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Geeknet (NASDAQ:GKNT)

Q1 2013 Earnings Call

May 08, 2013 11:00 am ET

Executives

Nicole Gunderson

Kathryn K. McCarthy - Chief Executive Officer, President and Director

Analysts

Daniel L. Kurnos - The Benchmark Company, LLC, Research Division

Justin Ruiss - Sidoti & Company, LLC

Arthur Michael Winston - Pilot Advisors, L.P.

Operator

Good day, ladies and gentleman, and thank you for your patience. You've joined Geeknet First Quarter 2013 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference may be recorded. I would now like to turn the call over to your host from Investor Relations, Ms. Nicole Gunderson. Ma'am, you may begin.

Nicole Gunderson

Good morning, and welcome to Geeknet's conference call reviewing first quarter 2013 financial results.

Joining me today is Katy McCarthy, Chief Executive Officer; and Kirk Somers, our new Chief Administration Officer, will join us for Q&A.

We will make certain statements today with respect to our expected financial results, go-to-market strategy and product efforts designed to increase traffic to our website. These statements, as well as other statements, such as beliefs, expects, estimates, anticipates and other similar expression are made pursuant to the Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995.

Such comments are forward-looking and involve a number of risks and uncertainties that could cause actual results to differ materially. Please note that these forward-looking statements reflect our opinions only as of the date of this call, and we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events.

Please refer to our SEC filings, as well as our financial results press release for a more detailed description of the risk factors that may affect our results.

These documents are available at our website, geek.net, and at the SEC's website, sec.gov. The content of this webcast contains time-sensitive information that is accurate only as of the date of this live broadcast, May 8, 2013.

Any redistribution, retransmission or rebroadcast of this call in any form, without the expressed written consent of Geeknet, is prohibited. I caution you that any forward-looking statements made by the company are not guarantees of future performance and that a variety of factors could cause the company's actual results and experience to differ materially from the anticipated or projected results, which the company may discuss in this conference call.

During our call today, we will discuss adjusted EBITDA financial measures. In our press release and our filings with the SEC, each of which is posted on our website, you will find additional disclosures regarding these adjusted EBITDA measures, including reconciliation of these measures with comparable GAAP measures.

With that, I'll turn the call over to Katy, our CEO.

Kathryn K. McCarthy

Thanks, Nicole, and welcome, everyone. Geeknet had a solid first quarter and a successful start to our first full year with a solid focus on e-commerce. Our mission is to be the #1 destination in the galaxy for smart products while delivering an amazing customer experience.

This quarter, we continue to grow revenue and make investments to capture the large opportunity in front of us.

I'll start by walking through the financial results and then I will give you an update on our progress toward our key initiatives.

As a reminder, our financial results show the impact of the media business that we sold last year in discontinued operations.

We have also adjusted the 2012 results accordingly.

First quarter revenue grew 12% to $19.6 million compared to $17.5 million in the first quarter of 2012. GAAP net loss for the quarter was $2.3 million or $0.35 per diluted share compared to net loss of $2.1 million or $0.33 per diluted share in 2012.

Included in GAAP net loss are severance and other expenses totaling $1 million related to the changes in the leadership team.

Excluding these items, GAAP net loss was $1.3 million, an improvement over last year.

Our first quarter adjusted EBITDA was a loss of $1.3 million compared to a loss of $850,000 last year.

Excluding severance and other expenses related to the leadership changes, adjusted EBITDA was a loss of $310,000.

Product gross margin was 26%, an increase from 23% in the first quarter of 2012. Progress in this area came from an increase in revenue from GeekLabs, an increase in exclusive product and improved vendor management.

Overall, gross margin was 19%, up 4 points compared to the first quarter of 2012.

Total operating expenses were $5.9 million, an increase of 22% compared to the first quarter of 2012. Excluding severance and other expenses related to leadership team changes, operating expenses for the quarter were $5.2 million or up 8%.

Including severance and other expenses, sales and marketing increased 9% year-over-year. Technology and Design increased 76% due to investments in innovative GeekLabs custom products and infrastructure investments to support the ThinkGeek website. G&A increased 13%.

We ended the quarter with cash and investments of $51 million compared to $57 million at the end of 2012. The reduction in cash is due in part to the purchase of products to support growth in our Wholesale business and prepare for Mother's Day and Father's Day in the second quarter.

We continue to make progress on our year-over-year metrics. Daily unique visitors was 21 million, an increase of 14%. Orders received increased by 7%. Average order value shipped increased to $57 compared to $55 in Q1 2012. Average order value booked was $60 compared to $57 in Q1 2012.

As I mentioned on the last earnings call, our goal is to build a brand that sustains profitable growth. To do this, our focus is on 5 key initiatives: Deliver creative and successful new products; expand brand awareness and the customer base; improve the customer experience and increase conversion; improve gross margins through improve category planning and vendor management; and improve process, excellence and quality.

This quarter, we made progress in all of these areas. We delivered over 300 creative new products, including 88 exclusive products. GeekLabs sales increased significantly with fantastic successes, such as the Unicorn Bouquet, Unicorn Slippers, the Build-On Brick Mug and the Titan Sword.

Additionally, we continue to enjoy success with our GeekLabs Minecraft products and our Doctor Who product line.

GeekLabs also worked very closely with Princip in the development of the Futuro cube, which we are proud to say won Popular Science Magazine's Best Of Toy Fair 2013.

At the beginning of the second quarter, we once again participated in the April Fools' Day, offering 8 safe products, such as the Play-Doh 3D printer, the Death Star Trench Toss and the Eye of Sauron Desk Lamp. Customer feedback was terrific.

We expanded brand awareness and our customer base this quarter with unique visitors increasing 14%. We also closed wholesale deals with specialty retailers such as Hot Topic, Spencer's and Books-A-Million.

ThinkGeek participated in 5 trade shows and conventions including MagFest, a music and gaming festival, Toys Fair in New York City, Toy Fair International and PAX East, a fan-driven convention, where we successfully sold exclusive merchandise.

We also officially partnered with Nerdist Incorporated to launch the Nerdist Network on YouTube.

Increasing conversion is another important focus for us. While our conversion rate was 1.6%, slightly down from 1.7% in Q1 2012, we were able to reduce customer returns this quarter. We're currently working on a detailed project plan to improve the site experience and increase conversion rates.

To improve processes and quality, we also plan to dedicate additional resources to improve our site experience and implement in the ERP system.

In summary, we had a good start to the year and we're very excited about our plans for the rest of 2013.

Our team is devoting their energy to delighting customers and achieving our key initiatives to deliver year-over-year top and bottom line growth. And we are excited about the many new products and ideas our team will bring to life throughout the year.

With that, let's open the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Dan Kurnos of Benchmark.

Daniel L. Kurnos - The Benchmark Company, LLC, Research Division

Katy, on the revenue side of the equation, we did see a little bit of a slowdown in sales. And I know that you talked about focusing on profitable growth and I think that showed through in the quarter. I'm just curious how we should think about the pacing of sales growth of the balance of the year and maybe if you'd be willing to split out GeekLab growth in the quarter?

Kathryn K. McCarthy

How are you? I'll take the question in 2 parts. So first, we're pleased with the results in the first quarter. We said we had a focus on gross margin and we're happy with the improvements that were made there. We have plans in place that we want to execute for the rest of the year. I would say on the revenue, we know the first quarter isn't always our strongest quarter of the year. We feel good about the performance. Obviously, there are certain events that occur in the other quarters throughout the year such as Mother's Day, Father's Day and, of course, the holidays that don't occur in the first quarter.

And the second question on GeekLabs. I will put out that differently. I'll just echo the comments that the performance year-over-year was very strong.

Daniel L. Kurnos - The Benchmark Company, LLC, Research Division

Okay. And just to follow up on that. I would just ask, e-commerce growth, in general, was sort of, call it, mid-teens for the quarter. And you guys are a little -- pacing a little bit below that. Is it really just timing relative to the general industry of your own product sales? Or is there something else that we should think about there? I mean, we should see maybe growing e-commerce plus, I would think, with your new product launches?

Kathryn K. McCarthy

Yes, I would think about it as timing, Dan. I mean, if you think about year-over-year, one thing that was a little bit different is where Easter fell this year for us, just it being at the end of the quarter. The introduction of our products does tend to be later in the year. However, we -- and as I've said previously, we do have a focus on introducing more earlier in the year to help improve the performance in the off-holiday quarters.

Daniel L. Kurnos - The Benchmark Company, LLC, Research Division

Got it. Okay. And then turning to the cost side, you did give some decent color on the cost of revenue improvement. I'm just curious if now we should think about sort of where you're at, as a percentage of revenue, as sort of a base level, maybe if there's some additional improvements that you can make here, or if we might see, as growth maybe ramps up in the back half of the year, that number -- you will lose a little bit of those efficiencies?

Kathryn K. McCarthy

Well, in general, as I've said, gross margins are a big focus for us. The increase in GeekLabs sales certainly helped the margins for the quarter. Now that's something we ought and we want to do, but we always have comparisons year-over-year due to mix. From a shipping efficiency standpoint, we tend to gain efficiencies later in the years, given the volumes. So it's -- every quarter is different, so it's difficult to say, and you can see historically what our pattern has been throughout the year. So it's -- we are providing guidance on future margins, but I think you can look historically at what improvements have occurred year-over-year in certain quarters.

Daniel L. Kurnos - The Benchmark Company, LLC, Research Division

Okay. And then the other piece to the equation. We did see that ramp intact and a little bit of headcount increase, I think. And you gave some color on what's going on there. I just -- without giving specific guidance, could you give us maybe some color on how you think about increasing your spend over the balance of the year to invest in some of the initiatives, whether it's the website refresh, or how much longer do you think you could be playing sort of investment catch-up to get to a point where you can really get some nice leverage going forward?

Kathryn K. McCarthy

Well, as I've said, there are really 2 key areas where we're investing. There are other areas that have certainly leveled off over the past years. For example, distribution. We've made investments in the past. In GeekLabs, specifically technology and design, we continue to invest in talent to continue to bring more creative new products to our customers. So that's an area that we've invested in. I would say we'll continue to invest there. And our effort to improve our conversion involves improving the site experience. So investing in the technology that runs our website, yes, that's something we've built in to the plans for the year.

Daniel L. Kurnos - The Benchmark Company, LLC, Research Division

And then just maybe one more for me. Any thoughts on increasing the distribution to the wholesale channel?

Kathryn K. McCarthy

So the wholesale had a very nice improvement year-over-year, both from a sales and margin standpoint. It's one of our key efforts to improve our brand awareness, is backed up by wholesale. That's something that can get ThinkGeek known by other customers, and it's something we certainly put a big focus on.

Operator

[Operator Instructions] Our next question comes from Justin Ruiss of Sidoti.

Justin Ruiss - Sidoti & Company, LLC

I just had a quick question. I know that you had mentioned in your prepared remarks that basically, uses of cash will just be reinvested into looking in -- or expanding the new products. But is there any other uses of cash at this point? I mean, is there anything else that you're looking at?

Kathryn K. McCarthy

Well -- so the Board and its leadership team were always looking at the best ways to deploy our cash to drive growth and to do what's best for shareowners. There's nothing planned at this time other than executing the plans that we have in place as a leadership team.

Operator

Our next question comes from Arthur Winston of Pilot Advisors.

Arthur Michael Winston - Pilot Advisors, L.P.

Do you have any special programs underway to increase the non-holiday, non-gift sales. And if so, do you have a methodology of measuring how successful this is?

Kathryn K. McCarthy

Thanks for your question. Certainly, a big effort and initiative for our company is to promote more events throughout the year. Our business has many opportunities to -- because it's something where people like to buy gifts, that you can promote those sales in the first 3 quarters of the year. Our team, from the new leaders we've brought in, has developed a calendar that it focuses on promoting key events throughout the year, holidays, movie launches, et cetera. So it's something we certainly look at. It's something we certainly measure. Clearly, we are a business that is going to be focused on the holiday, as many retailers are. But it's a big initiative to focus on the other 3 quarters for our company.

Operator

Our next question comes from Mr. Kurnos from Benchmark.

Daniel L. Kurnos - The Benchmark Company, LLC, Research Division

Yes, just one more quick follow-up, Katy. I know it's real early, but just any color you can provide us on the progress of mobile and how that's developing?

Kathryn K. McCarthy

Sure. Good question. So we've talked in the past about mobile being an area of focus for us. More e-commerce is now being driven from tablets and mobile devices. Our mobile purchases almost doubled in Q1 to approximately $900,000. That's not something we're not certainly going to update on a quarterly basis, but we want everyone to know that we're excited about the progress it has made around this -- the mobile opportunity.

Daniel L. Kurnos - The Benchmark Company, LLC, Research Division

And are you focusing that opportunity mostly on, I would assume, the tablet space and less on the phone, just because it tends to be a better shopping tool and carries a higher AOV?

Kathryn K. McCarthy

We would -- we focus on both because the ultimate goal is to provide the customer with the best way to get there our products and to get to our site. And our customers are very tech savvy, so they're focused on both their phones and their tablet. So we want to provide that opportunity for them. Anyway they can come into the site, we want to be a great experience.

Daniel L. Kurnos - The Benchmark Company, LLC, Research Division

And maybe just talk about how you're leveraging mobile with your really strong social presence?

Kathryn K. McCarthy

That's something that we continue to try to do. Social media is something that we're making so they can access it anywhere. We haven't done anything specific there that I'm going to talk about today. I think it's something we can probably talk about more in the future. But clearly, our social media presence is a strength when you think about mobile sales.

Operator

And at this time, I'd like to turn the call back over to CEO, Katy McCarthy, for any closing remarks.

Kathryn K. McCarthy

I'd like to thank everyone for joining us today, and have a great day.

Operator

Thank you, Ms. McCarthy, and thank you, ladies and gentlemen for your participation. That does conclude your program. You may disconnect your lines at this time. Have a great day.

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