Geeknet's CEO Discusses Q2 2013 Results - Earnings Call Transcript

| About: Geeknet, Inc. (GKNT)

Geeknet Inc. (NASDAQ:GKNT)

Q2 2013 Earnings Call

August 1, 2013 11:00 AM ET

Executives

Nicole Gunderson – IR

Katy McCarthy – President and CEO

Analysts

Daniel L. Kurnos – The Benchmark Company

Justin Ruiss – Sidoti & Company, LLC

Operator

Good day, ladies and gentlemen, and welcome to the Geeknet, Inc. Second Quarter 2013 Financial Results Conference Call. At this time all lines are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator instructions) As a reminder, today’s conference is being recorded.

I would now like to turn the call over to your host, Nicole Gunderson, Investor Relations. Please proceed.

Nicole Gunderson

Good afternoon, and welcome to Geeknet’s conference call reviewing second quarter 2013 financial results. Joining me today is Katy McCarthy, Chief Executive Officer and Kirk Somers, our Chief Administrative Officer.

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 believes, expects, estimates, anticipates, and other similar expressions 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 risk 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.

Any redistribution, retransmission or rebroadcast of this call in any form without the express 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 on 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 reconciliations of these measures with comparable GAAP measures.

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

Katy McCarthy

Thanks, Nicole, and welcome everyone. Geeknet had a strong second and a successful first half of 2013. Our mission is to be the number one destination in the galaxy for smart products while delivering an amazing customer experience.

This quarter, ThinkGeek 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’ll give an update on our progress toward our key initiative. As a quick reminder, our financial results showed the impact of the media business that we sold last year and discontinued operation. We have also adjusted the 2012 results accordingly.

ThinkGeek second quarter revenue increased 24% to $22 million compared to $17.8 million in the second quarter of 2012. ThinkGeek continues to make progress on the bottom line as well. GAAP net loss from continuing operations for the second quarter was $1.5 million or $0.22 per diluted share. This includes severance and other expenses related to leadership team changes totaling $538,000. Excluding these items, GAAP net loss from continuing operations was $1 million.

For comparison purposes, net income from continuing operations in the second quarter of 2012 was $1.3 million or $0.20 per diluted share which included a $4 million gain on the sale of the Collabnet investment.

Adjusted EBITDA for the quarter was a loss of $356,000 compared to a loss of $1.8 million last year.

Excluding severance and other expenses related to leadership team changes, adjusted EBITDA was $182,000.

Product gross margin was 26%, a vast improvement from 19% in the second quarter of 2012. Progress in this area came from increased revenue from GeekLabs and wholesale products and increase in excusive ThinkGeek products and improved vendor management. Overall gross margin was 20% versus 12% in the second quarter of 2012.

Total operating expenses were $5.9 million, a 13% increase over the second quarter of 2012. Excluding severance and other expense related to leadership team changes, operating expenses for the quarter were $5.4 million or up 3%.

Sales and marketing increased 7% year-over-year. Technology and design increased 70%, due to increased investments in innovative GeekLabs custom products and ThinkGeek site and technology improvements.

G&A was down 2%.

We ended the quarter with cash and investments of $48 million compared to $57 million at the end of 2012, reflecting the purchase of products to support our second half business plans. Looking to the second half of the year, keep in mind that our historical pattern is buy inventory in the third quarter and early part of the fourth quarter in preparation of the holiday season.

We continue to make progress in our year-over-year site metrics. Daily unique visitor was 20 million, an increase of 10%. Orders received increased by 6%. Average order value increased to $60 compared to $58 in the second quarter of 2012. Conversion was 1.54%, down slightly from 1.59%.

As I mentioned previously, our goal is to build a ThinkGeek brand that’s the same profitable growth. To do this, our focus is on five key initiatives, deliver creative and successful new products; expand ThinkGeek brand awareness and customer base; improve customer experience and increase conversion; increase gross margins to improve category planning and vendor management and improve process excellence and quality.

This quarter, we made progress in all of these areas and we continue to drive our strategy forward. We created excitement in our community by delivering over 500 creative new products including 92 exclusive products.

GeekLabs sales increased significantly with fantastic such as the Tactical Barbecue Apron, the Tony Stark Light-Up LED Iron Man T-shirt, and our Minecraft products. We also had success with our Doctor Who product line, our iGeek portable charger, the bag of holding messenger bag, our Star Trek pajamas and polos, and designer Star Trek watches.

Unique visitors this quarter increased 10%, showing that we’re making progress toward expanding brand awareness in our customer base. Additionally, our wholesale revenue increased $2.4 million over last year. As we made progress in this area, our products are now being sold in several specialty retailers including Toys “R” Us, Hot Topic, HMV, Urban Outfitters, and Books-A-Million.

In order to help increase our brand awareness even further, we conducted an audience segmentation and brand awareness study that identified as significant population of the potential ThinkGeek customers for engagement and possible conversions. Another key focus is increasing conversion. This quarter we focused on implementing improvements to our site including highlighting key license products showing current best sellers and key themes and redesigning our gift center.

We are beginning to see the benefits of these improvements and have more changes to our site plan for the second half of the year. To improve processes and quality, we also plan to dedicate additional resources to improve our site experience and implement a new ERP system.

Before I turn the call over for Q&A, I want to highlight some recent changes to our leadership team and our Board of Directors. Last month, we announced that Julie Pangelinan will be joining us as Chief Financial Officer on August 12. We’re very excited to have Julie join our leadership team.

Yesterday, we announced that Eric Semler from TCS Capital will be joining our Board of Directors. We believe that Eric brings excellent business and financial experience to our company and we look forward to leveraging his knowledge in the new media and e-commerce space as we continue to grow the company.

Additionally, Ken Langone will be stepping down as Chairman of the Board but will remain an active board member. In addition to my role as CEO, I will be replacing Ken as the Chairman of the Board of Directors.

In summary, we had a good second quarter and first half of the year. Looking to the rest of 2013, we’re very focused on planning and preparing for the holiday season and are excited about the many new products and ideas our team will bring to life.

The ThinkGeek team is committed to delighting customers and achieving our key initiatives while delivering year-over-year top and bottom line growth.

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

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question comes from Dan Kurnos, with The Benchmark Company. Please go ahead with your question.

Daniel L. Kurnos – The Benchmark Company

Great. Thanks very much. Good afternoon, Katy. Just to start with, maybe you could give us a quick update on the progress of the internal hires that you made, how they’re doing and any internal changes that they have made so far.

Katy McCarthy

Hi, Dan, how are you? We’re really happy with the new leadership team that I talked on the previous call. As you can see from the results, they’re having impact on top line and on gross margins, and working on the initiatives that I talked about today and on the previous call and making the investments that are necessary for the company to grow long term.

Daniel L. Kurnos – The Benchmark Company

Maybe just a little bit more on that, I know you guys have an interesting culture over there. I think the good, a nice, open and free-type culture, and I’ve seen a lot of companies bring in outside help before and changed some of the way, the internal lay out, have you seen any development from within the business beyond just the metrics that you provided and some of the initiatives you’ve been pursuing?

Katy McCarthy

Well, you bring up an important point, the ThinkGeek culture is extremely important. It’s something we want to maintain and we feel very strongly about that. I think the goal is to bring in people who have previous e-commerce and retail experience, blend it in with the culture to help accelerate the growth of the company and the profitability of the company.

Daniel L. Kurnos – The Benchmark Company

Okay, fair enough. You had a nice – a really big increase in your product launches quarter over quarter from Q1 to Q2 here. Is that what mostly drove the increase in sales growth, how much of the sales growth was organic and should we expect a similar level of product launches going forward?

Katy McCarthy

Well, we made a conscious effort this year to try to launch more products, especially exclusive products during the first half of the year, as we’ve talked about promoting more events throughout the year. However, historically, we’ve always launched a lot of products for our Q4 holiday season and I would expect we have the same goal because new products of course drives sales growth. The sales growth is from new products and as I mentioned, it’s also from our wholesale channel.

Daniel L. Kurnos – The Benchmark Company

So, looking towards Q3 which is sort of the set up quarter for the big Q4, should we expect to see a quarter-on-quarter revenue improvements or might we also see some testing or promotions planned for Q3 to prepare for Q4?

Katy McCarthy

Oh, that’s a good question. So, historically, Q3 has been a time where we have done promotions to make sure we have the freshest inventory possible for our Q4 holiday season. Typically, we have some level of promotion and clearance happening. We’ve been focusing on improving our inventory management and hopes the impact this year won’t be as significant.

I mentioned our wholesale business, our wholesale business can fluctuate. It can fluctuate depending on certain large orders from specialty retailers. Typically, that is a business that’s smaller in the fourth quarter as retailers want to have their products on hand by the time the fourth quarter runs around.

Daniel L. Kurnos – The Benchmark Company

And on the wholesale front, I mean, it seems like you guys have made some good strides in penetrating that channel. It’s a little bit earlier than I think we were expecting. What kind of opportunity do you see near-term to gain traction with additional retailers and I don’t know how much of your hot stock, if you will, is on their shelves currently, if there is an increased penetration opportunity within your existing wholesale channels, so maybe if you could speak to that as well.

Katy McCarthy

Certainly. So I think there is positive momentum, in fact, we’ve built relationships now that we didn’t have previously. So if we have the right products and we have those creative and successful new products, we now have the opportunity to continue to penetrate within those retailers where we already are on the shelves and also potentially pursue other retailers.

Daniel L. Kurnos – The Benchmark Company

And then, just, two, on the expense side, well, one on the expense side and then on CapEx, but you did mention – called out a number of reasons why COGS saw some nice leverage in the quarter. Is that going – do you think that’s sustainable going forward? How much of what you guys have implemented is going to drive, you know, further operating leverage on the COGS side and might we see, as you get towards Q4, a return to a little bit higher COGS?

Katy McCarthy

Well, as you know, our gross margins have fluctuated and they do fluctuate depending upon the quarter. Historically, Q4 has been higher because of the volume that goes through during that period. Of course, everything does also depend on the environment, the competition, promotions, so there are many factors that’ll go into what that looks like in Q4. I think you can look historically in terms of how it’s fluctuated throughout the quarters. We do think the initiatives we’ve put in place are taking hold, but we still have a lot of work to do there.

Daniel L. Kurnos – The Benchmark Company

Yeah, I think, I missed to ask the question. I was meaning more towards going in to Q4 than what Q3 might look like but that’s good enough color.

Katy McCarthy

Well, I think I can add a bit, Dan.

Daniel L. Kurnos – The Benchmark Company

Yeah.

Katy McCarthy

So if you look historically, as I said earlier, Q3 has typically – in the summer time for an e-commerce business and with the holiday coming, than a more challenging quarter. We hope with some of the improvements we’ve made, there’s an impact, but typically and historically, that’s been a more challenging quarter.

Daniel L. Kurnos – The Benchmark Company

Okay. So it might not be fair to expect the same year-over-year improvement in total gross margin in Q3. And then on CapEx, you guys have had pretty muted CapEx to the first two quarters, just maybe your thoughts there on how that might pace over the balance of the year and what your spending plans are.

Katy McCarthy

Well, I talked about in the call and we’ll see how – where it ends up on the balance sheet or on the income statement that we are going to be making – and we’ve made investments in management and leadership changes. We’re also going to be making some investments in our site and in our – in an ERP system to help support the growth the business has already experienced and want to experience and increase our conversions.

We do plan to make those investments.

Daniel L. Kurnos – The Benchmark Company

Got it. Just last question for me actually. Just any updates you have on the mobile front, you gave us some good data on uniques but any update you have on mobile and mobile metrics would be great. Thank you.

Katy McCarthy

Sure. Mobile sales were over $2 million in the second quarter, up from $1.2 million last year. And I think they were $900,000 in the first quarter.

Daniel L. Kurnos – The Benchmark Company

Great. Thanks, Katy.

Katy McCarthy

Thank you, Dan.

Operator

(Operator instructions) Our next question comes from Justin Ruiss with Sidoti, please go ahead with your question.

Justin Ruiss – Sidoti & Company, LLC

Hi, Katy, how are you?

Katy McCarthy

Hi, Justin.

Justin Ruiss – Sidoti & Company, LLC

Just had a quick question, when you were talking about the average order value that it went to E60 from – what was it a year ago?

Katy McCarthy

$58.

Justin Ruiss – Sidoti & Company, LLC

$58, okay. And then, just looking at, I know a lot of this relies on some of the holidays that are out there, are you going to see any kind of tailwind from possibly back to school? Could that help out in any which way for the third quarter?

Katy McCarthy

Well, I don’t know the answer to that yet but I would always say that you look at our site. We’ve made conscious effort to really focus on what we call back to campus this year. So not only really try and capture back to school but the students who are heading back to college, we have a whole gift center around that and promotions that have been geared around that. So it’s definitely been one of the areas that, as I’ve talked previously about trying to promote events throughout the year, it’s one that we’re focused on heavily this year.

Justin Ruiss – Sidoti & Company, LLC

Got you. And just with the, I guess, with the new users coming to the site, I mean, have you seen – I mean, obviously, the order volumes are up and the average order value is up as well, but is it coming from a lot of britty [ph] customers or is it the average user coming by are spending more? I mean, does that break down anyway that has a little more color on it?

Katy McCarthy

Well, I mean, I think you saw that, of course, we continue to incentivize and encourage previous customers to come back. We had 10% increase in unique visitors this quarter. I think, what we see, I believe is an opportunity to continue to increase that through improving our brand awareness and there are some things we learned about potential customers that is early stages, so we don’t have a lot to share as yet but we believe that there is an opportunity.

Justin Ruiss – Sidoti & Company, LLC

Okay, perfect. Thank you very much.

Katy McCarthy

Thank you.

Justin Ruiss – Sidoti & Company, LLC

Okay.

Operator

I’m not showing any other questions in the queue; I’d like to turn it back over to management for closing comments.

Katy McCarthy

Thank you everyone for joining us today. Have a great day.

Operator

Thank you. Ladies and gentlemen, thank you for your participation at this conference. This does conclude the conference. You may now disconnect. Good day.

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