Q2 2007 Earnings Call Transcript

Aug.13.07 | About:, Inc. (BIDZ)
Wall Street Breakfast
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Q2 2007 Earnings Call

August 13, 2007 4:30 PM ET


David Zinberg - President and CEO

Lawrence Kong - Chief Financial Officer


Mark Argento - Craig-Hallum Capital

Dean Shephard - Square One Distributors



Good Evening everyone. Welcome to the second quarter 2007 conference call. As a reminder, this call is being recorded. It is now my pleasure to turn the floor over to your host, Allyson Pooley, Integrated Corporate Relations. Please go ahead.

Allyson Pooley – Integrated Corporate Relations

Good Afternoon everyone and thank you for joining us today to discuss second quarter financial results. With us on today’s call are David Zinberg - President and CEO and Lawrence Kong - Chief Financial Officer. By now everyone should have access to the press release which went out at 4:00 PM ET. If you do not have the release, it is available on the Investor Relations portion of the’s website.

Before we begin today, we would like to remind everyone of the safe harbor statement under the Private Securities Litigation Reform Act of 1995. The following prepared remarks contain forward looking statements and management may make additional forward looking statements in response to your questions. These statements do not guarantee future performance and therefore undue reliance should not be placed upon them.

For more detailed discussion of the factors that could cause actual results to differ materially, from those suggested in any forward looking statements, we refer you to filings with the Securities and Exchange Commission including the most recent annual report on Form 10-K, Quarterly report card on Form 10-Q, as well as current report filed on Form 8-K.

With that, I would like to turn the call over to David.

David Zinberg - President and CEO

Thank you and welcome to our first earnings conference call as a publicly traded company. Today, I will provide highlights from the second quarter. Lawrence Kong will then update you on our second quarter financials in more detail and discuss our accounts. Finally, we will open the call for your questions.

As you know our stock began trading to date, trading on bulletin board on May 1st. As of early June, we moved to NASDAQ. We are very pleased to be sharing our strong second quarter results with you today. We hope that after this voice call, you will have a better sense of business and the company growth opportunities. We believe we have a compelling story with a bright future.

In the second quarter, we experienced good growth and exceptional profitability. Our net sales increased approximately 21% to $39 million, primarily driven by increased demand, stronger traffic and greater awareness to our site. On a comparable basis, expenses grew 12% evidencing both our financial discipline and operating leverage of our financial model. As a result of improved metrics and congenial positive leverage, net income was $2.9 million or $0.12 per diluted share compared to just $0.01 per diluted share the same period last year.

The primary factors driving those results were: An average order value increase of 29% from $133 to $171 as well as increases in average items sold per day and average price per item. These strong results in a somewhat recently weak quarter represent the beginning of what we expect to be continuous acceleration in our business.

Our first half results allow us to raise our pre-tax guidance for the year when we announced the second quarter results two weeks ago. is a leading online auctioneer of jewelry. The jewelry market is estimated to be $160 billion, and close to $60 billion of that in the U.S. According to Internet Retailer magazine’s 2006 survey, we have 17% market share in the online jewelry category, and online sales represent only a small portion of the total industry.

As the e-commerce jewelry market continues to gain share over traditional retail channels, we expect to benefit from that trend. In 1999, we started as a jewelry focused auction site and had revenues of approximately $125,000 that year, compared to projected revenues of $170 to $180 million this year. During the second quarter of 2007, we sold an average of 8,700 items per day, more than any other online jewelry site. Our consumer traffic continues to grow rapidly as well. According to and online auction ranking sites, our monthly visitors grew almost 70% to 6.9 million in June 2007. This was significantly higher than any of our peers.

The growth we have achieved was recently noted by the Entrepreneur Magazine. In the July edition, we have ranked 81st in their annual Hot-500 list of the fastest growing small businesses which is a significant accomplishment for us. The magazine evaluated 19 million companies when generating that list. Our auctions create a fun and exciting environment and keep customers coming back. Our short auction times provide immediate gratification for our customers, as most items are hosted and sold in 30 minutes or less.

Additionally, our auctions are like live-auctions. They do not end at any specific time. They end when the bidding stops. We find that competition creates added excitement for consumers while allowing us to maximize profitability from each transaction. We expect our revenue growth to continue and are keenly focused on improving our core metrics to increase margins and profitability.

We have four primary initiatives that as an organization we are focusing on. First, we will continue to expand our consumer base. During the second quarter, we had 54,000 new buyers who are spending nearly 30% more on our site per order than just a year ago. We will continue to spend on online advertising, primarily search advertising and affiliate marketing to drive additional traffic to the site. We also conduct email campaigns to existing customers which drives significant repeat business and as discussed we will continue to focus on monetizing this process.

Second, we will continue to grow and refine our supplier base. There are over 10,000 jewelry suppliers from which we could buy. Currently, we are sourcing from only 300. The 9,700 suppliers that we currently do not purchase from, represents a significant growth opportunity for We are consistently seeking out new opportunities by attending various jewelry shows and traveling the globe. Additionally, our growing size and positive cash flow give us additional scale and allow us to obtain better pricing.

Third, we are constantly looking to increase the breadth and depth of our product offering. Our merchandizing strategy allows us to be very flexible with our inventory and to quickly respond to changing consumer demand. We are always increasing the variety of our product offering and are adding higher priced items and name brand jewelry and watches. We believe this would help to drive additional consumer traffic to our site and enable us to increase the number of auctions we set up each day.

Fourth, we plan to continue to expand internationally. During the second quarter, our international growth was approximately 35% year-over-year and represents 22.7% of our net sales. We have customers from over 100 different countries and plan to continue to market and expand our international presence.

In summary, is a results driven company that is focused on profitable growth, while continuing to innovate and deliver compelling consumer value and increasing market share. We look forward to delivering strong results and drive shareholder value over the coming quarters and years.

With that I will not turn the floor over to Lawrence to discuss the financials in more detail.

Lawrence Kong - Chief Financial Officer

Thank you David!

As David said, we had a very strong second quarter. Net revenues in the second quarter of 2007 were $39.1 million, a 20.6% increase compared to the same period of 2006. The increase in revenue was mainly due to the growth and demand for our jewelry products and auction of higher priced items. Income before tax in the second quarter was $3.7 million compared to $151,000 a year ago. The $3.7 million is substantially above our original guidance of $2.8 million to $3.3 million.

We are focused on continuing to meet and exceed investor expectations as well as our own profit growth. Earnings-per-share in the second quarter of 2007 was $0.12 per diluted share compared to $0.01 per diluted share in the same period of 2006. The increase in net income and EPS was due to the increase in revenue and higher gross profit margins.

In the second quarter of 2007, we reduced our marketing expenditure and focused on attracting buyers that were willing to spend more. As a result, our acquisition costs per new buyer dropped to $38 from $49 in the prior year. This is a dramatic improvement and a key metric we will continue to focus on.

Our average order value in the second quarter increased 28.6% year-over-year to $171 from $133 a year ago, and the number of items sold per day increased 12.3% to 8,678. The increase in average order value is due to the increase in the number of items per order to 3.2 compared to 2.7 in the prior year. This increase is due to continued improvements in our site: Increased traffic, which creates more demand for our items, our compelling auction format, and a significantly increased selection of products.

Gross profit dollars in the second quarter of 2007 increased 41.4% to $10.9 million compared to $7.7 million in the prior year. Gross margin percentage increased to 27.8% compared to 23.7% a year ago. The gross margin improvements versus a year ago is attributable to a combination of better pricing due to increased cash purchases, product makes, and a discontinuation of our free shipping promotion at the end of January 2007.

The increase in cash purchases is a result of $15 million credit line which we obtained late in 2006. It is important to note that going forward gross margins will fluctuate on a quarterly basis but we feel that 25%-26% annually is appropriate for modeling our business. At this margin, we believe we are optimizing our gross margin dollars that falls to the bottom line thereby maximizing profitability.

Total operating expenses in the second quarter of 2007 decreased to $7.1 million from $7.6 million reported in the same period of 2006 resulting in operating income of $3.8 million, or 9.6% of the sales as compared to $110,000 in the second quarter of 2006.

We are focused on achieving an industry-leading operating profit of approximately 10% from 2008 onwards. Included in the prior year period is a $1.2 million of costs related to a withdrawn initial public offering. Excluding these costs, operating income in the second quarter of 2006 would have been $1.3 million or 4.1% of the sales.

Adjusting for this, we still achieved over a two-fold increase in operating income from the prior-year. General and Administrative expenses increased by 44.8% to $5 million in second quarter of 2007 compared to $3.4 million in the same period of 2006. The increase was mainly due to expenses to support our overall growth and investment to build our infrastructure.

Increases occurred in payroll, outsourcing, IT and other administrative expenses. We also incurred some one time legal and professional fees in the quarter related to the recent public listing of our common stock. Going forward, we would expect to see smaller increases as we further leverage our operating infrastructure. General and Administrative expenses as a percentage of net revenue increased to 12.7% in the second quarter of 2007 compared to 10.6% in the same period of 2006.

Sales and Marketing expenses decreased to $2 million in the second quarter of 2007 compared to $2.8 million in the same period last year. Our focused efforts to control the sales and marketing expenses and improve the effectiveness of our marketing campaign have been extremely successful in lowering the costs while driving high growth in net revenue.

As a result, our acquisition cost per new buyer decreased to $38 from $49 in the second quarter a year ago. Additionally, we typically budget for less marketing spending in the second and third quarters as they are seasonally weaker periods. We expect to increase our spending during the fourth quarter. Sales and Marketing expenses as a percentage of net revenue decreased to 5.2% in the second quarter of 2007 from 8.8% in the same period of 2006. On an annual basis, we believe marketing costs of 6% to 8% of sales is an appropriate level.

Starting in the third quarter of 2007, we will be implementing a change to how we manage our marketing budget. Specifically, our inventory suppliers will be making contributions to help defray some of our costs of marketing in the form of Co-Op Advertising. We expect this will continue to drive traffic to the site.

As of June 30, 2007, we had cash of $1.8 million and no long term debt. At the end of June, we had a very small balance on our revolving line of credit of $316,000 which we have substantially paid in June. Our ability to pay down our line was due to strong cash generation. Cash flow from operations for the first half of 2007 increased to $6 million from $228,000 in the first six months of 2006.

Now, turning to guidance. For the third quarter of 2007, we expect revenues to be in the range of $37 million to $39 million: A 40% revenue growth rate at the midpoint. Expected income before income tax of $3 million to $3.2 million compared to $1 million in the third quarter of 2006. For the full year of 2007, we confirm our revenue guidance of $170 million to $180 million and anticipate growth margins of approximately 25% to 26%.

We anticipate income before tax for 2007 of $14 million to $15 million. We expect our effective tax rate for the full year and each of the next two quarters to be approximately 11% and expect to end the year with approximately $24.5 million shares outstanding.

In summary, we are very pleased with our second quarter results and the overall performance for the first half of the year. The last several months have been particularly exciting for the company. is quickly becoming a recognizable brand and a leading online jewelry site, and we are very optimistic about our growth prospects for the remainder of 2007 and beyond.

With that, I would like to turn the call back to the Operator so we can take your questions. Thank you.

Question-and-Answer Session


Thank you. The Question-and-Answer Session will be conducted electronically. If you would like to ask a question, you may do so by pressing *1 on your telephone. *1 for question. If you are on a speakerphone, please make sure the mute function on your phone is turned off for the signal to be read by our equipment. *1 for questions, and we will pause a moment to assemble our queue.

We will go first to Mark Argento of Craig-Hallum Capital.

Mark Argento - Craig-Hallum Capital

Good Afternoon. Two questions for you. Little bit about looking at your guidance of $3.0 to $3.2 million of pre-tax income, I’m assuming you’re looking for a quarter pretty similar in terms of marketing spend and gross margins to the quarter we saw here and then you re-engage in the marketing spend in Q4. Is that a good characterization of how we should be looking at the model?

Lawrence Kong - Chief Financial Officer

Yes, Mark. I think the guidance of 25% to 26% for the gross margin I think would be a good level to look for in the third quarter. I think marketing expenses may be slightly higher than the second quarter, but will be under control and that’s why we feel comfortable with the $3.0 to $3.2 million profit before tax. And we are halfway into the quarter and we feel confident that we can achieve those results.

Mark Argento - Craig-Hallum Capital

That was my next question. Is that what you are seeing in terms of new customer additions? Are you seeing the purchasing per customer up over that 3.2 items per purchase?

Lawrence Kong - Chief Financial Officer

Right, we are seeing a continuation of those trends in the third quarter continuing from the second quarter and the average order size also reflects what you see in the second quarter.

Mark Argento - Craig-Hallum Capital

In terms of the effectiveness of various marketing channels, could you talk a little bit about where you are spending your money and where you plan to spend your money on the marketing side in Q4 both online and offline, if at all?

Lawrence Kong - Chief Financial Officer

Basically all our marketing expenses are online and most of it is still in search where it represents close to 40%. The rest of it is spread out among affiliate marketing, contextual marketing and email marketing. And we’ve been very successful in controlling that cost as you can see. The acquisition cost of buyers actually went down about 22% compared to the same quarter last year. So even though we spent less than last year, our revenues actually grew and reflecting that strong trend in the third quarter we are expecting at the mid-point of our guidance a 40% increase in revenue compared to last year which is a very good and strong trend.

Mark Argento - Craig-Hallum Capital

I’m sure you have some of this data, but if you look at the quality of the new customers you’re bringing on, is the quality similar to that of previous quarters? Are you able to attract a decent customer who’s going to be a long term profitable customer at that sub-$40 level? Can you anecdotally talk to the quality of the new customer that you’re bringing on versus the aggregate pool of customers?

Lawrence Kong - Chief Financial Officer

Yes, I think definitely the quality is better. If you compare the fact that in the second quarter of 2006 we spend $49 to acquire each customer and they only spend on average $133, right now we are spending less to acquire the buyer, $38 per buyer, and they are actually spending more. They are spending about $170 per order. So, that really speaks for the quality of the customers and also they are buying more units per order. It was 3.2 units per order in the second quarter of this year compared to 2.7 last year. So they’re buying at slightly higher prices and more units per order.

Mark Argento - Craig-Hallum Capital

Switching gears a little bit, to the product mix. What are you having success with and what is the mix with watches relative to some of the other products and when you focused on bringing some more branded products on to the site, what categories will we most likely see some more branded product in?

David Zinberg - President and CEO

Just more of the same. More and more doors are opening up when we have cash to buy and basically it’s not going to be anything different. It’s just going to be more of the same and more brands.

Mark Argento - Craig-Hallum Capital

What does watches roughly make up as a percentage of overall sales.

David Zinberg - President and CEO

They tend to be around 10% to 15% of our total sales.


Ladies and Gentlemen, at this time there is no further questions but we do want to give everybody a final opportunity to signal by pressing *1. *1 for questions please. We will pause a moment.

We’ll go to Dean Shephard, Square One Distributors.

Dean Shephard – Square One Distributors

My question is about future marketing on media such as television. Are there any plans for that and, if so, when would that take place?

David Zinberg - President and CEO

At this point, we don’t have any plans to do any television advertising. We believe that we’re doing a good job online and we want to continue to do that for now.

Dean Shephard – Square One Distributors

I agree you are doing an excellent job and I appreciate your time. Thank you.


Next we’ll go to Mark Argento, Craig-Hallum Capital.

Mark Argento - Craig-Hallum Capital

Just a follow up on some of this co-op advertising dollars you are getting. Can you tell us a little bit about either the quantity or how that is going to work? Is it related to specific purchases of product from different vendors or is it blanket dollars that these guys are going to provide you?

David Zinberg - President and CEO

It is going to differ with each vendor and it is going to be basically we will make a deal on the amount of the merchandise the vendor wants us to sell. If the vendor wants us to sell a lot more merchandise for them then they are going to pay us more to advertise a certain product.

Mark Argento - Craig-Hallum Capital

When did you guys say that that was going to kick in, was that Q3 or Q4?

Lawrence Kong - Chief Financial Officer

It kicks in Q3. It’s already kicked in and since it’s fairly new we cannot determine the actual impact on our financial statements, but we expect it to be very positive.

Mark Argento - Craig-Hallum Capital

And in terms of some of the keyword trends on paid search, in terms of keyword pricing, affiliates, and other metrics in terms of the cost there, are you still able to reach a good audience with the keyword stabilizing in terms of pricing?

Lawrence Kong - Chief Financial Officer

We do not really see an increase in pricing as we have been optimizing it pretty well and as a result you can see that the acquisition cost per buyer has come down. So we do not really see any increasing cost in those areas.


Ladies and gentlemen, this does conclude our question and answer session. I would like to turn the conference back to Mr. Lawrence Kong for any additional or closing remarks.

Lawrence Kong - Chief Financial Officer

Thank you everyone for joining us. We look forward to communicating with you again next quarter. Thank you.

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