FTD Group F3Q07 (Qtr End 3/31/07) Earnings Call Transcript

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FTD Group, Inc. (FTD)
F3Q07 Earnings Call
April 30, 2007 11:00 am ET

Executives

Michael Soenen - President and CEO
Becky Sheehan - CFO
Jandy Tomy - IR

Analysts

Aaron Kessler - Piper Jaffray
Troy Mastin - William Blair
Aaron Kent - Goldman Sachs
Sandeep Aggarwal - Citigroup
James Sanford - Merrill Lynch

Presentation

Operator

Welcome to the FTD Group Inc. third quarter 2007 earnings conference call. (Operator Instructions) Your speakers for today are Michael Soenen and Becky Sheehan. I would now like to turn the conference over to Ms. Jandy Tomy. Please go ahead, ma'am.

Jandy Tomy

Thank you and welcome to FTD Group Inc.'s fiscal 2007 third quarter conference call. A press release was sent out this morning highlighting the company's results. A copy of that release is available at the company's website www.FTD.com, under the Investor Relations section.

Before we begin I want to reiterate this conference call contains various forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding FTD Group's outlook, anticipated revenue growth and profitability. Also included are statements regarding the anticipated benefits of investments and new products, programs and offerings and statements regarding opportunities and trends within both the domestic and international businesses including opportunities to expand these businesses and capitalize on growth opportunities or increase penetration of service offerings.

These forward-looking statements are based on FTD Group Inc.'s current expectations, assumptions, estimates and projections about the company and its industry. Actual results could differ from those anticipated by the forward-looking statements. Certain factors that could cause these results to differ are detailed in the third quarter 2007 press release. We expressly disclaim any obligation to update forward-looking statements.

I would now like to turn the call over to Michael Soenen, President and CEO of FTD.

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Michael Soenen

Thank you, Jandy and thanks, everyone for attending. I am going to set a quick agenda for the call today. I am going to start by talking through some of the highlights in our third quarter. I'm going to have Becky then come on and walk you through the financial details of the third quarter. I'm going to then come back and give you some highlights on my outlook for what I think the fourth quarter will look like for the year. Hopefully we will move through the fixed remarks fairly quickly and then we will open it up for question-and-answer.

With that, we were very pleased with our revenue margin and earnings growth for the quarter. Obviously the 42% revenue growth in Q3 we think is very attractive and while that is driven by the international order volume which is up 12.9%; the domestic consumer business was up 6%, our florist business was down, but a lot of that had to do with a large account we had on the fresh flower side with a mass merchant that we decided not to renew because it was a money-losing account. A little bit with some of the order volumes from the florist associated with Valentine's Day which we will talk a bit more in the context of the call. A little bit under some of the wholesaling, container lines and stuff that I'm really trying to keep us less focused on and more focused on some of the higher profit margin lines.

As a result of not only having good revenue but profitable revenue, we see our operating margins expand in each of our segments. The consumer business was up 145 basis points. The florist business was up 60 basis points. In the International business we don't have an audited comp for the prior year but just by looking at the prior quarter, it was up to 9.9% from 7.2% margins in the prior quarter. So I think we are starting to see some of the leverage there that we have been looking for, very good growth and leverage now we are starting to see in the business.

EBITDA was up 34%, which I think is a good sign, and diluted EPS was $0.32 which includes the $0.02 related to the offerings so in my mind that's about $0.34 compared with the $0.26 in the prior year. So about a 30% increase in EPS as well. Overall, strong on the revenue side. Nice operating margin expansion, good EBITDA growth, good EPS growth. Overall, I am very pleased with the quarter.

With that I'll turn it over to Becky and let Becky walk you through the details. Becky.

Becky Sheehan

Thanks, Mike. As Mike mentioned, we are very pleased with our operating performance which drove improved margins and solid bottom line results during the third quarter. Let me begin with our consolidated results. Our third quarter revenue was $182.9 million, an increase of $54.3 million or 42.2% over the prior year's quarter. Interflora contributed $53.6 million of revenue and the remainder of the revenue growth was driven by order volume increases in our domestic consumer business.

Third quarter fiscal 2007 EBITDA, excluding other expense income net, was $26.1 million which represents $6.6 million over the same period of the prior fiscal year. Fiscal 2007 other expense of $0.6 million is primarily related to secondary offering costs, net of foreign currency gains.

Net income for the quarter was $9.6 million or $0.32 per diluted share versus $7.4 million or $0.26 per diluted share last year. As Mike said, diluted EPS during the current year quarter, included $0.02 related to the costs that FTD incurred associated with a secondary offering of $6.9 million shares by affiliates of Leonard Green & Partners and certain members of management. The secondary transaction closed on March 12, 2007.

Now, moving onto our segments. Our consumer segment reported year-over-year third quarter revenue growth of 6% to $80.2 million. This was primarily driven by a 4.1% increase in order volume which totaled $1.243 million during the third quarter and an increase in average order value to $63.04 in the current quarter from $62.18 in the prior year quarter.

Operating income was $4.2 million or 5.3% of revenue compared to $2.9 million in the third quarter of the prior fiscal year, or 3.8% of revenue. Operating margins during the period strengthened as we effectively managed our marketing, technology and general and administrative costs.

Moving onto our florist segment, which reported revenues of $49.1 million in the third quarter of fiscal 2007 compared to $52.9 million in the prior year quarter. The decline in the florist segment revenues was due to decreased clearinghouse order volume, a decrease in fresh flower sales resulting from one large customer contract in the prior year that was not renewed this year, and reduced container sales. Operating margins in the business also remain strong. The decline in revenues was attributable to lower margin products and services within the segment.

Operating income for the quarter was $16.4 million or 33.3% of revenue compared to $17.3 million or 32.7% of revenue in the same period of last year. We are particularly pleased with our domestic business performance during the quarter in light of the inclement weather conditions affecting parts of the country during the Valentine's Day holiday. Our consumer business experienced higher refunds associated with cancellation and higher product guarantee costs associated with rescinds of orders and other quality matters. Our florist business also experienced less orders sent through the network.

Finally, our international segment. Revenues were $53.6 million in the third quarter and operating income was $5.3 million or 9.9% of revenue. Consumer order volume in the segment totaled $665,000 up 12.9% of the same period over the prior fiscal year, driven by increased order volumes in both their Mother's Day and Valentine's Day holidays, both of which occurred in the third quarter. Average order value in the international segment was $66.87 and Internet orders comprised 73.4% of their order volume.

Now turning to the balance sheet. Cash totaled $41.4 million at March 31, 2007. Cash generated from operations on a year-to-date basis was $37.4 million. Total debt was $336.9 million which includes no payables related to the Interflora acquisition totaling $24.5 million. As planned, we expect to pay approximately $22.9 million of these notes in the fourth quarter.

During the third quarter we voluntarily repaid $7 million on our term loan. As of March 31, 2007, the company had $49 million available under its revolving credit facility. Capital expenditures for the quarter were $1.2 million, primarily related to continued technology improvement.

Our business model generates strong cash flow and we remain committed to returning cash to our shareholders while actively reinvesting in the business. FTD paid its first ever quarterly cash dividend on April 2, 2007, to shareholders of record on March 19, 2007 in a total amount of $4.7 million or $0.1625 per share. The board has also approved the company's fourth quarter dividends of a like amount, $0.1625 per share to shareholders of record on June 22.

I will now turn the call back over to Mike for him to comment on our outlook.

Michael Soenen

Thanks Becky. Let's give you an outlook, starting with our consumer business. Certainly our key focus here is on our aggressive, yet profitable, marketing programs. We continue to see an aggressive online marketing environment although we continue to and look forward to continuing to offset this risk through the expansion of our affinity programs, our corporate programs and better retention marketing. Through that, obviously, we will drive growth and increases in profitability.

Now we are going to continue to expand our product sets, our Vera Wang collection that went through a very successful launch at Valentine's Day. We are expanding that collection for Mother's Day. We look at that as a very nice premium line for our customers and continue to hope to see growth there. Certainly what we are doing with the Todd Oldham line, it has consistently been one of our top sellers since its launch. We are also expanding that product line and adding a plant line to the collection. We believe that is also going to help us drive growth here in the fourth quarter.

In terms of the technology front we have been making several investments to the website both to improve our SEO and our conversion rates, something that we hope will allow us to get better yields out of the marketing dollars we are spending. We continue to yield the investments we made last year in our order processing capabilities, reducing our overall cost structure and improving the core quality and the routing of the orders that are being fulfilled. Finally our call centers continued to have a great year, both providing better service at lower costs, giving us yet better opportunities to drive further margin expansion and improve profitability going forward.

On the florist business, we're really focused in three key areas here. It's penetration of our key higher margin product lines, our technology product line continues to have a tremendous year. What we're doing in terms of online services in terms of the web hosting, in terms of marketing for florists, email marketing and such, seems to be a very popular product line for us, something that is a very good profitable business. A lot of the other marketing and advertising programs we are doing on behalf of the florists continued to be good, high margin product lines where we are seeing increased penetration.

I am also continuing to re-evaluate the lower margin -- or in many cases, no margin -- product lines. Things like fresh flowers, the account we decided not to renew with a mass retailer where we had bought product and were reselling it to them and it wound up being a very low to no margin. My decision really not to continued to engage in relationships that take up energy on behalf of the company but did not yield improved earnings in any way.

Certainly what we are doing on the container side, I have said on many occasions the wholesaling business has a role at FTD but I don't really enjoy being in these wholesale commodity-type businesses. We are going to continue to evaluate how much of that business I want to continue carry going forward since it contributes very little EBITDA and once again, takes up a tremendous amount of energy here at the company.

Also other relationships with certain large customers who had financial arrangements that were simply unprofitable to us at FTD. While good relationships for certain reasons, as we look at the profitability of the growth going forward, we are going to continue to evaluate what relationships -- whether it's vendor relationships, customer relationships or otherwise -- that are taking tremendous amounts of energy but may not necessarily be adding anything to the company's value. So all of those are under re-evaluation and we will always continue to flow with the growth rate of the florist business.

Finally, our grocery initiative. You know we have a 13% increase in the number of grocery members versus the prior year which is nice. We don't give that number out with the relative stat. It is something that is growing quite nicely. We have seen revenues increase over 17% year-to-date coming out of that channel so we are starting to see the success there that we had looked for. We have new products that we are launching in Q4, for competitive reasons I won't be discussing, but I also think based on what we know today should help allow us to have some improved growth rates coming out of that sector in Q4 as well.

Looking at the domestic florist business, continue to focus on the key, high margin product lines and getting out of or minimizing the lower ones and starting to see some traction on the grocery initiative all give me great comfort in the direction of that business right now.

As for our international business, things continue to go extremely well there. The team is doing a great job. We are going to continue to grow that and really just trying to let them do what they have been doing because they have been very successful on their own, and letting us lend whatever advice and help we can. Things that we have been able to help with like what they are doing with Google and Yahoo! and the experiences that we have to have there. Certainly what's going on with affinity accounts and broadening those accounts overseas where appropriate, and working with some of the third party advertising programs that have been so successful here in the States are programs that we have been able to implement there that are having near-term impacts on the consumer business.

Additionally, we continue to do joint investing both in terms of websites and in terms of order processing networks and really trying to leverage the technology across multiple platforms to keep the operating costs down while expanding and leveraging our capabilities.

In terms of the florist segment for the international business, we have had several key initiatives that are underway that I would like to point to that I think are going to help us as we get into, not just Q4 but into next year. One, we did hire a new head of the florist segment to help drive growth in that business. They have added several new members to the membership base after years of decline and having some membership growth there kind of backfill some of the newer customers has been a change in the trend line for the better of the business.

They've had a tremendous amount of success selling the florist website products. They have penetrated to almost 36% of the membership base now up from 23% in the prior year so, clearly, not only are we adding members but we are penetrating that membership base successfully. They are beginning to test our version of what we call Flowers All Hours and After Hours Answering Service beginning in the fourth quarter, for some of their very top members. So we are seeing an addition here on the florist side. On the consumer side we are seeing them leverage existing relationships, doing great work on their own, growing and growing profitably; but then on the florist side really making good initiatives in terms of bridging products over, penetrating those products into that customer base and using that to increase the monthly revenue coming out of that channel.

Finally, I continue to be pleased with our progress just looking at acquisitions and building relationships, whether it's what we're doing in Asia and other countries. I tend to be very pleased with the progress there and the opportunities in the future for us to continue to make acquisitions on that front. As I look forward now and I set the targets for the rest of the year I was little bit torn. Clearly I am optimistic about the business but I do feel the need to take a revision downward just to be conservative. It is really around Mother's Day. I have a very conservative forecast for Mother's Day. It is the biggest holiday of the year by a lot; the kind of holiday where a couple of good hours actually makes a difference in the holiday and simply one of those things I just don't know. I don't where it will be.

The other thing that is really kind of a question mark in my head is how much longer do I want to continue to sell things very low or sometimes unprofitable in that florist business. There's always a trade-off because revenue growth is something investors want and expect and should expect and we will deliver. Yet at the same time I have certain product lines that as I take them down, certainly impact that revenue growth. So how I bridge that and when I bridge that, some of it I think we will do in the fourth quarter as well. I think I have enough to offset much of that but I guess we will continue to be very strategic and thoughtful about how we do it. A lot of the reduction in the forecast reflects both of those two impacts.

That said, since a lot of the unknowns are around the Mother's Day holiday are what they are. The low margin florist stuff that I would not sell, it doesn't impact our profitability for the year. That is how we have been able to increase our EBITDA and EPS targets for the full year. EBITDA we are taking from $89 million to $90 million and EPS is going from $0.96 to $0.98. The $0.98 includes the $0.02 related to the secondary. So as I view it, the $0.96 is really going to $1 and I think that is a pretty meaningful bump in EPS, especially considering our conservatism around the revenue forecast for Mother's Day.

Finally, I'm just proud of our commitment in terms of giving cash back to shareholders. As Becky said earlier, the Board has approved its fourth quarter dividend. The $0.1625 per share dividend is about a 3.5% yield on the stock as of Friday's close and I think as we continue to look at the dynamics of both our ability to grow EBITDA, our ability to delever the balance sheet which we have done, we think it is an appropriate and good use of our excess free cash flow and we think that it is a great way to use that money.

In summary, we are just very pleased with our progress here to-date. We are going to continue to focus on profitability and I believe over the longer term should be able to drive the most amount of shareholder value by focusing on profitability.

With that, I would like to thank you for your continued support and your interest. We will open the call for any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Aaron Kessler – Piper Jaffray.

Aaron Kessler - Piper Jaffray

Good quarter. On the consumer side in terms of the order growth, it is 4%; a little lower than our 8% estimate. Was that primarily due to the winter or are there some competitive factors there as well?

Also on the international margin, much stronger than our estimate. What drives that strong growth? Do you have any longer term margin expectations on the growth margin side or operating margin side for your international business?

Becky Sheehan

On the consumer side with the 4.1% increase in order volume I think a couple of things there. I do certainly think as I had mentioned in my remarks, that the weather issues around Valentine's Day certainly, we believe, had an impact on order volumes during that period. That showed itself through either orders not being placed and in some cases, orders being canceled and in other cases refunds or quality issues that impacted us.

I think the other thing, more to what Mike said as well, is that we are focused on making effective spends with respect to our marketing dollars and therefore, we are very conscious about the kinds of dollars we are going to spend, particularly online to generate additional order volume increases, if you will, with our focus being on making sure that we remain profitable and have order volume that is profitable as well.

On the International side, I would say that this was their biggest quarter of the year. They had both Valentine's Day and Mother's Day and that, coupled with their continued focus on looking for ways to continue to improve margins, is something that they were effective in doing and obviously came through with the results for the quarter.

Aaron Kessler - Piper Jaffray

On the Interflora business, order volumes also ticked down to down to about 13%. Is that apples to apples or is there anything that was not normalized in that growth?

Becky Sheehan

We believe it is apples to apples. We think that's comparable growth.

Operator

Your next question comes from Troy Mastin - William Blair.

Troy Mastin - William Blair

On the florist business first wanted to ask about clearinghouse volume being down. If there is anything specific you can point to there? Was that just Valentine's Day? Has anything changed meaningfully on the competitive front there?

Michael Soenen

Yes, two things. I think the clearinghouse volume was down slightly and I think there are three trends that occur, but one was with Valentine's Day. I think some of the florists just didn't have as much spending as they anticipated; the network filled up fairly quickly as large chunks, almost a third of the Northeast, was not accepting orders to even have them sent. So I think that was probably the largest driver of it.

Certainly as I look at the other dynamic on the consumer side which is the growth that we are experiencing there, some of what we see growth in at Valentine's Day is the direct ship business and a dozen roses is a very commoditized item. I think the growth there somewhat, to a much smaller degree impacted the orders going through the clearinghouse as those were extremely popular items at the Valentine's Day holiday and I think somewhat cannibalized some of the growth going through the clearinghouse. I think both those trends had an impact there.

Troy Mastin - William Blair

On the florist businesses, as you think through these low margin or no margin businesses, how much smaller should we think this segment might get? Are we talking another 5% or 10% of revenue or is it maybe a bigger share of total revenue? Just so I have an idea of where maybe the bottom is and what you've thought through this process?

Michael Soenen

It's about a $50 million business, all the wholesaling. All the containers, the direct, all that kind of knicky knacky stuff and it's a very low margin business. So could it be half that size someday? Sure, it could be half that size. I could easily maintain it and it would have no impact on the revenue. I just struggle with deploying firm resources on things that don't generate a tremendous amount of strategic value. So I'm a little bit torn. It may not get a whole lot smaller, but on the other hand as I get to these cross points and I know that I am not going to make any money and I know that I am going to be tying up money in inventory and I'm going to be taking risks on getting the stuff resold and florist fulfillment, sometimes I think let's let it shrink a little bit at a time. Hopefully, once we get through some of the phases we're in now getting the growth out of what we are seen in fresh flowers and grocery and other stuff will more than offset that longer term. In the near term, we are still ramping up the fresh and the other categories, but they don't always come as quickly as you want to take down some of the unprofitable stuff.

I think as long as I am continuing to grow EBITDA and EPS I think I'm fine. That's the proxy I'm looking for and if this business were to go back another $20 million, $25 million which I am not anticipating or forecasting at this point, as long as I did that and was able to continue to grow EBITDA and EPS, which I believe I can, I think that's actually the best decision for the company long term. We will just kind of keep working through that quarter by quarter as we look at it.

Troy Mastin - William Blair

On the consumer side of business, I don't know if you have tried to do this or if there is even a way to do this, but if you were to try to normalize around the weather situation that you faced around Valentine's Day, do you have maybe a better sense of where order volume growth would have been had you not faced that?

Becky Sheehan

Troy, I think as you know it's a hard question to answer, but we certainly looked at what was happening during that period of time with respect to the matters that I discussed: the refunds, the cancels and the product guarantee. We think for the quarter that may have cost us between 1.5 and 2 points of growth.

Troy Mastin - William Blair

That's helpful. There may have been some changes in some of your partnerships or feeds for order volume as well in the quarter. I'm curious if there was anything substantial that may have hurt order volume as well?

Becky Sheehan

What do you mean by that, Troy?

Troy Mastin - William Blair

Well I know you'll do some larger partnership deals through affinity programs, through portals, things of that nature. I didn't know if you had any changes that would have impacted order volume in this particular quarter or not.

Michael Soenen

Well we did some large online deals, deals with MSN and others that we simply took a pass on. These were deals that were running in the $60 per order range. In the prior year there were competitors out there who decided to be aggressive in bidding for those. This was one of those classic trade-offs where the first year when I bought it at $65 an order that was a lot more than I thought I was paying. When the renewal came up and they were asking for a similar -- if not a higher price -- this year, we did not find that to be an attractive financial deal for us and so we passed on it.

Some of it, clearly by nature of the fact that we knew we weren't doing those deals was going to have lower revenue growth for us. I think we ended up with probably 4% unit growth. I know one of our competitors reported something like 5% unit growth and I think considering we passed on a couple of $65 per order type marketing programs to come in at about similar type unit growth, I felt pleased with that decision.

Troy Mastin - William Blair

That's really helpful. Then if I could, one more on international. If you could maybe break down or give us some idea of where you are in the evolution here? So you are putting up fantastic numbers there. I'm curious if it's the marketplace is that you have put certain incentives in place with the management team over there. Is it that you have started to extract some synergy from the combination? Is there any way to maybe weight those or maybe there's something I'm missing, so I can understand maybe how much further we have to go in terms of the value that you'll get out of this acquisition?

Michael Soenen

Sure. I think there's a couple of places. First and foremost, the team is doing a great job. We tend to stay out of their hair pretty well and I think they tend to execute very well and overall, that makes me pretty happy. That has been great and I want to make sure everybody understands that we have a good, solid team there.

I think beyond that some of it really cuts some of marketing programs we have. Things we've done with third party advertisers here where we can generate revenue, bringing those relationships over there has added real revenue and earnings this year. Things that we are doing in terms of working together with our Google and Yahoo! Relationships, considering ways to do that more tightly, I think have added value, revenue and earnings this year.

I don't know that we have a lot though, Troy, frankly in terms of synergy. I think synergy is something that is really viewed as a standalone business. They run their own business. There's not a ton of overlap although we are doing some amount of work in terms of thinking through next-generation websites and how we have one platform versus two and one set to support versus two, but for the most part we view them as a separate entity that runs their own business very well. We like to think we exchange a lot of ideas.

I think the one area that's really an unknown yet outside of all of that which could be a really big benefit over the long term is simply pricing. As you know, we have begun to experiment with service fees there around the holidays. Service fees are not charged in that segment but that is a large amount of where we drive operating income and EBITDA out of our business here. It has been a nice offset to marketing CPOs rising over time. Those marketing CPOs in that market continue to stay in the $6 range and we haven't explored much on the pricing side so far, because this business has been running so well and we've been able to hit a lot of the lower-hanging fruit. But over the longer term, I think we probably have another year or two of getting all the low-hanging fruit cleaned off, but I think the longer pricing discussion and how the market reacts to pricing will actually dictate how much better the business will get after it gets to its state two years or so from now.

Operator

(Operator Instructions) Your next question comes from Aaron Kent- Goldman Sachs.

Aaron Kent - Goldman Sachs

It looks like if you try to back into the organic growth in the quarter it was flat to maybe up 1%. I think the guidance calls for florists and consumer business to decline year on year in June. Can you discuss when you think those trends may reverse?

Secondarily, harping back to the International business and the success in the quarter, when we try to think about the June quarter, how should we think about that relative to the December quarter? I understand that March was a seasonally strong period but how should we think about that relative to December? I also wanted to ask about the sustainability of the margins in the near term, understanding there's likely some upside over the longer term?

Becky Sheehan

Let me try to answer your questions. You have several built in there. For the third quarter, you are right. The domestic business on a combined basis was up slightly, about a point, and that again is because the consumer business grew at 6% while the florist segment experienced a decline. Obviously results in the combined domestic segment looking like it is up about a point. I think that was the first question you had.

As it relates to the fourth quarter, what we have given is the overall target for the year. We haven't necessarily given a segment target. I think it relates to what assumptions are you making with respect to how each of the segments are going to perform? Maybe that's why you are assuming that there will be some decline in the fourth quarter. I don't think we've necessarily built that into our model ourselves.

The fourth quarter for the international segment has no holiday in it. I think that is an important point, while our domestic business as Mike had mentioned in his comments of course, Mother's Day is the biggest holiday for us in our domestic consumer business.

I don't remember the last part of your question. I apologize.

Aaron Kent - Goldman Sachs

It was just related to the 9% operating margins in the quarter internationally and whether that was sustainable in the near term?

Becky Sheehan

I think that you have to remember that the 9.9% operating margin that we experienced in the international segment for the third quarter really came in the biggest quarter of the year for them. So while we do believe that their go-forward margins will improve, compared to what they had been running prior to the third quarter, 9.9% is also the peak for them during the fiscal year.

Operator

Your next question comes from Sandeep Aggarwal - Citigroup.

Sandeep Aggarwal - Citigroup

Two questions, one on the paid search. Can you talk about your efforts for paid search marketing during the quarter, especially I think last quarter you were mentioning about yield management? So I wanted to know if you are able to improve your yield on your paid search effort.

Secondly, when you selectively eliminate a florist member, does that negatively impact some of your more profitable merchants?

One quick question on the florist segment again, do you think the competitive environment does not allow you to offer more FTD-favorable terms instead of just eliminating a merchant? Thank you.

Michael Soenen

I will try to take all three pieces. So paid search, we are not going to talk much about yield or yield management. The online environment hasn't materially changed in any way. Obviously there was Yahoo! and the launch of Panama and is that going to be a big deal, and this that or the other. But I would say from our standpoint, paid search is materially the same as it was before. We have seen some improvements, of course, but nothing that I want to disclose to my competitors and nothing that I think is going to materially alter the P&L.

As for selectively eliminating certain customers, it really comes in two buckets. I think we have said on a couple of occasions publicly, materially all or substantially all of our revenue and EBITDA comes out of the top two quartiles of our customer base. So we will often see 95% plus of the revenue and earnings coming out of the top two quartiles. So when I am eliminating them, it comes in two ways. One depends on which bucket they are they in. If they are in the bucket that is not contributing revenue or EBITDA in any meaningful way, than I would say it doesn't impact us at all and we believe that it allows us to get more orders filled by the higher quality florist and strengthen our value proposition to them. So in that case, I opt to eliminate them.

I do have some customers on the other side who are in those top two quartiles who may have, by nature of their size or whatever, attractive financial incentives. You always have to look at those year to year and quarter to quarter and say well, Are these the types of relationships I want to maintain? For the most part the answer is yes. Some customers you obviously want to lose a little bit of money to keep them around, but then there are other customers where just the size of the loss or maybe they don’t have a long-term strategic value for the company, and while they have great near-term revenue that looks good on paper, long term they are financially draining. In some cases I've made elections to let those customers move on to competitors as a component of maintaining profitable growth and not sustaining unprofitable customers and introverting resources to that.

So it is a florist by florist, account by account call; and when we are dealing with our big guys for the most part I don't see us making many changes within that set today, but it is certainly something we keep an eye on.

Operator

Your next question comes from James Sanford- Merrill Lynch.

James Sanford - Merrill Lynch

Just a couple of quick questions. It looks like the advertising component of the domestic consumer business is up about 29% year over year and that's just backing from your reported average order value. Is that something that we should be expecting to continue to increase? Are you using that to fund a lot of your other marketing initiatives? How should we think about that part of the business?

On the International side, it looks like based on the order volume the florist revenue jumped from about 18% to 22% of the mix. Is that in ballpark of how we should be thinking about that side of the business? It sounds like you benefited pretty significantly from the florist side this quarter.

Michael Soenen

Yes. I want to get back to you probably on both those questions but first, the 29% really doesn't tie to our numbers. We don't see that kind of growth in the advertising side. So maybe we can touch base with you later and just try to make sure we are working with the same numbers so we can answer the question. For the benefit of all the investors we don't see the advertising component growing that much out of line with the rest of that business. Maybe offline we can handle that.

As for the mix shift, I hadn't really thought of the business that way in terms of the mix of 18 to 22 so I would want to think about that more. We don't see that shift changing materially at this point, but clearly over the longer term, the consumer business will grow and outpace the florist business and grow somewhat as customers move out of ordering from flower shops and into the consumer channel which is pretty consistent.

Operator

Mr. Soenen, there are no further questions at this time. I will now turn the call back to you for closing remarks.

Michael Soenen

I just want to thank everybody for their continued support. Obviously Mother's Day holiday is going to be a big one and it is an important one for us. Hopefully we will be able to get back on the call after Mother's Day and provide you guys with more good news. I appreciate your support and look forward to talking to you.

Jandy Tomy

That was FTD Group Inc.'s fiscal 2007 third quarter conference call. If you did not have the opportunity to listen to the entire call a replay will be available through May 14, 2007 by calling 1-800-633-8284 for North American callers or 402-977-9140 for international callers. Please mention conference ID 21337004. Thank you.

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