Geeknet Management Discusses Q3 2013 Results - Earnings Call Transcript

Nov. 8.13 | About: Geeknet, Inc. (GKNT)

Geeknet (NASDAQ:GKNT)

Q3 2013 Earnings Call

November 08, 2013 11:00 am ET

Executives

Nicole Gunderson

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

Julie A. Pangelinan - Chief Financial Officer

Analysts

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

Justin Ruiss - Sidoti & Company, LLC

Ralph Weil

Operator

Good day, ladies and gentlemen, and welcome to the Geeknet, Inc. Third Quarter 2013 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to turn -- introduce your host for today's conference, Nicole Gunderson, Investor Relations. Please go ahead.

Nicole Gunderson

Good morning, and welcome to Geeknet and ThinkGeek's conference call reviewing third quarter 2013 financial results. Joining me today are Katy McCarthy, Chief Executive Officer; Julie Pangelinan, Chief Financial Officer; and Kirk Somers, Chief Administrative Officer.

We will make certain statements today with respect to our expected financial results, go-to-market strategy and efforts designed to increase traffic to our website. These statements, as well as other statements including words 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 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 on 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 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 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.

Kathryn K. McCarthy

Thanks, Nicole, and welcome, everyone. ThinkGeek had a strong third quarter, with revenue growth of 30% year-over-year. We improved gross margin, made improvements to the bottom line and continued to invest for growth in the business. Additionally, we made progress on a number of our key initiatives that support our mission to be the #1 destination in the galaxy for smart products.

First, we created excitement in our community by delivering 477 creative new products, including 98 exclusive products. Geek Labs sales increased significantly, with fantastic successes, such as the Minecraft diamond pickaxe and sword, the Iron Man deluxe hero shirt and the Travel Boy carry-on bag. We also had success with our exclusive Borderlands 2 diamond-plate loot chest, which retailed for $99.99 and contains swag and clues from the Borderlands video game. And the ThinkGeek Doctor Who product line continues to shine with items such as the TARDIS throw rug, which was featured in our back-to-campus center.

Another key initiative for us this year is increasing brand awareness. Our wholesale business is experiencing tremendous growth, with sales increasing approximately 290% over last year. These wholesale partnerships are important and help drive brand recognition and product awareness in key retailers. For example, in preparation for the holiday season, we signed deals with retailers such as Target and Toys "R" Us to sell our Minecraft products. We also have ongoing marketing efforts to follow up on the brand awareness and audience segmentation study we conducted earlier this year.

We're working with a third party to increase customer acquisition in key segments, and we have designed our holiday creative message and site images to target certain audiences. To reach potential customers for engagement and conversion, we attended San Diego Comic-Con in July and PAX Prime in September, where we launched exclusive products tied into an e-mail marketing and social media campaign.

ThinkGeek's social media community is strongly engaged, as we have currently over 745,000 Twitter followers and on Facebook, we have over 613,000 fans. During third quarter, 1 post on Facebook saw about 35,000 likes, 23,000 shares and reached almost 2 million people. We've also been focused on improving our site to make it more streamlined and dynamic to increase conversion. This quarter, we implemented easier navigation throughout the site and enhanced Bestseller section, improved images for Apparel, and we launched a much-improved Halloween Shop. In preparation for the holiday season, we launched new product categorization that will further improve the customer experience.

Our mobile and tablet initiatives are in the early stages but doing well, with sales increasing 60% over last year with improved conversion rates. In Q4, we plan to implement improvements to the tablet experience, and we plan more changes to our mobile experience next year.

We've also been focused on improving processes and quality. In the third quarter, we kicked off our ERP implementation. The first phase will focus on the financials, and the next phase will involve the procure-to-pay process. We expect to realize process efficiencies, improved vendor management and better business intelligence from this important project. And finally, while we continue to invest for growth, we once again increased gross margin year-over-year through higher Geek Labs sales and wholesale deals, exclusive product sales and improved vendor management. Gross margin will continue to fluctuate on a quarterly basis due to factors such as seasonality, but the goal is to improve it on an overall basis over time.

In summary, we had a strong third quarter, and we continue to improve the business through several key initiatives. We've now entered the most exciting time of the year for ThinkGeek. We successfully launched our Holiday Gift Center on November 1, and we are preparing to bring many new products to life during the holiday season, with a continued focus on growing our wholesale business. The entire ThinkGeek team is committed to delighting customers, achieving our key initiatives and delivering year-over-year top and bottom line growth while continuing to invest in the business.

I'll now turn the call over to the Julie Pangelinan to walk you through the financial results. As I announced on the last earnings call, Julie joined Geeknet as Chief Financial Officer on August 12. She brings over 25 years of operations and financial experience, most recently as Chief Financial Officer of Interstate Hotels and Resorts, Inc. and Sunrise Senior Living, Inc. Her dynamic leadership, mixed with her strong financial background, is a tremendous asset to the company. Julie?

Julie A. Pangelinan

Thanks, Katy. I'm excited to be here today, and I look forward to meeting all of you over the coming months.

As Katy mentioned, we had a great third quarter. ThinkGeek's third quarter revenue increased 30% to $22.4 million compared to $17.3 million in the third quarter of 2012. We also continued to make progress on the bottom line. Net loss from continuing operations for the third quarter was $1.4 million or $0.21 per diluted share. For comparison purposes, net loss from continuing operations in the third quarter of 2012 was $2 million or $0.31 per diluted share. Adjusted EBITDA for the quarter was a loss of $831,000 compared to a loss of $2 million last year.

Regarding year-over-year site metrics, daily unique visitors was 19 million, a decrease of 2%. While the number of orders received was down slightly to the prior quarter at 282,000, the average order value received increased to $62 compared to $60 in the third quarter of 2012. And conversion was 1.47%, up slightly from 1.45%, helping to drive our increased site revenue.

Net contribution margin was 24%, a solid improvement from 21% in the third quarter of 2012. This was driven by higher site sales of our unique Geek Labs and other exclusive products, which generally have a higher gross margin, improved margins from sales to our wholesale channel and a decrease in shipping and processing costs as a percentage of revenue. Overall gross margin was 19% versus 13% in the third quarter of 2012.

Total operating expenses were $5.7 million, a 4% increase over the third quarter of 2012. Sales and marketing expenses increased 23% year-over-year due to our increased efforts to improve our brand awareness. Technology and design increased 30%, driven by investments in technology to support our growth. We also continued to invest -- increase investments in Geek Labs. G&A decreased 20%. This was driven by lower stock-based compensation and bonuses related to the departure of certain key executives and higher bonuses in 2012 related to the sale of the media business.

We ended the quarter with cash and cash equivalents of $40.7 million, which includes the $3 million payment we received in September relating to the sale of the media business. Historically, the end of the third quarter is our low point of cash for the year as we have made the majority of inventory investments to support our anticipated fourth quarter peak sales. As we look to Q4, we're excited about the holiday season and our unique products we are set to launch.

I want to remind everyone that, this year, the holiday season is compressed by a week due to a later Thanksgiving. In anticipation of this, we launched our holiday shop on November 1, which is earlier than our typical Black Friday launch. In closing, ThinkGeek had a strong third quarter, delivering improvement on both the top and bottom line, and the team is gearing up for our peak season.

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

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Dan Kurnos with Benchmark Company.

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

Katy, maybe just a high level. Obviously, we're getting into the critical period for you guys, the "make or break" point. And I just want to get a sense of your thoughts on the macro environment. We've heard everything from cautious commentary out of eBay to Amazon putting up record levels of temporary hires. So any color you could give going into the holiday season? And just maybe a little more granularity on the impact of the shortened window between Thanksgiving and Christmas.

Kathryn K. McCarthy

Sure, Dan. We're excited about the products we plan to launch in the fourth quarter. Our goal is to launch more than we did last year. We also feel good about our wholesale business and have deals, as we mentioned, with retailers such as Target and Toys "R" Us. We think that should help us. We're cautiously optimistic, though, given some of the retail industry forecast. We'll have to see how it plays out during a shorter peak window. But as we've said in the call, we've taken steps to launch our holiday shop earlier this year to make sure that -- we're making sure that our new and great products can be presented to our customers.

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

Can you give us a sense of what the promotional environment is like right now? I know we've seen, at least from a brick-and-mortar standpoint, very early promotional, maybe as early as we've ever seen. And I'm just curious what you're seeing on your end.

Kathryn K. McCarthy

Well, I think we're seeing what you are, which is certain retailers are, I would say, backing up some of the retail promotions that they typically do close to the end of the month of November. So I think we see some of the same actions. In terms of our business, we're really focused on bringing new products out to our customer. And promotions, it is going to depend somewhat on the competitive environment, but it also depends on the success of the products.

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

And speaking of products, we've seen that you guys have launched a number of higher AOV SKUs, and it sounds like that shift up has done well by -- within your customer base. I'm curious if this is actually a strategy to move upmarket a little bit. Or does it really just have to do with the product availability and what's popular at the time?

Kathryn K. McCarthy

Obviously, it's a little bit of both, Dan. We certainly are focused on the mix of orders, and our goal is to increase the average order value. But we also want to provide a wide variety of products that are appealing to our customer base. So it's certainly helpful to have higher-value products, but we also want to make sure we have a wide array of products for our customers.

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

And obviously, with your results, you did give some color on this. Maybe you could just go into a little bit more detail on how the progress is going with expanding your audience and exactly what steps you're doing besides just pursuing the wholesale channel, maybe in the advertising arena to expand your target audience.

Kathryn K. McCarthy

Sure. As we've said before, we know we need to increase our brand awareness. We've been investing in marketing. You can see our sales and marketing expenditures are up. We're investing in search engine optimization. We're actually working with a third-party to help increase our customer acquisition within different segments that we learned of, as a result of our brand awareness study that I discussed on the last call. We're also trying to reallocate dollars amongst different segments to target segments that are not as much of the traffic. We're going to continue that focus this quarter and into next year.

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

That's helpful. And on the -- nice tick-up in conversion. Curious, though, you're making a lot of changes ahead of the holiday season. Any concerns that there might be a disruption near term, as you make some changes on the website? Or are you still seeing positive improvements in conversion rates?

Kathryn K. McCarthy

Well, I think, we're making changes that we believe will yield positive results. They're changes that will help the customer more easily find the product that they're looking for and also optimize their tablet experience because the forecasts are that the tablet sales in the holiday will go up significantly in the industry. So we're pretty careful about putting in changes in advance of the holidays. We put those in that we really feel like will improve the customer experience. So we don't know what that will yield yet. As you know, the majority of the sales will occur over a pretty small period of time. But we feel good about the changes and the reaction so far.

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

Okay, great. And the last one for me, not to monopolize the call here. Just maybe, again, your high-level thoughts on the long-term margin profile of the business and how much leverage there is as we go forward.

Kathryn K. McCarthy

Yes. I mean, we've discussed this before, is that we really had a goal of increasing gross margins for our company. I mean, they will fluctuate depending upon seasonality, depending upon the competitive environment. But our goal is to continue to make improvements every year. We feel like we've made progress with vendor management and our management of our inventory, as well as our fulfillment costs. So that has contributed to better margins, as well as the product mix we just talked about. However, we also feel there's still work to do, and it's going to be an ongoing focus for the company.

Operator

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

Justin Ruiss - Sidoti & Company, LLC

I just had a quick question just with the cash also where they're at now, I mean, is there any plan for use of cash? What would it be going forward? Anything in terms of buybacks, acquisition, something along those lines?

Kathryn K. McCarthy

Justin, as we've talked about before, some of the cash is invested in the products to deliver the growth, some had been invested in the business with the leadership and some of the changes we've made this year. Some of the cash is -- will be deployed to invest in future growth. The Board of Directors were constantly evaluating the best use of that remaining cash. Previously, we decided to do the tender offer. We're open to the idea of acquisitions. That's our strategy. But right now, there is nothing planned and there is no buyback planned at this point.

Justin Ruiss - Sidoti & Company, LLC

Got you. And then, just with the G&A levels, where they're at, I mean, should we be assuming that those levels are adequate going forward?

Kathryn K. McCarthy

I think what we've said in the past, and we'll say now, is that we want to continue to invest in technology and design, Geek Labs and also in our website. We also plan to continue to invest in marketing. I think that we've had a lot of different items that have come through G&A. I think this quarter was pretty stable. But you never know what will happen down the road. But in terms of our priority of where the investment will go, our priorities are to technology, design and marketing.

Operator

Our next question comes from the line of Ralph Weil with R. Weil Investments.

Ralph Weil

We've heard in the past that the company has various things that have to be done before it can be viewed as a really successful e-commerce company. Katy, what do you feel has been accomplished so far that you're most proud of, in terms of -- whether it be customer conversion, whether it be technology, big data, merchandising, going out to new clients or customer retention or anything? And where do you feel that you still have work to do before you're really satisfied?

Kathryn K. McCarthy

Sure. Well, I think it's probably our job to be never be truly satisfied. But I would say that -- what are we most proud of? I think we're most proud of the products that we've developed or sourced that delight our customers. So I think the creativity and the ability to create and identify unique products is something we're very proud of and want to continue to grow and build upon. I think I've talked about a couple of the areas I think we still need to improve. We have to continue to work on process excellence and quality. We need to continue to improve our gross margin on our products on an overall basis. We need to focus on our brand awareness and making sure that everybody that's out there knows how fun and unique ThinkGeek is and has an opportunity to see our site. And so I think that those are some of the areas that we're -- it's not a 1-year journey. It's going to take time to continue to make progress.

Operator

I'm not showing any further questions at this time. I would like to turn the call back over to management for closing remarks.

Kathryn K. McCarthy

We'd like to thank everybody for joining us today. Have a wonderful day.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a good day.

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