QVC Group Inc. (QVCGA) Q4 2018 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Qurate Retail 2018 Q4 Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded, February 28. I would now like to turn the call over to Courtnee Chun, Senior Vice President of Investor Relations. Please go ahead.

Thank you. Before we begin, we'd like to remind everyone that this call includes certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual events or results could differ materially due to a number of risks and uncertainties including those mentioned in the most recent Forms 10-K and 10-Q filed by our company and QVC with the SEC. These forward-looking statements speak only as of the date of this call and Qurate Retail expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein to reflect any change in Qurate Retail'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 OIBDA margin, adjusted EPS and constant currency. Information regarding the comparable GAAP metrics, along with required definitions and reconciliations, including preliminary notes and schedules one through three, can be found in the earnings press release issued today, which is available on our website. Today speaking on the call we have Qurate Retail President and CEO, Mike George; Qurate Retail Group CFO, Jeff Davis; Qurate Retail, Inc., CFO, Mark Carleton; and Executive Chairman Greg Maffei. A couple of housekeeping items before we get started. As a reminder, at the beginning of 2018, we changed our revenue recognition in accordance with new accounting standards related to recognizing branded credit card income as revenue rather than an offset to SG&A expense. Throughout our comments unless noted, we'll discuss Q4 and full year revenue results for QVC US, HSN and zulily, as if the credit card income remains an offset to SG&A expense, as it was in 2017. We believe this provides the most comparable review of our year-over-year performance. In accordance with new accounting standards, we also now recognize revenue at the time of shipment rather than delivery. We did not adjust our results for this change in our comments on this call because this impact balanced out over the course of the year. For Q4, the new delivery-based standard had an immaterial impact on Qurate Retail's reported results, so it did have an outsized negative impact on reports resulted at zulily in the fourth quarter, which Jeff Davis will discuss. Our reported results and the impact of the revenue recognition changes are included in our earnings release issued this morning and in our SEC filings. And finally, beginning this quarter, we have published slides to accompany the earnings release. These slides are available on our website. Now I'll hand the call over to Mike George.

Thank you, Courtnee, and welcome, everyone. Thank you for joining us this morning. 2018 was a pivotal year for our company. We completed the split-off of the creation formerly known as Liberty Ventures, became an asset-backed stock, renamed the company Qurate Retail to reflect our more focused mission, made substantial progress on HSN integration and formed QXH to drive accelerated performance across QVC US and HSN. We achieved full year growth at QVC domestically and internationally, significantly narrowed the sales decline at HSN in the second half of the year and delivered double-digit annual sales growth at zulily. We accelerated our digital initiatives. We've stepped up marketing investment, the expansion of our digital store and strong gains in digital and mobile sales penetration and engagement. We drove strong growth in new customers, including the largest number of new customers at QVC US in the fourth quarter and in the full year in our 33-year history, along with the first quarter of new customer growth at HSN in three years and another year of customer growth at international. We delivered $40 million in synergies while also significantly increasing our anticipated total annual synergy target to $370 million to $400 million by 2022. Against these achievements, we also experienced significant margin pressure in Q4, especially at QVC and HSN, primarily reflecting product mix impacts and amplified by the investments we are making in digital initiatives and customer acquisition. We continue to work hard to rearchitect the P&L to support long-term top and bottom line growth, but it is a work in progress. I'll provide more color around our plans a little later in my remarks. First, let's take a look at each of our businesses starting with our newly combined QXH business. In October, we announced that we will bring QVC US and HSN together in a new business unit QXH to better capture the scale of the combined platform, while preserving and strengthening the two brands. The new structure will enable us to integrate the buying organizations and share brands and vendors, lean into digital innovation and performance marketing, optimize programming across our networks, cross-promote both brands to our combined customer base, integrate our fulfillment networks and reduce costs. Last fall we raised our anticipated cost synergy targets and we expect to accelerate synergy capture in 2019. At QVC US top line growth was consistent in Q4 with prior quarters, although we saw some deceleration late in the quarter. HSN sales declines narrowed to 1% building on the improved trend we saw in Q3. New customer growth across QXH was a highlight. 1 million new customers were acquired by QVC in the quarter, up 10% year-over-year and representing the largest quarterly customer class in our history. For the full-year, new customers grew strong 6% at QVC to 2.3 million also an all-time record. HSN added more than 400,000 new customers in Q4, up 9% and reversing three years of declining new customer acquisition. It's important to note that accelerated new customer growth has modest immediate top line benefit, but we believe it's an important driver of long-term performance and a measure of the health of the business. In November at our Investor Day, we highlighted five strategic priorities to accelerate the QVC HSN flywheel leveraging our unique brand promises and business model in ways that we believe are relevant for today's consumers. First, we strive to be the destination for product discovery engaging and inspiring shoppers across generations with compelling daily discoveries. In Q4, we combined our HSN and QVC buying teams to focus on driving product leadership across the brands. We also kicked of our Qurate discovery development and design initiative, a new dedicated function focused on finding or developing new exclusive product lines around the world. Major brands in Q4 included Amazon along with its Spanx brand, Apple, Josie Maran, Dyson and Isaac Mizrahi Live!. Coupled with compelling gift and holiday entertainment into core programming, we set a number of records at QVC for new customers, web sessions and digital sales during the important Black Friday and Cyber Monday Weeks. Brands are also increasingly interested in our digital platforms based on the success we're having an ability to offer expanded assortments beyond traditional television platforms. Our digital store now offers over 500 digital-only brands across multiple categories, and our digital-first offerings gained some early momentum. Digital successes in Q4 included Urban Decay, Nintendo and Fitbit. And while we are constantly managing the balance in our product assortments, in Q4 our QVC product mix shifted strongly into consumer electronics driven by consumer demand, and in particular into lower-margin brands in electronics. We also saw strong sales from our expanded digital-only assortments. These mix impacts created three interrelated OIBDA pressures: lower product margins inherent to consumer electronics, higher fulfillment costs as much of the products from our digital-only assortment is drop shipped, and higher bad-debt reserves as these categories are typically offered with higher levels of Easy Pay. These three product-related factors drove over half of our adjusted OIBDA margin pressure in the quarter at QVC U.S. At HSN, we rebuilt inventory intentionally through the year, which impacted free cash flows in 2018, as Jeff Davis will discuss. During the second half of 2018, we launched nearly 100 new and reactivated brands and had our best week ever for mobile sales during the Thanksgiving holiday period. Other highlights included strong sales around our special programming event in support of Disney's Mary Poppins film, and continued success of the Beekman brand, which sold out nearly all of its holiday gift sets including 100% sell-through of Bath & Body gifts. Our second strategic priority, we want to engage shoppers across generations on their video platforms of choice with compelling content that's relevant to their shopping journeys. We remain focused on developing destination television programming. At QVC, viewing minutes on television, once again increased in Q4, up 1% our seventh consecutive quarter of viewership growth. With viewership gains from popular programs like In the Kitchen with David and AM and PM Style; strong celebrity guest appearances from such stars as Catherine Zeta-Jones, Brooke Shields and Rachael Ray as well as gift-focused program through key points of the holiday season. At HSN, we improved channel placements and moved to the HD tier at one of our top broadcast distribution partners. And we believe these actions, coupled with more compelling products and programming, and an elevated broadcast experience contributed to a 5% increase in TV viewing minutes at HSN and a dramatic turnaround from a multi-year erosion in viewership at HSN with double-digit declines as recently as the first half of 2018. We continue to invest as well in innovative viewing experiences outside of the TV platform. Viewing minutes on digital media jumped nearly 30% in QVC U.S. with especially strong viewership gains on our mobile platforms and on OTT platforms like Apple TV. We're also testing compelling new content models like our first podcast launched in Q4 on iTunes, Spotify and Google Play, and digitally native programs targeted to platforms like YouTube. A great example is One on Wine, a hosted YouTube program that seeks to build social connections through wine education as opposed to direct product selling and by extension drive interest in QVC. Our first two episodes in Q4 each generated more than 300,000 views. Earlier this month, we unveiled a new brand identity and a new video app for QVC, both designed to invite discovery and enrich the immersive engaging video-based shopping experiences we offer, particularly on mobile devices. The new brand is designed to capture attention on smaller screens, supported by fresh visuals, including more candid photography, and videos, and new story layouts that are more relevant for today's lifestyles. All of this is embodied in a modernized new logo that evokes the ongoing conversation we have with our customers. And our new Q Anytime app complements our flagship app with a video-centric focus, offering an expanded array of shoppable videos available on-demand plus all of our live content from QVC, QVC2, and Beauty iQ and the ability to customize speeds based on category interest. I encourage you to download the Q Anytime app and experience it for yourself. Third, we're leaning into digital performance marketing as a demand driver, complementing the strength of our TV platform to reach new generations of customers, increase the spend of occasional customers, and drive consumers to our digital media platforms. In Q4, we increased marketing investment 30% in QVC U.S. and 7% at HSN, which for the year -- for the full year resulted in marketing expense totaling 1.1% and 2.1% of each business' revenue respectively. As part of these efforts, we also continue to build out our performance marketing team and tool kit including expanded usage of Facebook Messenger to drive engagement and new customer acquisition. We've seen early success with Click-to-Messenger ads at HSN and sponsored messages at QVC in the fourth quarter and Facebook has highlighted these results in recent case studies. We're still early in the investment cycle with performance marketing and we're committed to disciplined approach to this path. Fourth, we're focused on extending the conversation through the power of social, reaching new consumers and those who previously haven't embraced our brand through social, media, and influencers as well as expanding the visibility of our own host beyond the video screen, all with the objective of deepening the engagement of our best customers and enabling lively viral communities. Early in the fourth quarter, we also launched our first HSN skill on the Alexa platform that allows consumers to interact with the company by voice. And finally, we're enhancing our service promise. In October, we announced a major multiyear initiative to combine and relocate HSN and QVC fulfillment centers to shave two days off of our average delivery times, while also reducing our freight costs. We're on track for the first phase of this work with our new combined FC in Bethlehem, Pennsylvania scheduled to open this fall and expanded -- and expected to handle over 25% of our combined volume at full ramp. We believe these five strategic priorities will enable us to continue to shape our unique shopping platform in ways that are engaging and relevant to customers across generations. Turning now to QVC International, results were up from a topline and new customer standpoint for the full year but down in Q4, coupled with heightened margin pressures. Fourth quarter adjusted OIBDA performance improved in Japan, but that was offset by disappointing European results. These results are well below our expectations. We believe macro pressures including the distractions of Brexit played a role, but our German business also struggled as we increased markdown and sale activity to move through inventory and incurred higher promotional and marketing costs attributable to free shipping and the launch of a new loyalty program. As in the U.S., our international teams are investing in social and secondary channels and we're investing in such areas as customer loyalty, product innovation, and analytics depending on local needs. On the margin front, we ended 2018 in an improved inventory position and we're very focused on strengthening disciplines around pricing and promotion decisions in driving better product mix. A notable highlight in international, in December, we became the first broadcaster in Japan to offer native ultrahigh definition 4k programming 24 hours a day, offering our customers an exceptionally engaging shopping experience, featuring richer visual information of our products than ever before. Higher quality and better carriage are critically important to our on-air business. So this launch was a major milestone for us and a real credit to our incredibly talented global engineering and broadcast team. Included in our Q4 results is a charge related to the potential closure of our operation in France. We were unable to make a final decision as to such a closure, until we complete consultations with the relevant employee representatives and finalize regulatory filings to seek approval from the relevant French labor agency. That process is ongoing. So we're not in a position to announce any specific details today. That said we are sufficiently far enough along that we felt it appropriate to recognize the charge effective in the fourth quarter. France has significantly under-performed. In large part due to unique in market structural challenges, especially in multiple-channel moves that negatively impacted the business. If completed we expect the move will allow us to better allocate our annual investment in France into our other markets, while also enabling our team to sharpen their focus on these existing markets since a number of corporate functions are shared across European markets. To be clear, we see this as a prudent move if we go forward with it and in no way reflects a change in our view of the attractive growth opportunities, we see for our International business. Turning now to zulily. The team continue to deliver good revenue growth in Q4. Although, sales trends slowed later in the quarter. As we anticipated in our last conference call, the impact of changes in revenue recognition also negatively impacted Q4 results with an additional headwind from the activation of sales tax collection in many additional states. For previous experience, we believe sales tax in new states will create a headwind and sales comps through much of 2019. For the full year, zulily generated double-digit revenue and adjusted OIBDA growth. Looking forward, our zulily team is focused on International growth expansion of the China direct business, continued customer engagement innovations in video, mobile and Shop by category capabilities and targeted technology and operational initiatives to drive customer experience improvements in areas like delivery times and returns. For Cornerstone, Q4 reported results were impacted by the closure of improvements, which negatively impacted revenue. Ballard Designs and Garnet Hill continued to deliver strong results. Performance at Frontgate and Grandin Road declined and was disappointing, but at Frontgate the negative demand trends moderated in the quarter and adjusted OIBDA improved. Our focus areas for 2019 include strengthening the new product pipeline and simplified assortments of Frontgate and Grandin Road, driving margin opportunity across each of the businesses and leaning further in to customer experience. Let me close with a few thoughts on 2019 for Qurate Retail. We are excited by our new customer growth in 2018 and the number of innovations we have under way to evolve our shopping platform for future generations. That said 2018 also demonstrated that we need to move faster to rearchitect our P&L. In 2019, we're focused on that. We're focused on driving margins by first, delivering on our cost synergy commitments currently planned at approximately $120 million to $130 million in 2019 on top of the $40 million delivered in 2018. Second, better balancing product assortments and managing product margins were necessary to adjust the shifting mix including taking surgical actions on pricing and shipping and handling especially related to proprietary assortments where we believe we're offering extraordinary value to the customer. Third, continuing to optimize our performance marketing spend with enhanced tools and capabilities, while optimizing the new customers we brought in recently. We recognize that we're operating in a period of heightened macroeconomic uncertainty and a highly competitive retail environment. However one of the underlying benefits of our model is our agility. In addition the rapid expansion of digital media plays to our strengths and creates new opportunities for us to access, engage and inspire consumers in ways no other retailer can. No one can match our deep expertise in creating highly engaging video-rich shopping experiences, featuring curated products at great values, brought to life through compelling storytelling and personalized content. With 2018 behind us let me close by thanking our 27,000 Qurate Retail team members who came together last year to form our new company, to integrate our varied businesses and practices and take the hard actions necessary to position us for the long-term all while accelerating our focus on invention and innovation and staying resolutely focused on our customers. I'll stop there. And turn it over to Jeff to run through our segment financial performance.

Thank you, Mike. It's a pleasure to join everyone this morning. I look forward to meeting many of you at a future conference or investor meeting. Before I begin I'd like to remind everyone that my remarks will reference certain non-GAAP metrics. And we refer you to our earnings press release which is available on the Qurate Retail website for information regarding the comparable GAAP metrics along with applicable reconciliations and definitions. As Courtnee mentioned in our opening remarks we posted a few slides to our website to support our prepared remarks and provide a summary of earnings for the quarter and full year. In the fourth quarter while we reported revenue growth our adjusted OIBDA performance was well below our expectations. Looking more closely at the results, revenue grew 1% to $4.4 billion led by QVC U.S. and zulily and HSN showed continued quarterly sequential revenue improvement. Pro forma adjusted OIBDA decreased 9%. We faced margin pressure primarily from product mix impacts and the balance largely from marketing and promotion investments. And we delivered adjusted EPS of $0.62. For the full year 2018 revenue increased 2%. Pro forma adjusted OIBDA declined 4% primarily reflecting higher order fulfillment costs, lower product margins and higher fixed costs. We met our integration cost-reduction plan and captured synergies of $40 million which was the midpoint of our range. We delivered adjusted EPS of $1.86. Turning now to our business segments. QVC U.S. grew 2% in the fourth quarter adjusted for the reclassification of credit card income. Unit volume was up 2% and ASP was down 1%. Adjusted OIBDA declined 7% in Q4 and adjusted OIBDA margin decreased 180 basis points after normalizing for the reclassification of revenue from private label credit card income. The primary factors contributing to margin erosion were; one product mix, which contributed to half of the decline from a higher mix of lower margin consumer electronics, growth in lower margin rates sub-categories within electronics and higher mix of digital-only assortments. This drove several impacts to the P&L including lower product margins, higher fulfillment costs due to increased drop ship penetration and higher bad debt revenues -- excuse me, reserves due to expanded offerings of Easy-Pay and the number of installments. Notwithstanding, bad debt remains relatively modest, representing approximately 2% of revenue. And while drop ship carries higher expense, it enables us to provide customers with a broader array of digital-only products, while reducing our inventory risk exposure. Second, higher performance marketing costs contributed to margin pressure. However, we believe this is an important investment focused on driving customer growth and engagement over time. And finally, we saw pressure associated with the ramp up of our Ontario, California fulfillment center and higher wages across our centers. These pressures were particularly offset by lower affiliate commissions and lower customer service and fix expenses. For 2018, revenue grew 2%, excluding the reclassification of credit card income, which was consistent with the fourth quarter despite more challenging comps faced in the second half of the year. And adjusted OIBDA declined 3%, primarily due to higher order fulfillment, bad debt and marketing costs. At HSN, we continued our recovery plan and saw positive trends in customer count, digital penetration and viewership, which led to revenue improvement. Revenue declined for the quarter, a significant -- revenue declined 1% for the quarter, a significant sequential improvement from earlier in the year. These results were driven by a broader product assortment across the categories of home, beauty, apparel and accessories, as well as new brand introductions. Unit volume was down 5% and ASP increased 2%. Revenue trends were also supported by aligning to QVC shipping and handling rates in June. Adjusted OIBDA decreased 3% due primarily to the increase in obsolescence reserves and temporary warehouse space consistent with our planned inventory build and increased team member healthcare costs. These were partially offset by the reclassification of certain TV distribution rights to amortization and lower customer service costs. As mentioned on last quarter, fourth quarter results included a positive impact of new multiyear carriage agreements, which include a more variable cost structure along with upfront distribution right payments which were amortized over the life of the agreements. Summarizing HSN's 2018, revenue declined 7%, normalizing for revenue recognition for credit card income and adjusted OIBDA was down 3%. We still have more work to reestablish sustainable growth. As Mike discussed, in October we announced that bringing QVC and HSN together in a new business unit QXH. This is consistent with how we are managing the two platforms to deleverage the distinct and combined power of both. Accordingly beginning in Q1, we anticipate reporting our U.S. video results on a combined basis under a new QXH segment. Moving to QVC International. Overall, performance for the quarter did not meet our expectations. Revenues declined 3% in U.S. dollars and was down 1% on a constant currency basis. Unit growth was essentially flat and ASP was down 1% in constant currency. Adjusted OIBDA decreased 11% in constant currency primarily due to lower-margin product margins and higher fixed costs. As Mike mentioned, our fourth quarter results also included $13 million in charges related to the potential closure of our operations in France of which $9 million was for severance and was excluded from adjusted OIBDA and $4 million was for inventory obsolescence and affected adjusted OIBDA. We are continuing to evaluate potential exit costs and will provide an update as appropriate. For 2018, QVC International revenue increased 1% and adjusted OIBDA was down 8% in constant currency. Zulily reported revenue growth of 6% in the fourth quarter and an adjusted OIBDA decline of 11%. As communicated last quarter Q3 results were positively impacted by the change to recognized revenue at the time of shipment versus delivery. Therefore, Q4 results had a corresponding offsetting impact. Normalizing for the impact of this change in revenue recognition revenue increased 8% and adjusted OIBDA grew 4% in Q4, so this accounting change was neutral for the full year basis. Q4 top line was also impacted by the activation of sales tax collection in many additional states, which we expect to continue to create a headwind through much of 2019. The Q4 decline in adjusted OIBDA was primarily due to higher freight, fixed and marketing costs, which were partially offset by higher product margins and private label credit card income. For the year, Zulily generated strong growth and improved profitability with revenues up 13%. Adjusted OIBDA was up -- was higher by 19%. Turning to Cornerstone. We are pleased to see initial signs of improvement as three of our four brands posted improved adjusted OIBDA in the fourth quarter. Revenue declined 4% or down 2% excluding the Improvements catalog business, which was fully exited in the fourth quarter. The revenue performance reflects sequential improvement from Q3 results. Similar to Zulily, Cornerstone was also impacted by the activation of sales tax collection in additional states, which we believe will continue to be a headwind through the third quarter of 2019. There are a few highlights for the individual brands. Ballard Designs posted record fourth quarter revenue and delivered solid growth through the digital and retail channels. Garnet Hills growth was driven primarily by strong performance in apparel. And Frontgate produced improved year-over-year adjusted OIBDA driven by strategic brand positioning and new and refreshed product assortment. Cornerstone's adjusted OIBDA decline primarily reflects the decline in revenue and higher employee benefits, which is partially offset by lower marketing expenses. The team did a nice job of managing the shutdown in Improvements' operations in Q4. For the full year, revenue was down 7% and the Group reported lower adjusted OIBDA, but we are encouraged by the progress made this year and we believe the team can return to profitable growth over time. Turning now to balance sheet and capital expenditures. With respect to the balance sheet, I wanted to call out that we had a meaningful increase in working capital used in 2018 primarily from replenishing inventory support, sales particularly in HSN and higher receivables as we leverage our Easy Pay and Flexpay programs. Capital expenditures in 2018 were $275 million which was below our guidance of $290 million to $300 million due to the timing of expenditures late in the fourth quarter. In 2019, we anticipate CapEx to be approximately $410 million to $425 million, in line with expectations we communicated previously. This is a meaningful increase from 2018 largely due to our new U.S. fulfillment network optimization announced last year, as well as continued investment in our information technology and commerce platforms. In summary, we believe we are focused on the right areas, making investments in product discovery, digital platforms and performance marketing to create a foundation for future opportunity. Thanks. And now I'll turn it over to Mark.

Thank you, Jeff and welcome. Qurate, let's take a quick look at the liquidity picture. At the end of the quarter Qurate Retail had attributed cash and liquid investments of $653 million and $7.6 billion in principal amount of debt. QVC Inc.'s total net debt to adjusted OIBDA ratio, as defined in the credit agreement, was approximately 2.2 times which now includes HSN and zulily's adjusted OIBDA compared to a maximum allowable leverage ratio of 3.5 times. QVC's leverage covenant and pricing grid now nets 100% of domestic and 50% of foreign unrestricted cash from debt, up to a maximum of $1 billion. When our 10-K gets filed later today you'll notice that Qurate Retail is remedying material weaknesses related to access and program change management, IT general controls, as well as certain controls in the U.K. meant to validate the complete and accurate reporting of revenue. We are implementing remediation activities to correct these problems and we'll continue to focus on strengthening the control environment going forward. We note that the issue was not an external breach and did not result in any misstatements in our reported financial results. Now I'll hand it over to Greg Maffei for final comments.

Thanks, Mark and also thanks to Mike and Jeff. I'd note that during the quarter, Qurate Retail repurchased in the period November 1 to January 31, $321 million worth of stock. That brought our total for the full year 2018 to $988 million. As the business transitions, we will continue to evaluate our buyback target for the calendar year 2019. We have set the date for our Annual Investor Meeting in New York for November 21. We hope to see you there. And as always, we appreciate your continued interest in Qurate Retail. I'd now like to open the call for questions. Operator?

Thank you. [Operator Instructions] We will take our first question from Alex Fuhrman with Craig-Hallum Capital Group. Please go ahead.

Great. Thank you very much for taking my question. You know, I was really impressed to hear about the very large growth in customer counts for both QVC and HSN. And I guess, I'm just wondering how we should be thinking about this. I mean the revenue growth from QVC certainly seemed fine in Q4. But I guess I'm wondering why revenue perhaps wasn't up more considering this was the most customers QVC's ever acquired within any given quarter. You know, should we be thinking about that growth in customers as a pipeline that's going to be driving revenue growth in 2019 and 2020? Or perhaps are you just seeing more churn in your existing customer base while you're bringing in all these new customers? A – Mike George: Alex, thanks for the question. We're not seeing any heightened churn in our existing customers. So our retention rates of existing customers as you know have been highly stable over time and continue to be stable. So it's really just more a matter of in any given year new customer classes are a very small percent of our revenue -- so they don't -- even a big swing in the growth rate is going to have a very modest impact on your total revenue and could easily be swamped by a modest change in units purchased per your existing customer. So we think new customer growth is an important sign as a business that's relevant that's healthy and it certainly helps sustain growth if you have multiple years of strong new customer classes. But the immediate impacts on revenue are fairly modest.

Okay, thanks. That's helpful. And then just curious the international part of QVC sounds like it had a much tougher quarter. Did the international business participate in that big upswing in new customers as well? Or was that primarily more the United States?

The big growth was more the U.S. International did grow. Both U.S. and international grew their total customer base new and existing over the course of the year. And international had fairly good performance in new customers it wasn't as pronounced in Q4 however.

That’s helpful. Thank you, Mike. A – Mike George: Thanks.

Our next question will come from Heather Balsky with Bank of America.

Hi. I guess first off on the margin front, can you just outline the key headwinds going into next year? And then on the flip side the tailwinds when do we see the benefits from your efforts around product mix I guess changes and/or just sort of trying to manage that? Thanks.

Sure. Thanks, Heather. Well we think about it is -- the -- there's a headwind around performance marketing which we're committed to. We're going to maintain a tight financial screen on it, but as long as we believe it as long healthy term payout, we want to invest in performance marketing. So you saw us ramp it in 2018 and we'll continue to ramp it in 2019 and that will be somewhat of a headwind to margins. As you know the other big story of Q4 is -- are these product mix impacts we discussed. So it's a little bit harder to know exactly what's going to be appealing to the consumer and how our mix will shape in 2019 whether that will or won't be a headwind, but we certainly don't expect to see the kind of variances we saw in Q4. We need to get our other businesses performing well. We need to have a better balance across our assortment. So while we can't guarantee that's going to happen that's clearly our focus. So while it could be a headwind, we would certainly expect it to moderate. And then we do have a substantial synergy benefits. I would say some of those benefits occur ratably throughout the year. Some of our cost reduction actions that we took last year will see the benefit, for example, through the quarter others will be more back half weighted. So initiatives around combining our buying teams and getting more leverage on product sourcing, investing in more proprietary product sourcing those benefits are backend weighted. We have a new agreement on our private label credit card program, which will kick in at HSN in the back half of the year. So on balance we'll see more margin benefit from the synergies in the back half than the front half some will be all year with more will occur in the back half.

Thank you. And then you commented on some deceleration at QVC U.S. in the fourth quarter, can you just talk about the cadence of the quarter and the level of deceleration you saw? A – Mike George: Yeah. We saw and I think not unlike other retailers who reported similar results. We definitely saw the slowdown in the last two, 2.5 weeks of the year, which had a double impact. We found ourselves a bit below where we were anticipating they would be, but also those tend to be fairly high margin time periods in contrast to Black Friday Week and Cyber Monday Week where we did better than we expected, but those tend to be low-margin weeks. And so it had a modest impact on sales probably a somewhat greater impact on margin just because you're anticipating you'll recover some margin in that time period. But beyond that I don't want to get into any specific quantification but definitely a bit more of a slow down than we anticipated.

Is there anything you think drove that deceleration or was it in terms of consumer distraction or just what your promotions were or anything like that? A – Mike George: It's hard to speculate on the drivers. Certainly you had a lot of consumer distraction at that time with the shutdown and other external noise. But I also think you saw a customer that was really responding to the intense holiday gift giving time periods around -- or gift buying time periods around Black Friday, Cyber Monday and then just didn't seem to be as engaged quite frankly when she moved past that time period. So it had net impact of making the quarter a little bit more promotional in the sense that your sales were more weighted to those more promotional time periods. So yes so accepting we got to put the agile model just got to keep responding to those shifts in consumer sentiment as best we can, but hard to read it beyond those couple of drivers.

Great. Thank you. A – Mike George: Thanks, Heather.

We'll take our next question from Eric Sheridan with UBS.

Thanks for taking the question. Maybe following up on Heather's on margin as you think about the evolution of the cost structure and what you're trying to solve for on the acquisition front and the digital product front. How far along are you at the end of 2019, so we could just better understand rate of change in 2019 versus 2018 especially with respect to both those two pieces the customer acquisition front and digital product side? Thanks guys. A – Mike George: So I would say on the -- Eric on the customer acquisition front, you'll see continued increase in performance marketing spend. It's delivering, so we'll constantly revisit it. We laid out at Investor Day in November a kind of framework for what performance marketing is today and what it could be by 2021, 2022. And so I refer you back to that because the slope of that curve is probably about where we think we'll be in terms of stepped-up investments in performance marketing over that time period. But I will think about it as broadly kind of consistent and has changed to what you saw in 2018. We were really pleased with the response to our digital assortments. We would expect that to continue, but also as I shared at November Investor Day, we need to balance the growth in those digital assortments with more diversity in those assortments and better performance of our on-air business and that's a work in process. So how they kind of core on-air business weighs out versus the digital-only business is something we're trying to understand better and fine tune and make sure we're not just trading people down to a lower-margin product. And we have more work to do to find that balance and to make sure we're making the right trade-off of sales growth versus margin enhancements. So I think you'll see us really work that this year to try to get to a healthier balance. Then of course, the other big piece of the -- a little bit of margin story is the cost synergy. So we go from $40 million run rate in 2018 to $160 million to $170 million in 2019 inclusive of the $40 million. And so we said all along that part of the way we would fund some of these investments in performance, marketing and digital is to take a slice of the synergies and reinvest them in the business. So we'll have more air cover, much more air cover in 2019 with the synergies to help offset -- to do better job of offsetting these investments than we were able to do in 2018. Q – Eric Sheridan: Thanks so much.

We'll take our next question from Edward Yruma with KeyBanc Capital Markets. Q – Edward Yruma: Hey good morning. Thanks for taking my questions. I guess first I'm trying to maybe see if there is some linkage between some of the comments you made. On the new customer front, how much of these new customers are driven kind of through TSVs particularly within some of these lower-margin products? And I guess for maybe some of the new customers you introduced earlier in 2018, how do they perform relative to your more habituated maybe more traditional video product users? And then as a follow-up from time to time when you seen higher bad debt you pulled back on the use of Easy Pay. Given that you're attributing this to mix, are you signaling any kind of shift in the way to use Easy Pay going forward? Thank you. A – Mike George: Thanks Ed for the questions. There's definitely a linkage, right? So we tend to bring in new customers. First they're heavily weighted to our digital platforms. So as we lean into performance marketing, obviously that's meant to attract new customers. And they're going to typically buy from our digital store and they're going to be more attracted to some of the lower-margin electronics items. And those new customers will bring in through the on-air experience definitely when we see growth in electronics on-air which we saw as well that's going to have a higher -- that's going to enable you to bring in more new customers. So we love the electronics business from a standpoint of bringing in new customers. And the good news is the new customers that we brought in at this heightened rate in Q4 are every bit as good a quality as preceding classes. So, to your other question the quality is there. We've seen literally no change of quality of the Q4 2018 class to the Q4 2017 class despite the big increase in count of new customers. So, we love the number of new customers we're getting, we love the quality the new customers, but we also recognize that it is partially buoyed by the growth of consumer electronics. If we get a better balance in the mix of the business or if we pull back on consumer electronics, you could see some impact on new customer growth although our intent is certainly to continue to bring new customers into the fold. So, it's not a perfect correlation but there's certainly some relationship. And so, again, I think we've got more work to do to balance new customer growth, sales growth, category mix, Easy Pay usage; and make sure that we feel like on balance we're getting the right mix of those various drivers with Q4 probably being a little more weighted towards new customers, but tougher on the margin side. So, we need to find a better balance there.

Great. And just as a follow-up to that point when those -- when the kind of newer customers that you introduced earlier in 2018, when they may be introduced through the funnel through performance marketing and digital are they then turning to the video product over time? Are they engaging in the beauty product? I'm just trying to understand -- I know you said the quality is very high, but are they buying other margin mix? Or are they predominantly electronics customers? Thank you.

Yes. So, effective quality is consistent. We measure that in lots of different ways, but it tells you that those customers are definitely branching out in buying across the full range of products. Now, it is true that that new customer that comes in through digital will likely have a higher propensity over a long period of time to be buying off-air items at a higher rate than say a customer that comes in through traditional TV phone call sort of manner. But it doesn't impact their value to us because they do branch out. So, they kind of stay in digital land, but they branch out and they buy multiple categories and their overall value is pretty comparable on average the overall digital customer.

Great. Thanks so much.

We'll take our next question from Barton Crockett with B. Riley FBR.

Great. Thank you for taking the question. I wanted to see if I could put one to Jeffrey Davis and given your background of coming from brick-and-mortar and given the momentum I think in retail generally and among the consumer towards click and brick with the brick-and-mortar guys getting better online and Amazon moving into brick-and-mortar with things like whole foods, where do you think Qurate fits in that? I mean there's really no brick-and-mortar presence of substance. Do you think that something that needs to be addressed? And if so do you have any thoughts about how it could be addressed?

Great question. One of the things that attracted me quite honestly to a company like Qurate was this idea that it is different. It's a third way to shop. It's the opportunity for this company engaging the customer in a way that brick-and-mortar, and quite honestly, digital historically has not been able to which is to engage that customer in a way that is around story-telling, it's around discovery. That relationship that you have with a customer is what really drives the value. And whether you have that in the -- a lot of people are trying to get to a physical environment, but they're still just offering product. They are not offering the experience, not offering that relationship and the discovery. I think that's the real strength of what Qurate Retail Group has with it's video commerce business.

Okay. But do you think that there's a need to have a brick-and-mortar relationship Amazon is working with calls, I mean, do you think there's something like that that would be important helpful over time to be able to check that box?

There is always different relationships that you can look at strategically, it has to fit well within your own. So the dynamic of what your business stands for. If you think about the returns process and the interaction with the customer there's always an opportunity to think about how you might be able to do that differently, but as we see it today, our presence particularly in expanding our digital presence along with the video is where we believe our strength is and how we can continue to grab market share.

Okay. That's great. I will leave it there. Thank you very much.

We'll take our last question from Victor Anthony with Aegis Capital.

Hi, guys and thanks. So one more question on the new customers that came in from, I guess, mostly from performance marketing. Maybe you could just talk about the type of customer that's coming in? Are they younger? Is it different geographies, different parts of the country? Are they less affluent? And second part to that is going forward, do -- should we expect you guys will do the same in terms of increased marketing spend significantly at HSN to try to get the same sort of results? And just another one mostly out of curiosity, mostly anything else, you talked about the mix shift to electronics and QVC in the quarter, but then there was a decline in electronics and HSN. Just wanted to see if I could reconcile that, I've heard in between the two digital platforms. Thanks.

Okay. Thanks. Thanks Victor. You know in the main I would say the demographics of that customer that comes in through performance marketing is broadly similar to what we see in the rest of the [indiscernible]. And just to put some context around it the folks that come in directly through performance marketing it’s probably about 25% of our new customers. So it's meaningful, it's definitely helping drive that growth. But it's still not the majority which comes in organically to both digital and on-air platforms. Within performance marketing, there are certain channels that tend to bring in a slightly younger customer. So we're looking at demos by marketing channel and we might trade off a slightly more efficient spend to get, let's say, a younger customer that we're going to bet on their lifetime value even if the spend is a little less efficient. So we're looking at that carefully with a goal of making sure we are relevant across generations. But we're also keeping an eye on kind of percentage of both new customers and total customers in younger demos. And those numbers have continued to shift up. I shared some data at the November Investor Day on that trend, and that trend has continued in Q4. We're definitely seeing modest, but important shifts down in each segment. So feeling good about that mix and feeling good about our ability to target our expanded ways that produces healthy multi-generational customer file. And we're definitely focused on that both at QVC and HSN. HSN had, prior to the acquisition, already been spending much more on performance marketing. So it's probably less about increasing the spend at HSN as it is making that spend more effective. But we have formed a centralized marketing team that is managing the spend across now the QXH platform. So we're going to be less focused on is it HSN or is it QVC, and more how do we optimize our marketing spend in North America and make sure we're getting the most for the spend we make kind of however that falls out by brand and channel. On your electronics question, I think the difference is I think the starting point. So as you may recall, HSN prior to the acquisition had a much, much higher mix of consumer electronics. It was more dependent on consumer electronics than QVC. And so we're very purposely trying to build up the other aspects of the HSN business. The fashion business and the beauty business were both very under-penetrated. So it's really a matter of different starting points and different emphasis. We think there is a big opportunity to grow the HSN brand through fashion and beauty and less reliance on electronics. We'll take electronics growth. We still would love to have electronics growth, but we're leaning into these other categories with our resources and airtime.

Okay, great. Thank you very much.

Great. So I think that wraps up our call. We thank everyone for your interest and support, and look forward to talking again next quarter. Thank you.

Thank you.