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Blue Nile (NASDAQ:NILE)

Q2 2013 Earnings Call

August 01, 2013 8:30 am ET

Executives

Nancy Shipp

Harvey S. Kanter - Chief Executive Officer, President, Director and Member of Stock Award Committee

David B. Binder - Chief Financial Officer and Member of Stock Award Committee

Analysts

Ross Sandler - Deutsche Bank AG, Research Division

Maren Kasper - Wells Fargo Securities, LLC, Research Division

David Wu - Telsey Advisory Group LLC

Mark S. Mahaney - RBC Capital Markets, LLC, Research Division

Andrew Marok - Cowen and Company, LLC, Research Division

Paul Judd Bieber - BofA Merrill Lynch, Research Division

Rick B. Patel - Stephens Inc., Research Division

Paul Swinand - Morningstar Inc., Research Division

Operator

Good morning, ladies and gentlemen. My name is Georgina, and I will be your host operator on this call. [Operator Instructions] At this time, I would like to introduce Nancy Shipp, Director of Investor Relations of Blue Nile.

Nancy Shipp

Good morning, and thank you for joining us on our conference call today to review our second quarter 2013 financial results. With me today are Harvey Kanter, President and Chief Executive Officer; and David Binder, Chief Financial Officer. Both will be available for Q&A following today's prepared remarks.

Before we begin, I would like to remind you that we will be making forward-looking statements during this call regarding the company's future performance. These statements are only predictions based on assumptions that are believed to be reasonable at the time they are made and are subject to significant risks and uncertainties. You should not rely on these forward-looking statements as representing our views in the future, and we undertake no obligation to publicly update or revise these statements. Our actual results may differ materially and adversely from any forward-looking statements discussed on this call.

Our quarterly results on Form 10-Q, our annual reports on Form 10-K and other forms on file with the SEC identifying important risk factors and uncertainties that you should consider when making an investment decision regarding Blue Nile, and that may affect whether our forward-looking statements prove to be correct. Also, please note that during the course of this conference call, we may discuss certain non-GAAP financial measures as we review the company's performance.

We will discuss non-GAAP free cash flow, which is defined as net cash provided by or used in operating activities or operating cash flow less outflows for purchases of fixed assets, including internally-used software and website development. We will discuss international sales on a constant exchange rate basis. And we will also discuss non-GAAP adjusted EBITDA, which is defined as earnings before interest and other income, taxes, depreciation and amortization adjusted to exclude the effects of stock-based compensation expense. Please refer to our Investor Relations section of our website to obtain a copy of our earnings release, which contains reconciliations of non-GAAP measures to the nearest comparable GAAP measures.

Now, I'd like to turn the call over to Harvey, our President and CEO. Harvey?

Harvey S. Kanter

Thanks, Nancy. Good morning, and welcome to Blue Nile's second quarter 2013 earnings conference call. I'm very pleased to announce our second quarter results. We are excited to achieve double-digit revenue growth in the second quarter of 2013 across all 3 major categories of our business, U.S. engagement, U.S. non-engagement and international, delivering a record second-quarter sales of $108 million, an increase of 18.7% from the second quarter of 2012. This is our fifth consecutive quarter of double-digit revenue growth, and demonstrates continuing momentum behind our strategies to accelerate growth and achieve scale.

We also expanded profitability versus last year, and delivered earnings at the high end of our expectation, with EPS at $0.17 and adjusted EBITDA of $5.5 million, increasing 22.7% over last year.

We are operating with discipline across the business, and are very focused on providing the engaging and empowering shopping experience and an incredible product selection and value in the highest level of customer service that continually defines Blue Nile. This quarter represents another milestone of consistent and significant progress, as we continue to build upon the core DNA of what is Blue Nile, that has enabled us to be a worldwide leading retailer of diamonds and fine jewelry.

Our business is built on merchandising loose diamonds and the sale of engagement rings, and this core continues to be the foundation of our results. And so with that in mind, I will start with these highlights.

We delivered another quarter of strong growth in the sale of loose diamonds and engagement rings in the U.S. with an increase of 22%. This is our fifth consecutive quarter of double-digit growth from this category. We clearly remain the dominant player in the online space. We continue to set records in the number of people buying engagement rings from Blue Nile. We continue to have exceptionally high net promoter scores, often exceeding 80, demonstrating the enviable level of advocacy and loyalty for the brand. The increasing volume of customers who are thrilled with their Blue Nile experiences, building momentum for continued growth, scale and the brand's awareness.

At the risk of sounding repetitive, I do want to highlight what makes Blue Nile's core engagement experience so compelling to consumers, and such a fundamental competitive advantage to the industry. Our unique business model and retail platform offers an empowering customer experience. Our exclusive relationships with the top global suppliers in high quality diamonds allows us to display an unmatched selection of over 140,000 diamonds of the highest quality available, anywhere in the world.

Our low-cost structure or capital-efficient model operates like no other, certainly like no other traditional brick-and-mortar jewelry store and provides consumers such an incredibly compelling value.

We believe that our competitive position is stronger than ever and will allow us to continue to gain market share, share of mind and enhance our market leadership.

Within the U.S. non-engagement, we are excited to deliver double-digit growth of over 11%. This represents significant acceleration in our growth rates from each of the past 2 quarters. The Mother's Day holiday, specifically, was extraordinarily successful. We feel awesome about the execution of our merchandising, marketing and the website in the quarter, and specifically across the gift-giving mix, which drove our Mother's Day results. In addition, equally exciting during Mother's Day, was we reaccelerated the growth rates in the units of bands and the diamond jewelries throughout the entire quarter, and this was 2 primary areas of focus for us within the non-engagement category.

Within bands specifically, we clearly have a tremendous opportunity to drive sales from our engagement ring customers. We continue to refine the assortment, the pricing and promotion, and it's clearly working.

In the second quarter, we set a record for bands selling and sold more than any previous quarter in our history. To help build our momentum, in June, we launched band matcher, and there is a lot of excitement around band matcher. Band matcher is a visualization element, and it's an important element in helping enhance our customers' ability to see and imagine what the ring and band would look like together.

Going forward, we are developing even more innovative ways to further expand our assortment, leverage our scale, leverage our centralized inventory and develop the deep supplier relationships in place to provide even greater selection. Simply put, we are building on our position as the best place in the world to a buy wedding band.

In diamond jewelry, we set a high mark as well for the number of orders versus any other prior second quarter. We're expanding the assortment and broadening the customers' ability to custom-build earrings and custom-build pendants, and refining our target marketing to drive more people to our compelling shopping experience.

Our international business is on track as well, with $17.1 million in revenue and over 19% year-over-year growth for the quarter. The Asia-Pacific region led the way with great growth, followed by continued strength in Canada. Looking forward, we see our future growth in the Asia-Pacific market. In China alone, with a population in excess of 1.4 billion people and over 10 million weddings per year, this is an incredible opportunity for Blue Nile. Our core capabilities to source diamonds, build engagement rings and create incredibly compelling value, resonates with Chinese consumers. We continue to build our presence in the market, expand our assortment, expand our service and fulfillment capabilities and, over time, we see the Chinese market place to be the greatest growth opportunity within the Asia-Pacific market.

Across all product categories and regions, we continue to develop the website features that will, in fact, provide a more compelling experience on all end-use devices. The trends are clear with nearly half of our visitors now coming to our website from a tablet or smartphone. The need is now.

The first round of our integrated experience, which we internally define as phablet [ph], is launching very soon, and it looks great. We're starting with a new homepage and a series of corresponding web page updates, and these are incredibly compelling. Full deployment of this phablet [ph] experience for the holiday season will happen across phone and tablets. This is a critical initiative for us to build a better mobile experience, which we believe will improve conversion and allow us to invest even more aggressively in marketing to drive traffic to our website.

We also see great momentum and expansion opportunity for our exclusive partnership with Monique Lhuillier. Last year, we launched a number of engagement ring settings and wedding bands on our site. The response from consumers has been incredible. The launch styles sales are exceeding our expectations. For the holiday season, we're expanding this product line further with updates in both wedding and bridal, plus an extension into diamond jewelry. It's too early to share secrets, but rest assured, we are excited about where this is heading.

Next, I would like to discuss changes at the board level. Today, we announced that our founder, Mark Vadon will step down from his role as Chairman and Director of the board at the end of the year. As founder, Mark is an integral part of Blue Nile. His vision and obsession over the customer experience is firmly part of our DNA and will be his legacy as we continue to execute that vision by providing an exceptional and empowering experience, offering unique online tools, education, high-quality diamonds, and all at incredible value.

Mark expressed to me that his decision to step down was based on his confidence in the strength of the management team and the solid digit -- double-digit execution we have now achieved for 5 consecutive quarters. On behalf of Mark -- on behalf of Blue Nile, we would like to give Mark a big thank you.

On a personal note, I want to acknowledge that Mark has been an incredible teacher, colleague, friend and confidante to me. He has provided incredible counsel and guidance for which I am truly grateful. While I believe strongly in Blue Nile's future and know that it's stronger than ever, Mark will be missed.

I would like to end my discussion with a commentary on the remainder of the year. As we continue the execution of a long-range plan in engagement, non-engagement and international, we continue to prepare for the holiday peak season.

In marketing, we will increase our investment as we focus on driving traffic and awareness. We have exciting and comprehensive marketing plans in place for online, across social, media and PR.

In summary, we are delivering strong profitability. We are investing in the business for the long term. We remain incredibly focused. We remain incredibly focused on the fundamental tenets of the Blue Nile brand and the priorities we outlined at the beginning of this year. We will remain steadfast in offering our customers the highest quality products at the most compelling value, hands down. We will deliver all this through an empowering shopping experience, and one that continues to evolve, to be available for consumers where, when and how they want to engage, no pun intended.

On a PC, on a mobile phone, on a tablet or through our call center, we will deliver an exceptional customer shopping experience. One that we know they will want to share with their friends and family, and that will drive a level of loyalty and advocacy you can't buy, you must earn.

And last, I would now like to thank everyone on the Blue Nile team. It is a team, it is our team and it is the heart of our success. Our team obsesses about every customer. Our team obsesses about the value they bring to market and delivering an exceptional experience to each customer, each and every day. The list of thank yous is very long, but I want to thank many. So instead of that, I'm just doubling back to our team to once again, say thank you. Thank you for being here. Thank you for your efforts, and thanking you for being what has delivered the last 5 quarters of double-digit growth and an expectation for an incredible holiday season ahead.

And now, I'm going to turn the call over to David.

David B. Binder

Thanks, Harvey. And welcome to everyone on the call this morning. As Harvey mentioned, we are excited to report great results in the second quarter with double-digit revenue growth and a significant increase in profitability versus the same quarter last year.

Now turning to the details of the financial performance. Net sales totaled $108 million, representing an increase of 18.7% versus the second quarter of 2012.

U.S. engagement sales for the second quarter grew 22% to $63.9 million, compared to $52.4 million in the second quarter last year. This is our fifth consecutive quarter of double-digit growth in this category.

This result is also impressive when you look at the comparable quarter performance last year. Our growth of 22% is on top of quarterly growth from last year of 19.2%. We continue to set quarterly records in the volume of engagement rings sold, which is at the highest level reached, outside of any holiday peak period. Additionally, growth is strongest at our core price points. Orders and revenue from customers spending less than $25,000 on their engagement ring continues to grow at significantly faster rates than those at higher price points.

Now looking at the sales of our non-engagement products in the U.S. Sales in this category grew 11.3% to $27 million versus $24.2 million in the second quarter last year. This represents a market acceleration from the prior 2 quarters. The number of units sold in both bands and diamond jewelry grew by double-digit and at rates greater than the overall category average. This performance is what we expected. The opportunity to accelerate the sales of wedding bands is inherent in our growing volume of engagement ring customers.

Within diamond jewelry, we see great opportunity to expand the sales of our diamond basics built on the foundation of our diamond supply chain and excellent customer service.

Now turning to our international markets. International sales for the second quarter increased 19.1% to $17.1 million compared to $14.4 million last year. On a constant currency basis, international sales increased by 20.6%. This represents the third consecutive quarter of growth above 20%. Growth rates in Asia Pacific and Canada were greatest, which offset a downturn in revenue from Europe. Again, these results were as we expected. In Europe, we struggled to generate growth in a tough economic environment. By contrast, Asia-Pacific is a tremendous opportunity for growth, and that represents nearly half of our international revenue.

Investments we're making to expand our marketing, assortment and service within China are helping to resonate, or helping to generate sales broadly in the region. Within Canada, we continue to drive growth through expanding assortment and targeted marketing.

For the overall business, gross profit was $20.1 million, up by $2.9 million from our result in the second quarter last year. Gross profit as a percentage of net sales was 18.6%, compared to 18.9% last year. The decrease in gross profit as a percentage of net sales resulted entirely from a shift in the mix of our revenue to the lower margin engagement products.

The mix of revenue from engagement grew to 71.9% in the second quarter of 2013, versus 70.2% in the same period last year. On a sequential basis, we posted an increase in gross margin percentage, growing from 18.2% in the first quarter this year. While the mix of revenue from our engagement categories continues to increase, we are generating a higher level of gross margin within the category.

Selling, general and administrative expenses increased 12.2% to $16.7 million in the second quarter, compared to $14.9 million in the second quarter last year. Total SG&A expenses as a percentage of net sales equaled 15.4% compared to 16.3% in the prior year, demonstrating leverage in the business and expanding profitability. Within our SG&A total, marketing expense equaled 5.2% of revenue, down from 5.7% last year.

We also delivered leverage within our SG&A expenses. With greater revenue scale, we are able to expand operating margins while continuing to increase the amount we're investing in marketing, technology and headcount to continue our growth.

Operating income for the second quarter totaled $3.4 million compared to $2.3 million in the second quarter last year, an increase of $1.1 million. This growth is driven by the increase in gross profit of $2.9 million, offset by an increase in SG&A of $1.8 million, of which marketing expense increased by $500,000. Net income totaled $2.2 million.

Second quarter earnings per diluted share equaled $0.17 compared to $0.11 in the second quarter of 2012. Net income per diluted share includes stock-based compensation expense of $0.07 in the second quarter of this year, compared to $0.06 in the second quarter of 2012. Non-GAAP adjusted EBITDA for the second quarter of 2013 was $5.5 million compared to $4.5 million from the second quarter last year, an increase of $1 million.

Cash flow generated by operations totaled $10.3 million in the second quarter and $26.1 million over the trailing 12 months. We continue to generate cash from operations, significantly in excess of our operating income and consistent with the fundamentals of our business model.

Our quick conversion of sales to cash, coupled with our efficient, centralized inventory, yields negative working capital and superior cash flow generation with growth. We ended the second quarter with cash and cash equivalents of $47.3 million compared to $53.7 million in the prior year, representing a decrease of $6.4 million. Over the past 4 quarters, we spent a total of $32.8 million to repurchase 1.3 million shares. Of this total, we spent $2.5 million in the second quarter of 2013, purchasing 79,000 shares. Year-to-date, we've purchased a total of 122,000 shares.

Our inventory balance at the end of the second quarter equaled $31.6 million compared to $26.8 million at the end of the second quarter last year, an increase of 17.9%. As our inventory balance is growing at a rate slower than revenue, our turns are increasing. We look to continue this momentum throughout the year, and enhance our yield in operating cash flow.

Now turning to our guidance for the third quarter of 2013. We expect net sales to be between $96 million and $100 million, and earnings per diluted share between $0.13 and $0.17. For the full year, we continue to expect net sales to be between $440 million and $470 million, and earnings per diluted share to be between $0.75 and $0.85.

Our guidance for the third quarter reflects some caution about moderating short-term growth. As I mentioned earlier, growth in the sales of engagement products priced above $25,000 has lagged our core price points. As we enter the third quarter, we continue to see relative slower performance in this area. By contrast, growth in our core price points continue to be strong, and we are optimistic by these trends and what they mean for longer-term momentum into the fourth quarter.

Now I'll turn the call over to the operator, and we'll be happy to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question will come from the line of Ross Sandler with Deutsche Bank.

Ross Sandler - Deutsche Bank AG, Research Division

Just one question for Harvey, one for David. Harvey, can you talk about the efficiency that you're seeing in marketing, is that from optimizing your marketing channel strategy? Is that from leverage from higher kind of organic repeat customer purchases? And then David, the gross margin dynamic that you explained, it seems like lower ASP engagements growing faster than higher ASP engagement. So that would create some gross margin lift. If non-engagement were growing in line with engagement, what would, I guess, overall gross margin improvement look like?

David B. Binder

Hey Ross, this is David. I'm going to try to handle both questions and Harvey, I'm sure, will chime in if I missed anything. First of all, on the marketing efficiency, I mean, we definitely expand our marketing and our investments in marketing when we see a peak holiday season coming up, like Mother's Day, which did really well for us and we invested behind that. As our core business is doing really well and as growth in engagement outpaced non-engagement, we gained a lot more efficiency in the marketing line. So we're able to invest less as a percentage of revenue with core engagement, because there's so much good organic traffic, there's so much organic traffic in non-pay channels that drive a lot of that business. So some of the marketing efficiency had to do with the mix in revenue towards engagement. On the gross margin dynamics, certainly, if non-engagement grows faster, we would expect the gross margin to improve. The improvement within the categories, as you noted, the engagement business did benefit somewhat from lower ASP, lower growth at the high end, will give us a higher gross margin percentage within that category. If we can get our non-engagement business growing at a rate equal to gross -- equal to the total business, I mean, we would see a -- I would say, a market improvement in gross margin. I won't quantify it on this call, but historically, we've said that gross margins within non-engagement are twice that of engagement, and that dynamic is holding true.

Operator

Your next question comes from the line of Trisha Dill with Wells Fargo.

Maren Kasper - Wells Fargo Securities, LLC, Research Division

It's Maren Kasper for Trisha Dill. I have 3 quick questions. One is, can you speak to the precious metals prices you're seeing? Based on our research, we can see the diamond prices are falling a bit or relatively stable, while gold and silver are declining a lot, and kind of how that flows through your model. And then on non-engagement, great growth here. And it's nice to these strategies playing out. Where do you think you guys are taking market share from? And then finally, can you give a little bit more detail on Europe? And can you maybe speak to regional trends?

Harvey S. Kanter

This is Harvey. I'll handle the first 2 and David will talk -- give a little more color on Europe. Commodity prices. We have talked, actually, about mining, really, the value that customer opportunity has through the reduction in price. So in gold specifically, we have talked about the 10% reduction in pricing, bringing to market, better value. As the market has seen commodity prices fall within the first big fall of gold, 2 days later, we reduced, basically, our entire jewelry assortment by about 10%. And we have continued to really maximize the value that we bring to the customer as pricing has moved down. And that's an opportunity we have, based on our turnover, which is typically 3x to 4x faster than traditional jewelers with one inventory center, if you will, and the ability to turn so much faster, we have taken those prices down. We've already bought back inventory at the lower cost structure and continue to bring that value to the customers. And the same can be said in silver. On where -- the second question you had was where the engagement business -- non-engagement business is going?

Maren Kasper - Wells Fargo Securities, LLC, Research Division

Yes, where do you think they're taking market share from?

Harvey S. Kanter

Yes. And I would say that our share of market, while being really meaningful, it's a much larger market. If you think about the diamond jewelry business and the fashion business, we talk about a $40 billion addressable market. And so it's -- our share of market, I think, it would not be defined specifically as, we think we're taking share from any one company or really categorically, in total. But to David's point, our growth is 11% on a relatively small share market, less than 1%. I don't think we characterize it as a meaningful share pull at this moment.

David B. Binder

And Trish, your last question, this is David, I'll field that one. So when you look at our international market, the first thing we said was, Europe was weak for us, which has been what we've expected to happen, really for the past few quarters. The macro environment there is challenging and we sell high price point fine jewelry. We've seen strength until this quarter, which has really surprised us. The high-end consumer, where there's health there, tends to favor our value proposition. And so we'll see good growth -- we had seen good growth historically. But we continue to expect Europe to be challenge really, until the macro environment improves and we don't expect that to happen throughout the rest of this year. What's really exciting to us is the strength that continues to come out of Asia-Pacific and like we said earlier, it's about half of our international business and we think it will continue to grow at a rate faster than the other regions. For us, one of the dynamics that is most profound is that building a greater presence in mainland China, where your consumer base is so large, and where even the wedding population is -- the number of weddings per year is 5x that of the U.S. It's a huge addressable market. And having presence there actually creates resonance and sort of the momentum effect throughout the region in total. So as we're adding product in mainland China, we're able to market more, we're able to have a greater level of customer service that is in China and broadly within Asia, and that's actually helping lift our performance across the region.

Operator

Your next question comes from line of David Wu with Telsey Advisory Group.

David Wu - Telsey Advisory Group LLC

First, Mark, I just want to give you my congratulations on building a fantastic and really, truly game-changing company over the years, which does lead to my first question for Harvey. Perhaps if you could talk about your initial goals that you may have for the company as Chairman, and really how you plan to take Nile to the next level?

Harvey S. Kanter

David, that's a great question but quite honestly, it is the exact same vision that we have continued to share. The bringing to market, to the consumer the incredible value and the highest quality offer is number 1. And doing that is an experience that this as empowering as it has been for the last 14 years, will be equally so as we move forward in our initiatives with respect to really giving the customer the ability to have that same experience anywhere they want it across phone, tablet, with our call center and on the PC. And honestly, nothing changes there. We intend to carry that torch in every shape and manner moving forward and continue to grow share of market and share of mind.

David Wu - Telsey Advisory Group LLC

Great. And obviously, I'm very encouraged to see that non-engagement continued to accelerate. And want to know if you could provide some more color on what styles, what items are really resonating with the customer and how ASP trends are tracking. Is it still declining as that customer gravitates towards the more entry-level price points.

Harvey S. Kanter

On terms of the product, I'll talk to it specifically. David and I might tag team on ASP. But specifically, our core business in the band category is driven certainly by diamonds. So whether it's eternity rings, 3-stone rings or the core band business in terms of gold and platinum, and what have you, those businesses are working. It's not any one specific thing, quite honestly. It's the execution of band matcher program, it's the execution of [indiscernible] email capture, it's the execution of life cycle marketing to really leverage the consumer buying engagement rings to buy a band as a follow-up. We have data that says, that literally, the market-- there may be as much as 2x potential in terms of the market opportunity to accelerate our band business to match the number of consumers looking to buy a band from the same retailer that's buying an engagement ring. And so, we have gone after that, we have talked about that on several calls. It's one of our greatest initiatives, we refer to it as the attachment rate, and we are seeing success, most recently with the launch of band matcher. And if you have been on the site or on a phablet [ph], you would've seen that we have 2 to 5 matching bands for each engagement ring. And we make it a seamless experience for him and for her to understand, during the buying process, what the options are. And it clearly appears to be working in terms of incremental sales conversion and what have you. So that's really the answer relative to the band side business. On the diamond jewelry side of the business, we brought to light in the last quarter on the tablet-based environment an element of build-your-own, which wasn't in place, which will then extend further as we launch the full phablet [ph] experience in the fall. We really mined the diamond business and our best foot forward is the build-your-own category, which we've really continued to drive in our marketing, in our life cycle and in major events beyond really getting engaged and those seem to be working really well. And I wish I could tell you that there's one great thing but I guess, at the flip side, is I'm happy to tell you, it's not any one thing. It's really a holistic experience across the website, the product mix and the experience consumers are having that are generating this growth and development, and our efforts specifically around those 2 areas. I might also remind you that what we have said in the recent past phone calls was that we have figured out over the last year that the opportunity to drive incremental assortment, in diamond jewelry specifically, was something that we have not maximized. And as we broaden that mix, especially broadening it at the way that we bring it to market, it is clearly getting traction. And those were the 2 areas that we saw the greatest opportunity to really drive non-engagement and it's starting to accelerate.

David Wu - Telsey Advisory Group LLC

That's great. And in terms of the third quarter sales guidance, the caution of a moderating sales trends, is that sort of a reflection of what you saw in July? Or is there sort of a level of conservatism sort of built in there?

David B. Binder

This is David. Coming out of June and into July, we saw the high end. I mean it's been growing at a rate slower than the core price points for a few quarters now. And in general, we'll take that dynamic because the high end can be somewhat volatile period to period. Our guidance reflects what we know about the business and what the most recent trends look like. And starting at the end of June and into July, we saw the high end slow down a little bit more than it had in the prior quarters. So that's what we're really reflecting. I mean, I would say that we would continue to expect that to be volatile, it might slow down for a period of time and then spike back up. And the fact that the core is doing well is what really gives us the optimism. We're just -- we're providing a little bit of caution based on the current trends.

David Wu - Telsey Advisory Group LLC

Got it. And then just lastly, if you could perhaps talk about, or even quantify it all sort of the incremental sales traction that you've been generating with the ADS partnership.

David B. Binder

Sure. This is David again. We are coming on to a little over a year since we launched ADS. It was -- we're probably in our 14th or 15th month. And we continue to see that program do really well. It's actually now at a level greater than we've had with any financing program in the past in terms of the relative number of sales that it's generating. I think, as we go forward, we would expect that to continue to generate a good incremental lift for us. But I think what will become more and more interesting over time is how we can remarket to those customers who now have a credit line with Blue Nile. And I would say, there, we're making some traction but there's a lot deeper that we can still go. This is a multiyear deal. We really like them as a partner and I think, over time, we're going to evolve to really generate a lot of repeat business from the customers who have a line of credit with us.

David Wu - Telsey Advisory Group LLC

Excellent. And what percentage of the business now is generated through the program?

David B. Binder

We don't provide that metric specifically, what I would say is that if you look at some of our peers who have over 50% of the revenue on their in-house financing, we're not approaching those levels. We're at double-digit percentage but we're not approaching 50%.

Operator

Your next question will come from the line of Mark Mahaney with RBC Capital Markets.

Mark S. Mahaney - RBC Capital Markets, LLC, Research Division

2 questions, please. Harvey, you talked a little bit about marketing plans for the back half of the year. I know there's only a fair amount that you'll disclose about them. But qualitatively, do you expect that we'll see something dramatically different than what we've seen in the past? Is it just -- or is it more a quantitative increase in current channels? Just any sort of color on that. And then secondly, on the mobile side, I think you said that more than half of your visitors are coming through mobile channels. I assume that, as a percentage of revenue, mobile is a lot smaller than that. Could you talk about what you think -- is there an opportunity in terms of improving the transactions capability of your mobile user interfaces, or do you not need to do that because it's a seamless experience anyway and usage on mobile devices inevitably leads to a converted sale on the desktop?

Harvey S. Kanter

Great question, Mark. I'll take the first one and then tackle the second. The first one is both quantitative and qualitative. We will continue to invest in marketing and ramp in Q3 and Q4, and that's incorporated in our guidance. We believe that there is the opportunity when the fish are biting, so to speak, to push harder, and we will do that. I would not characterize it in a way you wondered. If it was going to be drastically greater, it will be within appropriate reasonable level of increased investment, maximizing trial and awareness and ultimately, bringing more business through the funnel. In terms of qualitatively, again, I wouldn't characterize it as drastic. I would definitely acknowledge that we will continue in incrementally move how we're executing first and foremost, I would say, in terms of visibility, will be in the social and PR world. We have some plans which, to your point, I'm not really at liberty to talk to in much way. But our social media strategy is one of our more successful elements within the marketing. Whether it's across Twitter or Pinterest or Facebook or some other elements, if you really continue to look at what we're doing, we're creating engagement and dialogue with a consumer. It's really powerful and it creates awareness for the brand. But one of the things we've really learned and understood long ago was that friends and family have the greatest influence on the consumer buying the engagement category. And really, that's what -- how we look at, really, the social media world. The ability to engage consumers, have them share with their friends and family, is very powerful and we're tracking and monitoring what that means both in incoming traffic and revenue. While we don't talk about specifics, it's meaningful enough to continue to warrant our investment of time and energy. In addition to that, as we launch certain elements of what I've referred to in my opening comments, we have some things, if you will, that will expand further. Obviously, most -- first and foremost is Monique Lhuillier. And as we do that, we'll continue to drive in ways that are unique as we did, when we launched it last year, that are not as traditional from our perspective, but incremental in supportive of the really big push for what we will launch in fall, in which we are feeling really excited about. And then in addition to that, we will continue to drive down what I would define as more, hard to believe, I can say, but traditional digital opportunities that exist today. And as the world evolves, qualitatively, we'll push ourselves to make sure we stay in the forefront. And that's really generated most around mobile and all interfaces mobile. And that's a segue then to your second question. And really in mobile, our expectation is to bring a different level of experience. So what we're launching in fall is response to the design for all mobile devices, which is basically -- it’s an agnostic experience that, regardless of what device you come on, the device will respond and adapt to that device, so that you can have basically a transparent experience that is the same. So sliders being available to be used on any mobile device, today is not at the level it will be in the future. The rollout of the build-your-own program, which has been launched on tablet but is not yet fully capable on a mobile phone, will be brought to life. And elements such as that will then continue to allow the consumers not only to actually interact with us on a mobile device but have a much higher likelihood to actually convert on a mobile device, or at least maintain what will be a cart that can be then picked up on a PC, which today is not in place as well. So that experience in a mobile device will measurably improve and give the consumer the ability to not only engage but to convert on that device itself or into a shared card to get pretty far along and then finish the transaction at home. Our expectation is conversion will go up, average ticket will go up, the PC will still be the -- a really meaningful part of our experience based on price point and the decision process. But mobile-based devices will increment significantly from where they are today.

Operator

Your next question comes from the line of Kevin Kopelman with Cowen and Company.

Andrew Marok - Cowen and Company, LLC, Research Division

This is Andrew Marok on for Kevin. Two questions. Was just wondering if you can provide an update on your promotional environment in Q2 and what you're seeing into Q3 so far? And on the international side of the business, if you could give us an update on your thoughts on investment versus profitability in that business.

Harvey S. Kanter

Yes. This is Harvey again. On the promotional side, we believe that it's pretty hot. We, as Blue Nile, have always brought to market such incredible value with our everyday pricing structure that we have not have kind of played the same, if you will, as some of the really hot retail promotions out there. And what I'm referring to is the 50%, 60% and 70% off. It seems like it accelerated in the tail end of Q2. There might be some soft business on our end. We're feeling really good about where we are, our results speak to that. And we have basically maintained a year-over-year comparison. So our summer sale event was not a new event. It was similar. Our partner promotions, whether it be LivingSocial or what have you, are similar. And we have not pushed harder on promotion. And you can actually see that as well in our gross margin results overall, relatively in line with what you would expect. That's what I would suggest. So we feel really good about where we are promotionally. We do believe the market is pretty hot and that I think it's just not literally limited to the jewelry diamond category as much. We've also would suggest that we've seen that in the apparel side. Internationally, we're continually challenging ourselves to invest to maximize the opportunity in front of us. And while we don't speak about profitability specifically, I would tell you that we are pushing very hard to make sure we are there to mine the Asia-Pacific market. And our specific reference to seeing China is the single greatest opportunity in that market continues to be an investment for us. We have invested with people, we have 2 literal, physical office locations now in Shanghai. We have a team in place in Shanghai. We feel incredibly good about what they're doing. And our business, as David mentioned, is now nearing and really achieving half of our international revenue in that entire geography, and feel really good about the opportunity ahead in that respect. David, any other comments [indiscernible]? That would be the kind of general perspective.

David B. Binder

No, I'm good.

Operator

Your next question will come from the line of Paul Bieber with Bank of America.

Paul Judd Bieber - BofA Merrill Lynch, Research Division

First, I was wondering, when we think about the long-term operating model, how should we think about margin expansion? Can the business get back to the margins from 2010 to 2011 timeframe over the long term? And then secondly, just following up on Asia-Pacific. Can you comment on some of the initiatives that you're investing in specific to China to scale that business and basically realizing, capitalize your opportunity?

David B. Binder

Paul, this is David. I'll take both questions. So in terms of the long-term operating margin. When you look at just the gross margin percentage, we're going to continue to invest to assure that the value proposition is significant when customers come to the site. We have said that gross margin as a percentage of revenue can get back to some historic level, some of our historic highs, when the mix of revenue shifts more towards non-engagement. And that's still the case. That's still our belief. Now I would say that we see a tremendous opportunity to continue the momentum we have in engagement. So the timeframe could be relatively longer, but that's because we are doing such a good job at driving engagement and we think, in the long run, that creates a lot of momentum for the other categories. We think that there's greater efficiency with scale throughout the rest of the P&L, marketing and other SG&A. So eventually, this business can get back to its original operating margins when we were at our peaks. But I would say for the short and the midterm, we're really focused on continuing investments and making sure that we continue to grow the business to scale. So we would prefer it to take time because that would mean that we continue to grow at significant double-digit rates. Within Asia Pacific, the investments have to do -- they're broad in nature, but we believe, in general, the more presence we have in market, the more we can really authentically push marketing, and more authentically we can really provide product and customer service. Since Harvey mentioned, having multiple offices in China are bringing more product to market, having customer service agents who are locally hired, speak the language, obviously, but also know the cultures and style, we think that, that creates more authenticity with the customer and it gives us an ability to spend marketing dollars more efficiently, so we can then ramp that spend and drive more volume. And as we keep saying, that works in China but it also resonates broadly in Asia-Pacific. And we think that's fundamental to some of the trends we're seeing in the strength in those markets.

Paul Judd Bieber - BofA Merrill Lynch, Research Division

And just a quick follow-up to Mark's question on mobile. When you think about mobile right now, do you consider it a headwind or a tailwind for the business?

David B. Binder

I would say that it's kind of is what it is. It's the development of how consumers are choosing to really read content, to engage with commerce. And for us, it's an interesting trend, because we really think that we serve the next generations more and more so than our competitors. The next generation of people who are looking to get engaged grew up in an e-commerce environment. They're comfortable buying significant purchases online. And they also are doing it through their mobile devices. So it plays really well into how our business model of providing transparency, product, customization. And we think that we can be really ahead of the industry in doing that on multiple form factors. So I wouldn't say it's a headwind or a tailwind for us right now. But we think that we can lean into it pretty significantly for us to really enhance our value proposition and our market leadership.

Operator

Your next question will come from the line of Rick Patel with Stephens Inc.

Rick B. Patel - Stephens Inc., Research Division

Just a question on innovation and returns on investment. I know you've put a lot of investment into creating a better experience for customers on the web and through mobile devices. When you make these improvements to customer experience, do you see an immediate step-up in traffic or conversion? Or are these experienced changes all about trying to create a more loyal customer over the long run?

David B. Binder

Rick, this is David. We actually do, I would call, a very thorough assessment of the return on investments, behind every project we do both in technology and marketing. We are incredibly disciplined in that regard. And we do take -- we can tend to take somewhat of a longer-term view, but we actually look for metrics to immediately improve when we launched some of our initiatives. Harvey mentioned that we've launched band matcher, we've launched a few elements that improve the mobile experience. And we immediately looked for, at least, improvements in metrics in terms of click stream, conversion rates for the audience that, that touches. That really proves that our thesis in terms of a mid- or longer-term ROI will pay back. And if it doesn't work, then we adjust pretty quickly. It's one of the benefits of being a relatively small and very nimble organization. And so we would be remiss if we didn't measure ROI and the key metrics behind that very closely because we can respond so quickly.

Rick B. Patel - Stephens Inc., Research Division

And I know you had a strong quarter in the band business in general. When you launched band matcher, did you see this, did you see that side of business accelerate in the month of June? And do you see this as a primary driver for non-engagement in the back half of the year?

David B. Binder

So we certainly saw the attachment of customers who go through the band matcher experience perform better than others. So the initial read on it was, this is a good experience and it's starting to get the behavior and the lift that we would expect it to have in the long run. What we've launched so far, I would say, is an early stage, and we need to improve the depth of assortment that's behind it. And we also need to make it work much more fluently -- fluidly through all mobile devices. So I would say that's early, that the lift that we saw in the second quarter has to do with a lot of elements, band matcher is one of them. But just the fact that our engagement volume continues to break records will tell you that the band business should be doing a lot better. And I think that this is a gradual progression of improvement that we should see over the next few quarters.

Rick B. Patel - Stephens Inc., Research Division

All right, great. And just one last question regarding the moderation, high-end spending in the new quarter. Is this something you're seeing just in Europe, or is this relevant across geographies?

David B. Binder

Great question. It's across geographies, which we try to diagnose every component of our business. And this one felt to be, or feels to be a global and macro. Then again, I will revisit the comments earlier that it is a very volatile part of our business. So I mean, you can see 4, 5 week swings one direction, and then they can come back. So it's hard to read exactly what's causing it, but it's not specific to any one region.

Operator

Our final question will come from the line of Paul Swinand with Morningstar Inc.

Paul Swinand - Morningstar Inc., Research Division

I just wanted to drill down on mobile a little more. I know we've got a lot of discussion already. But can you give us any idea, just really how difficult it is to do the mobile and tablets. And maybe just give a rough idea of the absolute spend. And where I'm digging at there is, how difficult will it be for smaller players to catch up if you continue to build an advantage there?

Harvey S. Kanter

This is Harvey. It is, for us, a really significant part of our investment and it's obviously incorporated in all that we've communicated in terms of guidance and the model. But it's pretty meaningful. We have a relatively robust team at this point in place. We are using a combination of internal and external resources to tap into kind of the best of the best to really bring this forward. But it has our attention and then some. I think that it is difficult for retailers that are not specifically kind of on the same page, don't have the wherewithal, don't have the -- really, the history of Blue Nile in terms of disruption and bringing technology to the marketplace. Things that we initially launched that were disrupted, things like sliders and what-have-you, build-your-own business, the way the Diamond Search works, those being brought to life in the mobilization environment is really complex. It's going to be very robust for us, that's our expectation. But without specifically talking about how others -- how difficult or easy it is for them, certainly the expectation is it's a major undertaking for us and it would be for them as well. And so I would think that if they're not deep into it at this point, there's not a quick catch-up you can do. We have been at this for quite some time, we were the first jeweler to ever have an app quite some time ago. Our mobile experience has been robust quite some time ago. And I think David mentioned, and if he didn't then I'll be mentioning this for the first time, but our consumers really desire this and are requiring it at this point. We have sold both on the phone and the tablet items in excess of $200,000. I think our biggest ring on a tablet was $250,000 and I think $226,000 engagement setting on a mobile phone. It's a requirement for our business. I don't know that everyone have the same level of requirements we do. But it has helped push us to develop the level of intents [ph] that we have around what we're defining as the tablet-based environment.

David B. Binder

The one thing that I would add is, the skip of our business really helps us figure the roadmap of what consumers -- what resonates with consumers. And so mobile is an ongoing development to make sure that you're optimizing the experience. And the more customers you have, the deeper your product set is, the better you can build that experience. Our competitors, many of the startups, don't have that volume, so they're not going to know exactly what to do. At least I wouldn't expect that. And I would expect is that they will copy what we do. And we're already seeing that. They'll imitate and we'll stay ahead.

Paul Swinand - Morningstar Inc., Research Division

Interesting. But obviously, it's going to take them maybe a little longer bit on up the scale just because there's a lot of fixed costs involved. Is that fair?

David B. Binder

That's fair. And what you see on the pages you can imitate, but you may not be seeing a lot about what goes behind the full customer experience. And so you can imitate but it's -- you're not going to be able to replicate the parts that are really working.

Paul Swinand - Morningstar Inc., Research Division

Again, very interesting. Can you comment on -- you did say 50% or at least coming in through mobile or tablet. Is that the same international? Or is that really a higher number in the U.S. and that's blending to 50%?

David B. Binder

Actually, internationally, you'll see a higher use of mobile and, particularly, smartphones. So I think that, in particular, in Asia Pacific, they're ahead of the curve in terms of mobile adoption, particularly for commerce.

Paul Swinand - Morningstar Inc., Research Division

Interesting. And is the-- are the developments that you need to do that you were just describing, is that pretty much to apply to all regions? Or do you have to do separate development for different regions like China?

David B. Binder

We're really focused on a central platform so that we can gain leverage and scale with the developments. So everything that we do is really intended to push out across all regions and all devices. We try to keep it as centralized as possible for efficiency.

Operator

I will now turn the conference back over to management for any concluding remarks.

Nancy Shipp

Thank you for joining us today. And we look forward to chatting next quarter. Have a great day.

Operator

Ladies and gentlemen, this does conclude today's conference. Thank you, all, for joining and you may now disconnect.

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Source: Blue Nile Management Discusses Q2 2013 Results - Earnings Call Transcript

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