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Blue Nile, Inc. (NASDAQ:NILE)

Q3 2007 Earnings Call

November 6, 2007 5:00 pm ET


Nancy Shipp - IR

Mark Vadon - CEO, Chairman

Diane Irvine - President

Robin Easton - CFO


Mark Mahaney - Citi Investment Research

Doug Anmuth - Lehman Brothers

Jim Friedland - Cowen

Malindi Davies - CIBC World Markets

Jaime Sheinheit - Merrill Lynch

Kristine Koerber - JMP Securities

Analyst for Imran Khan – JP Morgan


(Operator Instructions) At this time, I would like to introduce Nancy Shipp, Director of Investor Relations of Blue Nile.

Nancy Shipp

Good afternoon and thank you for joining us on our conference call today to review our third quarter 2007 financial results. With me today are Mark Vadon, Chief Executive Officer; Diane Irvine, President; and Robin Easton, Chief Financial Officer.

Before we begin, I would like to remind you that some of the comments we will make on this call are forward-looking including, without limitation, statements regarding expectations of future financial performance, net sales, gross margin, expenses, net income, operating cash flow, capital expenditures, international growth, stock-based compensation expense and other financial statements or balance sheet items, as well as statements about our future plans and objectives, beliefs, expectations, targets, goals, outlooks or predictions for the future.

These statements are only predictions based on assumptions that are believed to be reasonable at the time they are made, and are subject to significant risks and uncertainties. You should not rely on these forward-looking statements as representing our views in the future, and we undertake no obligation to publicly update or revise these statements.

Our actual results may differ materially or adversely from any projections and forward-looking statements discussed on this call. Our quarterly reports on Form 10-Q, our annual reports on Form 10-K and other forms on file with the SEC identify important risk factors and uncertainties that you should consider when making an investment decision regarding Blue Nile and that may affect whether our forward-looking statements prove to be correct.

Also, please note that during the course of this conference call, we may discuss certain non-GAAP financial measures as we review the company's performance. We will discuss non-GAAP free cash flow, which is defined as net cash provided by or used in operating activities or operating cash flow, less outflows for purchases of fixed assets, including internal-use software and website development.

We will also discuss non-GAAP adjusted EBITDA, which is defined as earnings before interest and other income, taxes, depreciation and amortization, adjusted to exclude the effect of stock-based compensation expense. Please refer to the investor relations section of our website to obtain a copy of our earnings release, which contains reconciliations of non-GAAP measures to the nearest comparable GAAP measures.

At the conclusion of the call, we will conduct a question-and-answer session. Now, I would like to turn the call over to Mark Vadon.

Mark Vadon

Good afternoon, everyone, and welcome to today's conference call. The third quarter was another strong quarter for Blue Nile. Throughout this year, we have been focused on driving profitable growth for the business, building on our clear leadership position in the industry we pioneered more than eight years ago. Through the first nine months of the year, those efforts have been successful, with year-to-date revenue growth of 28.9% and year-to-date operating income growth of 46.3% compared to the first three quarters of 2006.

This year, we have had two overriding priorities. First, we have sought to drive innovation of the purchasing experience on our website in order to maximize customer satisfaction. This objective is grounded in our belief that building an Internet brand that resonates with consumers is not done primarily through marketing or technology. Building a great brand, especially on the Internet, is accomplished through a focused obsession on offering a superior customer experience. It is done by focusing on every single contact point with the customer and improving those contact points every single day.

Second, during 2007 we have invested significant effort in expanding our business to new markets. Earlier this year, we relaunched our Canadian and UK businesses and opened our Dublin office. These efforts have led to accelerating growth in our non-US business. We are still in the early stages of our international expansion, but I have been very happy with our progress to-date. Diane will be sharing more color on our success in these and other areas.

Before turning the call over to Diane, I would like to take a moment to introduce you to Robin Easton, our new CFO. Robin joined Blue Nile a little less than two months ago, and he has been a great addition to our team. We are happy to introduce Robin today to the investment community, and I know that Robin looks forward to working with all of you in the future. Robin will provide more details about our financial results later in the call.

At this time, I would like to turn the call over to Diane.

Diane Irvine

Thank you, Mark. The third quarter was an excellent one for Blue Nile and a great start to the second half of the year. During the third quarter, we delivered strong sales growth and exceptional profitability. Our sales increased 26.5% to $67.4 million. Net income in the third quarter totaled $3 million or $0.18 per diluted share. Our EPS of $0.18 increased 63.6% from the prior year, and was $0.03 above the top end of our guidance range.

We performed well across all areas of the business, and we saw strong sales in virtually all product categories during the third quarter. Growth continued to be strong at the high end, with more than 50% year-over-year growth in price points above $25,000.

During the quarter, our marketing efforts were very effective in driving increased levels of high quality traffic to our website. Traffic grew 20% year over year, the highest third quarter traffic growth we have experienced since 2004. We saw excellent growth across all marketing vehicles, and we continue to be very focused on efforts to improve conversion through website and operational enhancements. These efforts, combined with our ability to drive high-quality traffic, have been key contributors to our rapid growth.

Our results reflect how well the Blue Nile brand and experience resonate with our customers. We firmly believe that our ongoing strategy and business initiatives are having a sustainable and positive effect on our business.

Over the past few years, we have talked repeatedly about striving for the perfect customer experience. Throughout Blue Nile's history, we have made many enhancements to our business that improved the overall shopping experience for our customers. Every business decision we make takes into account its effect on the customer, and we strive to make improvements each and every day. We believe that this intense customer focus is why we are the category leader and the only way to build a lasting brand.

I'd like to talk about a couple of key initiatives that speak to our commitment to invest in and enhance the Blue Nile shopping experience. Last month, we introduced free priority shipping on all orders. This means that for all orders of non-customized products that are placed by 3 pm Eastern time, the customer will receive the product the following morning. This is a tremendous offering for our customers, and one that is truly differentiated within the ecommerce landscape. While it is too early to assess the impact, we believe customers will react positively to this offer and that it will help us convert new and repeat customers during the holiday shopping season.

In addition, last Thursday we launched a new and improved website in preparation for the holiday season. We have updated the look and feel of our website and have increased the focus on one of the key tenets that Blue Nile stands for: education and guidance. Our prior website was one of the best in all of ecommerce in its ability to monetize shopping traffic, and we believe our updated website will take this capability to a new level.

Efforts such as these, which continue to innovate and improve the consumer experience, help build brand loyalty and trust, and thereby help us grow that important repeat and referral business.

As Mark mentioned, another key initiative for Blue Nile is the expansion of our international business, taking the customer experience we have created in the US and expanding to other parts of the world. While our international sales are still a relatively small part of our overall business, international growth was strong in the third quarter. We generated approximately $4.5 million in net sales through our Canada and UK websites, representing year-over-year growth of 105%.

We are very happy with the growth we're seeing in this business following the second quarter opening of our operations center in Ireland, which serves our UK customers, and the launch of our localized websites in the UK and Canada. It is an especially exciting time for the business as we prepare for our first holiday season in Europe. International growth will remain a priority for us going forward.

So far this quarter, we have continued to see strong sales momentum and as we gear up for the important holiday season, we feel great about our competitive position. We have an integrated marketing plan in place to continue to drive record levels of qualified traffic to our website. As I mentioned earlier, we are driving this traffic to a brand new website, which was built to incorporate our years of learning about how to convert our target consumer. Early indications are that the new website is converting very well.

On the merchandising front, we are extremely well positioned for the upcoming holiday season. We have many exciting new offerings geared toward the holiday that include beautiful sterling silver and pearl items to one of a kind diamond jewelry pieces. Our product assortment, while being carefully edited by our merchants to provide a distinct viewpoint, is the largest and deepest assortment in the company's history. We are confident that our customers will enthusiastically embrace our product offering this holiday season.

In operations, we have built the capacity to handle significant growth this holiday season and deliver on our commitment to our customers to provide high quality jewelry products with unmatched levels of service. During this holiday quarter, we will continue to be focused on profitably growing our business while executing with excellence. First and foremost, we will do this by providing an unbeatable purchase experience to our customers. We believe that if we do this well, we will certainly continue to gain share in the jewelry market.

Now, I would like to turn the call over to Robin.

Robin Easton

Thank you, Diane and good afternoon, everyone. I am very excited to be here at Blue Nile and to be meeting all of you on this call today. Since joining Blue Nile just under two months ago, I have spent my time immersing myself in the business, and I can say that I am even more enthusiastic about the future opportunities for Blue Nile's growth.

In the third quarter, we posted net sales of $67.4 million, representing an increase of 26.5% over the third quarter of 2006. In Q3, total orders increased 16.3% as compared to a year ago. Our average selling price per order was $2,093 in the third quarter, compared to $1,884 in Q3 2006. Gross profit for the quarter was $13.4 million, an increase of 28.4% year over year. As a percentage of net sales, our gross margin for the quarter was 19.8%, compared to 19.5% a year ago. The growth in gross profit was the highest third quarter growth rate we have delivered as a public company.

Net income for the quarter was $3 million. Net income per diluted share was $0.18, representing EPS growth of 63.6%; again, the highest third quarter earnings growth we have experienced as a public company.

We performed well on costs during the third quarter. Our SG&A totaled $9.7 million for the third quarter and included $1.4 million in stock compensation expense. As a percentage of net sales, SG&A declined to 14.5% in Q3 compared to 15.5% in the third quarter a year ago. Operating income showed exceptional growth in the third quarter to $3.6 million, an increase of 67.3% compared to Q3 of 2006. This operating income growth was also our highest third quarter growth rate as a public company. In Q3, incremental operating income as a percentage of incremental revenue was 10.3%.

Non-GAAP adjusted EBITDA, which we define as earnings before interest and other income, taxes, depreciation and amortization, adjusted to exclude the effects of stock-based compensation expense, increased 38.3% for the quarter to $5.4 million. This demonstrates our ability to continue to deliver leverage as the business grows. Interest income was $947,000 for the quarter, compared to $670,000 in last year's third quarter.

Our effective tax rate for the quarter was 35%, compared to 35.6% a year ago.

Turning to the balance sheet, we ended the quarter with $74.3 million of cash. Inventory, at $15.3 million, grew 20.7% compared to last year, resulting in improved inventory turns of 16.3 times compared to 15.9 times a year ago.

Accounts payable grew 35.1% from last year to $40.3 million, with days payable expanding nine days compared to last year.

Now, let's turn to the cash flow statement. Operating cash flow for the trailing 12 months increased 9.6% to $33.2 million. I think it's important to note that we have posted excellent cash flow results, despite having fully utilized the tax benefit of our cumulative net operating losses for federal income tax purposes.

Free cash flow, which we define as free cash flow from operations, including cash costs for taxes, tax benefits from stock compensation and changes in working capital less capital expenditures, increased 4% to $29.4 million on a trailing 12-month basis. Our free cash flow results include higher capital expenditures of $3.8 million for the trailing 12-month period, compared to $2 million for the previous trailing 12-month period.

The year-over-year increase was primarily related to investments in our domestic fulfillment facility and the establishment of our international operation in Ireland, investments that are important for our future growth.

I would now like to discuss our guidance for the fourth quarter and full year of 2007. In the fourth quarter, we expect net sales to be between $109 million and $115 million. Net income is expected to be $0.40 to $0.45 per diluted share. We are increasing our financial guidance for the year 2007. For the year, we expect net sales to be between $316 million and $322 million. We expect net income per diluted share to be between $1.00 and $1.05 for 2007.

We expect capital expenditures for the year of approximately $5 million, which includes the investments I just mentioned related to the expansion of our US fulfillment center and our new European facility. The effective tax rate for financial statement purposes for the fourth quarter is expected to be approximately 35%.

Consistent with prior years, we will not be providing guidance for 2008 until our Q4 2007 earnings call in February. This is because we have the ability to provide much more informed guidance following the completion of the fourth quarter, the most important quarter of the year for our business.

Now, I would like to turn the call back to Diane.

Diane Irvine

Thank you, Robin. In summary, we are pleased with our Q3 results and the excellent performance we have had so far this year. We have made good progress on our strategic initiatives in 2007, and we are optimistic about the upcoming holiday season.

This is the end of our formal presentation. Before we begin the Q&A session, I would like to take a moment to thank Nancy Shipp for all of her work over the past three-and-a-half years. Nancy has done a wonderful job in establishing our investor relations program since we became a public company, and in interacting with investors and analysts. Nancy will be leaving us soon to spend more time with her family. Nancy, thank you for all of your work on behalf of Blue Nile. We will miss you.

I would also like to welcome Eileen Askew, who has joined Blue Nile and is taking over our investor relations program. Eileen looks forward to meeting our investors and analysts in the coming days and weeks.

We would be happy to take your questions now.

Question-and-Answer Session


Your first question comes from Mark Mahaney - Citi Investment Research.

Mark Mahaney - Citi Investment Research

Thank you very much. Two questions, please. On the international expansion, are there any trends you're seeing in terms of the products that sell in the UK and Canada, the price points and how that's different from the US market to date?

Then a quick question just on the gross margins; they were up year over year, down sequentially. Was there anything unusual in that pattern? That 90 bips sequential decline may have been just a touch bit greater than we would have expected, but not out of the ballpark. Just checking to see whether there was anything unusual about the comp last year. Thank you very much.

Diane Irvine

Thank you, Mark. In terms of 2Q margins, I'll take that one first. As you know, the third quarter is much more driven by engagement products as opposed to the non-engagement category because there is no gift-giving holiday in Q3 so we would expect the margins to be lower than Q2, and then from that point it just depends on the mix, particularly within engagement, whereas to the extent we have larger sales the gross margin percentage might be a bit lower, but we're looking to optimize, really, the dollars per unit. I think we felt great about the margin performance during the quarter. Certainly, as we look at the year-on-year trends, that gross profit growth is exactly what we have been looking for and expecting so that was terrific.

Then in terms of our international markets, what we're seeing there is great growth and development in those markets where I would say, we're starting to sell much larger diamonds there and higher quality than perhaps have been in those markets in the past. We don't sell an entire range of products, as we do in our US website yet today in those markets, but we're adding more and more product offerings all the time, so we're very pleased with our progress there.


Your next question comes from Doug Anmuth - Lehman Brothers.

Doug Anmuth - Lehman Brothers

Thank you, a few questions for you. First, I knew you had a tough year-over-year comp in terms of the number of orders, but do you think that there was anything else in particular that did drive the deceleration in orders during 3Q?

Secondly, can you talk a little bit about your checkout payment process, in terms of the fact that you had Google Checkout early on in the year? Now Google Checkout seems to be gone, and PayPal is on the site. Thank you.

Mark Vadon

On Checkout, we accept both Google Checkout and PayPal. Both of those are on our shopping cart. We've been very pleased with the results of both of those. We just released PayPal probably less than a month ago, so it's still very early there. But overall, we're just trying to provide more options for our customers, and I think both of those are appealing to their own audience, and we think they're useful for our business.

On the number of orders, I think overall we're seeing great growth in traffic to the website, and that traffic is converting really well but we don't manage the business to a number of orders. We're managing the business more, we're looking at traffic coming into the website, and we're trying to monetize it as well as we can irregardless of how many orders it drives. Just as you look at our business, it's relatively unique because of the range of price points. Our price points this quarter went from $35 up to I think our largest order was something like $190,000. So when you've got that range of price points, your average ticket can move around, just based on what types of traffic you are driving. Different marketing channels drive different mix. Things like what you put on an e-mail as it goes out, what you're featuring on the homepage, all of those things can move the mix.

What we're always doing at any given time is we're just trying to maximize the revenue generated from the traffic, and that can lead to a lower order, higher ASP type of quarter or the opposite. Truthfully, I never even look at that number of orders number until you guys bring it up. I'm a much more interested in, how much revenue are we driving out of this?

The two numbers we're watching most closely to understand conversion are what's the traffic inbound to the site? I think Diane mentioned that that was plus 20% this quarter, which we thought was a great, great number. And then, how many dollars of gross margin are we generating per person we are driving onto the website? That also is doing quite well.


Your next question comes from Jim Friedland – Cowen.

Jim Friedland - Cowen

Thanks. Some questions relating to gross margin. First, on the international business, are there any cost of goods that are non-locally driven coming out of the UK, or are you buying diamonds in pounds and euros?

In terms of the free overnight shipping across all the items, FedEx I think, is raising their prices pretty meaningfully. How should be think about gross margin in 2008 in terms of the various trends? Because you have a positive anniversary which you've already experienced on the price cut.

Basically, my question is, could the FedEx price increase weigh on gross profit at all?

Diane Irvine

Thanks, Jim. In terms of gross margins in the international business, I think you were asking specifically about purchasing diamonds. Diamonds are denominated in dollars globally, and those sales are being reflected in dollars here. The only thing that would happen there, for example, in the UK a customer is buying in pounds and then we'll be converting that into dollars. So you have a few days of different currency, but that's really the only thing that's happening. At this point, that operation is a very small number in terms of any conversion impact from currency.

In terms of shipping, really the priority overnight shipping we look at that as an investment in the customer experience. As you know, as we always talk about, we're putting value out there for customers. We believe they find it, so we certainly think that's going to be a tremendous offering that customers will embrace.

As you look at next year, I think what you would see more of is, as our mix shifts a little bit towards more non-engagement product which carries a higher gross margin percentage because it's a lower ticket, you'd expect to see stable to possibly upward margin movements. We're doing a great job across the board in the company in terms of costs, whether it's in our product purchasing or whether it's in any of the other line items that go into cost of goods. I think we feel like we have healthy trends there going forward.

Mark Vadon

When you look at that free shipping, the priority overnight, our average ticket is so high that the shipping cost as a percentage of revenue is relatively minor. I think our belief very much is this is not a cost; it's an investment that will pay out relatively quickly, because we think we're going to see the lift necessary to pay for that change in shipping.

Overall, you start looking as we are shipping everything on priority overnight on FedEx, we're becoming a decent-sized customer for FedEx and we're seeing some leverage as we continue to ramp the business. Focusing all of our efforts and our buying power on one form of shipping helps us when we need to negotiate our pricing.

Jim Friedland - Cowen

One quick follow-up on pricing. I think last quarter you said that you were in a position where you even experimented a little with raising prices. Can you talk a little bit about pricing trends on the site in engagement and non-engagement this quarter?

Diane Irvine

I think in terms of pricing, I would say we're relatively stable, to use that term, where as you know, our pricing is really driven by the price point of the product. So we're looking at the gross margin dollars as we can go up from as Mark said, a $35 product to something in the hundreds of thousands of dollars.

So there are always times, for example, within diamonds where we might see certain pockets where prices either get raised or lowered during a quarter, but it's not a structural change in our pricing. Then as you look at metal products, whether it's something containing platinum or gold, over time as those prices have gone up, we might have periods when we are raising our prices by a bit, but nothing significant in terms of changes, just kind of here and there, based upon supply and demand. We'll make changes on a continuous basis.

Mark Vadon

You're seeing our margins creep up more from mix than anything. We're keeping relatively stable pricing within product lines, but then the mix is slowly shifting over time. I'd just say that in Q3, that's when the mix is the most geared toward engagement of any time period during the year. That shift will be lightest during Q3, I guess I'd say.

So overall, I think you should expect to continue to see gross margins edge up as the mix continues over the quarters and years to come.


Your next question comes from Malindi Davies - CIBC World Markets.

Malindi Davies - CIBC World Markets

I was hoping you could elaborate on your top markets. Are they still growing at 20% plus, as you've said on previous calls? Do you see any difference in terms of engagement versus non-engagement split in those markets versus the rest of your markets?

Mark Vadon

Yes, we continue to see really strong growth from our top markets. I think what we have been seeing for the entire history of the business is our most mature markets are growing slightly slower than the business at large. We keep watching those markets, and as long as those markets are showing healthy growth, we think that's kind of a forward indicator of the upside revenue potential of the business.

Our belief is eventually the whole country shops online the way people do today in markets like San Francisco or Northern Virginia or Boston or those types of markets. But we're seeing no change and we're seeing those markets continue to grow.

Those markets tend to have a little broader range of products in the mix. I think what we're seeing is there are more repeat buyers in those markets, and so the mix is a little bit geared towards the non-engagement. So those markets along with that have slightly higher gross margin levels. They just look like as we would expect, the overall business to more and more look over the years as the rest of the country sort of matures in its purchasing behavior.


Your next question comes from Jaime Sheinheit - Merrill Lynch.

Jaime Sheinheit - Merrill Lynch

You've talked about significant strength in the higher-ticket items. I was wondering if you could talk a little bit about the trends you're seeing in the lower-priced items?

Diane Irvine

Over time, we really find that the tails are growing. The high end is growing very nicely. We also see, as you look at price points that at the lower price points in engagement, that is growing as well. So I think you are finding just a broader range overall in the business. That looks very healthy to us.

Jaime Sheinheit - Merrill Lynch

Just quickly on international, I was wondering if you could expand a little bit more on how you're driving traffic to the international sites?

Diane Irvine

We may have talked in the past in terms of international. I'd say we are just in the early stages of marketing there. We're doing online marketing search and just started an affiliate program. I'd say we've built a really good business there albeit, at this point, a smaller one without doing a lot of marketing. So I think that's very encouraging to us. We're doing more and more as we see the revenue build and we see the momentum there.

Mark Vadon

The marketing in those markets looks a lot like what the US Blue Nile marketing looked like in 1999. We've just layered in the very beginning of a marketing program. So there's paid search happening, there's natural search. There's a lot of referral happening in those markets. We just introduced an affiliate program in the UK. I think what you're going to see over the next year or so is we're going to start launching a complete integrated marketing program, more similar to what we have in the US.

I think that's one of the things we're most excited about. Even with pretty limited marketing, those businesses are growing well. If you look at our UK and Canadian businesses combined, our belief is that combined business is larger in the sale of diamond engagement rings than any competitor we have in the United States.

So I think again, that just points to competitively the lead we have on anybody is immense and is just getting stronger over time.


Your next question comes from Kristine Koerber - JMP Securities.

Kristine Koerber - JMP Securities

A couple of questions. First of all, how should we look at inventory growth going forward, especially as the mix shift changes towards non-engagement jewelry? Any risks associated with that?

Diane Irvine

In terms of inventory growth, as you look at mix shifting over time, it's a slow shift. I think in the past several years it's been 2 percentage points a year, where the mix shifts towards non-engagement. In terms of what happens there, a portion of that non-engagement business is also driven by diamonds, where we're not holding those in inventory, so obviously very favorable working capital characteristics there.

Then as you look at other items that we are holding in inventory, we have great payment terms and very fast turns of that inventory, such that really across the board for any product at Blue Nile, we have negative working capital.

I think the inventory growth is not always able to be predicted based upon the revenue growth. But I think we feel that we have very favorable dynamics there and that will continue.

Kristine Koerber - JMP Securities

Lastly on the expenses, the SG&A margin, can you just elaborate on what really drove the margin so much lower this quarter? Thank you.

Diane Irvine

I think if you look across the board at SG&A, we are very efficient. I think we tend to run lean and really are disciplined in our cost management. So if you look there in terms of people, professional services, everything there; our marketing, very efficient. I think it is across the board throughout the business. We have been really great at managing our costs and as Mark talked about, getting more purchasing power. I think that's in a lot of areas, not just in that cost of goods area. I think that's really what you're seeing there. Obviously, in terms of profitability, the gross margin growth that we're seeing is an additional benefit there.


Your next question comes from Imran Khan – JP Morgan.

Analyst for Imran Khan - JP Morgan

A quick question just about holiday sales. Are you expecting non-engagement sales to trend, given the tightening economy? Have you seen any changes in competition domestically from people such as Amazon for holiday season?

Diane Irvine

In terms of holiday trend, I think as we had mentioned in our comments earlier, as we have started the quarter we're seeing very strong momentum so that is great. I think in terms of consumer spending or what you see more broadly, I think we have always said we don't exactly know. I think there's a very strong argument that when you look at engagement, that is less discretionary. I can only point to what we're seeing, which is great strength in the business, even stronger at the beginning of Q4 I'd say than what we saw in Q3. Of course we are taking share, so I think we're a bit different than you see in retail broadly. But I think we feel very optimistic today in that we're well positioned for the holiday season.

In terms of competition, I would really just point to what Mark talked about earlier, that I feel every quarter we get ahead of the competition and really expand our lead. Mark mentioned our international business as being larger than any of the US competitors in terms of engagement online. I think we need to continue to get better and better at what we're doing, which is why we focus so heavily on the customer experience. I think you see that happening.


Your final question comes from Mark Mahaney – Citi Investment Research.

Mark Mahaney - Citi Investment Research

Could you provide a little bit more detail on that traffic growth year over year? Could you give us some context versus what the traffic growth was the last couple of quarters, or maybe divide that between US traffic growth and international traffic growth?

Then real quickly, on the share buybacks, you seem like you almost have a cash problem. You're generating so much cash. You haven't bought back stock the last two quarters. You have something of a CapEx ramp this year for international expansion. You probably don't need that kind of CapEx level next year. What you do with all the cash? Do you want to be back committing to buying back more stock?

Mark Vadon

I'll take the traffic part, then Diane can answer the question about what we're going to do with our cash. On traffic, the international really doesn't come much into play there. The amount of traffic coming off the international sites is very, very small right now.

Overall, I think the traffic we're seeing is very strong. We have been experiencing traffic levels in the mid-teens and up all year long. There's months when it's higher, months when it's lower, but overall it's been very, very strong. Those rates of traffic growth are stronger than we saw the last couple of years.

So if you go back to 2005 and 2006, we were driving growth in the business more from the conversion side than the traffic side. Now I think that has flipped over where we are now able to drive a lot stronger traffic than we have previously.

We continue to work on improving our conversion. So one of the things we've been very excited about, we've been working hard behind the scenes on the new website. That just launched just days ago. Overall, what we're going to try to be doing here is just continuing to drive that level of traffic growth and convert it better and better. I think if we do that, we will do really well. But as far as the top level of traffic that we're driving it seems like, if anything, in the marketing environment out there, it's getting easier to drive qualified traffic instead of harder right now.

Diane Irvine

Mark, in terms of our cash position and buybacks, we certainly plan to continue to use the buyback program as a strategic means to deliver value to shareholders. As you know, we've bought back 15% of our outstanding shares to date, and we have operated that program to try to be opportunistic. What I would tell you is that we'll continue to be thoughtful there and do the right thing for shareholders, and we will clearly look at that as a program through which to do that.

Mark Vadon

Thanks, everybody for participating on the call today. We look forward to updating you after our fourth quarter.

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