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Executives

Gregory B. Maffei - President and Chief Executive Officer

Christopher W. Shean - Senior Vice President and Chief Financial Officer

Mike George - QVC CEO

Claire Watts - QVC U.S. CEO

Courtnee Ulrich - Vice President, Investor Relations

Analysts

David Gober - Morgan Stanley

Benjamin Mogil - Stifel Nicolaus

Matthew Harrigan - Wunderlich Securities

Liberty Interactive Corporation (LINTA) Q4 2012 Earnings Conference Call February 27, 2013 5:30 PM ET

Operator

Good day everyone and welcome to the Liberty Interactive Corporation Q4 2012 Earnings Conference Call. Just a reminder, today's call is being recorded.

For opening remarks and introductions, I would now like to turn the call over to Ms. Courtnee Ulrich, Vice President of Investor Relations. Please go ahead.

Courtnee Ulrich

Good afternoon. This call includes certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements about financial guidance, business strategies, and market potential, future financial performance, new service and product launches, and other matters that are not historical facts.

These forward-looking statements involve many risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements, including, without limitations, possible changes in market acceptance of new products or services, competitive issues, regulatory issues and continued access to capital on terms acceptable to Liberty Interactive. These forward-looking statements speak only as of the date of this call and Liberty Interactive expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking 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. The required definitions and reconciliations, preliminary notes and schedules one through three can be found at the end of this presentation.

Now, I'd like to introduce Greg Maffei, Liberty Interactive’s President and CEO.

Gregory B. Maffei

Thank you, Courtnee, and good afternoon to all of you. Besides myself, today speaking on the call, we will have, Liberty's CFO, Chris Shean; QVC's CEO, Mike George; and QVC U.S.'s CEO, Claire Watts.

Onto the highlights. QVC had solid results for the quarter. Notably in Q4, dotcom penetration in the U.S. was 43%, with 23% mobile penetration. QVC is the second largest mobile commerce retailer in 2012, behind only Amazon, according to Internet Retailer magazine. Regarding Liberty Ventures, in December, we purchased an additional 4.8 million TripAdvisor shares for $300 million. We now control 22% of the economics and 57% of the vote at TripAdvisor. We are very pleased with the performance of Liberty Ventures. Since its creation, the stock is up 58%. Notably during the quarter, we also ramped back up on LINTA repurchases, buying back $177 million worth of stock.

So with those highlights, let me turn over to Chris Shean to discuss the financials.

Christopher W. Shean

Liberty Interactive Group's revenue increased 2% in the fourth quarter and 4% for the year to $10 billion, while adjusted OIBDA increased 1% for the fourth quarter and 4% for the year. QVC increased net revenue by 2% for the quarter and 3% for the year, while adjusted OIBDA increased 4% for the quarter and 5% for the year. Liberty Interactive’s other e-commerce businesses grew 5% for the quarter and 11% for the year, while their adjusted OIBDA for the quarter decreased 29% and 22% for the year.

We had previously discussed some of the challenges that these businesses have faced this year which have negatively impacted adjusted OIBDA. The decrease for the full year was a result of principally increased spending in paid search as a percent of revenue, increased promotional activity to move some seasonal inventory which negatively impacted gross margins, and lower advertising revenue due to pricing and a shift to mobile applications. Operating income has been reduced by $325 million and $323 million of non-tax-deductible amortization related to Liberty's acquisition of QVC for the years ended 2011 and 2012 respectively.

Taking a quick look at liquidity, at the end of the year, the Group had attributed cash of $700 million and $4.6 billion in attributed debt. QVC's total debt to adjusted OIBDA ratio, as defined in their credit agreement, was approximately 1.9 times as compared to a maximum allowable leverage of 3.25 times.

Now, I'll hand the call over to Mike George for a detailed commentary on QVC.

Mike George

Thank you, Chris. We were pleased with our success, driving revenue growth and increasing our adjusted OIBDA margin, in the face of some external pressures in the quarter. Revenue increased 2% and adjusted OIBDA increased 4% despite the continued FX headwinds that we faced. On a constant currency basis, we increased revenues 3% and adjusted OIBDA over 5%. But we continued our strong e-commerce performance, as Greg mentioned, with worldwide penetration of 37%, up 3 points from a year ago. And we continue to be a leader in mobile commerce. Our mobile orders were up 87% globally and well over 100% in the U.S., U.K., and Germany. Mobile orders now represent 24% of total e-commerce.

Earlier this month, QVC earned the number two spot, along with Apple, in ForeSee's annual mobile retail customer satisfaction ranking. And to further our additional strategy, we were delighted to announce the purchase in Q4 of Oodle, a leading social marketplace, which we will use as a platform to establish a leadership position in social commerce. Claire will tell you more about this exciting opportunity shortly.

Our customer metrics also remained strong, and we enjoyed an increase in both the count and the spend of our existing customers, and the retention rate remained unchanged at a high 89%. In addition, revenue from new customers was up in the U.S., in Germany, and in Italy, although it was offset by continued soft results in Japan, driven by challenges with new customers located in our channel following the digital conversion last year. We do expect this negative trend in Japan to moderate in 2013.

Now turning to the results by market, in the U.S., we grew revenue 2% and adjusted OIBDA 7%. Now while we were generally pleased with our sales momentum, there was a number of highlights in the quarter that Claire will touch on. Our growth was adversely affected by Sandy. There was approximately 25% of our sales coming from the areas directly affected by the storm. Our revenue growth rate for the quarter was negatively impacted by 1% or 2%. Excluding the storm impact, and some softness that we felt at the very end of the holiday selling season, we posted consistently strong results, with revenue growth rates comparable to the first half of the year.

Additionally, our return rate remained relatively flat compared to the prior year, at 17%. And we once again stuck to the fundamentals of our model and avoided the increased promotional frenzy at traditional retail. Our shipping and handling revenue per unit was stable and our use of Easy Pay was up just 1%.

E-commerce in the U.S. increased 3 points to 43% of our business and mobile jumped 5 points to represent over 10% of our total business and 23% of our e-commerce business. Our adjusted OIBDA margin increased nearly 110 basis points and that was primarily driven by a $20 million net legal settlement in the quarter.

Japan had another terrific quarter with revenue up 6% and adjusted OIBDA up 8% in local currency on top of a strong performance last Q4. While our new customer growth, as I mentioned, has been hampered by the digital conversion, we saw revenue from existing customers increase 11%. We have also substantially completed our new headquarters, broadcast studio, and call center, and will begin broadcasting from the new facility on April 1. With our new studios, we'll be able to significantly enhance the quality of our broadcast and our programming, for example through improved steps for kitchen and cooking, our first outdoor steps, and a new fashion runway experience.

As with the U.K., we will incur some duplicate and incremental operating costs as we complete the move. These costs will adversely impact adjusted OIBDA by approximately $5 million through the course of 2013.

In Germany, while our revenue declined 3% in local currency, we were encouraged by the improvement in trend, relative to the 6% decline in Q3. In a somewhat sluggish consumer economy, the team is really focused on improving the diversity and the freshness of our products, our brand, and our programs, and we believe these efforts are beginning to pay off. Adjusted OIBDA declined 13% due to the anniversarying of some one-time benefits that we realized last year, the clean-up of our jewellery inventory, and reduction in the mix of high-margin health products.

In the U.K., we grew revenue by 3% in local currency in the face of the double-dip recession. Adjusted OIBDA margins increased slightly due to a significant reduction in inventory obsolescence rates and lower affiliate commissions, partially offset by a higher mix of lower-margin consumer electronics products and higher costs associated with the move to the new headquarters earlier in 2012.

Italy continues on a very strong trajectory, with revenue up 119% over last year and 44% over Q3 in local currency. Our adjusted OIBDA loss fell to €4 million, a 44% improvement over the prior year. And we continue to be encouraged by the positive customer response in Italy with purchase frequency rates for our existing customers among the highest of any QVC market. We now anticipate achieving positive OIBDA on a quarterly basis late this year or early next year, it is about three to six months behind the guidance we gave prior to the launch a few years ago.

In China, our CNR Mall joint venture achieved revenue of 160 million RMB or about $25 million, up 37% over Q3 in local currency. The venture's adjusted OIBDA loss was 14 million RMB or about $2 million, approximately the same as the prior year. CNR Mall ended the year reaching over 48 million homes, that's up from 32 million at the start of the year. In just its first two and a half years of operation, CNR Mall has already served nearly 1 million customers. We're committed to evolving this format closer to a traditional QVC model, which we believe will further build customer trust and repeat purchase rates, enable the business to emerge as a market leader in China.

I'll wrap up my comments with a few brief reflections on the full year. We're proud of the financial results we achieved in a difficult year in the face of the worsening economic situation in most of our markets and some external events like the Olympics and Sandy, along with worsening FX rates. We still grew revenue 3% and adjusted OIBDA 5%. And normalizing for the FX impact, we grew revenue over 4% and adjusted OIBDA over 6%. With adjusted OIBDA margins over 23% in the U.S. and over 21% worldwide, and climbing, we once again demonstrate our ability to achieve industry-leading financial results and to provide our shareholders with steady, consistent gains and profits and cash flow.

More important still, we invested in the future, offering our customers and viewers a compelling, immersive, multi-screen shopping experience. We rolled out our new e-commerce platform in the U.S. and Europe. We grew our mobile commerce business almost 100%. According to Internet Retailer, we were the second largest mobile commerce retailer in 2012, behind only Amazon, and also number two, as I mentioned, in ForeSee's mobile retail customer satisfaction rate.

We acquired two highly innovative companies in the digital commerce space, Send the Trend and Oodle, which will help us extend our leadership in both e-commerce and social commerce. We completed our new headquarters and broadcast studios in the U.K., and in six weeks, we'll begin broadcasting from our new headquarters in Japan. These new buildings are a reflection of our growth and success in each market, provide a significantly enhanced viewing experience for our customers and are designed to foster collaboration and creativity among our teams.

In just its second full year of operation, we ramped Italy to a nearly $90 million business, built on the strong loyalty and repeat purchase behaviour of our new Italian customers, and without resorting to promotional stimulants. We also launched our joint venture with China National Radio, and in its second full year of operation, the CNR Mall achieved over $80 million in revenue, and we continue to actively explore additional markets for expansion.

Finally, our capital expenditures for 2012 were $246 million. Now that's below the guidance of $300 million to $320 million that we communicated at the start of the year. This lower spend reflects cost savings on our Japan headquarters and a reduction in new IT projects, as we focused our efforts on completing and deploying Websphere and other systems. Now for 2013, we anticipate capital expenditures of $250 million to $275 million.

And with that, I'll turn it over to Claire to discuss our U.S. business in more detail.

Claire Watts

Thank you, Mike. QVC U.S. generated solid results to close up 2012. We continue to make progress on our efforts to enhance the real relationships we have with our customers and provide a unique shopping and service expedience across all of our platforms. Our holiday brand campaign, 'All of the Joy, None of the Craziness', offered our customers compelling and engaging product and programming across all platforms and positioned QVC as the destination for inspired gifting.

We were pleased with the strength of our home business in fourth quarter. We saw strong performance from a number of brands, including (indiscernible), KitchenAid, (indiscernible). The HALO Pocket Power Charger, which was a Today's Special Value that aired on Tuesday, November 27th, sold more than 305,000 units on the day, making it the number one selling TSV of all time in terms of units.

Within our beauty, fashion, and accessories businesses, we saw a strong performance from the following brands; (indiscernible) Velocity, [France or Italia] (ph), [Young Rivers] (ph) (indiscernible).

During one of the busiest shopping weeks of the year, Monday, November 19, through Cyber Monday, QVC created the ultimate multimedia shopping experience for our customers across all platforms. Our customers responded. We achieved our biggest sales week in history, welcomed 5% more first-time customers than last year, and generated the highest number of web sessions and unique visitors in QVC.com's history.

Program host, David Venable's cookbook, 'Comfort Foods That Take You Home', was the third best-selling cookbook in 2012 according to Publisher's Weekly, to close to 265,000 units sold last year since it debuted on air in April. To promote his cookbook, David made appearances on the Rachael Ray show, The Today Show, [The Two] (ph), and was also featured on Anderson Cooper Live Show as part of the Family Dinner Challenge theory.

We remained dedicated to improving customer experience at every touch-point. We implemented a click to call messaging in paid search ads to make it easier for customers to access QVC via their mobile devices. We refreshed our customer service webpage to make it faster for customers to find the information they are looking for, and we created a special fees to improve speed of delivery of our product to our customers.

Our customers are taking advantage of our multi-platform shopping experience, as evidenced by our extraordinary growth in web and mobile penetration. As Mike noted, Q4 total e-commerce sales grew by 10% with penetration of 43%. Our mobile growth is exclusive. Q4 orders increased by 114% and penetration grew 23% in the quarter. We continue to focus on optimizing the shopping experience on tablet routes, which continues to be the fastest growing portion of our mobile portfolio.

The QVC shopping experience is fundamentally social in nature. We have a strong community of hosts, designers, guests, and customers, who enjoy interacting on our community forum on QVC.com, on social platforms such as Facebook and (indiscernible) and of course on mobile applications. The acquisition of substantially all the assets of Oodle provides us a sophisticated technology platform that will enable QVC to capitalize on the growing consumer trends of discovering new products via social, and allow us to better leverage our brand essence of real relationships on all digital platforms. This opportunity of growing enables QVC to grow our customer base and strengthen our brand as an innovative retailer.

We're excited about the shopping experience that we've offered to our customers so far in 2013. Italian (indiscernible) debuted his much anticipated new album on QVC in front of a live studio audience. QVC was in LA this past Friday, February 22, for red carpet style with fashion icons, Heidi Klum, Nicole Richie, Young Rivers, and Jennifer Hudson. We delivered a unique social shopping experience for our customers with a live video feed of celebrity guests walking the red carpet on QVC's iPad app, and social inflencers showcasing in the moment fast shot of exclusive event n Instagram, creating QVC's very own Instagram experience. And as we say hello to friends, we're helping our customers discover the latest fashion trends, fresh spring cleaning ideas, vibrant flowers, health plans and more.

And with that, I would turn the call back to Chris.

Christopher W. Shean

Thanks Claire. Let's take a quick look at the liquidity picture of Liberty Ventures. As of December 11, as Greg had mentioned, we gained control of TripAdvisor, who is now a consolidated subsidiary of ours through a voting of shares, and going forward, will be a prominently displayed operating unit within the Ventures Group. I wanted to point out that full purchase accounting that reflected, and as a result, essentially we have to mark our historical ownership percentage to market which resulted in a $800 million gain that you'll see in the financial statements. But going forward, full consolidation, 78% of the economics will get allocated back out through the non-controlling interest line item in the P&L.

At the end of the year, the Group had cash of $2.1 billion and $3.3 billion in attributed debt, which includes TripAdvisor's cash, and $412 million of their debt facility. We recently announced the full redemption of all the outstanding 3.25% senior exchangeable debentures due 2031, which this will occur and be effected on March 8 in the outstanding principal amount of these bond debt, December 31, 2012 was $414 million. The value of the equity method securities I guess principally [expedia] (ph), and non-strategic AFS securities attributed to the Group was $1.8 billion for each respectively at the end of the year.

Now with that, I'll turn it back over to Greg to wrap up.

Gregory B. Maffei

Thanks to Mike, Claire, and Chris, you may have heard from their tone, we're pleased with our results for the quarter and the year, and are excited for 2013. We appreciate your continued interest in Liberty Interactive.

With that, operator, we'd like to open up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from David Gober with Morgan Stanley.

David Gober - Morgan Stanley

Good afternoon, guys. Thanks for taking the question. One quick housekeeping question for Mike. You mentioned a $20 million net favourable settlement in the press release. Just curious what that was, and then I have a follow-up for Claire.

Mike George

Yeah, David, the settlement related to credit card fees. We're not able to get into the details of it but view it as sort of a one-time non-recurring benefit in the quarter.

David Gober - Morgan Stanley

Got you. And Claire, you talked about the exclusive growth on the mobile side of the business. I was wondering if you see any different characteristics of consumers either, are you seeing better acquisition of customers, are you seeing greater loyalty of any difference between a customer that uses mobile devices versus somebody that just comes on the website or uses the standard phone interface?

Claire Watts

Thank you, or your questions. Yes, we're really pleased with our growth in mobile crossing over $500 million for the year. Couple of things that I would tell you that we see. One, we have a high percent of our mobile purchases are from new customers. So, something about 24% of our mobile customers are actually new customers. And then as we earlier stated, year after year, our best customers are the ones that use all of our platforms, and we see mobile as continuing that trend. We may add it to the portfolio, we do see them become a very, very valuable customer. Within that though, we see different behaviour and activity coming from mobile phone versus tablet, web versus app, and we talked a little bit about that before that the web is a (indiscernible) portion of mobile and on tablet and that is definitely a shopping more of what we call, buying time experience, where our app on mobile continue to be more like an ordering mechanism for the customer. So, definitely adding mobile to the portfolio makes them a better customer and we see a high percent of the mobile customers being new.

David Gober - Morgan Stanley

And maybe just a quick one, not sure who would be best on this, maybe Greg, just on e-commerce side, obviously some challenging trends there. Just curious if you could give us any color on the performance of the various subsidiaries there and what's going on with the various sites?

Gregory B. Maffei

I think we talked about some of these before. We were in a transition with a couple of the subsidiaries. We have a new CEO for Celebrate which has struggled through the hollowing seasons. We have had good top line growth but some discounting at Bodybuilding as well as legal expenses which showed its results. Backcountry had challenges around a tough environment for outdoor with the retailers, a lot of discounting in the industry which they suffered commensurately. They actually are off to a very improved January with more snow in the west, and that's a positive. Provide, has a new CEO as of about a year ago who's made I think some good changes, and we saw direction improvements to provide flower business for Valentine's Day, and I think we're pleased with that but there were some one-time charges around the new CEO and a retention program, some hiring charges and the like that hurt that result, company's results, and the one that has done the strongest, CommerceHub, continued that excellent result.

So, if I look across the portfolio, we have two businesses or so which are doing quite well, which are sort of banging along, while we're having issues around the weather, and which we cleaned up some items in one, which is probably the most challenging, Celebrate, but we're excited about the prospects with our new CEO there.

Operator

And the next question comes from Tom Forte with Telsey Advisory Group.

Unidentified Analyst

This is actually [Kelvin] (ph) filling in for Tom. Thanks for taking my questions. You guys talked a little bit about the strength in health and beauty. Could you just talk about whether that is sustainable in 2013, and then just could you give some highlights for what you're seeing in electronics?

Claire Watts

Yes, thank you for your questions. We have seen within home, our cook and dining business, our household business, particularly floor care, and the (indiscernible) and particularly our seasonal and toy business, all very strong, consistent results throughout the year, and we do expect this category to remain strong going into '13. Beauty is (indiscernible). We've had year-over-year sustained growth. We are quite a player in the prestige beauty market and we have big plan for our beauty business in 2013 as well.

Unidentified Analyst

And in electronics?

Claire Watts

I'm sorry, yes. In electronics, what we've seen is, a pretty tough year for us, finished pre-stock. The categories that has been good continue to be good, and that is the tablet business has been particularly strong, particularly the Apple brand, our camera business is pretty strong, but we continue to have a sluggish performance in televisions and computers, picked up a little bit in the fourth quarter but not anywhere close to our performance in the past couple of years. So, we remain a little bit unsure of the growth for electronics in '13, and we're viewing it fairly conservatively.

Operator

Next question will come from (Trisha Gill) with Wels Fargo Securities

Unidentified Analyst

Good afternoon. Thanks for taking my question. Just a question on the e-commerce and mobile growth. Although the penetration continues to increase at QVC, just wondering if you can comment on sort of slowdown in the year-over-year growth rate during the quarter, and what you attribute that to?

Claire Watts

Yeah, 10% growth – we have a large site, so $2.6 billion for the year, but part of that is, when the top line grows, 2% as Mike talked about, we definitely experienced unusual impact from external. So that affects the overall growth rate on the web side as well. 10% is okay, but we expect it to be a little bit higher than that. So it definitely reflected the overall performance in the business in the quarter.

Unidentified Analyst

Then, just a question on sort of a competitive free shipping and promotional environment. It doesn't really sound like you participated in that. Your gross margin in the year (indiscernible) doesn't really reflect that, but perhaps that contributed a little bit to the slower sales growth versus 3Q. I was just wondering if you can comment on that and maybe what you're seeing so far in the first quarter in the commercial environment.

Claire Watts

So, we did strategically make the decision, as Mike outlined, to stick with our brand story, which we are not a highly promotional brand. Free shipping and handling, when we offered in the fourth quarter, really has to do more with the competitive landscape, so in some cases national brands. We do offer free shipping and handling, because that's what it takes to be competitive, but for the most part, we see ourselves having differentiated products and experience, and we try to stay out of the promotional activity.

As far as the impact on sales, I would tell you, where we strategically offered it, we felt like that was the right thing to do and we saw great performances where we didn't offer it. So, the top line for us, 2%, was disappointing to us in some regards because of the (indiscernible) impacts that we incurred through the year.

So, bottom line is, we are going to stay as non-promotional as we can. We feel like that did pay the bills in the fourth quarter. We ended our season very clean (indiscernible) inventory we've had in a long time, and we're well positioned to be successful in '13.

Operator

The next question comes from Benjamin Mogil with Stifel Nicolaus.

Benjamin Mogil - Stifel Nicolaus

Good afternoon. Thanks for taking the question. Since January, between sort of the payroll tax holiday going away and of course rise in gasoline prices, just talk about where you're seeing your customer sort of be a little bit more conservative? I know that you're obviously not the Wal-Mart customer but sort of talk about what you're seeing, if any, change in tone sort of since Jan 1 from the consumer perspective.

Claire Watts

So, I can't at any point tell you that we can trace a change of behaviour. It is something we are watching very closely because again, any money that comes out of the pocket is not good for retailing, not just for us, but we haven't seen a notable change in our customer's behaviour by category yet, but we remained very, very focused on that as some of them are really seeing paychecks diminish for the first and second time. So more to come on that I would say.

Benjamin Mogil - Stifel Nicolaus

And what about in Europe? I mean obviously the payroll tax is not an issue there, but just given the European environment continues to be sort of very, very much up and down, Italy for example, is there anything you can sort of share there again since Jan 1 in terms of tone, et cetera?

Mike George

Quite a similar answer to what Claire described with the U.S. It will be hard for us to see any sort of obvious impact, and as you pointed out, Europe has been – the economic pressures in Europe have been significant and sustained now for many quarters. So, certainly nothing we've seen that would suggest any fundamental change in what continues to just be a relatively soft environment where you have to kind of outperform and take the share.

In Italy, as we've said before, I think because we're so new and so small that (indiscernible) to the backward economic forces and the business might have ramped even faster in a healthy economy. We've nonetheless seeing that we can continue to ramp that business from the fairly small share standpoint, even with all the challenges going on in Italy. So, nothing real specific that feels different this year relative to last year.

Operator

Moving on to Matthew Harrigan with Wunderlich Securities.

Matthew Harrigan - Wunderlich Securities

Thank you. I had a couple of questions, all on international. I think in the release, it says, in China, you were up 14% year-over-year in Q4 and 85% for the full year, I mean you have some favourable seasonality Q3 to Q4. I was just wondering if you can comment on that because that's sort of a quirky number. Then secondly, on Italy, I mean QVC I think you said it was a quarter or two behind plan but just so impressive in the context of everything, but Italy is such a quirky country, I mean seemingly, it's round up (indiscernible) again as a power broker if not the next key app, and I think you commented before that (indiscernible) advances in that market in terms of the (indiscernible) and just kind of what the Italian consumer was used to dealing with, with retailers, do you feel confident that you can extrapolate from Italy going to some of the other markets, like Spain or France, and obviously you generate proportional results that there's a huge buckets of value there for the taking. You said that Italy was just low hanging fruit on account of under the top retailing environment. Then lastly, particularly this event program around fashion and beauty and all that, are you starting to see more things out of Italia and the U.K. in particular, and so the programming that you can use in the U.S. and in other markets as well as Europe?

Mike George

Thank you, Matthew. Let me sort of take each one of those. China, as I mentioned in my comments, we're just really pleased with the partnership in China and the success we're seeing with a very strong growth from Q3 to Q4, to grow as strong as you know on a year-over-year basis, but prior to us operating the channel, they were probably doing some businesses last Q4 that were not the kind of businesses we wanted to be doing. So it was gradually evolving the mix, increasing the product margins, you know trying to kind of build sort of the business that we want to build, that we think is sustainable for the long-term. So, we're pleased that we saw a nice lift over the Q3 performance, and lost just because we weren't engaged in the business a year ago, the year-over-year comps are a little less relevant.

The other thing to keep in mind is that China, is the seasonality will feel a little bit different in China than in the rest of the world. It is not as driven by Christmas and it is more driven by New Years, which of course occurs in February. So, you really see the seasonality. In most markets, the heavy seasonality is November, December and China, it feels more like December, January. So, some of the sequential trends tend to look a little bit different in China, but overall very pleased with the progress there.

In terms of whether on Italy, whether we can extrapolate from Italy to Spain or France, the short answer is, we think we can. Certainly going into Italy, no one we talked to, none of our internal work made us think that Italy would be an inherently stronger market than Spain or France from a consumer proposition. It was really more that we were able to get the right kind of carriage in Italy sooner than France. In particular, Spain is a little smaller market, so it was sort of one step behind Italy on our list of priorities.

So, as we've said in past discussions, if we could get the right feel in Spain or n France, we would definitely explore that, and we are working hard, and looking at those markets. France is a little more complicated to get into, and we've been close a couple of times and haven't quite gone over the finish line, but we're continuing to work on it and we continue to look very hard in Spain and have a variety of discussions in that market. So, we do think there's value creation in those markets and we'll pick harder ways to enter them.

On your question about – I think your other question is around the ability to sort of export some of the successes we're having in fashion let's say from Italy to another market. What we're trying to do is to – we spend a lot of time just trying to leverage best practices across markets, understand what the hot trends are and share those across markets, so leverage them where we can, although also very conscious that specific products filing and – what works in one market doesn't always work in the other market. So, no, I won't say that there is – I could point to a lot of sort of directly leverageable activity out of Italy into the other markets, but nonetheless, I mean at present in Italy we think it's a good thing, we've got a good partnership with the Logan Vogue Italy, and I think developing sort of a nice local supply base, and didn't necessarily help every time some of those local Italian suppliers were developing in Italy, so we'll be attractive in our other markets as well, but a little too early to read that at this point.

Matthew Harrigan - Wunderlich Securities

And what about the event program in Milan Fashion Week and London Fashion Week? Are you actually showing them in U.S. now? I mean, I should know the answer to that but unfortunately I don't.

Mike George

We don't directly broadcast Milan Fashion Week back into the U.S. on that specific line, although we have tried over the last couple of years to get more global leverage out of our fashion events. So, Claire talked about the red carpet event which was really extraordinary last week with the kind of viewer excitement we had and the kind of celebrity turnout we had, and we had our teams from Germany and Italy broadcasting from the red carpet getting a lot of footage. So I think we'll continue. We haven't done it specifically on Milan fashion's night out but I think we'll continue to look for ways to scale up these events globally and leverage the content across markets, and we've had some early success doing so.

Operator

Moving on to Victor Anthony with Topeca Capital Markets

Unidentified Analyst

Thanks a lot for taking my call. Just two questions. So, during your prepared speech, you talked about softness that you felt into very end of the holiday season. Wanted to get an idea of what was that attributed to, and did you see a rebound as you headed into the first quarter? And second, if you could just discuss the results you've seen from the Websphere e-commerce platform that was launched in the U.S., Germany, and the U.K.?

Mike George

So on the end of the selling season softness, unfortunately it was really – it was a follow-on to the new town tragedy. We had extraordinary sales fall off in the five days after the tragedy and (indiscernible) being in the Northeast and sort of get in the midst of that but it's just – it really had an extraordinary impact on the psyche of our customers. I haven't quite frankly seen anything quite like it since October of 2008 in terms of the size and depth of the drop-off. It was, as you would expect, it was relatively short-lived and it lasted for about five days, then business was back on track. So, it was very much a unique thing and not in any way continuing, but it definitely – just as we were finishing our selling season, had a meaningful impact on the quarter.

In terms of Websphere, pleased with results. Claire can add maybe some color on the U.S. but has been (indiscernible) across Europe and the U.S. Germany has been the most significant beneficiary of it, because quite frankly, we have a further need for improvement, the biggest functional gaps. So, we have seen just a significant uptick in their e-commerce performance, their growth rate, sort of increase in penetration rate has been about double the rate it was prior to the launch of Websphere. U.K., we're pleased with the results. They haven't been as dramatic but good finishing results, and Claire, do you want to add any color on the U.S. experience?

Claire Watts

Sure. What I would say is that we are very pleased that we had a smooth transition as we did. We have a very large site and didn't make the complete transition until the end of third quarter. So, (indiscernible). What we're looking forward to is, this was just to get an end and stabilize our very large e-commerce platform, which is done, and in '13, we're really looking forward to now pushing it forward. So, with enhancement and fine tuning, optimizing by category, so all of that work is underway.

Operator

That does conclude the question-and-answer session. That concludes today's conference. We do thank you, for your participation today.

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