Geeknet Management Discusses Q4 2013 Results - Earnings Call Transcript

| About: Geeknet, Inc. (GKNT)

Geeknet (NASDAQ:GKNT)

Q4 2013 Earnings Call

February 21, 2014 11:00 am ET

Executives

Kirk L. Somers - Chief Administrative Officer, Executive Vice President, General Counsel and Secretary

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

Julie A. Pangelinan - Chief Financial Officer

Analysts

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

Justin Ruiss - Sidoti & Company, LLC

Arthur Michael Winston - Pilot Advisors, L.P.

Ralph Weil

Thompson Clark

Operator

Good day, everyone, and welcome to the Geeknet's Fourth Quarter and Annual 2013 Earnings Results Conference Call. This call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Kirk Somers, General Counsel and Chief Administration Officer. Please go ahead, sir.

Kirk L. Somers

Good morning, and welcome to Geeknet's conference call reviewing the fourth quarter of 2013 and annual 2013 financial results. Geeknet is the parent company of the online retailer ThinkGeek.com. Joining me today is Katy McCarthy, our Chief Financial Officer; and Julie Pangelinan, our Chief Financial Officer.

We will make certain statements today with respect to our expected financial results, exclusive on custom products, wholesale business, brand awareness and customer acquisitions to reach new audiences, site and business systems, and quality and delivered processes. 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.

The content of this webcast contains time-sensitive information that is accurate only as of the date of this live broadcast, February 21, 2014. Any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of Geeknet is prohibited.

During our call, 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, geek.net, and on the SEC's website, sec.gov, you will find additional disclosures regarding these adjusted EBITDA measures, including reconciliations of these measures with comparable GAAP measures.

With that said, I'll turn the call over to Katy, our Chief Executive Officer. Katy?

Kathryn K. McCarthy

Thanks, Kirk, and welcome to everyone. ThinkGeek grew fourth quarter revenue by 12% year-over-year. Despite competitive and promotional e-commerce and retail environment that put pressure on gross margins and earnings, we achieved positive adjusted EBITDA and net income in the fourth quarter. In the fourth quarter, we delivered 770 new products to our customers, including 189 exclusive items. We also grew Wholesale revenue and margins significantly by delivering products to customers such as Target, Toys "R" Us, Walmart and Hot Topic.

For 2013, ThinkGeek grew revenue 16%, improved gross margins, delivered positive adjusted EBITDA and significantly narrowed the loss from operations. During the year, we delivered over 2,000 new products to our customers, including over 470 exclusive items. We continued to significantly grow our GeekLabs custom product sales. Some of our best-selling products were Minecraft Foam Pickaxe and Foam Sword, the Doctor Who TARDIS Throw Blanket, the Tactical Chef Apron, the Build-On Brick Mug, and Star Wars, Star Trek and Portal-themed products and apparel. We implemented site improvements, including a better tablet experience. In 2013, we also continued to execute on our strategic business plan and invest in future growth.

I will now turn it over to Julie who will provide more specifics on the financial results. Later, I will provide an update on our business, the highlights and the progress on our strategic plan. Julie?

Julie A. Pangelinan

Thanks, Katy. As we shared in our press release, ThinkGeek's fourth quarter revenue increased 12% to $74.3 million compared to $66.3 million in the fourth quarter of 2012. For the year, revenue grew 16% to $138.3 million compared to $118.9 million in 2012. Wholesale revenue increased over 200% to $22.4 million.

Fourth quarter gross margin was down 1 point to 20% from 21%, driven by site promotions and higher fulfillment and shipping costs during the shortened holiday season. For the year, gross margin increased by approximately 2 points to 20% versus 18% due to higher sales of GeekLabs products, increased Wholesale revenues and reduced product costs.

Net income from continuing operations for the fourth quarter was $5.1 million or $0.76 per diluted share compared to $4.7 million or $0.71 per diluted share in 2012. For the year, net loss from operations narrowed to $143,000 from a loss from operations of $2.1 million in 2012. Loss from operations in 2012 excludes the sale of the media business included in discontinued operations and the gain on the sale of our CollabNet interest. The net loss for 2013 was $234,000 or $0.04 per diluted share compared to net income of $13.9 million in 2012 or $2.12 per share. 2013 net loss includes $1.8 million of cost-related to leadership team changes.

Adjusted EBITDA for the fourth quarter was 50 -- $5.7 million compared to $7.5 million last year. Adjusted EBITDA for the year was $3.2 million or $5 million, excluding costs relating to leadership team changes compared to $2.9 million in 2012.

For the year, total operating expenses were $27 million, an 18% increase over 2012. Sales and marketing expenses increased 29% due to increased market research, paid search, affiliate partnerships and credit card fees, as well as our efforts to improve brand awareness. Technology and design expenses increased 53%, driven by investments to support GeekLabs' growth and to improve the infrastructure and functionality of our website. G&A decreased 7% primarily due to lower stock-based compensation and bonus expenses.

Regarding 2013 year-over-year site metrics, daily unique visitors were 91 million, an increase of 2%. The number of orders received was up slightly to 2,015,000. The average order value received increased to $59 from $58 and conversion was 2.21%, down slightly from 2.25%. We ended the year with cash and cash equivalents of $53.1 million, down from $57.3 million at the end of 2012, primarily due to the increase in receivables from our Wholesale business.

I will now turn the call back over to Katy, who will share some additional business highlights and discuss our 2014 priorities.

Kathryn K. McCarthy

Thanks, Julie. At ThinkGeek, our vision is to create a world where everyone can embrace their inner geek, express their passion and connect with one another. We're obsessed with creating and sharing the most unique and authentic product experiences with all of our fans.

In 2013, we demonstrated this by delivering over 2,000 new products, including over 470 exclusive items. In 2014 and beyond, our goal is to drive growth through new exclusive products and new channels. We plan to continue to create and introduce GeekLabs custom products while driving growth in our licensed products, collectible, apparel, jewelry and several other product categories. We want to build upon our success in Wholesale and continue to develop partnerships with new customers and vendors.

In 2014, we will be launching a new brand strategy and would like to invite all fans and potential customers to join in, geek out.

As we have discussed, another key priority is to increase brand awareness to target different customer segments. In 2013, we conducted a brand awareness and audience segmentation study to identify opportunities. In 2014, we are working with third parties to launch the new brand strategy, increase customer acquisition in key segments and reach new audiences with the goal of increasing sales growth. We will continue to build upon ThinkGeek's strongly engaged social media community. We currently have over 766,000 Twitter followers, over 661,000 Facebook fans, and we are growing on other platforms such as YouTube, Pinterest and Google Plus.

We have committed to improving our site to enhance the customer experience. During 2013, we implemented easier navigation throughout the site, new product categorization, launched an enhanced bestseller section and created new Halloween and holiday shops. Our mobile and tablet initiatives are performing well, with sales increasing 66% over 2012 with improved conversion rates. In 2014, we are planning more exciting improvements to the site and are heavily focused on the mobile tablet experience as more traffic shifts to these channels. We will continue to invest in the technology platform to improve the customer experience and to increase sales. We will also continue to implement an ERP to reduce our business risk, improve business intelligence and maximize efficiency. We are heavily focused on improving process excellence to improve the customer experience while increasing profitability. We are working closely with all of our vendors to improve quality and delivery while reducing cost. We are partnering with our fulfillment Center to decrease order processing time and increase flexibility. We are working to increase our in-stock percentage on top items while delivering clear site messaging supported by the best customer service.

And finally, while we continue to invest for growth, we are dedicated to increasing gross margins year-over-year through higher GeekLabs sales and Wholesale revenue, exclusive product sales and improved vendor management. Gross margin will continue to fluctuate on a quarterly basis due to factors such as seasonality and the competitive environment, but our goal is to improve it on an overall basis over time.

I'm proud of what the team has accomplished in 2013, however, we know that it is not enough. And we still have tremendous work to do to achieve our goals. The entire ThinkGeek team is committed to executing our strategic initiatives, improving our financial performance while continuing to invest in the future. With that, let's open the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Dan Kurnos from The Benchmark Company.

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

Katy, let's just start with the top line here. Certainly lower I think than most people were expecting overall. Maybe some granularity would help here. Could you give us maybe some more specifics on exactly how wholesale performed in the quarter? What the revenue impact from the condensed shopping period was? And maybe just why -- how competitive the environment was from a pricing standpoint? And whether or not that was a significant impact on your revenue results?

Kathryn K. McCarthy

Sure. Well I think I'll start with the second part of your question first, Dan. Certainly, as I highlighted, it was an incredibly competitive environment this year. Some of that driven, I believe, by the shortened holiday period especially for our business, where we tend to have a peak season that is a little bit back-end loaded. I would say it did affect the promotions. Clearly, the promotions year-over-year during that time were up significantly. Some of that's driven by competitors offering very enticing promotions. In addition, we also had a higher shipping cost related to extending deadlines to -- in expediting packages to customers, which we saw in the industry. So I -- those are some specifics around what drove some of the pressure on margins in the fourth quarter. On your question on top line, obviously, Wholesale did perform extremely well in the fourth quarter. We had some details I think in the filings that will be -- about the performance on the quarter and on the year. But it was up significantly. We're not as pleased with the site performance in the fourth quarter or for the year. And while it's up, we want to see it grow faster. And that's why I referenced some of the initiatives we'll be driving in 2014 around increasing brand awareness and reaching new customer segments.

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

So let me dig a little bit deeper on that. Sales and marketing was even -- understanding that the pressures on cogs, sales and marketing was still a little bit higher than we were expecting. And I guess it doesn't seem like there was either a lot of traction or I am not sure exactly how to phrase it. But would you characterize the quarter as you're still testing to try to find out what exactly works with the customers? Or where there specific areas that you were targeting that didn't work out, as well as expected? And now that you've got some learnings from this quarter that you'll be doing things a little bit differently going forward?

Kathryn K. McCarthy

Well, no, I think it's a good question, Dan. We're always learning. So some of the sales and marketing costs are going to go up in relation to some of the volume. But we did invest in some more, I'd say future initiatives, such as working with the third parties as we talked about to acquire new customers. Most of that doesn't yield immediate results. That will yield results in 2014 and beyond. So as a new management team, we're working to execute a turnaround. And we -- in that sales and marketing spend, you have something related to the current quarter volumes, but you also have things that are related to driving future growth. And so, and yes, we're always testing new things in e-commerce and trying to learn from what worked and what didn't necessarily work.

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

We noticed lately that on the website are 3 of your promotions, there's been a lot of heavy promotional offers as we get through the -- now that we're past the holiday season. It seems like to us, at least, that you're attempting to liquidate or play down a lot of your inventory here going forward. I mean, is that an accurate assessment? How do you feel about where your SKU count stood in Q4? How do you feel about the inventory build? And how you bought for the holiday season and the outlook for 2014?

Kathryn K. McCarthy

Well, let me start with how we feel about how we ended up on inventory, then I'll talk about the promotions. So in inventory, some of -- in the balance sheet, the tax -- we still see there inventories are up year-over-year. A piece of that is driven by inventory that was purchased ahead to fulfill a first quarter Wholesale deal. There's another piece of that inventory that's related to making sure that they are not stock outs during the Chinese New Year shutdown we experience every year. We've learned after a few years the fact that can be a problem. But inventories did end a little higher than we wanted to because of the site sales were a little bit lower than what we wanted them to be. That being said, we have plans in place and we don't feel that's going to be a big drag on margins, although we're not certain in 2014. Details where we want to be, we feel good about the SKU count. We've done -- I think the team has done a terrific job on bringing in these new items that I referenced while making sure of the inventory stays fresh. In terms of January, January typically is a promotional month in our business, just because it isn't the busiest month of the year following the holiday season, so we typically do see promotions in January into February.

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

I'll ask one more and step aside and get back in the queue. But just any additional color you could give in the quarter around how mobile performs? And how -- whether or not you're seeing improving conversion rates on mobile with some of the investments you've made in that particular platform would be helpful.

Kathryn K. McCarthy

Great. Well I don't have much more information than what I shared. But I would say that our mobile and our tablet performed very well. Sales were up 66%. We've made improvements to the tablet experience that we think were very positive. And we'll continue to work on that this year. We're making improvements to the mobile site. Our conversion rate improved, but they're still lower than our conversion rate on desktop, which people throughout the industry see that. And we're working on making them even better in the future.

Operator

Our next question comes from Justin Ruiss from Sidoti.

Justin Ruiss - Sidoti & Company, LLC

I just had a few questions. Just with the cash levels that we have here. I know it's down year-over-year, but are there any still plans for buybacks or anything like that going forward?

Julie A. Pangelinan

No, we don't have any plans at the moment for plans to share buybacks.

Justin Ruiss - Sidoti & Company, LLC

Got you. Okay. And then, the other thing that I wanted to ask was, for GeekLabs, for I guess the R&D that you're going for. Are you planning on upping the count of employees or how are you managing GeekLabs at this point?

Kathryn K. McCarthy

Well, Justin, we really -- you'd see it in the technology and design line, we've invested in more employees, more creative talent and graphic designers to drive higher GeekLabs sales. That's something that we really worked on over the past couple of years, and with that goal of increasing the percentage of GeekLabs and custom product sales for our company.

Justin Ruiss - Sidoti & Company, LLC

Got you. And then the last thing too that I wanted to ask was with the wholesale division, I know you mentioned Target, Toys "R" Us and Hot Topic. But are there any other targets out there that you would be focusing on, might be an opportunity?

Kathryn K. McCarthy

That's a good question. We're always focused on building new relationships in wholesale. And we feel like 2013 was a good year that opened many doors. And we're continuing to focus on building new partnerships to add to those that we already have.

Justin Ruiss - Sidoti & Company, LLC

And then just lastly, actually, the question I had was just related to this new strategy this Geek Out strategy, could you just get back into that, or kind of just flesh out that a little bit?

Kathryn K. McCarthy

Sure. No, I mean, I don't want to get too far ahead of the marketing people because we'll be launching this new brand strategy. But what I'll say is that, we've spent some time with a third party, with our internal team. We had a new leadership team that's been on board for over a less than a year. And we really feel like we have a great opportunity to launch a brand strategy that can help increase the awareness of ThinkGeek and all of the great products we have and all of the fun experiences that we have in our site. So our -- we're thinking of a tag line, which is join in and geek out. But there's a lot more around that. That I'll leave to the marketing team, that you should be seeing things from us on that shortly.

Justin Ruiss - Sidoti & Company, LLC

Okay. And is that part of like that third-party initiative that you were speaking about before?

Kathryn K. McCarthy

Yes.

Operator

Our next question comes from Arthur Winston of Pilot Advisers.

Arthur Michael Winston - Pilot Advisors, L.P.

Your operating expenses, I know it's about $10 million in the fourth quarter. Just quite a big -- bigger than it used to be. I'm curious, is this -- should we anticipate a run rate of over $40 million for 2014 calendar?

Kathryn K. McCarthy

Well, Arthur, we're not -- well we don't provide guidance on 2014, I can comment on...

Arthur Michael Winston - Pilot Advisors, L.P.

Well, let me ask the question. Is your -- are your operating expenses going to rise whether there'd been without any guidance?

Kathryn K. McCarthy

There is certainly -- if you think about operating expenses -- let me break it down to the pieces. So sales and marketing expenses, you're going to have a piece of that, that's going to correspond with growth. So for example, our credit card fees, paid search expenses, so those are going to go up with our growth. There are other expenses in there though that are probably investments. We -- As I've said, we made some investment in 2013. We will plan to continue to make some investments in 2014. Technology and design, I think we've made some investments in GeekLabs in '13. I would expect that in '14 with more -- we're focused on GeekLabs as always, but we're also focused on technology and our website. G&A, the targets continue to drive G&A cost down as a percentage of sales.

Arthur Michael Winston - Pilot Advisors, L.P.

It would seem that -- particularly relating to your websites, you're not getting a terrific return on these investments in your spending. It seems like your acquisition cost to get sales seem to be rising and rising precipitously from these numbers.

Kathryn K. McCarthy

Well, I think that we're not looking at all of the investments as yielding a return in one quarter. Clearly, there's some costs that were up. There's costs of paid search, they do go up depending upon the competitive environment. But we're not seeing -- some of the investments that we're making in the site, we're not viewing as for 1 quarter or even 1 year, we're viewing them as for long-term growth. So there's a mix of cost I think you have in there that ultimately led to the cost being up year-over-year.

Arthur Michael Winston - Pilot Advisors, L.P.

But why do you think that the sales from the traditional websites are kind of flat? What do you think the major 1 or 2 or 3 reasons is? I guess you alluded to some of them.

Kathryn K. McCarthy

Well, I'll give you a few. I'll repeat a few, I guess. One, we did see that this holiday, due to a shorter holiday period for us because our peak really starts heavy on Black Friday, Cyber Monday, that there were some effects of that year-over-year. I'd say, secondly, we need to continue to improve the traffic and increase the traffic to the site. We thought some changes in social media, particularly Facebook, and changes that Facebook has made that make it more difficult to get that traffic than it was in the future and we're addressing that. So I would say those are a couple of reasons that I would give. I feel really good about the products that we delivered, and of course, I always still feel great about the experience that we're working on for our customers on the site. But I'd say those are 2 -- a couple of things that really affected us.

Operator

Our next question comes from Ralph Weil from R. Weil Investment.

Ralph Weil

You talked about the new leadership that came in, in March or April, in terms of -- in the areas of marketing, merchandising and financial systems. Could you please -- and I know you've touched upon some, but maybe could you elaborate a little more on some color on what you feel has been significantly achieved so far in terms of changes or enhancements? And what has been put in place which will significantly benefit the company in 2014 and going forward? And what has been done or attempted, and which you feel hasn't actually worked? And also, are the same people that came in, in March or April still the ones who are there in those leadership positions?

Kathryn K. McCarthy

Sure. I can elaborate on that, Ralph. So yes, as I highlighted, last year, probably in the first quarter call, we had some changes and we brought in some individuals with e-commerce and retail background to help us in merchandising, marketing and technology. So what have achieved so far? I mean, the idea was we have some things to do to turn things around and drive the company to a more profitable growth in the long run. The team has worked on and built a strategic plan with key priorities that we are executing for the next few years. One of those priorities is developing world-class marketing, increasing the awareness of the ThinkGeek brand. We are still early days in doing that. We have -- I feel the team has done a terrific job, but we have a long way to go to implement that. We've also made significant improvements to the website. You can see it in the navigation of the site and the feedback on the overall customer experience that will continue to need to happen in the future. We're working on improved vendor management, where we use our increased volume to get better discounts from our vendors to make sure that we're constantly focused on increasing our gross margin. Those are some of the things that the team is working on, not just for 2014 but for 2015 and beyond.

Ralph Weil

Do you feel you have the financial systems in place at this point in time, or you still have to work to do there?

Kathryn K. McCarthy

So yes, as I mentioned, we're working on implementing the ERP system. That is one of the investments that we have made and are continuing to make to improve our financial reporting, our business intelligence and gain some efficiencies in the business. That really only started -- the planning occurred last year. Revenue is only starting in this -- in 2014, so we still have work to do on that. That's a big priority for 2014 for us. And I think you asked if the people are still the same people? Yes, they are still the people in the leadership position.

Ralph Weil

What is being done if anything can be really done to improve the seasonality of the company so that it's not just, we have to sit around and wait for the fourth quarter each year? And anything -- is anything being done in that regard? And also, regarding the conversion rate, I'm sure you've been trying to get that conversion rate up. What do you feel are the obstacles to getting that up? And what can you do to try to improve that somewhat more than a little bit?

Kathryn K. McCarthy

Well, when we -- I'll start with the seasonality. Clearly, this is a business that has gifts that are terrific for holiday, so we are going to have that seasonal element to the business always. But we have taken steps to try to move out that seasonality. Wholesale is actually a really -- a very good thing for that. We are able to gain deals with retailers outside of the peak. In many cases, the big box retailers will look for those sales all year long. There were also, in many cases, plan ahead and look for those sales in the third versus the fourth quarter because they tend to be ahead with shoppers versus online. So that's one step. We've also taken steps such as creating more on other holidays, including Mother's Day, Father's Day, Back to Campus and Halloween, and we saw results yield from that in 2013. So by nature, our business is going to be seasonal, but we're doing our best to identify ways to gain sales in the other quarters. I'd say on conversion, some of that is increasing the focus on user experience on the site, trying to improve the checkout process, improve the way the site is laid out, and many things were achieved on that in 2013, but we're getting started. We have a lot more to do there. And then I also referenced mobile. There's a big shift to mobile tablet, therefore, we put focus on improving that experience for the customer to drive improved conversion.

Ralph Weil

Okay, one last thing. Can you talk a bit about your apparel sales and how -- what kind of progress you're making there? And are you offering a lot more apparel type items than you did in the past?

Kathryn K. McCarthy

Sure. We don't disclose the specifics of how much apparel is growing or how much percent of the total it is, but I will say that we had a lot of success in apparel in 2013. And we've expanded the offerings. So whereas a few years ago, our company sold black T-shirts for a lot of -- just T-shirts and we still sell those fun and amazing T-shirts. But now we're offering more hoodies, we have more accessories, we have some more clothes that are appealing to women as we realize that women are a big demographic that shop on our sites. So we've really expanded the apparel offerings and that has been successful.

Operator

Our next question is a follow-up from Dan Kurnos from The Benchmark Company.

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

Arthur asked most of my follow-up questions, but I did just to want to drill down a little bit on the cost side, Katy, particularly as it relates to the investments made this year. I'm wondering if you could at least give us a sense of what margins or what the margin impact was or what margins, normalized margins might have been if you were to exclude the investments made for 2014? Just trying to get a sense of how much of the compression was due to investments versus just current run of business? And then next year, I know you gave some really good color on sort of the cost buckets. But as I look at sales and marketing, and you're launching a new brand campaign that could range from anything from pure online campaign, offline and online to any number of things. And I'm just wondering if, at least directionally, you could give us a sense of the size of how big that might be?

Kathryn K. McCarthy

Sure. So I think your first question related to 2013. And what I'll say is that, one unusual thing that's in there that we talked about in the expenses and EBITDA margin is the $1.8 million of cost related to the transitions that I don't expect to repeat. However, the sales and marketing investments or the sales and marketing run rate, we will, as you mentioned, continue -- we engage third parties but we're going to continue to work on this brand strategy in 2014. Now that is that with goal, of course, of yielding sales and yielding something from that investment. So I would expect we will still see numbers without providing guidance, we would still see investments in sales and marketing in 2014 that will be significant because we believe we need that to drive growth and ultimately drive profitability.

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

Can you just give us a sense of how the marketing campaign might be laid out between offline and online? And which particular channels you intend to attack more aggressively than others?

Kathryn K. McCarthy

Honestly, I don't have all the specifics of that yet. The marketing team's doing that right now. But what I would say is, we're going to spend money prudently, so that will be part of the discussion is the projected ROI on that spend. But I don't have all of the details of that yet, but we should have that soon.

Operator

And our final question is a follow-up from Arthur Winston of Pilot Advisors.

Arthur Michael Winston - Pilot Advisors, L.P.

There's one thing I don't understand -- it's seems like going to all of these places like Target and Toys "R" Us, et cetera, is a slightly different business than your investing in with all of these third-party studies and all these stuff, so your growth is in selling in the Wholesale channel and yet your investments seem to be in the area that doesn't seem to grow very much and it seems that there's a contradiction going on here and some confusion.

Kathryn K. McCarthy

Well, what I'd say, Arthur, is that yes, the Wholesale channel, it's a separate -- but we've reported that now as separate segment, you'll see that in the financial statement. Now the products are products that you'd sometimes we've already sold on the site and then we have a new channel that we can sell them to. But we also design certain products and will design certain products for the Wholesale channel, so that's a door we'll open that we think is very exciting. On the site though, we still believe we have a tremendous opportunity and the rational for the investments again isn't for necessarily the sales that were yielded in 2013. But for the future opportunity of getting more customers to come to our site and to convert. So Wholesale will grow and the site will grow. That's the ultimate goal.

Operator

And we actually have some additional questions from Thompson Clark of Agora Financial.

Thompson Clark

I just have 2 quick questions. On the -- I noticed that some of your products are sold through Amazon.com. Is that reported through the online segment? Or is that, for some reason, going through Wholesale?

Kathryn K. McCarthy

The -- so I just want to make sure I understand the question. Then so -- that you mean our -- that products from ThinkGeek or similar products to those that we sell on ThinkGeek? Because...

Thompson Clark

Your products that are sold on -- I think you have a ThinkGeek landing page on Amazon or?

Kathryn K. McCarthy

Yes, so those are site sales. I mean, it's a pretty small percentage of the total, but those are site sales.

Thompson Clark

I see. Okay. And then my second question has to do -- I know one of your listed competitor's overstock.com in the past 2 months or so, has announced that they're now accepting Bitcoin as a form of payment. It just seems to me that might pair well with ThinkGeek and with their customer base. Is there something that you guys should maybe consider to accepting Bitcoin for payments?

Kathryn K. McCarthy

Not at this point but we'll -- - we saw that too and we'll take a look at it.

Operator

Our next question comes from Matt Ray Shindio [ph] .

Unknown Analyst

Katy, just a couple of questions for you. On the third-party marketing folks that you're working with, what's the kind of cost level that you saw in 2013 related to that? And what do you think it will do in 2014?

Kathryn K. McCarthy

So we don't disclose the exact number. But what I'd say is the cost in 2013 were obviously higher than they were in 2012. And we continue to expect to spend money in that area in 2014.

Unknown Analyst

So what's your kind of hurdle? I know you said you're looking for an ROI, what kind of hurdle are you looking further? Have you specifically quantified it with your team?

Kathryn K. McCarthy

Internally, we quantify it. Internally, we look everyday at whether the investments are yielding the top line results. So yes, we certainly do that, and we continue to reflect on it. And if it's not working, then we don't spend the money.

Unknown Analyst

So if -- you mean to say if it's not working we don't spend the money, or are you saying that you've made decisions like that to constantly steer it or that's kind of -- what's your horizon for those decisions?

Kathryn K. McCarthy

Well, there's different types of investments. Some of the investments will make or some of the things that we're putting in to sales and marketing are more for the short term or that period. And that's what I'm referring to as, if you don't see yielding, you do something else. And particularly in e-commerce, you need to be flexible and able to make those shift. But some of them, as I've mentioned aren't like that, that we're investing in future growth. And we're trying to think ahead to the fourth quarter of 2014 and the whole year of 2015 and 2016 because we have now built a strategic plan that looks out over future years.

Unknown Analyst

Got you. And on the ERP, I imagine the implementation incur some more -- one-time kind of set up costs with Oracle or whoever you're working with above and beyond the ongoing maintenance expense. Can you talk about how much of that was in 2013 and how much of that remains?

Julie A. Pangelinan

Matt, this is Julie. The investment in the ERP system in 2013 was relatively low. We have selected NetFleet as our provider and it's a cloud-based solution for Software as a Service. So there's not a huge upfront investment but there will be an ongoing monthly subscription fee. And we were just starting a portion of the implementation in Q1 and we'll continue with it through midyear 2014.

Unknown Analyst

Got you. And then, last question on the sales and marketing ROI. You track or work with your wholesale partners for kind of where that ROI is coming through, because I imagine on brand spend if you're driving business exclusively to tablet or online versus wholesale, they spend[ph] the benefit from some that. So I'm just wondering if there's any digit[ph] in how you attribute that?

Kathryn K. McCarthy

The wholesale agreements really are separate from what we're basically selling directly to those retailers, and each one of those agreements is different. So I think that you can view that as kind of separate from what we're doing on the sales and marketing related to the site.

Unknown Analyst

Okay. So your brand marketing is -- you believe that, that will be reflected in your more traditional non-wholesale businesses?

Kathryn K. McCarthy

Yes. I mean, we feel like Wholesale in its own right can be marketing for the brand by getting our products to different customers and different places. But there's also obviously marketing that we need to do on the Internet to drive customers to our site and convert them.

Unknown Analyst

Got you. And then, last question, with somewhere around or just over half your market cap and on cash the balance sheet, which I know is a little bit seasonally inflated. But how do you think about that? I know you said no to buybacks, but it seems like a pretty high number for the capital intensity of your business?

Kathryn K. McCarthy

Well, no, as I've said in the past, you make a good point, yes, it is seasonal but we do have the cash on the balance sheet and we feel good about our position, not having debt and having cash. That being said, the Board of Directors is always looking at opportunities to best utilize that cash, whether it be investing in the company or are looking at other opportunities down the road that will be best for our investors.

Operator

That concludes our Q&A. I would now like to turn it back over to Ms. McCarthy for closing remarks.

Kathryn K. McCarthy

I want to thank everyone for joining us today, and please have a great day.

Operator

Ladies and gentlemen, that does conclude today's conference. Thank you for your attendance. You may now disconnect. Everyone, have a great day.

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