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Drugstore.com Inc. (NASDAQ:DSCM)

Q4 2009 Earnings Call

February 09, 2010 05:00 pm ET

Executives

Brinlea Johnson - IR, The Blueshirt Group

Dawn Lepore - CEO and Chairman

Tracy Wright - VP, CFO

Robert Potter - VP, CAO

Analysts

Mark Argento - Craig-Hallum Capital

Shawn Milne - Janney Capital

Operator

Good afternoon, ladies and gentlemen, thank you for standing by. Welcome to the fourth quarter 2009 and full year earnings call for Drugstore.com. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for question. (Operator Instructions). This conference is being recorded today Tuesday, February 9, 2010.

I would now like to turn the conference over to Brinlea Johnson of the Blueshirt Group. Please go ahead.

Brinlea Johnson

Good afternoon. Welcome to the Drugstore.com fourth quarter and full year 2009 earnings call. With me today is Dawn Lepore, Chairman and Chief Executive Officer; Tracy Wright, Chief Finance Officer; and Rob Potter, Chief Accounting Officer. Before we get started, we'd like to remind you that information on this call may include forward-looking statements. Words such as "expect," "believe," "anticipate," and similar expressions, are intended to identify forward-looking statements, which involve risks and uncertainties that could cause Drugstore.com's actual results to differ materially from those discussed in the forward-looking statement.

In particular, comments about Drugstore.com's anticipated future revenues, earnings and growth rate are forward-looking. Factors that could cause actual results to differ materially from anticipated results are detailed in our periodic filings with the SEC.

I'd also like to point out that during the call, we do mention certain non-GAAP financial measures, which will be explained during the call. A reconciliation of these non-GAAP measures to most comparable GAAP measures can be found in our earnings press release, which is made available prior to today's call. This conference call is also being recorded and will be available for replay and broadcast on the internet.

In addition, we are providing a slide presentation to accompany the commentary during the call. Both the presentation and call are available on Drugstore.com's website at www.drugstore.com under corporate information.

Finally the fourth quarter and 2009 period on 14-Week and 53-week fiscal calendar, respectively, and compare to a 13-week fourth quarter and 52-week year in 2008.

Please note that unless otherwise indicated our (inaudible) rate include the extra 14-week of the quarter.

And with that I'll turn the call over to Dawn Lepore, Chairman and Chief Executive Officer.

Dawn Lepore

Thanks Brinlea, good afternoon everyone and thank you for joining us. I am pleased to report a very strong fourth quarter, ending a pivotal year at Drugstore.com. Over the last four years our strategy has continued to evolve. First, we needed to correct what wasn't working, just continuing on profitable partnerships specifically in the RX business leveling the capacity of our distribution center and redesigning our Beauty.com website.

Next we optimized our business our pricing, renegotiating shipping at vendor contract, refining our promotional strategy and laying the ground work for monetizing our traffic. In 2009, we reaped the benefits of this initiatives as we consistently strong growth [have it] the industry despite a challenging economic environment.

Fourth quarter march and inflection point, our base business performed very well and we made significant progress in our strategic growth initiative including as affinity, positive impact from our partnership strategy.

Fourth quarter also offered evidence, that the online retail customer is alive and well and moving even more purchases online. We believe we are gaining share in a growing market and we clearly saw an improvement over in holiday spending.

Here some highlights from our 14-Week Q4. Overall revenues were $117.4 million up 25% year-over-year.

OTC revenue grew by an impressive 32%, home beauty was up 33% and Beauty.com increased 28%. New customers inclusive of partnership, were a record 603,000, up 49%. Not only are our partnerships allowing us to tap into new customer basis, they are also helping to lower the cost for new customer, which was down 20% over the prior year period. Total orders increased 28% over last year, and retention was up 400 basis points from the prior year.

We continue to drive improvement in our conversion rate, which were our best ever, gross margins were also highest in company history at 29.4%, up 90 basis points year-over-year and on an apples-to-apples basis, the adjusted EBITDA generated from our ongoing business minus LPU transaction related expenses and one time consulting charges was up over a 125% from 2.1 million in Q4, 2008 to 4.9 million in Q4, 2009.

In addition to our strong financial results, during Q4, we moved each of our five strategic growth initiative forward, specifically we added eight new beauty brands, bringing the total new brand added to Beauty.com to 35 for the year.

Launched two new microsite at (inaudible).com and the naturalstore.com we've now released three microsites in less than six month and are on track to launch five to eight new microsite in 2010. Continue to expand our E4X partnership internationally now providing services to 52 countries.

Announced our first major acquisition in one of our key categories which will greatly expand our prestige beauty business in 2010. And finally saw very tangible benefits from our partnership which contributed six points of overall revenue growth and eight points of OTC growth.

Now, let me go into a little more detail on some of the most significant developments of the fourth quarter.

I'll start with our partnership which are ramping nicely. In fact they contributed over five million of OTC revenue in Q4, as compared to less than two million in Q3. Looking at 2010, we expect that growth to accelerate, in fact we expect Medco to contribute between 10 to 20 points of OTC growth during the year, as they continue to drive improved conversion.

In Q4, we also announced the strategic multi year e-commerce partnership with Luxottica a global leader in the design, manufacturing and distribution of fashion, luxury and sports wear. With this partnership, we'll leverage our platform and our core strengths in marketing fulfillment and customer care on Luxottica's behalf.

There are several key pieces to this partnership, first we will develop branded contact lens e-commerce side for the Company's North American businesses such as LensCrafters, Pearle Vision, target optical and fierce optical. We believe that the seamless end-to-end customer experience we will develop with Luxottica will grow the overall market provision products.

Assuming these sites begin to launch in the second half of the year, we expect our vision business inclusive of the partnership to grow in the high single digits. Another key element of the partnership, is already in progress, we started to jointly purchase contact lenses and related products with Luxottica providing us with sourcing benefits based on supplier efficiencies in serving our combined businesses.

These steps are overall vision profitability initiative, including the sourcing benefit to contribute two to three points divisions growth margin in 2010, benefiting our overall adjusted EBITDA.

On December 28, we announced an agreement to acquire Salu, Inc. owner of SkinStore.com an operator and fulfillment partner of spalook.com. SkinStore.com is the leading online retailer of clinical skin care and beauty products. This acquisition is perfectly aligned with our high margin beauty business a corner stone of our growth strategy.

Combined, we will create one of the largest online beauty retailers, offering consumers a wide ranging product selection with mass beauty products from Drugstore.com, prestige beauty brands on Beauty.com and clinical skin care products on SkinStore.com.

2009 clearly was expected to generate over 40 million of revenue and 500,000 of net income. If you exclude a number of number one time charges during the year, 2009 adjusted EBITDA should be about $2 million. We plan to leverage our combined scale in areas like shipping and labor fulfillment to improve their profitability and adjusted EBITDA potential. We expect our synergies which will start having a meaningful impact in the second quarter to add over 50% improvement in Salu's adjusted EBITDA in 2010 with further benefit in 2011.

Under the terms of the agreement the purchase price is 36 million payable half in cash and half in Drugstore.com common stock. There is also an opportunity for Salu's senior management to receive an additional amount based on the achievement of certain performance target and integrating milestone. If these targets are achieved payments of any additional amount will be self funding.

We expect the acquisition to close in the next few weeks and for it to be accretive to Drugstore.com earnings per share in 2010 excluding one time transaction fee and integration cost. The strategic growth initiative that we put in place in 2009 will ramp throughout 2010, Tracey will be providing more detailed Q1 guidance but I would like to give you an overall picture of how we expect our business will perform in the coming year.

We expect our organic OTC revenue inclusive of partnership to grow 20% to 35%. Specifically within our OTC we expect that with pending acquisition of SkinStore.com to more than double our prestige beauty business.

Turning to vision inclusive of Luxottica partnership we expect to drive high single digit revenue growth while improving margins 2 to 3 points. Excluding transaction and integration related cost we expect to generate net income for the year we continue to focus on free cash flow and expect to generate significantly higher free cash flow despite not receiving $6 million in net income from LPU.

And finally from an EBIDTA perspective we should have a stronger first quarter before transaction and integration cost and then see further ramp in Q2, due to the strength of the core contributions from partnership and SkinStore.com.

With these growth drivers we only expect moderate seasonality in Q3 leading to another step in EBIDTA in Q4 in summary we posted a strong fourth quarter executing on our strategy and closing out a very successful year at Drugstore.com.

Our base business strong and growing and we are starting to see significant benefit from layering growth initiative on top of this phase. We are very excited about the coming year and believe that we will deliver accelerating revenue growth well ahead of the industry strong free cash flow and bottom line profitability. I will now turn the call over to Tracy our Chief Finance Officer for the financials.

Tracy Wright

Thanks Dawn. Over the next few minutes, I will walk you through some of the fourth quarter and year end key metrics and then provide guidance for the first quarter 2010. As a reminder the fourth quarter and 2009 periods are based on a 14 week and 53 week fiscal calendar respectively in compared to our 13 week fourth quarter and 52 week year in 2008 and as Brinlea previously mentioned unless otherwise indicated all metrics are inclusive of the fourteenth week in a quarter.

Net sales for the full year of 2009 grew to $412.8 million up 13% year-over-year driven by strong OTC and vision sales. Fourth quarter 2009 net sales were up 25% year-over-year to $117.4 million excluding the fourteenth week in a quarter net sales were up 16% year-over-year.

Looking at each one of our business segments on a year-over-year basis in the fourth quarter OTC net sales grew by 32% vision sales improved by 13% and as expected mail-order pharmacy net sales declined by 8%.

On a segment basis average net sales per order was $58 for OTC $118 for vision and $165 for mail-order pharmacy. Now turning to more detail on OTC we were pleased with our accelerated growth this quarter even excluding the fourteenth week in the quarter total OTC grew by 23%, while partnerships contributed 7 points of this year-over-year growth our base business growth also accelerated from 14% in Q3 to almost 16% in the fourth quarter.

The accelerated growth in the base business was driven by both strong performance in our replenishment categories, as well as an uptick in discretionary spending. Excluding the 14-week replenishment category such as traditional cosmetics were up 114%, vitamins and supplements were up 23% and first day it grew 29% in the fourth quarter.

Our beauty growth was also very strong in the fourth quarter, with total beauty growth of 33% and Beauty.com growth of 28% versus an industry decline of 4% as reported by NPD. This uptick and discretionary spending category helped drive a 3% increase in our base OTC basket.

Looking at our key customer metrics in the fourth quarter net sales from repeat customers declined to 74% of total sales, as partnerships delivered an increasing mix of revenue.

Overall new customers, inclusive of our strategic partnerships increased an impressive 49% year-over-year to 603,000 bringing our total life to date customer base to 11.7 million unique customers. Our trailing 12 months active customer base grew by 18% year-over-year to 3 million.

Now move on to gross margin. In the fourth quarter of 2009, we achieved record gross margins of 29.4% up 90 basis points over the prior year period due to an increasing mix of our higher margin OTC revenue a decline in our average shipping cost per order and a 110 basis point improvement in [mailer] pharmacy margin.

In the fourth quarter, contribution margin dollars increased an impressive 26% to $24.6 million and for the year grew 17% to $85.6 million. Moving onto expenses, we showed solid improvement in reducing year-over-year expenses at the percentage of sales due to a higher mix of customers from our lower cost partnerships as well as fixed cost spread across the higher revenue base marketing and sales expenses for the fourth quarter was $10.9 million or 9.3% of net sales an increase from 9.1% in the third quarter of 2009 but a 40 basis point improvement from 9.7% in the fourth quarter 2008.

The year-over-year decline is due to lower cost per new customer driven by our new partnership orders while the slight sequential increase due to an increasing mix of new customers marketing and sales expense per new customer decreased in the fourth quarter to $18 from $21.50 in the third quarter of 2009 and $22 in the prior year period.

The sequential and the year-over-year improvement was driven by the significant increase in the number of new customers as well as an increase in the percentage of OTC orders acquired to lower cost acquisition channel for the fourth quarter 2009 the fulfillment and order processing expense was $12.8 million or 10.9% of net sales down 50 basis points from 11.4% in the third quarter 2009 and down 20 basis points from the fourth quarter of 2008 the sequential and year-over-year improvement was largely due to leveraging our fixed infrastructure with the higher revenue base.

Technology and content expense for the fourth quarter of 2009 was $6.6 million or 5.7% of net sales. A 70 basis improvement over the third quarter of 2009 and an 80 basis point improvement from the prior year the sequential and year-over-year improvement was driven by fixed cost spread across the higher revenue base.

General and administrative expense was $5.8 million or 5% of net sales up 100 basis points sequentially and up 90 basis points over the prior year due to consulting fees related to the Luxottica partnership and transaction cost incurred in connection with the anticipated acquisition of Salu, Inc. Excluding these cost G&A would have been 3.8% of net sales, down 20 basis points sequentially and 13 basis point from the prior year.

For the fourth quarter, non-cash stock based compensation expense was $1.9 million and depreciation expense was $3.2 million. Looking ahead for the first quarter of 2010, we expect depreciation expense to be $3 million and non-cash stock based compensation expense to be $2.6 million, inclusive of the expense related to warrants issued in exchange for three years of consulting.

On a GAAP basis in the fourth quarter, the company reported a net loss of $1.6 million or $0.02 per share. We reported adjusted EBITDA of $3.5 million. On an apples-to-apples basis, the adjusted EBITDA generated from our ongoing business minus LPU, transaction related expenses and one time consulting charges was up over 125% year-over-year to $4.9 million. The fiscal year 2009, net loss was $1.4 million or $0.01 per share, compared to a net loss of $8.3 million or $0.09 per share for 2008.

Fiscal year 2009 adjusted EBITDA, was $17.1 million and compares to adjusted EBITDA of $13.9 million of 2008, we concluded $11.5 million from a discontinued LPU business.

We ended the fourth quarter with an employee base of approximately 925 FTEs. CapEx for the quarter, inclusive of capitalized labor associated with internally developed software projects was approximately $2.5 million, bringing our total CapEx for the year to $8.3 million, a decrease of 37% year-over-year.

We expect CapEx in 2010 to be $11 million to $14 million, as we resume investing in our site and multiple distribution center capability. Inventory of $40.2 million increased $7.8 million over the third quarter, this sequential increase in inventory was driven by an inventory build and anticipation of strong drugstore dollar redemptions and resolution sales in January 2010. As well as some duplicate inventory needed to support the movement of our vision distribution centre from Washington to New Jersey.

As of January 31, 2010, the inventory balance has already declined over $4 million to $35.7 million. We ended Q4, with a strong balance sheet and $37 million in cash, cash equivalents in marketable securities. With that as a review of fourth quarter and full year results, we'll move onto our outlook for the first quarter of 2010, which assumes that the acquisition of Salu, Inc. closes in the next two weeks and reflects our standard 13-week fiscal quarter.

For the first quarter of 2010, the company is targeting net sales in the range of $117 million to $121 million, a net loss in the range of $2.4 million to $3.5 million and adjusted EBITDA in the range of $2.15 million to $3.25 million.

This outlook assumes that the company's previously announced acquisition of Salu, Inc. closes in the next two weeks and includes an estimated $4 million to $5 million of net sales that the company expects Salu to generate after closing of the acquisition, as well as $1.9 million of transaction and integration related expenses.

We'll now move onto Q&A. operator?

Question-and-Answer Session

Operator

Thank you ma'am. We will now begin the question-and-answer session. (Operator Instruction). Our first question comes from the line of Mark Argento with Craig-Hallum Capital, please go ahead

Mark Argento - Craig-Hallum Capital

Couple of question around Medco I know you said your customer acquisition cost in the quarter look it came down to that $18 level versus in the low 20s previously can you talk about how Medco impact like customer acquisition cost when we are looking at the metric?

Dawn Lepore

I'll let Tracey address it, but basically we are putting contribution margin with Medco we are not having to incur the same marketing expenses that we would incur to get one of our customers though say a phase 3 channel.

Tracy Wright

Correct, so to think about the average basket we have set for our partnership is lower than our overall OTC basket because they tend ski towards new, so the average basket is more in the $40 to $50 range, with a 20% contribution margin you are talking about $8 to $10 contribution margins and there is a split that goes back to Medco

Dawn Lepore

But on the new customer cost there is no new customer.

Tracy Wright

That's the way it goes into our marketing.

Dawn Lepore

(inaudible). That’s right.

Tracy Wright

So its got to be something less than $10, this is going to bring down the overall cost.

Mark Argento - Craig-Hallum Capital

And then you said new customer acquisition about 50% of that came from your the Medco relationship is that right?

Tracy Wright

50% of the increase.

Mark Argento - Craig-Hallum Capital

50% of the increase. Okay.

Tracy Wright

Our new customer growth was 49% about 50% came from partnership not just Medco.

Dawn Lepore

All of our partnership,

Tracy Wright

The only percent of the 50% just to be clear.

Mark Argento - Craig-Hallum Capital

So basically 25% of the growth came from Medco

Dawn Lepore

We still have healthy new customer growth from My perspective in our core business minus the partnership, the partnership adds the customers as well.

Tracy Wright

OTCs new customer growth excluding partnership with 17%.

Mark Argento - Craig-Hallum Capital

Yeah that’s a handy number. In terms of the Salu acquisition where are you in terms of you know you have yet to close the transaction, but just remind us little bit of what we can expect in terms of full year contribution from that assuming flattish type revenue growth did you guys talk to that number?

Tracy Wright

Well what we said is in 2009, we expect that they'll generate a little over 40 million in revenue about 500,000 in net income and they had some one time charges in 2009, so excluding those their EBITDA would have been about will be about 2 million. So those are the 2009 numbers and then we did say that we would have synergies that would start having an impact in the second quarter and at those synergies would have about 50% impact.

Mark Argento - Craig-Hallum Capital

So it going to working in per employee that on the 2 million so that take EBITDA contribution kind of that $3 million levels is that the right way when you are telling a 50% improvement?

Tracy Wright

For full for the rest of the year and then that would accelerate in 2011.

Mark Argento - Craig-Hallum Capital

And you are going to Q2 should you have the kind of backend integrated where you do add very fulfilling for the Salu business or the SkinStore business?

Dawn Lepore

We are still working on the actual detail plans and the detail dates so you know may be a yearish is what we are shooting for lets see when we get down in to the detail. Some of the things we'll be able to do right away, some of the things will take us a few months either technology work or other work to be able to put in place.

Mark Argento - Craig-Hallum Capital

And where would you say Medco is in terms of how aggressive they have been marketing, where are we in terms of kind of the phase of roll out or the aggressiveness in terms of giving the offering in front of their client or customers base.

Dawn Lepore

No I don’t know exactly what their plans are for 2010. We did put a range in there of I believe 10 to 20 points of growth and they continue to just whole new offer as they get feedback from their members, but I don't have any detail into their marketing plans for the year.

Mark Argento - Craig-Hallum Capital

Cool you guys are pretty aggressive growth trajectory now given that these different partnerships are kicking in. How are you looking from a capacity perspective in your current DC and are you going to be pushing up on the need to open another facility or look for alternative ways to fulfill as you kind of get closer to the 25% to 30% growth rate for the year

Dawn Lepore

So that’s a great question Mark, we think that we will be fine for this year and but you noticed when Tracy talked about CapEx she talked about the fact that we are going to resume investing both in our website and in the multiple distribution center capability. So, we are going to make some backend changes to our technology, so that when we need to move to multiple distribution centers whether that's sort of 3PL or our own that we are able to do that.

So, we'll start working on that technology work this year, but we do believe that we should be fine this year from the distribution centre capacity perspective.

Mark Argento - Craig-Hallum Capital

Last question, Tracy maybe you could help me out with this more of a house keeping question but I noticed your receivables were up in the quarter kind of $50 million what kind receivable do you guys carry on your balance sheet?

Dawn Lepore

Actually I would be probably refer you to Rob on that one we may have to get back to you.

Robert Potter

The bulk of our receivables are obviously the credit card receivables from our customers and also for gender activities we do for adds on the side or offers that provide on the side in advertising and those receivables are due in the normal course of business, there nothing out of the extraordinary.

Operator

Our next question comes from the line of Shawn Milne with Janney Capital. Please go ahead.

Shawn Milne - Janney Capital

In terms of the Medco just wanted the simple math are you saying 10-20 points of what the OTC business was in 2009 are you saying 30 to 60 million or am I doing something wrong?

Dawn Lapore

That's outside of the math

Shawn Milne - Janney Capital

Okay and then on Luxottica clearly the certainly the benefit according the gross margin line 2 to 300 basis points on your size of vision is pretty significant to your EBIDTA but I was little surprised to hear you say you didn’t expect it to pick up your growth rate that much are you being conservative there or if you think about you know building the online commerce site for Lens Crafters or Pearle Vision it seems like there would be a pretty decent revenue opportunity there as well?

Dawn Lapore

Couple of things one is I just want to be clear that the margin benefit is from all of our profitability initiative piece of it is Luxottica partnership its also we moved our distribution center to New Jersey so we are doing a number of things to improve the profitability of that business so that’s just the technicality that I wanted to be clear and that’s where the 2 or 3 points are coming from all of those things combined.

In terms of the top line we are building a number of sites they will be rolling out though over time so they start in the second quarter but they won’t all launch at the beginning or excuse mid year, second half of the year. But they wont all launch at the beginning of the second half of the year so they launch throughout the rest of the year so that’s one of the reasons that you see that kind of growth rate I don’t know Tracey if you want to add anything.

Tracey Wright

I would just add that we will not be reporting that revenue gross there is a different way of reporting that revenue so it’s going to be revenue share I guess.

Shawn Milne - Janney Capital

Okay, that’s probably what it is okay so if you are going to take a revenue share on that business and that the certainly contribution margins of that business is going to go up even on top of the back end benefits that you get.

Dawn Lepore

Correct.

Shawn Milne - Janney Capital

And then just in terms of house keeping obviously you have guided Q1 in terms of your EBITDA including the 1.9 million in expenses so if you strip that out I mean do you think slowly we will be slightly dilutive on just pure operating basis in Q1 or do they make a little bit of money in Q1?

Dawn Lepore

Make a little bit of money in Q1 I mean we are not breaking it out but they are not going to be dilutive.

Shawn Milne - Janney Capital

Okay great and just last I mean it looks like if I do the math and you talked about already you did over 4.9 million of adjusted EBITDA taking out the charges it was 2.1 last year I am getting like incremental margin of 12% in the business certainly on the score in the leverage impacts and the partnership I mean is that something we should think about going forward or do you think that the extra week gave you may be a little bit more operating leverage?

Dawn Lepore

Obviously the extra week is nice in the years that it happens, but now I think you are absolutely right that was the fact behind our partnership strategy what that we built this platform and its capability and we want to be able to leverage that and add scale to it, add more revenue, more orders without having to go and spend a lot of money to get new customers, so we are looking for new customers, other sources of customers and other sources of orders that sell. It's playing out exactly as we had hoped and planned when we launched on the strategy.

Shawn Milne - Janney Capital

And then it certainly looks away to us so just lastly in terms of I mean will it surprise the CapEx is going up that and the prior question was asked there is no added capacity in that number that seems like a fairly big jump just in terms of working on technology, I mean how would you think about that number rolling into 2011?

Dawn Lepore

Well if you look historically prior to 2009, we did spend $12 million - $13 million on CapEx so it's not that 11 too, I think we said 11 to 14 it's not that unusual. There is some money in there to do some technology changes to be able to enable us to use multiple distribution centers. So there is some technology change we have to do the manage the inventory across multiple distribution centers, send the order to the right distribution center etcetera, etcetera. There is not a money in there to actually build the distribution center, but these are some of the backend things, we have to do so that we are ready to be able to use one when we need one.

Operator

(Operator Instructions). And our next question comes from the line Carlos Bois with Morgan Stanley, please go ahead

Unidentified Analyst

Real quick when you guys mentioned your estimate of 40 million in revenue for the Salu business for this year, can you give I guess either a sense of seasonality through the year or what that growth was versus 2008?

Dawn Lepore

I think we mentioned this at time we announced the acquisition they focused on profitability in 2009, so 2009 was not a huge growth year, and so we are going to go into 2010 with them, looking at making sure that we maintain that focus on profitability as well as looking for ways that we can grow the revenue across both sides, so have I answered your question? In terms of seasonality, its pretty similar to our business I think and I think that's the way you should think about it from a seasonality perspective and from the future growth perspective I think we've talked about that its more of a high single digit type of growth business as opposed to our prestige beauty business which is 20%

Unidentified Analyst

Okay. And then I guess just looking at your guidance it say it includes 4 million to 5 million after the close it sounded if you guys are assuming a mid quarter close so is it safe to assume kind if it was in for the full quarter than it would be a $8 million to $10 million run rate for the first quarter?

Dawn Lepore

Yeah that will be safe to submit it was specifically six weeks.

Unidentified Analyst

Okay. And then the next question is around the partnership, you guys have obviously announced Medco exotica is there anything that you can tell us just about the process kind of I don't know how long these partnership have been taken as you announced more and more, do you think that they are becoming easier or quicker, and also from the calls, are they more incoming calls are they outgoing calls or just a mix of both?

Dawn Lepore

It’s a great question, but there are a lot of questions there. So there is a pretty long lead time from the time we first have a conversation to actually being able to have a signed agreement announce the deal, because they are pretty complex as you can see, and both Medco and Luxottica are pretty. We're excited, we think there are very good opportunities for us so we really want to focus on them. So, we're not out there trying to drum up lots and lots and lots of these right now we want to make sure that we're focusing on the ones that we have find so that we can serve these very, very well.

What gets easier is that as we built the platform, as we have gone through the negotiations the next time through, we know obviously we can build on all that learning we had the previous time, but you get Medco and Luxottica, they are different in some ways right? Medco is building an OTC store, Luxottica is building website for their North American contact lengthy commerce businesses, so there are some differences as well. So in terms of incoming versus outgoing calls its all we've got, we certainly get lots of incoming calls, people who call us because we are the leader in health, beauty and wellness. In addition, we have a strategy and we have people that we believe would be good partners for us and we also do out reach to build relationships with those companies. So it’s a combination of both of those.

Unidentified Analyst

Okay and then I guess two other questions. I see that you guys launched Drugstore.com. These micro sites obviously tend to have a targeted customer base and I was just wondering, it looks like a great website. I notice lots of white on the sides and I was wondering kind of with that targeted audience what are your thoughts around advertising?

Dawn Lepore

So, that’s a great question and the target audience is you. I hope you like. So, and we are doing things a step at a time but obviously advertising on those micro sites will be another source of bottom line for us going forward. We want to make sure the site have traffic and that where its operating like it should etcetera, etcetera before we're necessarily selling ads but that is absolutely something that we would look at doing in the future.

Unidentified Analyst

Okay, is it safe to assuming your guidance that it doesn’t include any advertising initiatives this year?

Dawn Lepore

It does not and so to the extent that we feel we could at some this year, that would be an incremental opportunity for us.

Unidentified Analyst

Okay great and then the last question is just around kind of how you guys view the mobile opportunity in kind of different app say for your iPhone? I mean, historically it seems that your main competition is just the person that’s going to go into a physical drugstore on the way home as opposed to shopping online, I’m just wondering kind of some people think that that’s a great a way to attract kind of the impulse buyer or If somebody is stuck in traffic and running late, say instead of going into the store I can just get it from my mobile phone. What are your thoughts around that opportunity?

Dawn Lepore

Well I do think its an opportunity and we have mobile applications, we're also launching some iPhone applications both for beauty and for drug store. So those are in process right now or ready to be launched shortly or just in the process of being launched and they are very strong number at this point, but I do think there is an opportunity. There is an opportunity to do your risk on it a well designed app, there is an opportunity to look at different beauty information. So, I think we absolutely believe in this opportunity. Now we're not targeting at ton of orders from them in 2010, but we believe that we need to keep launching these apps and then when our customers tell us what they like and what they want to use and then evolve it over time.

Operator

And there are no further questions in queue. I would like to turn the call over to management for closing remarks.

Dawn Lepore

I want to thank everybody today for participating with us. As we indicated in our remarks, we're very excited about the year and pleased about our progress in 2009 and we look forward to keeping you up-to-date. Thanks very much.

Operator

Thank you ladies and gentlemen. This concludes the fourth quarter 2009 and full year earnings call for Drugstore.com. If you would like to listen to a replay of today's conference please dial 1303-590-3030 or 1800-406-7325 and enter the access code 4204272. ACT would like to thank you for your participation and you may now disconnect.

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Source: Drugstore.com Inc. Q4 2009 Earnings Call Transcript
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