/2017, we repurchased $766 million in QVC Group shares. I'd note that this is relatively impressive, given that we were out of the market multiple times during 2017 due to pending deals. And for the new Qurate group, we currently anticipate repurchasing approximately $1 billion of Qurate stock in 2018.

Turning now to Liberty Ventures. GCI reported results yesterday despite the ongoing recession in Alaska, the businesses continued to perform well. As I noted, we do expect to close on GCI and the subsequent split-offs on March 9.

Looking briefly at TripAdvisor. We were pleased to announce the investment by TCV, Technology Crossover Ventures, and to add Jay Hoag to the board. I think this is the fourth board that Jay and I have served on, including Expedia. Jay is a seasoned investor with experience in this sector, and I'm sure he'll provide valuable input. Importantly, TripAdvisor beat Q4 expectations with performance good in all segments. And we continue to believe that we're making the right investments at that business in 2018 and we will drive continued growth.

And with that, let me turn it over to Mark Carleton to discuss some of the financials in more detail.

Thanks, Greg. Let's take a quick look at the liquidity picture. At the end of the quarter, the QVC Group had a attributed cash and liquid investments of $330 million and around $6.7 billion in principal amount of attributed debt, which includes the HSNi revolving credit facility. QVC's total debt to adjusted OIBDA ratio is defined in that agreement was approximately 2.7x, which includes zulily's adjusted OIBDA, as compared to a maximum allowable ratio of 3.5. Take note that this does not include the debt at the HSNi. The HSNi leverage ratio was 1.7x, as defined in their agreement.

Pay attention that HSNi's results are not consolidated in the QVC Group for the fourth quarter as the last 2 days of the year, between closing and year-end, were deemed immaterial. There is, however, around $30 million of cash severance cost at HSN, plus $8 million of some nonstock cash stock comp and $5 million of severance cost at Cornerstone, which do get recognized, but that is not the results of operations of HSN for those couple of days. There will be ongoing expenses to realize the synergies with the deal with HSN. And I think, on Slide 43 from our investor's day presentation, you get a sense for those synergies and what those ongoing costs are.

We've got quite a few accounting updates on the Qurate side that will impact 2018. I'll talk briefly about some of them. Due to new FASB guidance, in quarter 1, Q and zu will recognize revenue at the time of shipment rather than delivery. This will result in a small adjustment in quarter 1, which really accounts for the items shipped before the end of 2017, but not delivered until 2018. So this will be the only quarter that this happens. And the impact of the shift in future quarters is really minimal. We'll have 90 days of sales in each quarter, the way we did before, but we'll quantify any impacts that come out of this as it goes forward. This change doesn't impact HSN at all as they were already recognizing revenue at the time of shipment.

Also, starting in Q1, QVC HSN and zu will begin to recognize a branded credit card fee income as revenue rather than an offset to SG&A expenses. Previously, we just recorded those fees as a reduction of expense. It will now be presented broadly. We'll talk about these amounts as we get throughout the year for comparison purposes to make sure everything's clear.

Purchase accounting amortization in 2017 was about $390 million related to QVC and zulily. In '18, the amortization from the Liberty purchase of QVC will be -- it will be fully amortized and rolled off and done. However, we have purchased amortization associated with zulily, and we will have some new amortization associated with HSN. We expect the HSN and zu accounting amortization to be approximately $260 million in 2018, none of which is tax deductible. And those numbers will trend downward in subsequent years. At Q, we also were tweaking a little bit our methodology for recording incentive compensation accruals in 2018. We'll now accrue it a little more evenly throughout the year. And earlier in the year, that will give us a headwind of, let's call it, $8 million to $12 million in the first half of the year, given that we had lower accruals of incentive compensation in the first half of 2017. So this may have a little bit of an impact in the quarters on OIBDA margin, but really will balance out over the year.

I want to comment briefly on tax reform and how it will benefit or impact these companies starting in 2018. For Qurate, overall, tax reform is a net positive. It's good to have lower tax rates. We generate a lot of taxable income and have historically been a full tax split payer. This is somewhat offset by our inability to immediately recognize tax benefits on all of our interest payments on debt as a result of the 30% cap, especially on the exchangeable bonds. In 2018, we expect to be restricted on our ability to utilize deductions on $75 million to $125 million of interest expense. Note that this calculation is based on OIBDA for tax purposes, which excludes certain international markets and some other adjustments, but that's currently what our estimate is. We'll continue to look at our capital structure and we'll do what we can do to reduce this negative impact, especially as things get more restrictive in 2022. But we're paying careful attention to our capital structure and really what our after-tax cost of all of these different pieces of financing are.

We'd also note that QVC shareholders are being made whole as the reattribution of the exchangeable bonds will be made at fair value. Same way we value these and any other transfers, and there's additional cash being reattributed to compensate for the increased value -- for the increased amount of the liability relating to the exchangeable bonds. So we've calculated that impact in there.

Going forward, we'd expect a low double-digit effective cash tax rate on worldwide OIBDA at Qurate, which includes federal, state and foreign income taxes after taking into account the deductions from interest and from the green energy investments.

GCI, in general, GCI will continue -- will benefit from a lower tax rate going forward.

At the end of 2017 and due to the tax rate change, we accelerated some onetime debt tax deductions for stock awards into 2017. Rather than having those benefits come in at the new rate, we accelerated them and got them into 2017 at the old rate. That resulted in incremental stock comp of $21 million at the QVC Group and $15 million at Liberty Ventures. And you'll see these amounts included in the corporate-level SG&A allocations of $44 million and $23 million for QVC Group and Ventures Group, respectively, in quarter 4. And you'll see those numbers in our press release.

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

Thank you, Mark. As Greg mentioned earlier today, we announced the planned introduction of the Qurate Retail Group. At first, this is much more than just a new name. Qurate captures the essence of who we are and what distinguishes us in the marketplace and reflects the size and scope of our aspirations for our new company. At Qurate, we believe in a third way to shop beyond traditional brick-and-mortar or transactional e-commerce. We serve consumers who crave engaging shopping experiences over impersonal transactions, and every facet of our business is in service to our customer with a mission that reinforces her passions and her values.

QVC, zulily, HSN, Ballard Designs, Garnet Hill, Grandin Road, Frontgate, and Improvements, these are all distinct businesses but all united by common beliefs. Across our companies, we offer curated collections of unique products and events made personal and relevant by the power of storytelling. We reach our customers through distinctive video and other direct marketing platforms tailored just for them. And we form deep connections with our customers, ensuring that we evolve with them, which fosters loyalty, innovation and growth. Our new name reflects our unmatched expertise in curation. We curate products, we curate experiences, conversations, communities with millions of highly engaged shoppers. And we also curate large audiences across multiple platforms for our thousands of brand vendor partners. And all of that is thanks to the incredible passion and dedication of our team members. But we do all this through a unique platform of extraordinary scale. In 2017, we've generated pro forma revenue of $14 billion and served 23 million customers. We're the largest video commerce retailer globally, reaching approximately 370 million TV homes on 16 networks, including our joint venture in China. And we're the third largest multi-category e-commerce and mobile commerce retailer in North America according to Internet Retailer.

Now looking back at 2017, I'm enormously proud of what our team has accomplished. Our U.S. team has stayed focused on returning the U.S. to healthy sales growth, successfully accelerating sales throughout the year and achieving full year sales growth while also increasing full year operating income margins by 120 basis points and full year adjusted OIBDA margins by 70 basis points, once you normalize for about $9 million associated with HSNi integration cost and $26 million associated with sort of refilling our incentive compensation pool in 2017, since we didn't pay incentive comp in '16.

Our international teams had a stellar year. We grew local currency revenue in every international market, and we've significantly expanded operating income margins, up 220 basis points, and adjusted OIBDA margins, up 130 basis points. our zulily team built tremendous momentum in the second half of the year and returned to double-digit sales growth with strong customer file expansion in Q4. We successfully closed the HSNi transaction, developed and deployed a rigorous integration plan and significantly increased our cost-synergy targets. And finally, we completed a major reorganization of our leadership team to align with the expanded aspirations and vision we've established as Qurate.

I'm now looking more specifically on our Q4 results. And we were thrilled with the strong sales momentum with QVC U.S., QVC International and zulily all achieving their highest revenue growth of the year. I would note, as Mark mentioned, that these results did not include HSNi.

Looking at QVC U.S., revenue increased 4% in Q4 on 7% volume growth and 2% lower average selling prices. Operating income was up 21% and adjusted OIBDA declined slightly. Adjusting for $7 million of HSNi integration cost and $6 million in increased incentive compensation, we had adjusted OIBDA growing about 2%, with OIBDA margin down 40 basis points. That 40 bp erosion in the fourth quarter primarily reflects a somewhat higher inventory obsolescence charges, higher marketing investment and ASP deleverage, which put some pressure on our warehouse freight cost. These were partially offset by lower bad debt expense and by the implementation of a number of freight cost-reduction actions. I'm proud of our team's success in returning the U.S. to healthy growth, and I will just note several highlights behind that growth in the quarter. First, we grow balanced growth across categories while keeping our commitment to increase newness and diversity in our assortments; second, every important major customer engagement increased; and third, we've successfully deployed a heavier level of marketing spend to profitably acquire high-quality new customers on digital platforms. The result was an outstanding new customer class and solid growth of existing customers as well.

So let me go through each of these in a little more detail. You'll recall that when our U.S. business turned down in Q3 of '16, I pointed to this perfect storm of largely, we felt, independent pressures affecting 5 businesses: electronics, kitchen, jewelry, hair care and handbags. Those businesses represented about 1/3 of our sales and declined approximately 20% back in the second half of '16. Through focused efforts in each of those categories, they are collectively now growing largely in line with the rest of the business. In fact, sales gains -- we have sales gains at all categories, except jewelry in Q4. We saw particular strength in home, led by top kitchen cook brands, Copper Chef, KitchenAid and Vitamix; in decor, from MyPillow, Santa's Best, and Northern Nights; and household items from Duraflame, Shark and Philips. In fashion, we saw strength in footwear from Vionic and Clarks as well as longstanding brands Susan Graver, Isaac Mizrahi Live!, and Joan Rivers; and more developing brands like Cuddl Duds, Anybody, Belle by Kim Gravel, and Barefoot Dreams. Beauty delivered solid growth led by philosophy, Perricone MD, and Peter Thomas Roth. Electronics generated gains for the second consecutive quarter, with strength from Amazon, Apple, Bose and Ring. And while jewelry did decline in Q4, the rate of decline slowed significantly from Q3 and productivity increased as we reduced airtime. And as part of growing these categories, we do continue to lean in the freshness and discovery. We added 166 new brands in Q4. That's a 41% increase over prior year, including the widely popular Hatchimals in toys; Fly footwear and handbags, a fabulous brand for us; and Bluetooth item trackers from Tile Mate. Our customers also have had a very positive response to the Martha Stewart launch in the second half of last year. We continue to add to it -- add new culinary and food categories, garden, fashion, skin care and we'll continue to expand into new items as we move into 2018.

I would also continue to increase consumer engagement with the QVC brand across platforms. On broadcast TV, total viewing minutes on QVC and QVC2 increased 3% in Q4. So that viewership growth, we believe, validates our connection with our loyal customers and the lower risk of cord cutting that we face given our customer demographics and given their behavior. Further, this viewership does not include our third network, Beauty iQ, which reached approximately 45 million homes. Viewership also grew dramatically on digital and interactive platforms. The number of net installations of our Roku app exceeded 1 million at year-end. The number of minutes our live and video-on-demand content were streamed on Roku increased nearly 300% in Q4. On Facebook Live, we simulcast 700 hours of live video per month, up about from about 400 hours in the prior quarter. And the number of video views and minutes viewed on Facebook Live increased 220% and 360%, respectively. And on our own digital platforms, the number of unique visitors increased 9%. Digital sessions rose 8%, and the number of live streaming minutes across our mobile and e-commerce platforms increased 290% in the quarter. Overall, e-commerce sales continued to hit record levels, with e-commerce representing 59% of U.S. sales and mobile representing 64% of all e-commerce orders in the quarter. These viewership successes, along with stepped-up marketing investment, allowed us to drive new record levels of new customer acquisition. We attracted 912,000 new customers in the U.S. in Q4, that's the second largest quarterly new customer class in our history. A 5% year-over-year increase in just 5,000 customers below our all-time record. And nearly 84% of the new customers made their first purchase on digital platforms, also a record, with 47% on mobile. And the combination of strong new customer growth and increased engagement from our existing and reactivated customers led to a 2% increase in total customers in the quarter.

Now turning to QVC International. Our team delivered another in string of outstanding quarters, strong growth in revenue, profits and customers served. Revenue grew 6% in constant currency with unit volume up 5% and ASP up 2%. We've generated revenue growth at every market and sales growth at every category, except electronics. And we increased the number of new and the number of total customers 4% each in Q4. The number of total customers was a quarterly record, and the number of new customers was the third best quarter ever.

Our Japanese business continued its momentum, growing local currency revenue for the sixth consecutive quarter. Our U.K. business rebounded after a softer start to the year, with strong sales gains, and our German and Italian businesses generated especially strong margin gains. And our China joint venture, we grew local-currency revenue 12%, and we've generated a positive OIBDA for the second consecutive quarter.

Turning to zulily. For the quarter, revenue increased 11% on 12% order growth. That strong sales momentum is largely due to the team's success growing the customer base, ending the year with a record 5.8 million active customers. That's a 16% year-over-year increase. This 800,000-customer increase is the largest annual increase since 2014, driven by a shift in marketing focus from member sign-ups to driving customer purchases and remarketing to existing members and customers as well as improving the customer experience and building customer loyalty.

Also encouraged by early results from the zulily Credit Card launched in late September, leveraging the success of QVC's proprietary Q Card program. Total accounts exceeded expectations, reaching over 100,000 by year-end. Importantly, we saw higher average order values and increased overall spend from customers with the zulily card compared with non-card customers.

Now as expected, we did experience a number of gross margin pressures at zulily in the quarter, including higher supply chain cost as we ramped our recently automated Pennsylvania fulfillment center, a higher mix of international business driving increased shipping cost, deleverage from lower average selling prices and higher marketing promotions. Our supply chain teams remain focused on optimizing the zulily fulfillment network, and we are confident that we'll see improving cost performance as we move through 2018. In addition, the merchandising team is focused on increasing ASPs, with the ASP credit improving month over month through the quarter.

The improving momentum in sales and customer accounts since midsummer is a real credit to the innovative spirit and drive of Darrell and the zulily team. And we are absolutely delighted that Lori Twomey, zulily's Chief Merchant, took on the additional role of Interim President of zulily, as Darrell moved into his new role leading our new ventures team. We believe she'll continue to build on the team's good momentum. Her leadership capability, her passion for the customer and her passion for great product is a really powerful combination to grow the business.

Finally, let me to turn to HSNi. We successfully closed our acquisition at the end of December, and we found HSN revenue declined 8% in Q4. They did experience decelerating performance through the year. These difficult trends reflect both some underlying challenges in the business and undoubtedly the distractions of the acquisition. Excluding transaction-related costs, operating income and adjusted OIBDA increased despite the sales erosion. These gains primarily reflect the anniversary-ing of about $16 million of cost that were incurred in Q4 of the prior year, delayed with problems with the automation of HSN's fulfillment center in Piney Flats, Tennessee. HSN also benefited from improved product margins and 5% lower operating costs. We believe Mike Fitzharris and our HSN team have the ability to turn around the performance. We'll focus on improving the business fundamentals, as we always do, building more balanced and diverse product assortments, introducing a higher mix of new items and brands, airing more items and brands per hour and day, and moderating promotional intensity. We'll also work on strengthening the on-air presentation and continuing to build on the online advances the team has implemented in recent years. Finally, we'll ensure we're managing costs consistent with the size and performance of the business.

At Cornerstone Brands, which consists of Frontgate, Grandin Road, Ballard Designs, Garnet Hill, and Improvements, sales and adjusted OIBDA declined 7% and 5%, respectively, in Q4. Now excluding the prior year impacts of a 53rd week and excluding the divestiture of TravelSmith and Chasing Fireflies, that sales declined 1%, primarily driven by softness at Frontgate, offset by growth at Ballard Designs, Grandin Road, and Garnet Hill. Cornerstone catalog circulation decreased 8%, consistent with the team's ongoing efforts to rebalance investments toward the digital and retail segments, to better fuel overall demand. The Cornerstone retail store footprint expanded with the Q4 opening of Ballard Designs SouthPark Mall in Charlotte as well as the relocation of Frontgate to Phipps Mall in Atlanta. This will bring the total count of full-line stores to 10, with additional Ballard Designs stores planned in 2018. Cost of sales as a percent of revenue improved 70 basis points to prior year on improved product and shipping margins, as well as selective price increases and lower promotional stimulus across the brands. Claire Spofford, who led an impressive turnaround of the Garnet Hill business, is now leading Cornerstone for us and is focusing with her team on creating a clear and concise positioning for each brand, providing innovative and differentiated products to our customers and ultimately increasing customer acquisition and retention rates, along with driving more efficient marketing and improved gross profit enhancement through more full-price selling and increases in direct sourcing.

As we shared at Investor Day, we estimated expected operating synergies in the range of $200 million to $220 million from the HSNi acquisition, ramping over the next 3 to 4 years. Those consist of procurement savings, reductions in duplicate functions, business process integration and MSO distribution and marketing spend optimization.

And we recognize that the turnaround of HSN and Cornerstone will take time. However, our new leadership teams are in place. We're off to a strong start integrating our companies, and we are highly optimistic about the long-term opportunities.

Looking at capital spending. QVC's CapEx in 2017 was $152 million. That's down from our original estimate of $180 million to $190 million. zulily's CapEx was about $50 million in '17. Now that's up from their typical run rate, primarily due to investments to automate its Pennsylvania fulfillment center. For 2018, we anticipate CapEx is about $290 million to $300 million, and that's for all the companies in the new Qurate Retail Group.

So in closing, we are excited about the formation of Qurate as we combine the best of retail, media and social. And we'll continue to distinguish ourselves from other retailers. Across our new company, we're focused on 5 shared priorities: first, to engage and inspire our teams to make a difference every day; second, to drive product leadership through highly curated, differentiated and proprietary assortments; third, to create the most engaging and inspiring shopping experiences across all customer catch points: online, on-air, in-catalog, in-store and through our amazing customer service representatives and fulfillment teams; fourth, to go wherever the consumer is going, ensuring that we're accessible on the newest and most popular digital and video platforms and highly personal and increasingly personalized waves. And finally, as we launch our new company, we're focused on unifying our technology, operations, people practices, corporate support across our global footprint and across all our retail brands to ensure we can operate at the best cost, the best quality with the highest ethical standards. And to achieve these big goals, we're fortunate to have one of the best teams in retail. At the conclusion of a momentous year for our company, I do want to extend my welcome and appreciation to all of our new team members joining us from HSN and Cornerstone. The engagement, the commitment and the enthusiasm that all of you have demonstrated for what you do and for the possibilities unleashed by our new company has been absolutely infectious. And you join, as you know, equally dedicated teams at QVC and zulily. And together, we will play an outsized role in transformation of retailing for coming generations.

And with that, I will turn it back to Mark.

Thank you, Mike. At the end of the quarter, talking about the Liberty Ventures' liquidity, the group had attributed cash and liquid investments of $573 million and $1.9 billion in principal amount of attributed debt. As previously mentioned, as part of the GCI transaction, reattribution and the split-off, we have put in place a $1 billion margin loan against some of our Liberty Broadband shares. And you will see that as a part of the capital structure of GCI Liberty starting in quarter 1. Value of the public equity method securities, including Liberty Broadband and other public holdings attributed to the group, was $4.7 billion and $2.3 billion, respectively, at the end of the quarter.

And with that, I will hand it back to Greg.

Thank you, Mike and Mark. As this will be our last Liberty Interactive earnings call, I'd like to thank our shareholders who have been loyal in Liberty Interactive. We hope you have your continued interest in the Liberty family with Qurate and GCI Liberty.

And with that, operator, we'd like to open it up for questions.

(Operator Instructions) We will start with Eric Sheridan from UBS.

Maybe just a few. On HSN and Cornerstone, those results were maybe just a little bit worse than we thought. But historically, you've seen, as you go into some of these closings, maybe the business has slowed down a little. How should we think about the integration of HSN and Cornerstone? And how that will be reflected in the results of those units as you look out over the next couple of quarters, Mike? And then on the corporate SG&A, I wanted to understand how much of that allocation at the end of the year was onetime versus ongoing. And then on tax rate, just want to make sure that I understood the message that the cash tax rate will be low double-digit percentages, but what that might mean also for the effective tax rate on the P&L.

Thanks, Eric. Let me take the first question. On HSN and Cornerstone, it's really hard to exactly attribute the impact of the acquisitions, but we were obviously making massive changes with our HSN and partners through the last few months of the year. So I do think some of the deceleration reflects all the distractions of going through that kind of a process. And that doesn't turn overnight, for sure. As we have our buying cycles and as we sort of evolve the business to the models that we think makes the most sense. I'm hesitant to put a time frame on how long it takes to turn or exactly what the impact in the first half is. I think what you can assume is that, as you've seen over the years, when occasionally a QVC business struggles and has a few quarters of the struggle, as we did in U.S., and in other times, in Germany or Japan, we take a pretty methodical approach to just, let's make sure we're building much more healthy assortments. And usually over a few quarters, you can see a meaningful impact from that. So we're confident about where HSN and Cornerstone are headed. Very excited on the Cornerstone side, where there's a big opportunity to just accelerate the performance of Frontgate, biggest part of the portfolio, by moving to a much more proprietary and direct source model. Lots of opportunities. Those will take some quarters to play out, but we feel really good about where we can take them. And we do think there's opportunity to continue to manage the cost side tightly as well as we kind of affect the healthy turn in the revenue line.

That's great, Mike. On the one-timers, Mark, maybe you can reiterate how much of it was due to the acceleration of options?

Yes. And that total was $21 million at the QVC Group and $15 million at Liberty Ventures. So that's really onetime on the acceleration of those options.

Great. So did we get all -- Eric, we get all your questions?

Just last one on the tax rate going forward. Just want to make sure, Mark, that I understood the messaging on tax and what it also might mean for the P&L tax rate at QVC as well.

I think what we're saying is we have excess interest deductions that exceed the 30% of EBITDA. And how -- what to think about going forward, to some degree, will depend in our ability to mitigate that through actions with either debt reduction or generation of more income. Part of this relates to the accretion of the exchangeable bonds over time, that they become larger tax shields over time. And so this is somewhat of a moving target. Albert, you want to add anything?

No, I think that's it. The one thing to remember is just to the [extent of our asset deduction], we'll be able to claim those in the future. But otherwise, I think it's -- we're continuing to work through what the numbers are going to be.

Mark, you want to add anything on what you think the bookings would be?

No, effectively, the statutory rate will go down just because of what the effective tax rates are, from what the statutory rates were before. But it's -- it will be impacted by amortization and by limits on what the interest is and all of those will drive the components on it. But I think, overall, it will be down just because the statutory effective rate is down.

We'll go to our next question from Heather Balsky from Bank of America.

Can you talk about QVC U.S. gross margin in the quarter? What was in that inventory obsolescence? And how -- I know you guys don't guide, but just how to think of pressure from warehouse and distribution cost next year?

Yes, sure. Thanks, Heather. The way I would think about it is, we accrue an inventory obsolescence charge that's sort of based on the rate of change in inventory as well as the usage of liquidation activity. It tends to be fairly sensitive to both your prior period growth in inventory, in your current period growth of inventory. So as I look at the U.S. number, a decent amount of that charge really just reflects the fact that we had an unusually low charge in Q4 of '16 that we anniversary-ed and a little bit of it reflects some inventory growth. I would say, looking forward, we're not especially concerned about inventory health, it's something we always pay attention to, but we don't see inventory obsolescence as inherently a long-term drag on the business. It does tend to bounce around a fair amount from quarter-to-quarter and had an unusually big impact in Q4 that would be indicative of what you would expect over time. The other impact on gross margin, as you touched on, was just when we do have ASP declines, you're shipping out lots of units for fewer dollars. And so you inherently have some deleverage on the freight and warehouse line. So those were the 2 things that pressured growth margins. The latter will continue to the extent that you have ASP declines. It will reverse when you're in a period of rising ASPs. We've seen both. And then inventory obsolescence should be somewhat more neutral over the mid to long term. And then we felt actually very good about the fact that our net client margins were very stable in the quarter and so the underlying kind of product health of the business felt good to us.

And as a follow-up, a fair number of retailers are talking about reinvesting some of the tax reform benefit into their business. How are you thinking of spending any of those incremental dollars?

The way we think about it is, we've been one of the fortunate few retailers to have a wonderfully healthy balance sheet and cash flow, and so we've never been shy about investing where we think there's a healthy return for that investment. And so tax reform further enables that. But I would say, even independent of tax reform, you'll see us kind of continue to do what we've -- what was historically done, which is when we need to lean into investments, we will. Certainly, we're leaning into technology investments, leaning into e-commerce investment. We're going to build it up more resources in those areas, as an example, we're leaning into marketing. And you've seen some of that over the last several months. It's working for us, so we want to continue that. And then beyond that, it's really just a matter of paying attention to the marketplace and making we're sure we're priced competitive in the market. We feel good about the team were attracting to the business and we'll kind of make those decisions as they come.

And if I could add, if you look historically, to reiterate Mike's point, we've been a huge free cash flow generator. We've reinvested that not only in share repurchase but also in acquisitions, like the cash that we spent on buying the half of zulily, like the money that was effectively reinvested alongside in the Liberty Ventures effort, which came originally from QVC cash generation has fueled the Charter investment. So I think there's an opportunity to do a lot of things with that cash flow that are attractive. I think we've done well with it in the past. And as Mike said, first and foremost, we look in the business for things that have a great rate of return, but we'll find other things if we can't find it in the business.

And next, we have Ed Yruma from KeyBanc Capital Markets.

I guess, first, Mike, obviously, a very impressive multi-quarter turn at QVC. When you look at some the issues at H, do you see any similarities? And is there any risk that some of the strength at Q is driven by share gains from H? And then as a follow-up, Easy Pay, it's been a little while since you've spoken about it. I know you've made some adjustments over the past kind of 18 months. How do we view that use of the tool? And how has the performance been?

Thanks for the questions. So as we look at QVC performance versus HSN, I don't think share gains tends to be a major story for us. We've historically believed that, and now that we can kind of see inside the numbers, we continue to believe it. We were actually pleased that we've moved through the acquisition process to find that the customer overlap between QVC and HSN was less than we expected. So obviously, the largest majority of both companies' businesses are consumers who don't cross shop. And so we've always believed that in this fairly niche business we're in, it's more about growing the total category, if you will, and getting more people to be attracted to our way of shopping as opposed to share shift between H and Q. So I'm not at all worried that there's a sort of fixed pie and if we were able to grow H, it will hurt Q or vice versa. We think it's a chance to just introduce more customers to the 2 brands to do all the things we've talked about that leverage the combined sales and resources, to be that much more effective in attracting vendors and serving customers and to grow the total pie. I think the issue that HSN faced is somewhat similar to the things we've seen at QVC over the years, some are more unique to HSN, but also like things that are impressionable. And we're certainly excited to partner with a terrific team we have at HSN to move the business forward. On Easy Pay, I would say that the headline message on Easy Pay for a few quarters now has been to keep it relatively stable. And I think that's a fair characterization of Q4. We had a slight increase in the number of payments but pretty modest. So I would say on balance, we've been stable. And we're going to try to keep it pretty stable going forward and of course, as you've seen, we've now had 3 or 4 quarters of -- I think 4 quarters of improved bad debt rates that have been a good value to the P&L. So I think we're managing it very tightly.

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

I'd be curious to hear what feedback you've gotten from the vendors that sell to HSN. Have you had a lot of interest in some of those brands and personalities perhaps introducing some product on QVC or appearing on the network and particularly with QVC's international properties?

Yes. Thanks, Alex. I can safely say that every HSN vendor almost has asked about getting on QVC and most QVC vendors have asked about getting on HSN. So there's definitely a lot of interest and excitement as you would expect in the vendor community. And so we're approaching it thoughtfully. We do want to keep the product portfolios of QVC U.S. and HSN pretty discrete and separate so that, again, we're growing the total pie, not just trading off vendors across the 2 businesses. But there is a big opportunity internationally, as you mentioned. So both looking at QVC vendors that are international but for whatever reason, haven't made sense in Q U.S., they could go on to HSN. And similarly, looking at HSN vendors that could be on QVC International. We already have some of that. There's probably a way to accelerated. But there's lots of other opportunities. There's opportunities to work with -- we've built -- just to give a couple of micro examples, but we built a really strong food business, gourmet food business at QVC. Much stronger than what has been built at HSN. We don't want the same stay products to appear in both networks, but some of the vendors behind those products know how to build great compelling gourmet food assortments for QVC, they're now excited about going and building a new department for HSN. We think that's going to be a real, just immediate opportunity. And I could go through a dozen examples like that. Including our own proprietary sourcing capability, where we're going to launch in the back half of the year 3 new fashion brands at HSN that were all developed by -- that are all being developed and sourced by QVC's direct sourcing team, the team that has had enormous success building great businesses like Isaac Mizrahi and Anybody, one of our more successful recent launches. They'll now be introducing new products to HSN. So I think we're going to find lots of good ways to get leverage from our vendors and direct sourcing of capabilities, but still keep the product portfolios very separate.

And our next question comes from James Ratcliffe from Evercore ISI.

I have 2 quick ones, if I could. First of all, on FTD being left behind, I guess, at QVC, what's the rationale for that? And looks like the only non-cable asset really that's going to be at GCI Liberty is the LendingTree stake. So why not reallocate that as well and less cash? And I guess, second, more broadly, once the GCI Liberty transaction's complete, you're going to have 2 stand-alone vehicles out there, which are primarily charter driven. Is there a rationale for having a stake separate? And if not, can you talk about what any barriers would be really to putting them together?

Sure. Thank you, James. On FTD, frankly, as the value of the FTD has declined in the marketplace, it has become less of a meaningful asset and putting it over at Q, where it's more rational. And frankly, if we ever have to take a tax loss because of our investment being higher than the current market, there is more capital gains to offset at QVC. So it's more attractive. As far as LendingTree, we like the business. It does not necessarily fit particularly well with either. They've done a hell of a job, Doug Lebda and his team. There are some reasons why, from a regulatory perspective, having what we call good assets over at the Ventures side -- formerly Ventures side, what will become GCI Liberty side, makes sense. And LendingTree qualifies as that. And given our ownership position, over 25%, the largest holder. On the fact that we will have GCI Liberty and Liberty Broadband in the marketplace, it's probably suboptimal on management time and board time to have 2. We have no, obviously, current plan or intent to merge them. But after a year passes, or if they have enough common ownership, it's not inconceivable that could happen. My understanding is if they have 50% common ownership, it could happen in less than a year. But as I said, we have no plan or intent. We just explore and understand the options.

And our next question comes from Barton Crockett from B. Riley FBR.

Okay. Great. I was curious about whether the QVC and HSN customers seem to be reacting at all to the tax cuts? Are you seeing any energy -- spending energy from that? Do you expect to see anything from that over the year?

Barton, as always, I never want to comment on kind of in-period performance or a customer response. Yes, so I just think we'll have to see over time how the customer responds to those tax cuts. But I think it would be premature to make any kind of an expectation level on what might that look like.

Okay. All right. So let me try different question then. One of the things I think that is an opportunity that you guys have not yet tapped is putting QVC on the skinny bundle for like the slings and the YouTube TVs. And I know in the past, you've said your customers aren't really there. But I do know that if you guys got on those bundles, I think your equity, at least investors I think would like some of the future-proofing there. And I was just wondering if you could update us on what you see in terms of the timing of being able to move there. The potential to do some innovation on those platforms could be interesting. Just how long do you think it is before you get there? Is there any reason those guys wouldn't want you or any resistance they've had to putting you on there? So it's just not been worth your while because your customers aren't there?

Yes, it's a great question. We definitely -- we're intrigued by that space, how big these skinny bundles will get, I think, we will need to see. But we'd like to be there. There's no reason we can't be there. I do think that we can do some innovative things on those bundles. So while I don't have any specific news to update you on, I would say we know all of the players in that space and we're in ongoing discussions with them. There's nothing that we've heard in all of those discussions that would suggest it's anything other than a matter of when as opposed to if. Clearly, some of those bundles, the Sling would be a good example, the Sling bundle have been a little more targeted at a male audience, maybe more targeted at the younger audience. So a less strong fit, at least as it looks today. But that could evolve over time. Whereas other bundles are maybe a little more in line with our customer. That said, where we stand today is, it isn't at a especially high priority of ours or the providers because it isn't really where our customers today. We know though with absolute confidence that as soon our customer migrates to those kinds of platforms, there will be a compelling economic reason for both us and the providers to put us on those platforms. So we've always looked at those platforms as only an opportunity, not at all a risk. I mean, there's simply no economic rationale to not be on them, just a matter of when -- if the customer chooses to migrate to them and then I think we'll be there.

And our next question comes from Jason Bazinet from Citi.

I just had 2 questions related to tax. Between the Investor Day and year-end, you guys, I think, put out a release sending about $400 million more to QVC to compensate QVC holders for the drop in the federal tax rate that made the tax shield on the exchangeable worth less. Was any of that money be -- to compensate QVC for the interest deductibility cap that's going to get more punitive, particularly after 2022? Or is that just the federal rate dropping?

Albert, do you want to comment on this?

Sure. In connection with the amount that will be reattributed, both the change in the rate and the limitations on the -- on introduction prospectively, were taken into account in determining the amount to be paid in connection with the reattribution.

Okay. Great. And then my second question is, as you guys think about your leverage as we go through time and this cap becomes more relevant, are you just looking at -- is it important -- let me put it this way, for every dollar of interest to have a tax shield associated with it? Or you're just looking more about whatever your net cost of debt is relative to whatever you think you can do with that capital?

I think it's a -- I do not believe it is as black and white as that because I think there are issues around the fact that what is the rate on the debt, what is the alternative use of proceeds, you could do if you're going to talk about repurchasing the debt, repurchasing other income -- purchasing other income streams to make sure that you have a sufficient amount of income so that you have nondeductibility and the fact that it's only deferral of the deduction, not an elimination of deduction. I don't think you can sit there and say it's a one-shot. Here's the calculation. I think there are many factors that are going to weigh how exactly -- how much of it we try and fix real-time in any one period or defer the deduction. Albert, I don't know if you'd have anything else.

No, the one thing that we do is to the extent we make future acquisitions or able to grow the business, we'll have incremental deductions which are available to offset that income and so it's something that we'll kind of monitor as we go forward.

Right. And you can be certain that we look at -- we look at the after-tax cost of whatever financing we're using against whatever returns we're projecting. So the impact of that -- of those restrictions, we factor in to what the best way to finance a particular company or an acquisition or division might be.

And our last question comes from Victor Anthony from Aegis Capital.

Just 2 questions. One on the international business, which performed way above expectations. So wondering, Mike, if you could just talk to the different countries, which ones performed better, which ones kind of underperformed. And on the viewership, I think this is second quarter in a row that you've seen an improvement in viewership. Correct me if I'm wrong on that one. I was wondering if there's anything specifically that you're doing to drive the minutes on the book FTD platforms?

Thanks, Victor, for the question. In terms of international profile, one of the things we've been excited about is just how balanced the performance has been across the international markets. It's hard to get every market working well at the same time. And in Q4, we did outgrow in every single market. So on balance, I would say we feel good about the performance across the board. I would say Japan was particularly standout and has been now for a few quarters. U.K. came back very strongly after a little bit softer start to the year. So those 2 in particular I would say were probably our strongest performers. But I think that the big takeaway on international is probably more the balance and the kind of consistency of growth across the businesses. And while the growth rate was not quite as strong in Germany and Italy, it was still good and we saw a very nice margin performance in those markets. So we like the balance. Now with viewership, you're right, it is the second quarter where we're seeing absolute increase in viewing minutes on traditional broadcast TV platforms, before taking into account all these other ways that we get viewing minutes on live stream platforms. So it's great to see the traditional broadcast platforms working. It's hard to point to any one thing. There's very much this kind of cause-and-effect where we both need people tune in on their TVs, but we know if we're operating compelling products, engaging programming, and they're going to stick around and be engaged and view, and when they view, they buy. So to me, it's as much a reflection of just getting the business stronger, getting an exciting and diverse product mix, getting more newness on the networks, continuing to lean into what we call our destination programming, where we attract large audiences around certain kind of tune-in shows that are on every week. I think all of those things are helping to contribute to what's been some very nice viewership performance.

I have a follow-up if I may. It's on, I guess, the 2 media events in the current quarter, which is the Olympics as well as the Florida school shooting. Just curious of what the impact is on, I guess, viewership and minutes?

Again, I can't comment on anything related to the current quarter. We've shared on past calls that when you have big externalities like that, there's certainly some impact on viewership, but I wouldn't want to be specific about that or connect it to the kind of current events.

So operator, I believe we're through with our questions. I want to -- and as I said, this is the lastly Liberty Interactive earnings call. We announced the formation of Liberty Interactive in November of 2005. It was actually on the earnings call in which I announced I was joining the company. So it's been a pretty good run. And I want to thank you all for your participation. Hope you will have continued interest in Liberty and both Qurate and GCI Liberty going forward.

That concludes today's conference. Thank you for your participation. You may now disconnect.