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Executives

Courtnee Ulrich – VP, IR

Gregory B. Maffei – President, CEO

Christopher W. Shean – SVP, CFO

Mike George – QVC, President, CEO

Claire Watts – QVC U.S. CEO

Analysts

David Gober – Morgan Stanley

Jason Bazinet – Citi

Trisha Dill – Wells Fargo Securities

Tom Forte (James) – Telsey Advisory Group

Matthew Harrigan – Wunderlich Securities

Liberty Interactive Corporation (LINTA) Q2 2012 Earnings Call August 8, 2012 10:00 AM ET

Operator

Operator

Good day everyone and welcome to the Liberty Interactive Corporation quarterly earnings conference call. Today’s call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Courtnee Ulrich, Vice President of Investor Relations. Please go ahead.

Courtnee Ulrich

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 financial guidance, business strategies, market potential, future financial performance, new service and product launches and other matters that are not historical fact. These forward-looking statements involve many risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements, including, without limitation, possible changes in market acceptance of new products or services, competitive issues, regulatory issues, continued access to capital on terms acceptable to Liberty Interactive, the creation of the Liberty Ventures tracking stock and the timing of our proposed REIS offering. These forward-looking statements speak only as of the date of this call, and Liberty Interactive expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein to reflect any change in Liberty Interactive's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. On today’s call, we will discuss certain non-GAAP financial measures, including adjusted OIBDA. The required definitions and reconciliations, preliminary notes and schedules one through three can be found at the end of this presentation. With that, I’d like to introduce Greg Maffei, Liberty Interactive’s President and CEO.

Gregory Maffei

Thank you, Courtnee, and good morning to all of you. Today speaking on the call besides myself we’ll have Liberty’s CFO Chris Shean, QVC’s CEO Mike George and QVC U.S. CEO Claire Watts. On to our highlights.

At QVC, we had very solid results, especially in the U.S. and Japan. A little weaker in Germany, but overall quite solid. We’re very pleased with, we received government approval in China and finalized our joint venture with China National Radio, and are investing in that partnership. We also raised $500 million in a 10-year senior secured note at very favorable terms, 5 1/8, and set the capital structure at QVC at an even more solid footing.

We do note that in the marketplace, there have been several recent transactions with international video commerce companies, which point to very favorable multiples. Bain Capital agreed to buy 50% of Jupiter Shop Channel in Japan. Providence Equity Partners is purchasing a majority of HSE 24 Video Shopping Channel, based in Germany, with operations in Germany, Italy, Austria and Switzerland. There’s limited financial information available on how these private companies are doing, but what we can glean suggests that the EBITDA multiples are well in excess of what LINTA is trading at today.

Later this morning, we’re going to have a vote of the shareholders of LINTA, that will create Liberty Ventures, if the vote is affirmative as we expect. Liberty Ventures will begin trading on Friday. We’re quite excited for this, as we hope it will highlight the strong operations of our digital commerce companies attributed to the new Liberty Interactive tracking stock group, and we will increase shareholder value thereby.

I’d also note that during the quarter, we made significant repurchases of our shares, buying back $257 million of LINTA stock, even though we were out of the market for all of July due to having a proxy out.

With that, let me turn it over to Chris Shean to discuss the financials at LINTA.

Christopher Shean

Thanks, Greg. Liberty Interactive’s revenue increased 5% in the second quarter, while adjusted OIBDA increased 1%. QVC increased total revenue by 4% for the quarter, while adjusted OIBDA increased 5%. Liberty Interactive’s other e-commerce businesses grew revenue at 13%, while adjusted OIBDA decreased 36%. Regarding this decline in adjusted OIBDA, we had some hiccups in the second quarter, with negative impacts occurring at most of our e-commerce businesses. These included some unusual and hopefully nonrecurring items such as legal settlements and a compensation arrangement that we had put in place due to some turnover at one of our e-com subsidiaries. The rest of the decline was due to operating decisions to increase spending and paid search as a percentage of revenue, and to be more promotional to move out seasonal inventory.

Now let’s take a quick look at the liquidity picture. At the end of the quarter, we had cash balances of $790 million and $6.4 billion in debt. QVC’s total debt-to-adjusted-OIBDA ratio, as defined in their credit agreement, was approximately 1.3 times, as compared to a maximum allowable leverage of 3.5 times. Now with that, I’ll hand the call over to Mike George for additional insights on QVC.

Mike George

Thank you, Chris. We were very pleased with our results in the quarter, with consolidated revenue up 4% and adjusted OIBDA up 5%, despite the difficult economic situation that we face in most of our markets, and every market achieved positive OIBDA growth after adjusting for the one-time cost of our U.K. headquarters transition.

E-commerce continues to be a strength, with sales up 16% worldwide, and that represents 34% of our global business. And we reached full deployment of our new Websphere e-commerce platform in the U.S. and Germany over the last month, and anticipate deployment in the U.K. later in Q3. We believe this new platform will provide numerous benefits over time, including enhanced natural search optimization, improved customer conversion and faster time to market with new innovations.

And within e-commerce, we continue to see great customer interest in our mobile and tablet platforms, which were up over 100% in the quarter and now make up 21% of our worldwide e-commerce sales. Consistent with what we saw in Q1, we had especially strong results from existing customers worldwide, with sales up over 4%. We also saw growth in revenues from previously inactive customers. However, sales from new customers were down about 5%, and that reflects in large part softer sales in some of our home and electronics categories, as they tend to drive a higher new customer mix.

Now looking at the results by market, in the U.S., revenue was up 4% and adjusted OIBDA up 3%. We saw particularly strong growth in beauty, up 14%, renewed strength in consumer electronics, supported by our expanded tablet offerings and good performance in our apparel business. We also saw modest positive growth in jewelry, which had been a drag on results over the last few years. These gains were partially offset by softness in some of our home categories.

E-commerce sales grew 15%, and represented 39% of our sales in the quarter, supported by strong mobile and tablet growth, up over 160%, to represent 18% of total U.S. e-commerce sales.

Our term rates were up, just under 120 basis points in the quarter. That largely reflects a mix shift to higher returning categories within apparel, jewelry and beauty. Our adjusted OIBDA margin declined slightly, with improvements in warehouse and customer service and growing Q card income, offset by lower product margins in certain categories, higher bad debt expense and some increase in our online marketing spend.

Now turning to international, Japan had another outstanding quarter, with revenue up 13% and adjusted OIBDA up 16% in local currency. We saw strong gains in jewelry, accessories and apparel and most home categories. The Japan team continues to offer highly innovative programming, like their successful Mercedes Benz remote sales event in Q2, which provided a great showcase for the Mercedes brand, and this fall they will become a formal partner with Vogue and Fashion’s Night Out, our third market after the U.S. and Italy, to participate in this worldwide event. Japan’s adjusted OIBDA margins increased 65 basis points, driven by strong product margins, improved warehouse and customer service productivity and volume leverage.

Germany continues to face economic headwinds, and as we discussed in Q1, they’re focused on better balancing their product mix and improving the freshness of their assortments. As a result of these pressures, revenue was down 1% in the quarter on a local currency basis, although that represents an improvement in trend from the 4% decline we faced in Q1. Germany successfully launched a third broadcast channel in the quarter, featuring replays of our beauty programming, along with a community-oriented beauty website. Despite the soft revenue results in Germany, adjusted OIBDA was up 7% on a local currency basis. The improvement in OIBDA margins was driven by a reversal of earlier bonus accruals to better reflect current business results, along with good expense management and lower returns volume.

The U.K. had another good quarter, with revenue up 4%, supported by gains in beauty and apparel, partially offset by softness in electronics and jewelry. The U.K. is also seeing explosive results in its mobile business, up nearly 190% to represent 24% of total e-commerce sales. And with the launch of their first Android app in June, we anticipate continued strong mobile growth. And in June, we also successfully transitioned to our new headquarters in Chiswick Park, which offers state of the art facilities to support the long-term growth of our U.K. business. While adjusted OIBDA declined 16% in local currency, excluding the one-time cost associated with the transition to the new headquarters, adjusted OIBDA would have increased 5%. These one-time duplicate running costs of £3.3 million include a £1.5 million charge for accelerating the remaining lease payments on our old facility. We anticipate about another £0.5 million in duplicate running costs for the remainder of the year.

Our new business in Italy continues to ramp nicely, despite the weak economy, with revenue of €14.5 million. That’s a 21% sequential growth from Q1. We added 33,000 new customers in Q2, and increased total member count 13% from Q1. Our adjusted OIBDA loss fell to €5.8 million, that’s a 33% improvement over the prior year as we continue to grow into our fixed cost base.

And finally, we were delighted to receive final approvals for our joint venture with China National Radio. We are now a 49% partner in the JV, which officially began on July 4th, and in Q3 we will begin to report the results of the JV as a nonconsolidated equity method investment. The CNR Mall shopping channel and website began operating in June of 2010. Headquartered in Beijing, the channel now reaches approximately 40 million homes, as business is off to a very strong start, and has served over 700,000 customers to-date. In 2011, CNR Mall’s first full year of operation, the company achieved revenue of 44 million, and through the first six months of this year, revenue was 38 million.

Dong Tieming is serving as board chairman of the JV, and James Clark of QVC is serving as CEO. James joined QVC in 2008, first serving as Senior Vice President of Operations for QVC Japan and later as Chief Operating Officer of QVC U.K., and most recently has been leading our China business development efforts. Prior to QVC, James served in key leadership positions in a few e-commerce start-ups, including one based in China, and among his other skills, he speaks Mandarin. We have a strong team under James, filled with seasoned executives from both CNR Mall and QVC, including merchandising, planning and TV sales leaders with deep QVC experience.

The home shopping industry in China has grown rapidly over the last few years, with total industry revenue estimated at 7 billion in 2011. With our strong CNR partnership and the highly capable leadership team, we’re confident that our China JV can become a very significant business for us.

Now I’d like to turn the call over to our U.S. CEO Claire Watts to provide more detail on the results of our U.S. business.

Claire Watts

Thank you, Mike. QVC U.S., we continue to be committed to offering a unique shopping experience that’s created to the synergy of integrating our live broadcast, website, mobile, tablet and social platforms. We continue to drive growth as we innovate and improve upon what we offer, how we offer it and who we serve. We’re elevating our content by taking our customers to interesting places, through our live remote broadcasts from Vicenza, Italy and the Food and Wine Classic app in Colorado. In the Kitchen with David, a program that offers an integrated live, digital and social shopping experience, continues to show strong growth, as evidenced by sales, increased sales, viewership, web sessions and minutes watched. Program host David Venable’s new cookbook Comfort Foods that Take You Home, provides an opportunity to expand our audience and reach new customers. In April, QVC began taking advance orders for the cookbook, and since it debuted on air, we’ve received more than 165,000 orders. The cookbook release is October 9th.

QVC U.S. is driving growth through an assortment of highly differentiated product offerings. We’re constantly adding brands to our portfolio. Newcomers this quarter include CE by Christina Ehrlich and Belle Gray by Lisa Rinna. We saw strong results from some of our established brands such as Isaac Mizrahi, Susan Graver, Judith Ripka, Bobby Brown, Apple, Dyson, Keurig and Kansas City Steak Company, and we had notable appearances by Jimmy Fallon, 50 Cent, The Beach Boys, [inaudible], Wendy Williams, Kris Jenner and the Kardashians and Heidi Klum. Our customers are increasingly engaging with QVC on multiple platforms. We continue to see very strong adoption rate of our mobile.

Our mobile sales year-to-date have almost surpassed mobile sales for the entire year of 2011, and mobile penetration accounts for almost 18% of our digital sales, up from 8% in the second quarter last year. Tablet web continues to be our fastest-growing platform, with sales increasing 240% over Q2 of 2011. All QVC.com users are now on IBM’s Websphere environment, a salable global e-commerce platform which provides search engine optimization and faceted navigation to enrich our customers’ experience. And, we now have more than 49 million subscribers in the HD tier.

We continue to focus on driving customer loyalty and satisfaction. We’re enhancing our customer service communications delivered after the purchase. Where we have done so, we have seen reduced return items and reduced advance order cancellations on those items, and QVC ranked second in the May 2012 Foresee E-Retailer Satisfaction Index, reflecting our growing reputation as a leader in service excellence.

Our team continues to deliver excellent inventory management. We reduced our overall inventory by 5.9% year-over-year. And as we look to this quarter, we’re really excited about the launch of Vanessa Williams skin care, the launch of Guy Fieri, Jennifer Hudson and Nicole Richie. We’re also continuing to build upon the Isaac Mizrahi franchise by launching a new handbag line, as well as a new fragrance, during Fashion’s Night Out in September. In addition, we have a new show called “Inspire Style,” hosted by Amy Strand, that provides our west coast viewers with a primetime shopping experience.

And with that, I’ll turn the call back to Greg.

Gregory Maffei

Thanks to Mike, Claire and Chris, we were very pleased overall with the results of the quarter and believe that businesses in the digital commerce arena that we have at Liberty Interactive are moving forward well. As we said, later today we look forward to the creation of Liberty Ventures. We appreciate your continued interest in Liberty Interactive, and with that, Operator, I’d like to open up the call for questions.

Question-and-Answer Session

Operator

(Operator instructions). We will go first to David Gober – Morgan Stanley.

David Gober – Morgan Stanley

Good morning, guys, thanks for taking my question. Just touching on the domestic QVC business for a second, clearly the trend shows the resiliency of the model given some of the mix signals of the economy is showing us. I guess I was just wondering if there’s anything you could kind of glean from the overall consumer environment, and particularly the new versus existing customer mix if there’s anything going on there other than the strategic shift that you guys had talked about a little bit at the Analyst Day a few months ago?

Mike George

I’ll make a couple comments, and then see if Claire would like to add anything. I do think the overall retail environment as you note David was cut in the quarter, and we saw that in the results of a number of retailers. So, we did see some softening in the overall retail environment through Q2, but we were pleased that our business hung in there nicely. I think our mix of new customers versus existing customers is probably less about the economy, and really more about the product mix. I think we’re just in a stronger cycle of apparel and other businesses that are more favorable for existing customers. So, we continue to feel very good about our ability to generate new customers, and continue to believe that will be a positive growth story over time, but it will go up and down as we discussed in the last quarter with our business mix.

Claire, anything else you’d add to that?

Claire Watts

No, I think that’s exactly right. I would just add that having gone through the quarter, one of the beautiful things about QVC’s business, is our flexibility. So, we have seen categories strengthen and weaken through the quarter. We’ve been able to adjust to that. For instance, our apparel business has continued strength. Our beauty business continues to outpace our expectations. And the opposite, electronics you know has not performed at the level we originally expected, and we’ve adjusted to that.

And I agree with Mike, new names for us is really – Specifically there are two areas that had very strong new name growth that have soften this year. One is computers which brings in a lot of new names, and the other is our wellness business, particularly Zumba, which has been a big new name driver for us, and it’s slowed a bit. So, we don’t see that as long term concern at this point.

David Gober – Morgan Stanley

Okay, that’s very helpful. And Claire, maybe you could dig in a little bit on the gross margin commentary that you guys gave in terms of the mix-shift within the apparel, health, beauty, and jewelry categories. Is there anything consistent going on there in terms of the return rates, or is that just kind of one-off differences in each of those different categories?

Claire Waitts

On the margin piece, there’s two things happening here in gross margins. One is at the total category mix that we sold less accessories, and more of our cook and dining area. And they’re a flip of margin rates. And then also within categories we’ve seen some pressure on margin, because of the mix within a category.

So, for instance; In our cook and dining area, this quarter we sold more electrics, so the Dysons and Keurig They weren’t at a lower margin than our cookware and our gadget business. So we’ve seen just sort of a mix issue around margin, nothing that I’m concerned with. I would say that we’ve had a little bit of pressure especially in the last two months on, you know, clearance inventory which is typical. So, part of the apparel pressure was just moving through seasonal inventory, which is in very good shape.

As far as returns, again it’s mostly a category mix issue, so the blend of the business was selling more of the soft side, than the hard side. But we have had three pressure points that we’re working on within, apparel, our dress categories that has higher returns and we’ve dug into that. And electronics, our tablet returns have put pressure on that category. So, overall the return issue really mix of categories. But there are a couple of hot spots that we’re working on.

David Gober – Morgan Stanley

Okay. And finally if I could just to follow-up with Greg or Mike on the commentary about some of the third party transactions in the video commerce space internationally. Does that change the way that you guys think about launching new markets, or does it accelerate the thinking on Brazil or France, which I know are a couple of markets you guys have talked about, that could be coming down the pike?

Gregory Maffie

This is Greg, I’ll comment first on what Mike had. I think the first thing we believe is that it’s a nice validation of the inherent strength of these models. We have strong businesses now in three very established markets, one growing. We think there’s a lot of upside still. And we obviously have new markets ahead. To see somebody who are considered smart money invested multiples, which are apparently 50% higher, something like that, than what we are trading, it’s a nice validation. I don’t think it changes our prospects or plans with regards to international, because we are moving as quickly as we can to be able to absorb those markets and grow where we sit fit.

Mike, what would you add?

Mike George

I agree with all that. Love the validation from others and that we’re running hard on international expansion. Would love to be in a position in 2013 to be talking about the next market, so we’re kind of full court press on two or three markets including Brazil and France, as you mentioned. And it’s always hard to predict the timing of these as I always caution, but very high level of commitment and belief on our part that that will be good for QVC and good for our shareholders, and we think it’s reasonably likely that we can make something happen in 2013.

David Gober – Morgan Stanley

Great, thank you very much.

Operator

And we will go next to Jason Bazinet – Citi.

Jason Bazinet – Citi

Thanks so much. I just had three quick questions. You guys put out a press release, I think on July 2nd regarding a $500 million new senior note issue, and I was just unclear if that’s included in the financials that you released today, or if it’s yet to come in terms of debt?

My second question is: Did you guys size the legal settlement on the e-commerce business? I didn’t see that.

And finally: Is the China JV loss making, is that a fair assumption. You gave the revenues, but I just didn’t know if we should be putting in some small losses in the earlier years?

Mike George

So, we talked about the new bond issue, which obviously not included in the June 30th results. We talked about that issue and the fact that it traded up since nicely. And that was just used to pay down revolve, right? That was really a substitution. The $500 million came in as long-term debt paid down, and gave us more flexibility on the revolver side.

As far as the legal settlement…

Gregory Maffei

Yeah, I can handle that. We had a couple million dollars already accrued and it was an incremental five charged during the quarter.

Jason Bazinet – Citi

Okay, great.

Mike George

So, that as we pointed out, as Chris called the “Perfect Storm of negative results”, sort of a bunch of onetime things came through and the digital commerce separated commerce businesses, and that was one of the large elements that was not of a non-recurring nature.

Jason Bazinet – Citi

Got it.

Gregory Maffei

On the China joint venture, we’ll release a more comprehensive look at the P&L with our Q3 earnings. But I think the way to think about it, is what I characterize as quite modest sort of single digit OIBDA losses in this period of startup.

Mike George

But those are going to come through as an equity pickup rather than consolidated.

Gregory Maffei

Right, you won’t see that in the OBIDA line because it’s going to be below the line.

Jason Bazinet – Citi

Understood, perfect. Thank you.

Operator

And we will go next to Trisha Dill – Well Fargo Securities.

Trisha Dill – Well Fargo Securities

Good morning, just a couple questions on QVC, and then one on the e-commerce businesses.

So, in the international division, you saw a nice improvement in the OIBDA, you know the few one-time items there. Can you help us think about how OIBDA should grow on a more normalized basis?

Mike George

Yes, I would say obviously the U.K. we had our biggest sort of OIBDA challenge due to these one-time duplicate running cost. We are essentially behind that, as I mentioned there’s about a half a million pounds to go, but we’re essentially behind that. So, I would expect us – as a very broad statement, I would expect us to start to see OIBDA growing in line with revenue overall in the international divisions. We will have a little bit of pressure in Japan who is also transitioning to a new headquarters, that will be around Q1 of 2013. But other than that, we think the long term story basically holds. And the long term story is, modest improvement in OIBDA yield in the international divisions over time, as they continue to gain scale and grow into their fixed cost base, but on a broad level we would expect OIBDA to grow modestly faster than revenue.

Trisha Dill – Well Fargo Securities

Okay, great. And then in the U.S. operating business; were there any severance cost there related to the customer service staffing in the call center, and can you quantify the impact from just that reduction in cost?

Mike George

Dan do you want to comment on that?

(Dan)

The provision for that occurred in Q1, so there was no incremental impact in Q2.

Trisha Dill – Well Fargo Securities

Okay, great. And then in the e-commerce businesses, if you could maybe help us think about what operating income would have been if the one-time items versus some of the more structural issues that you mentioned like, increase marketing expense and lower ad revenue and increased promotion? Thanks.

Mike George

There are really only two items that standout at truly one time. We mentioned the legal settlement incremental accrual, and we have a value creation plan that is non-comparable a payment that was made out of cycle that was above the line, it has previously been below the line, so they’re not really comparable. And those are roughly in the order of $10 million bucks between the two of them. We do think there were some – year-to date $10 million, not for the quarter, excuse me. We do think there were some, you know, even on the operating side there were some one-time nature things that are non-comparable going forward that we don’t think are indicative of the next few quarter results.

Chris do you want to add anything to that?

Christopher Shean

No, I think that pretty much captures it. But I mean, we had some inventory that we had to blow through to clean up the balance sheet a little bit during the quarter. And that had a negative impact from the results.

Mike George

For example, I think with Chris is referring to, we hope this is not an indicative winner just out here in the west for snow. That clearly hurt the business and we were forced to liquidate more inventory than normal in the first half of this year. How much of that is one time, we’ll leave you to judge, but we’re hoping it’s not an indicative winter.

Trisha Dill – Well Fargo Securities

Thanks

Operator

And we will go next to Thomas Forte- Telsey Advertising Group.

Thomas Forte (James)- Telsey Advisory Group

Hi good morning. This is James actually calling in for Tom. Thanks for taking my questions.

Looking at QVC, it’s good to see the ASP moment and persist again this quarter, but units did hold flat with prior year. Is that just a function of the mix changes that you discussed, and or macro thing, or something else? And then, I guess tying into that, all the initiatives that you have on digital and mobile, are you finding that from the customer purchase patterns that those sales are actually incremental to your overall efforts? And if you could speak to just overall behavior patterns, are they using it complementary to what’s going on TV or as a substitute?

Mike George

Claire, you want to take those questions?

Claire Watts

Yes, I will. So, on the ASP, this is a trend that we’ve seen for a while. It has to do with the mix of the business, but also the type of products that have been chosen by our customers within our categories. For instance, our designer business is growing at a faster rate than our basic business in jewelry. The higher end products in electronics have outpaced, you know, baseline. And if you look at vacuums, our Dyson business has outpaced our other lower price brands. So, it’s a function of what the customer is choosing within the categories and also you know, the mix of our business. And that has been a trend that we have seen for a while.

On the purchase behavior and sort of what’s happening in the digital space. We’re really excited about continued significant growth in our total digital sales, and the penetration that continues to improve. What we see is that we’re not sure that we can prove that’s in incremental, but we can definitively state that our customers that use multiple channels, are by far our best customers. And their sales are growing at a faster rate. So, if you’re a customer that engages with us on the computer and a mobile phone and a tablet, your individual sales are growing faster than those that use an individual channel. So, that’s one thing that we’re encouraged about. We are beginning to see some purchase behavior differences by platform. We’re fairly new at this, because of core metric and the tagging, we’re trying to sort a lot of it out, especially with (web sphere) conversion. But a couple of insights that I could share with you is that, we do see our softer categories like accessories, jewelry and beauty have – our customers seem to have more of an affinity to the tablets. And for especially electronic are really choosing mobile web phones. So those are just early indications that somethings that we’re seeing and again we’ll continue to inform you as our data gets more solid over the next couple of quarters.

Thomas Forte (James)- Telsey Advisory Group

Okay, that’s very helpful. And going back to the units number on QVC U.S. Was that a mixed issue as well, holding flat with last year?

Claire Watts

Yes, absolutely a mixed issue, yes.

Thomas Forte (James)- Telsey Advisory Group

Okay, thank you very much.

Operator

And we’ll go next to Matthew Harrigan with Wunderlich Securities.

Matthew Harrigan – Wunderlich Securities

Thank you. One of the things from your investor day was the commonalities [inaudible] and everything. [Inaudible] more markets in Italy and China and maybe in a way be more of a – and TOS be so much better [inaudible]. I think you said you had 7 billion already as a backdrop. I know you’re not going to be getting too much into the tactics, but can you tell me where the timing difference is in terms of how you [inaudible] markets? What where some of the angles and getting things launched last year? I know you probably took a little bit more tepid approach midway [inaudible] in the U.S.

And then secondly, on the [inaudible] side, you had success with the [inaudible] channels overseas and Claire talked about the tablets, apparel revenue and electronics. Are you doing a lot more on the micro channel side [inaudible]? Those were my two questions. Thank you.

Gergory Maffei

Matthew, we got the second question but you were breaking up on the first, so can you just try to briefly restate the first question and then we can take them?

Matthew Harrigan – Wunderlich Securities

China versus Italy, the market difference, the other commonalities in international markets you talked about in your investor day. I know you had to be pretty cautious with the economy, you know, China [inaudible] the consumer is a little bit more educated on distant shopping. How do you [inaudible] things out? I know you don’t want to get too much into your strategies, but how aggressive are you going to be trying to develop Italy and what are some of the things you would do differently in the market like China versus in a different economy like Italy?

Gregory Maffei

Thank you. So I’m going to take that one first. You know, we’re going to be in a learning mode in China, for sure. So I don’t want to state too much at this point. We’re fortunate to have a partner who’s been operating a channel successfully for over – for two years at this point, so there’s some experience. I would say they’ve been more driven by acquiring new names and getting high repeat rates of existing customers and that’s something that’s a strength of ours and I think it will be a strength – it is a strength across all markets. We’ve seen it in Italy, so you know, one of the things we’ll do early on is try to focus on just making sure we have a high-caliber diversity of product in China. We think we can bring kind of the best QVC brands from around the world to the China market and we and our partner think that will be a really differentiating point from the sort of more commodity kinds of assortments that exist in the home shopping markets today. And we’ll see what happens. Kind of like in any market, rather than try to predict the customer behavior, our bias is, bring in a diversity product, frequent rotation of product and see what works, see what the customer latches onto. But we do think QVC brands will be successful. We do think beauty, as an example could be a very strong business, which is the strength of QVC in many markets. And you know, it’s early days, but we’re excited about the potential.

Matthew Harrigan – Wunderlich Securities

So your consumer products company is supposed to be terribly excited about going to the Chinese market?

Gregory Maffei

Yeah, we’ve had – we’ve had a lot of interest from our vendors and vendor partners. We’ve been talking with them for quite a while and they’re eager to support us. It’s a great launching platform for them, so that’s another benefit we have, is they see the long-term value in it and are willing to take a risk to go into the market using QVC as the sort of launch platform. So we think that’s a real positive.

Mike George

On your second question, I’ll make a couple comments and then we’ll see, Claire, if there’s anything you would like to add. So we are trying to – we are focused on how to create more, as you called them, kind of micro experiences to tap into different segments of customers. And again, it’s – I characterize it as being in a learning mode with the practices varying around the world based on the specific conditions in each market. So in Europe, we’re focused on second and third channels and that’s because the cost of carriage is lower in Europe than Japan and the U.S. So you’re less likely to see us outside of Europe be adopting second and third channels, it’s not out of the question, but it is a higher cost and then there’s a higher bar on doing that. And with these second and third channels, we’re trying to do dedicated micro site to attach to them.

I would say in the U.S., we’re looking at that as well, but the focus is a little bit more on taking the tablet experience to the next level. We’ve got, as you know, several dedicated apps for both tablets and iPhones that create unique experiences, an app dedicated to our In The Kitchen With David program, an app dedicated to Beauty and on and on. So it’s about creating these more micro experiences on an app and tying that experience then to the TV broadcast and we create and integrated experience that spans the – sort of the broadcast environment plus sort of the narrow cast through the app. So that’s at a high level what we’re trying to do. But Claire, anything else you’d want to add?

Claire Watts

No, Mike, I think that that’s exactly right.

Matthew Harrigan – Wunderlich Securities

Beautiful. Thanks, Mike. Nice quarter.

Mike George

All right, operator, and listening audience, I think we’ve run out of time so I’d like to thank you all for your interest in Liberty and we’ll watch with great interest how venture starts trading. Thank you, and look forward to speaking with you next quarter if not sooner.

Operator

Thank you. This concludes our conference. You many disconnect.

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Source: Liberty Interactive's CEO Discusses Q2 2012 Results - Earnings Call Transcript
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