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Executives

Jandy Tomy – Investor Relations

Michael Soenen – Chairman, President, CEO

Becky Sheehan – CFO

Analysts

Megan Friedman – William Blair & Co.

Justin Post – Merrill Lynch

Jennifer Watson – Goldman Sachs

Mark Mahaney – Citigroup

FTD Group, Inc. (FTD-OLD) F2Q08 Earnings Call Transcript January 30, 2008 11:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by and welcome to the FTD Group, Inc. second quarter fiscal 2008 conference call. During the presentation all participants will be in a listen only mode. Afterwards we will conduct a question and answer session. At this time if you have a question, please press star then the number one on your telephone. If you would like to withdraw your question, press the pound key. As a reminder, this conference is being recorded, Wednesday, January 30, 2008. Your speakers for today are Michael Soenen and Becky Sheehan. I would now like to turn the call over to Jandy Tomy, please go ahead ma’am.

Jandy Tomy

Thank you and welcome to FTD Group, Inc’s fiscal 2008 second 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 ftd.com, under the investor relations section.

Before we begin I want to reiterate that this conference call contains various forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding FTD Group, Inc’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 in 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 second quarter 2008 press release. We expressly disclaim any obligation to update forward looking statements. I would now like to turn the call over to Michael Soenen, Chairman, President and CEO of FTD.

Michael Soenen

Thank you Jandy and thank you everyone for attending. I’ll set a quick agenda for the call today. I’ll go over some of the key items in the second quarter, Becky Sheehan will come on to take you through some more of a more detailed discussion of financial overview of the quarter. I’ll come back and give us our outlook for the remainder of the year. Hopefully we’ll move through all that fairly quickly and we’ll open it up to any Q&A you may have.

Obviously we’re extremely pleased with the quarter, suppose you saw the pre-announcement and saw our release today. Consolidated revenues were up roughly 3% to the prior year. We did have a very challenging consumer environment in which revenue was down 7%. You’ll see though that we were able to manage that effectively and generated an almost 18% increase in operating income for the quarter.

Florist revenue was flat to prior year which we think is significant and meaningful for many reasons but one of which is for those of you who follow the company you’ll know, one of our largest customers separated with us last year and as we still lapping through that situation, we believe we’re actually trying to generate really nice revenue growth when you look at it kind of net of the large customer who we ceased to do business with. Our international business revenue was up almost 23%, order volume was up almost 15%.

The business continues to do very well and feel very pleased with the progress management is making over there and are very pleased in general with how our investment in Interflor UK has gone. If you look at it in total, operating margins were up almost 108 basis points to 13%, EBITDA was up 12% and our diluted EPS was up 43%. In total, strong revenue growth, we were able to offset the consumer business quite nicely. Certainly the growth we’re seeing in the florist business and the growth in the international business, our ability to control our costs, drove much better EBITDA and EPS growth than many had anticipated. With that I’ll turn the call over to Becky and we’ll have her walk you through some of the details on our segments.

Becky Sheehan

Thanks Mike, let me walk through the segments. Our consumer segment reported second quarter fiscal 2008 revenue of $64.6 million compared with $69.5 million in the prior year quarter which represents a decline of 7%. Consumer order volumes totaled 998,000 during the second quarter of the current year. Average order value increased to $63.23 in the current quarter from $60.01 in the prior year quarter. Operating income was $61 million or 9.5% of revenue which compared favorably to $3.8 million in the second quarter of the prior fiscal year or 5.4% of revenue.

Operating margins during the period strengthened as a result in increases in our gross margin, effective management of our marketing technology general and administrative costs. Moving on to the florist segment, the segment reported revenue of $44.6 million in the second quarter of fiscal 2008, consistent with the revenue reported in the prior year quarter. Operating margins in this business also remained stable. Operating income for the quarter was $14.1 million or 31.5% or revenue compared to $14.4 million or 32.3% of revenue in the same period of last year.

Finally our international segment, revenues were $46.3 million in the second quarter of this year compared to $37.5 million in the second quarter of last year. This represents growth of 23.4% or $8.8 million which includes approximately $3 million related to favorable foreign currency exchange. Operating income was $4.1 million or 8.8% of revenue compared to $2.7 million or 7.2% of revenue in the prior year second quarter.

Consumer order volume in the international segment totaled 542,000, up 14.8% over the same period of the prior fiscal year. Average order value in the international segment was $69.66 for the quarter compared favorably to $64.07 last year. Internet orders comprised 71.8% of the order volume during the second quarter compared to 69.3% in the prior year. And now turning to the balance sheet, cash and cash equivalents totaled $27.5 million at December 31, 2007. Total debt was $302 million which includes $1.7 million in notes payable related to the interflor acquisition.

As of December 31, 2007, the company had $72 million available for borrowing under its revolving credit facility. Debt repayments during the second quarter totaled $11.4 million, capital expenditures for the quarter were $2.1 million and primarily related to continued technology improvement. Additionally, FTD declared a quarterly dividend on November 14, 2007 to shareholders of record on December 24, 2007 in an amount totaling $4.8 million or $0.1625 per share which was paid to shareholders on January 7, 2008.

Our business model continues to generate strong cash flow and we remain committed to returning cash and value to our shareholders while actively reinvesting in the business. I’ll now turn the call back over to Mike for further comments on the quarter and our outlook.

Michael Soenen

Thanks Becky, obviously we continue to be very optimistic about our business. It was a very competitive holiday on the consumer front, I thought I might take a few seconds to talk a bit about the environment. You know we see both Pro Flowers and 800 Flowers being as competitive as they have been in the past, perhaps a bit less so. For some of our competitors we’re starting to focus a bit more on profitability, but clearly we saw a challenging consumer environment.

As we look towards what we’re doing going forward, we have a couple of things that we think we need to do and are going to continue to do to help make sure we drive growth and profitability in this segment going forward. One of the first things we’re doing is we’re making several management changes in the consumer business. I’ve hired a new individual to head our consumer group, I’ve hired a new VP of merchandizing as well and we’re working on our VP of marketing hire. I think it’ll be great because we’re going to really start to focus more broadly on our marketing mix.

I think we have been very focused on online marketing heavily and as we begin to ramp up more of our traditional direct marketing, more of our radio, more of our print offline marketing campaigns, it’s going to be helpful to have a marketing team with a bit of more diversified experience. We’re also thrilled with our product line extensions. What we’re doing with Vera Wang and Todd Oldham has been a total home run for us as we continue to see tremendous growth in those license product lines. I’m also pleased to report we had tremendous success with our Harry and David test this Christmas, the ability for consumers to deliver gift baskets on a same day basis yielded a lot of interesting information for us and that the program we’re hopeful will continue going forward.

In terms of netted increase in the management and increase in the product lines, we’re also going to spending more money in the back half of this year on the holidays versus the prior year. This Christmas, you’ll see in the numbers for the second quarter, we probably were down roughly 10% of the prior year on spending in terms of what we had planned to do and we ended up almost down 20% because many of our paper order programs as you’re well aware to the extent that consumers were not ordering, we did not end up driving marketing costs, we’re not burdened with marketing costs, it didn’t actually drive orders.

As we look towards Valentine’s Day and Mother’s Day we actually see ourselves spending not less than the prior year but actually more than the prior year. We believe we’ve found very good places to spend that money. We’ve learned from the tests that we’ve done along and it gives us optimism in terms of growing this sector in the back half of the year. I think in addition to spending more money as I alluded to earlier, the company is definitely going to moving to a more diversified marketing mix, starting with Valentine’s Day, we have much heavier direct mail programs, much heavier radio programs and we’re hoping that this will help wean us off a little bit of our dependence on some of the online channels which have gotten quite competitive and quite pricey as we start to move back into some of the more traditional marketing tactics that we use.

In addition to the better management, better product lines, spending more money and spending that money differently, I think there’s also two other things investors should keep in mind around Valentine’s Day that give me a reason to believe we should have a strong holiday. One, this year Valentine’s Day is on a Thursday, where last year it was on a Wednesday, so it gives us an extra day of the week to get the message out to consumers that it is the week and now is the time to order. That’s something that should benefit us and our competitors.

The other is for those of you who remember a year ago, we had very, very challenging environment in terms of weather. Almost one-third of the country was closed down last year and that drove a fair amount of quality complaints and it drove a fair amount of refunds. I have no idea what the weather will likely be for this but I know it couldn’t possibly be worse than last year, so we feel that on the margin we should be in better shape going into the holiday.

So in total I feel great about the way the consumer business is performing in the sense that they’re delivering the profitability that we would want, we clearly want to focus more on the revenue side without losing the profitability and I think the plan I’ve laid out is going to get us there. In terms of the florist business, I couldn’t be more pleased with the progress we’re making here. Once again if you’ve been following the company we’ve been weaning ourselves off of unprofitable categories, we’ve had some large unprofitable customers and in terms of letting those leave our customer mix, we’ve also been launching lots of new product lines.

Our fresh flower program showed 25% revenue growth in the quarter versus the prior year quarter. We continue to get very broad acceptance from our customers yet the penetration levels are very, very small yet, so we think we have a lot of room to run with the fresh flower program. Technology, we sold several hundred POS systems in the quarter, more than 15% of those systems are actually conversions from Teleflora or other competitive systems. We think that’s important, in fact when we look through the data that we’ve been tracking, it’s our belief that nearly 2.6 tech customers were acquiring, for everyone one that we’re losing.

Clearly that’s a sign that we’re taking share if every time people are choosing, 2.6 to 1, they’re picking FTD versus the competitor systems, we think that’s a very good sign that we’re taking share here on the technology space. We expect that to continue. I feel great about our product set here and I feel great about the customers embracing our products and our technology effort. The grocery channel, you know look it’s still a small business but it has grown.

We’ve had a 14% increase in revenue year to date, it’s a channel that I remain very optimistic about, it’s a channel we’ll be in for the long term. It’s one that our competitors for the most part are not in today and I’m very excited about how that business is going to continue to grow. So when I look at those businesses that are growing, our fresh flower program, our technology and our grocery and the fact that they’re now fully offsetting some of the customers who were unprofitable who we’ve shed and some of the product line that we’ve eliminated, I think it’s a good sign for where revenue growth is likely going to head in this business.

On the international front, very strong fundamentals, order volume was up 15%, CPOs continued to be much lower than the US, almost half of what they are in the US levels. And obviously with our brand strength there, as I’ve told you before, we continue to be on top both in terms of the consumer business and the florist business. I’m very pleased with the progress the team has made and look forward to continuing to focus on international as a growth opportunity for the company. In light of all of this, we’re updating our targets for the year.

We’re going to leave revenue target of 645 unchanged. The EBITDA is going to be unchanged at $98 million, which will be roughly a 15% margin, which obviously includes the $4 million or so of stock comp for those of you that look at it both ways. We are raising the [nen kimbo] to $1.35 a share from our previous target of $1.23 a share, about a 10% increase and we’re hopeful that despite the challenging environment we’re in, despite the competitive landscape we’re playing in, we’re going to be able to continue to deliver this kind of performance, hopefully improved performance from these levels and we’ll be able to achieve the targets that we’ve laid out for you in the back half of the year. With that, I don’t have any further comments and I’d open up for any questions anybody may have.

Question-and-Answer Session

Operator

Thank you, ladies and gentlemen if you would like to register a question please press star then the number one on your telephone. If your questions has been answered and you would like to withdraw your registration, please press the pound key. If you are using a speakerphone, please lift your handset before entering your request. One moment please for the first question. Your first question comes from Megan Friedman with William Blair & Co.

Megan Friedman – William Blair & Co.

Just a couple of questions, first of all can you talk a little bit more about the florist segment and what some of the underlying causes were for the stronger than expected performance there?

Michael Soenen

Well as I tried to lay out, we’ve just continued to have good growth both in grocery, both in fresh flowers sales and in our technology. All of our new product sets are being very well received and they’re just more than offsetting the declines in some of our legacy businesses and the declines that we’ve created with some of the product lines and customers who are no longer maintaining. So it’s just simply new product innovation outpacing legacy businesses.

Megan Friedman – William Blair & Co.

That’s great and then can you talk a little bit about the outlook for consumer spending in the US and the UK and just what you’re hearing from the florists on that.

Michael Soenen

Well I think, it’s probably a better question for you guys on the phone in terms of the research community is. I mean I don’t have any prolific insight into consumer spending. I will tell you this and I think it’s a very important point, we play with a very broad competitive set at Christmas. Okay, we play with gift baskets, we play with chocolates, we play with lots of different competitors. When you get into Valentine’s Day and Mother’s Day, two things happen that’s very beneficial to the company.

One, our competitive set narrows substantially. If you look at it, it’ll be very much us and Pro Flo and 800 and Teleflor and others who are in the floral category and that’ll become a lead item. You’re not really going to send your girlfriend a gift basket for Valentine’s Day, it’s just not what occurs. So one, the competitive set narrows to just kind of us as a key player and two, they’re really much less economically sensitive at Valentine’s Day and Mother’s Day than they would be at Christmas. So gifts that are kind of on the margin for Christmas, maybe someone doesn’t buy, but I’ve said it many times before, no one is going to come home and tell their girlfriend or their wife, sorry, it’s been a tough economic year and there’s no flowers this year.

And no one’s going to have the same conversation with their mother. So I think the narrow competitive set and the fact that customers, it really isn’t an economic decision at these holidays, really bodes well for the company.

Megan Friedman – William Blair & Co.

Great and then you talked a little bit about some of your other personnel changes and some of your hiring. Any update on the CEO search?

Michael Soenen

No, I mean look, my guess is, who knows where it goes? We have several strong candidates, the Board is working through the process. We’ve told people June 30 for a reason which is I want to make sure the company gets through Valentine’s Day and Mother’s Day without any thought or hiccup and one of the best place to make a smooth transition, so that’s kind of, I’d say we’re dead on schedule for what we’ve told investors and I don’t see that slipping at all.

Megan Friedman – William Blair & Co.

Okay, great, thank you.

Operator

Your next question comes from the line of Justin Post with Merrill Lynch.

Justin Post – Merrill Lynch

Could you talk about the florist business, how do you see the overall environment for florists right now? Is the total number of florists coming down due to competition or how is that environment on a macro level?

Michael Soenen

Well look, I said this a couple times, there are less florists. Florists are struggling and you really got to ask yourselves which florists and how does it impact us? Okay so if I took my customer file and I broke it out into core tiles, you’d see that 95% of my revenue and earnings come from my top two core tiles, okay. If I pull my average florist in the top two core tiles, they’re actually doing okay to better than last year, okay. If you were to kind of go after florists who were my bottom two core tiles, core tiles three and four who really are very small in terms of total revenue and total earnings, I’d say they’re struggling.

I’d say there’s lots of consolidation, that they’re suffering through and I’d say that they’re having a very challenging time. The strategy that we have at FTD has been a very focused on our top two core tiles, making sure that those florists who are going to benefit from consolidation are the ones that we’re closest to and that we’re able to garner a larger share of wallet from those florists. So far I’d say that strategy has played out very well for us and though I would say nothing is going to be easy, it’s a much better strategy than somebody who is probably focused on all four core tiles if you will.

Justin Post – Merrill Lynch

Okay, when I look at the consumer business, if you look at the gross profit less the marketing expense, it actually beat our forecast. Can you talk about the mix or what might have driven the kind of upside there versus at least our numbers, I don’t have other people’s numbers, on the consumer side and was there a product mix benefit or what really drove that?

Michael Soenen

I may want to follow up with you offline Justin just to make sure I understand specifically the math that you’re doing. We didn’t see anything substantially different in terms of percent mix direct shipped to florist, we didn’t see anything materially different in terms of average order value, so I would want to get back to you, maybe dig in a little deeper into your numbers but we don’t see anything huge that was materially different in that regard.

Justin Post – Merrill Lynch

Okay and then last question, EBITDA unchanged but you did take EPS it looks like $0.12, is there a line between the EBITDA and the EPS line that has changed materially since you last talked or what drove the difference there?

Becky Sheehan

Yeah, if you look also on the attachments to the press release there’s a reconciliation between the EBITDA and net income which I think might be helpful to you. We had a couple of things that I think are working in our favor. One being interest expense is coming in less than we had originally targeted for the year. I think we’ve been able to enjoy lowered interest rates as well as paying down of the debt and you’ll also see our depreciation and amortization number coming down from what was originally targeted.

Justin Post – Merrill Lynch

Okay, as a follow up to that Mike, so you’re obviously generating a lot of cash. Where do you plan to deploy that over the next twelve months?

Michael Soenen

Well look our cash needs aren’t really changing a whole lot so where might we use it? Well obviously we have our dividend that’s out there, we’ll continue to fund our dividend. We’re going to use what’s beyond the dividend to pay down debt which is what we’ve historically done and you know I’m going to keep my eyes open for the right next acquisition for the company.

Whatever that may be, clearly we’ve had a tremendous amount of success with the UK acquisition and I think that I’d like to continue to pay up with that so that should I see that opportunity I really want, we’re in a position to go after it. Right now based on what I can see and based on what the forecast looks like for the year, our use of cash seems appropriate for me in need of what our potential needs might be on the acquisition front so I’m pretty pleased with where everything’s sitting.

Justin Post – Merrill Lynch

Okay and last question, can you estimate the impact on your florist revenues from that lost customer in the quarter?

Becky Sheehan

I think we said in the past that the annual number was between $2-$3 million. So in the quarter it’s less than one-quarter of that annual number because their numbers become more significant in the back half of the year also with the holiday seasosn.

Michael Soenen

Yeah, Justin, [unintelligible] would say call it somewhere between $2-$3 million then I would probably track that $2-$3 million according to how the consumer business funnels into ours and that’s probably not a horrible proxy.

Justin Post – Merrill Lynch

Alright, thank you.

Operator

Your next question comes from Jennifer Watson with Goldman Sachs.

Jennifer Watson – Goldman Sachs

Thank you. In the UK market can you talk a little bit about what’s driving the acceleration in order growth from I think you had mentioned 90% in the first quarter, can you talk a little bit about new products that you’re introducing there or what is specifically driving that. And then also about the near term ability for you guys to raise some prices within the network over there and if that is factored into your current guidance?

Michael Soenen

Alright so I’ll break it in two pieces. You know we’re not going to get too deep into the product launches. But clearly Valentine’s Day and Mother’s Day are the big ones. Clearly the direct ship products that we’ve done with Vera Wang and Told Oldham and frankly just even our more branded FTD stuff has gone over very well. Valentine’s Day tends to be a roses holiday anyway so it’s less about innovation there but it’s really driving a lot of the everyday business. So I think that’s going to be more of what we have been doing. And I’m sorry, the second question was?

Jennifer Watson – Goldman Sachs

Yeah in terms of the UK market, can you talk about the ability for you to raise prices within the florist network and if you’re planning to do so, if that’s factored into guidance?

Michael Soenen

Yeah, one I do believe we have the ability to do so but it’s really not in our best interest, it’s not in our customer’s best interest in terms of the long term strategy. My goal over the long term obviously is to stay very focused on rolling up Europe and seeing what other acquisitions we can do. I don’t see how doing short term price increases helps that and it isn’t factored into our guidance or our plan in any way.

Jennifer Watson – Goldman Sachs

Okay and then just one follow up to the first part. If you specifically in the UK, if there are any things that you could point to that drove order growth to the 14% growth rate that you saw this quarter versus 9% in the September quarter.

Michael Soenen

For the UK business?

Jennifer Watson – Goldman Sachs

Yup.

Michael Soenen

Yeah I mean I’m not going to get just for competitive reasons, I’m not going to get into the specific tactics that we’re using but let’s just say that the group tends to do a very good job, the consumer environment over there is better than it’s been here and I think we’re continuing to see lift from the investments that we made in the first twelve months as owning that in terms of database marketing and such and I would just say that the group is getting better and smarter and more efficient and has more tools with which to compete than they had before and we’re seeing and continuing to see some lift from those investments.

Jennifer Watson – Goldman Sachs

Okay great, thank you.

Operator

Ladies and gentlemen as a reminder, to register for a question, press star and the number one. Your next question comes from Mark Mahaney with Citigroup.

Mark Mahaney – Citigroup

Great, thank you, three quick questions please. In your guidance is there an anticipated or an assumed tax rate?

Becky Sheehan

The tax rate is assumed at a 38% and what you need to keep in mind is we took a benefit in the first quarter associated with the UK tax rate change so that makes the full year rate seem lower than that normalized 38%.

Mark Mahaney – Citigroup

Okay, secondly, Mike I know you made some comments about signs of consumer softening. The average order size increased and I’m sure there was a mix shift there, but was that a bit of a surprise to you that the average order size in the US increased given the consumer softness, would you expect to see the average order size maybe come down in a weakening consumer environment?

Becky Sheehan

Let me try to take a stab at that and Mike can jump in if he’d like. You know if you look at our average order value in the second quarter it was relatively consistent with what we’ve seen in the first quarter. It was not a surprise to us. We have seen consumers continue to choose products at the higher price point and more florists fulfilled as well which helps support the average order values. So not a surprise at all and I think historically the company has seen very consistent pricing over time as well. So we’re not surprised and we’re very pleased with where we are.

Michael Soenen

I’d say my only key learning I’d add on to what Becky said is if we’re seeing any softness or any challenges it would be in everyday discretionary purchasing, we’re not seeing it so much, we don’t anticipate seeing it in Valentine’s or you don’t see it in funeral orders or weddings or anniversaries, and so those tend to be very high ticket items where people are not shopping for price.

So that’s kind of our core bread and butter and so I think if we are seeing weakness or if there’s orders where we aren’t doing as well as we would like, it’s really in the everyday very discretionary, I didn’t have a very compelling reason but maybe I just missed you or was thinking of you or whatever, and that market has historically been a lower price point market. So I think, A, our customers are continuing to move to the higher end, especially on the new product designs, but I also think the marginal customer, the one who shopped at low price points was probably a very discretionary shopper anyway and that’s probably where we’re seeing some of the losses in terms of customers purchasing from us on an everyday basis.

Mark Mahaney – Citigroup

And then last question, you had talked about a shift in the marketing diversification of your marketing plans, you talked about pricing continuing to rise in online channels, is that also what you were seeing in the UK? It looks like the marketing costs per order rose, FX may have been a factor there, but it looks like it rose materially in the quarter on a year over year basis, so is that one of those signs of that online price inflation that you’re concerned about or that’s leading you to diversify your marketing mix?

Michael Soenen

I want to come back to you on the CPO thing in the UK because we didn’t see a material increase in CPO at all, so I’d maybe want to work offline with you and dissect that because we think they’re getting more efficient if anything so I want to go through that with you. But I don’t have the facts in front of me, I would say in general that as the Google and the Yahoos of the world and MSNs of the world network buys and paid searches has historically gotten more expensive.

And I’d say historically those mediums are trading at 5-25% discounts to other medium, being radio, being what I can generate in direct mail, et cetera, et cetera. But now those mediums have caught up with each other, it just makes economic sense for us to diversify back into some of those other channels. I think it would give us a better customer identify long term, it will give us a better consistency with our customers long term and it’ll help us control our earnings a little better as well. So I think it’s really just more of the fact that they’ve priced themselves up to the other medium and it just makes more sense economically for us to diversity than it does to stay focused in the one channel that was kind of selling at a discount if you will.

Mark Mahaney – Citigroup

Thank you Mike, thank you Becky.

Operator

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

Michael Soenen

Great, thanks everybody. I appreciate all the questions, I appreciate all the interest. We have Valentine’s Day coming up so we’re going to get back to work and we look forward to giving you an update after the holiday with our third quarter results. Thank you.

Jandy Tomy

That was FTD Inc’s 2008 second quarter conference call. If you did not have the opportunity to listen to the entire call, a replay will be available through February 13, 2008 by calling 800-633-8284 for North American callers, or 402-977-9140 for international callers. Please mention conference ID 21372777. Thank you.

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