GSI Commerce, Inc., Q4 2008 Earnings Call Transcript

| About: GSI Commerce, (GSIC)
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GSI Commerce, Inc. (NASDAQ:GSIC) Q4 2008 Earnings Call February 11, 2009 4:45 PM ET


Michael Conn - EVP, Finance and CFO

Michael Rubin - Chairman, President and CEO


Shawn Milne - Janney Montgomery Scott

Christa Sober Quarles - Thomas Weisel

Jennifer Watson - Goldman Sachs

Shyam Patil - Raymond James

Herman Leung - Deutsche Bank Securities

Mark May - Needham & Company

Paul Beaver - Lazard Capital Markets


Good day ladies and gentlemen and welcome to the GSI Commerce, Inc. Fiscal 2008 Fourth Quarter and Fiscal Year Operating Results Conference Call. My name is Amity and I will be your coordinator for today. At this time all participants are in listen-only mode. We will facilitate a question-and-answer session towards the end of today's conference. (Operator Instructions)

I would now like to turn the presentation over to your host for today's conference Mr. Michael Conn, CFO of GSI Commerce. Please proceed, sir.

Michael Conn

This is Michael Conn, CFO of GSI Commerce, and I am joined by Michael Rubin, our Chairman and CEO.

Before we get into the results, I would like to make the following remarks concerning forward-looking statements. All statements in this conference call other than historical facts are forward-looking statements. The words anticipate, believe, estimate, expect, intend, will, guidance, confident and similar expressions typically are used to identify forward-looking statements. These forward-looking statements are based on current expectations, beliefs, assumptions, estimates and forecasts about the business of GSI Commerce. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions which are difficult to predict. Therefore actual outcomes and results may differ materially from what is expressed or implied by these forward-looking statements. Factors that may affect GSI's business, financial condition and operating results are discussed in its filings with the SEC. GSI Commerce expressly disclaims any intent or obligation to update these forward-looking statements.

During this call we also will present certain non-GAAP financial measures; non-GAAP net revenues, non-GAAP income from operations and free cash flow and certain ratios that use these measures. In our Form 8-K which is located on our website at under SEC Filings you will find our definition of these non-GAAP financial measures, a reconciliation of these non-GAAP financial measures with the closest GAAP measures and a discussion about why we think these non-GAAP measures are relevant. These financial measures are included for the benefit of investors and should be considered in addition to and not instead of GAAP measures.

Well thanks as always to everyone for joining us this afternoon. Let me begin with a few summary thoughts and then I will provide more details on our 2008 results and on our guidance.

Overall we are very pleased with the strong results we delivered in 2008. In our view our results reflect underlying secular growth trends in ecommerce and interactive marketing, a proven business model and excellent execution.

We maintained an expansionary stance in 2008, including completing the largest acquisition in our history, signing new clients, extending and expanding our relationship with existing clients, establishing marketing services as a separate standalone growth segment. Investing and enhancing our capabilities and infrastructure and increasing our talented employee base.

In particular we are pleased with the long term contract extensions we signed this past year, including with several top ten clients which we believe demonstrates our ability to maintain our client relationships for the long term.

At the same time we were cognizant from the outset of the tough operating environment and maintained a focus on driving revenues and carefully managing capital and operating expenses. We strengthened this focus as the year progressed and it became clear that the environment was growing worse, particularly as we ended the fourth quarter.

In the end we did face external challenges including the liquidation of Linens-n-Things, a top ten client for us, and the winding down of business with BabyCenter in US and the liquidation of Woolworths in the UK.

Despite these challenges the end result of 2008 was growth in net revenues of 29%. Non-GAAP income from operations of 57% and record free cash flow of $38.8 million. We are proud of these results.

In particular 2008 was our third consecutive year of positive free cash flow and we expect to continue to be a strong free cash flow generator.

Our operations have more scale, our underlying margin structure is sound and our growth remains solid. Looking to 2009, we continue to expect to benefit from the secular growth trends in ecommerce and interactive marketing services, a proven business model and our demonstrated execution abilities.

In particular we believe that shrinking offline capacity for retail and media, growth in the interactive marketing budgets for retailers and consumer brands and continued improvements in the online shopping experience will drive growth for the ecommerce and interactive marketing services industries.

Our recently released reports from research predicted 11% growth for ecommerce in the US in 2009. At the same time we believe it is only prudent to expect the challenging environment to remain and we will continue to focus on driving revenues and carefully managing expenses.

We will however continue to make strategic investments in our business including enhancing our technology and operations capabilities and further developing our growth opportunities, marketing services and international ecommerce services.

Overall although while we are prudent we do expect to increase the size of our talented employee base in 2009. We benefit from having a diversified base of clients, with long-term agreements and have annuity like revenue streams.

Now I will cover our 2008 performance in more detail. For 2008 we delivered net revenues, loss from operations and non-GAAP income from operations that were all in line with our most recent guidance ranges and record free cash flow.

Net revenues for 2008 were $966.9 million an increase of 29% from $750 million in 2007 and in-line with our most recent guidance range of $950 million to $985 million. I would also note that we ended up only 3% below our initial guidance for fiscal 2008 net revenues or approximately $1 billion.

Net revenues from product sales increased 13% to $577.1 million in 2008 from $512.2 million in 2007 and net revenues from service fees increased 64% to $389.9 million in 2008 from $237.8 million in 2007.

Service fees accounted for 40% of net revenues in 2008 compared to 32% in 2007.

Non-GAAP net revenues were $491.4 million in fiscal 2008, an increase of 49% from $328.8 million in 2007.

Net revenues and non-GAAP net revenues included approximately $3 million in service fees related to gift certificate breakage. Prior to 2008, we had not recorded any revenues related to gift certificate breakage.

Loss from operations for fiscal 2008 was $9 million which was in line with our most recent guidance for a loss of $6.5 million to $9.5 million and as expected below the $4.9 million of income from operations we reported last year.

Our initial guidance for the year was from an operating profit of $3 million to $6 million, although, this guidance as we noted at the time it was given did not include several expense items related to e-Dialog including amortization of intangibles and stock based compensation. These items ultimately reduced income from operations by $9.5 million.

Non-GAAP income from operations was $81.9 million in 2008, which is inline with our most recent guidance of $80 million to $83 million. This is the same guidance we gave at the beginning of the year and we are pleased to have met this range.

Our non-GAAP income from operations increased to 57% from $52.3 million in 2007. Non-GAAP operating margins were 8.5% in 2008 compared to 7% in 2007 an increase of 150 basis points.

I would also point out that we delivered strong performance throughout the year, as we met or exceeded our guidance for each quarter. We generated 16% of our non-GAAP income from operations for 2008 during the first nine months of the year, compared to 8% in the first nine months of 2007.

On a net basis we have recorded a loss of $16.9 million versus net income of $3 million in 2007.

In addition to the operating items I have noted already, we recorded other expenses of $1.6 million, which is the impact of the foreign currency translation from our international businesses.

Additionally, we incurred a loss of $1.7 million, which was for an impairment charge relating to one of our equity investments.

Pre-tax net interest expense was $8.1 million versus pre-tax net interest income of $3.2 million, for a $11.3 million swing, primarily due to higher average debt balances and lower average cash balances resulting from the first quarter funding of the e-Dialog acquisition.

Free cash flow for fiscal 2008 was $38.8 million compared to $3.9 million in 2007, reflecting growth in non-GAAP income from operations, careful deployment of capital spending and solid working capital management.

Capital expenditures for the year increased 6% to $57.2 million from $54.2 million compared to the 57% growth in non-GAAP income from operations.

While capital expenditures were below our initial guidance of $70 million. The final amount still represented our largest annual capital investment including significant investments in the ongoing enhancement of our technology platform and several million dollars related to acquisition integration.

Looking at our segment performance, ecommerce services net revenues increased 22% in 2008 to $900 million from $737.8 million in 2007. With segment operating margins of 6.9% versus 6.2% in 2007.

Business highlights included client renewals such as Ralph Lauren, Dick's Sporting Goods, Aeropostale, GNC and Levis. New business launches including Christopher & Banks and Kenneth Cole and new business wins including Big Lots and Calvin Klein.

Marketing services net revenues increased 214% to $84.5 million in 2008 from $26.9 million in 2007 driven by acquisition of e-Dialog as well as organic growth for gsi interactive. Segment operating margins were 17.6% which is a 40 basis point increase from 17.2% in 2007.

Business highlights from marketing services include the completion of our acquisition of e-Dialog which performed very well for GSI in 2008, on an organic basis e-Dialog enjoyed strong year-over-year growth in revenues and operating profits and meaningful new business wins.

We are also pleased with the cross sell success we are seeing from our ecommerce service clients. We currently expect about 14% of e-Dialog revenue in 2009 to come from clients that are also ecommerce service clients of GSI.

We would not be surprised to see this percentage increase. Some of these clients were e-Dialog clients prior to the acquisition. GSI interactive experienced strong growth in revenue and profits for the year. While also winning interactive agency of record designations from Toys “R” Us, Dick's Sporting Goods and GNC and meaningful new business wins from broad cross section of GSI clients.

GSI interactive enjoyed success across a range of services in 2008 including search, affiliate and display advertising, creative services, usability research, product photography and copy writing.

We are pleased that both of our operating segments, ecommerce services and interactive marketing services delivered revenue growth and margin improvements in 2008.

A key component of our consolidated results for 2008 included a meaningful portion of fourth quarter to maintain revenue momentum despite the challenging macro-environment. Where we have visibility in this transaction volumes, sales through clients and ecommerce businesses and operated for the entire fourth quarter in both years were negatively impacted by Linens-n-Things and BabyCenter.

However, if you pull out these two clients our increase was in the high single-digits in the fourth quarter with notable strength in apparel and health and beauty.

We experienced a modest decline in the average order value offset in part by an increase in units per order.

Our full-year growth rate was in the mid-teens while Linens-N-Things and BabyCenter are excluded.

Some of the trends and factors including GSI specific initiatives that drove growth in the fourth quarter are as follows. First, in the part due to our advice our clients pushed meaningful promotional value to their consumers beginning in early November, well in advance to the traditional start of the holiday season.

This was done partly to combat the soft environment but also in recognition of the shorter 2008 holiday season which had five fewer days between Thanksgiving and Christmas in 2008 compared to 2007.

Promotions which continued throughout the holiday season included percentage off as well free shipping and were often for a limited time.

One of our clients generates more sales on line during an early season promotion event than they generated the same day through their entire chain of almost 100 retail stores.

With many time based promotions we know as the phenomenon of unusually strong shopping in evening hours as consumers shopped up until the deal expired.

Second, Thanksgiving day, Black Friday and Cyber Monday were huge days for our clients across a broad base of clients we saw very large year-over-year increases and a large number of clients set daily records these days.

Black Friday was our largest demand day of the year for the third consecutive year. And Cyber Monday was our second biggest demand day of the year for the second consecutive year reflecting strong values offered on these days by our clients.

Third, compared to 2007 we saw stronger comp store demand as we approached Christmas, reflecting the calendar shift to Christmas following on a Thursday in 2008 versus a Tuesday in 2007.

Reality that the procrastinated shopping segment was still alive and well and the benefit of leveraging our supply chain scale to offer compelling late shipping cut offs of December 28th and December 21st versus December 16th through 18th in prior years for guaranteed delivery by Christmas. This was also enabled by our new ship quick program that we rolled out to our clients in partnership with UPS, which is speeding the time of shipments to consumers while keeping the cost of shipping low, a true win-win.

Fourth, the period between Christmas and New Year was strong as consumers took advantage of end of season promotions. We made a consorted efforts to encourage our clients to take advantage of this increasingly important selling window.

One notable change to the shopping window is lower gift card redemptions. As gift card sales during the holiday season were depressed as consumer's opted discounted merchandize isntead.

To enable our clients to take advantage of these opportunities GSI hosted a series of conference calls and webinars throughout the holiday season.

These sessions allowed our client to share their best practices which help drive their businesses. Positive results generated from this demonstrate the power inherent in the network we have built.

Online marketing was very effective for us and our clients with email as we expected stood out and showed significant growth in email frequency. We enjoyed success with viral marketing during the holiday season that included a new offering for us the GSI viral marketing booster that leveraged the power of our entire employee base and extended network as well as tools like our newly launched consumer shopping blog,

I would note that despite some of the spikes we saw on volume, we executed very well during the holiday season, including during the peak days.

In comparison, many large retail sites experienced outages during these periods. Our fulfillment centers and call centers delivered excellence service to consumers throughout the season.

Turning to our balance sheet, we finished the year with cash and cash equivalent position of $130 million. This compares to $232 million at the end of 2007, reflecting $145 million in net outflows for acquisitions, primarily e-Dialog, offset to an extent by strong free cash flow.

Subordinated debt outstanding was unchanged at $207.5 million and secured debt outstanding was $37.5 million compared to $29.7 million due to an increase in capital leases for long lived warehouse equipment.

We did not have any borrowings under our $90 million credit facility at the end of the year. Between free cash flow and our credit facility, we have ample liquidity in the event the holders of our $57.5 million convertible bond issue put their bonds to us in June of 2010.

Total debt as a percentage of total capitalization was essentially unchanged at the end of 2008 compared to the end of 2007 at 48%. As I mentioned when I discussed free cash flow, our working capital management was strong in 2008, including a 9% reduction in total inventory despite a 13% increase in product sales.

Prior to discussing our 2009 outlook, I want to briefly discuss our decision to mutually terminate the acquisition of Innotrac. As we indicated at the time we announced the acquisition, Innotrac would have been a good strategic bid for GSI, with similar clients available fulfillment and call center capacity and a western US fulfillment hub in Reno that we could have used to begin our regional fulfillment offering.

However, in the approximate four months after signing the agreement, the external environment changed dramatically and asset values were dramatically revised while risk challenge was significantly reduced.

As a result based on declines in our valuation and Innotrac's valuation, which were meaningfully greater than the decline in the value of the deal. We just could not justify closing the deal and felt that termination was the better option given that it was an available alternative.

I would note that we have freed up fulfillment capacity due to Linens-N-Things and BabyCenter, we did not have any near-term capacity constraints. With respect to regional fulfillment, we still view it as a good strategic opportunity and will continue to evaluate opportunities to begin this offering.

I would add, we do continue to evaluate potential acquisition, but we do not expect any large acquisitions in the near-term. Now let me discuss our guidance, and then I will turn the call over for questions.

As we have see broadly among peer companies, due to the current economic uncertainty, we are only going to provide specific guidance for the first quarter. However, I will provide the following directional comments for full year 2009.

Net revenues, we should be modestly lower year-over-year due to factors that include, Linens-N-Things and BabyCenter and transitioning to a new non-seller record model with Dick’s Sporting Goods.

We are also assuming same-store sales growth will be positive, but at a more moderate rate than we achieved in 2008. This should be somewhat offset by continued strong growth of marketing services and new business based on solid pipeline activity. We would expect mix of revenues to show a decline in products revenue and an increase in service fees.

As a result, non-GAAP net revenue should increase for the year despite the expected decline in net revenues. With respect to new business, I would note that for e-commerce services, we launched a new piece of business earlier this month for specialty apparel retailer, and we are in the process of implementing five new pieces of business including add-on sites for two existing full service clients, the additional technology services to one of the fulfillment and call center client we gained through accretive acquisition and two new clients.

The new pieces of business are the apparel, sporting goods, home and specialty foods categories. We also have solid additional e-commerce services pipeline activity including international opportunities, Both GSI Interactive and e-Dialog are in the midst of implementing new business and also have solis pipeline activity.

For non-GAAP income from operations, we would expect growth of at least 10% in 2009 and possibly greater with a higher percentage of the annual non-GAAP income from operations occurring during the first nine months of 2009 than in the first nine months of 2008.

As marketing services continues to grow, we are becoming a bit less seasonal although the fourth quarter will remain our largest contributing period. I would note that second quarter non-GAAP income from operations will likely be down year-over-year, while the remaining three quarters should see increases.

We would expect a favorable revenue mix of higher services fees as well as strong variable operating efficiency and tax expense controls to enable margin improvement to overcome the modest net revenue downtick, which in turn should enable higher year-over-year non-GAAP income from operations.

Capital expenditures for the year should be no more than $50 million implying potential for solid growth and free cash flow. Depreciation and amortization is expected to be $64 million including $9.7 million in the amortization of acquisition-related intangibles.

Stock-based compensation is expected to $23.8 million in 2009. We are also going to be adopting a new accounting requirement in 2009 related to our two outstanding convertible bonds. This will cause us to record an incremental $10 million in non-cash interest expense. Because this is non-cash, we will have no effect on cash flow from operations, free cash flow or non-GAAP income from operations.

We are modeling a 17% tax for 2009 as we expect to be in the net loss position for the year. Though the exact outlook for 2009 is tough to peg in this volatile environment, I would note that we expect to remain strong performing growth company operating in a growth industry. But due to the external environment growing to a slower rate than we have been accustomed to, we expect to deliver in the future as the economy recovers.

Turing to our specific first quarter guidance, we expect net revenue in the range of $187 million to $192 million, compared to $195.5 million in 2008. Loss from operation is expected to be in the range of $20 million to $21 million, compared to a loss $17.8 million last year and non-GAAP income from operations is expected to be $2 million to $3 million, compared to $700,000 in 2008.

Loss from operations in the first quarter will include $1.3 million charge related to expenses for the terminated acquisition of Innotrac. Essentially all of which was already paid at the end of 2008, and as a result will not impact 2009 free cash flow.

As we entered this year, we expected to see a slower trend than we experienced in the fourth quarter as a promotional frenzy of the holiday season subsided lay off announcement increased and gift card redemptions declined.

Our general assumption was correct, we have been pleased that overall sales trends in the first quarter have been modestly better than we had expected and that gives us increased confidence at this time in our first quarter outlook.

And with that I will turn the call over for questions.

Question-and-Answer Session


(Operator Instructions). Your first question comes from the line of Shawn Milne with Janney Montgomery Scott. Please proceed.

Shawn Milne - Janney Montgomery Scott

Good afternoon and thank you for taking my questions, and congratulations on a strong fourth quarter in this environment. Michael Conn, could you just maybe go through in your free cash flow discussions just a little bit more as you look into 2009.

If we just take a peek back, you initially started the year 2008 looking at $80 million to $83 million in EBITDA, and CapEx was about $65 million, so our free cash flow expectations were certainly more in the $10 million to $15 million range.

You ended up doing $38 million for the year, so significantly ahead of expectations. If you think about that performance relative to what you just said for EBITDA and CapEx, if you can just add a little bit more color on '09 free cash flow? Thank you.

Michael Conn

You got it. So yeah, I would say, first of all with respect to 2008, we are really pleased with the free cash flow performance. I think that we focused significantly on it during the year in terms of CapEx coming in at $57 million, was less than we had planned for and we were particularly pleased with that, and that we really completed all the projects that we had set out to.

So, we started the year, there was some contingency, we ultimately didn’t need to spend that. That was a benefit. Also on the integration for Accretive Commerce, we really had forecast that conservatively. We are able to complete that integration loss spending less in capital that was one of the other benefits for us.

So as we look to 2009, we plan to spend no more than $50 million in capital, which when you strip out acquisition integration in 2008, really was about flat, so it's still a significant investment in capital expenditures.

Though the expectation that will grow non-GAAP income from operations of at least 10%, we should certainly see good growth in free cash flow in 2009. So, we think while we are pleased and did better than we would have thought in 2008, we think that's the base that we can grow nicely from 2009. We would expect to see a good up tick and free cash flow.

Shawn Milne - Janney Montgomery Scott

Thanks, just one follow-up. I am just looking at the segment margins, you reported for the quarter a nice lift in the e-commerce services side. Can you may be highlight a couple of areas? You mentioned your operations execution was strong. Is there anything else which is leveraging against good execution, what else is going on there? Thank you very much.

Michael Conn

Yeah, I think I would say three things. So I think that we are certainly focused on OpEx and getting leverage and you saw that in the quarter as well as for the year and expect to continue to see that benefit going forward.

Variable operating efficiency was nice for us during the quarter on the fulfillment side as well as on the call center side. We are really focused on the unit economics in driving efficiencies, we are making investments to be able to deliver that, we are seeing success and good return on those investments.

The final area that I would highlight is really stock purchasing efficiency. So we have also invested in additional resources to really focus on procurement leverage the size that we have reached as a company and we are making good headway there. We have had some breakthroughs and continue to have a lot opportunity for us on the purchasing side.

Shawn Milne - Janney Montgomery Scott

Great, thank you.


Your next question comes from the line of Christa Quarles with Thomas Weisel. Please proceed.

Christa Sober Quarles - Thomas Weisel

Hi. First question is on the gross profit on the product sale side, it is about 2 point lower than it was the year before. And I was just wondering, obviously there is sort of increased promotional activity.

But in terms of lowering prices and what not, do you expect that to be sort of the normal environment for 2009. And then as you indicated that Q1 so far is showing better than your expectations, I was just wondering if you could give us any category highlights around that thanks.

Michael Conn

Sure gross profit from product revenue really the biggest dynamic there is that we really had a push in terms of growing the amount of business where we are handling freight for our clients and that's actually been an area where we have added values, one of the things I had talked, on our ship-quick programs. So as we focus on adding clients there that actually ends up getting booked into product sales. But the margin there is low. So that ends up dragging down the overall product sales margin. So if you look at the actual pure inventory component of that, sporting goods was roughly flat year-over-year and grew as a percentage of the total product sales as we had a decline in electronics as we have been experiencing for a while. So no real major change in terms of what we are seeing on the inventory side of the business. But as freight becomes a bigger component of product sales. It ends up dragging down that margin ,although it's a good value-add and a good piece of our business that we are actually talking about.

As far as category trends, nothing really different than that what we have seen certainly the stand outs for us in the fourth quarter as I mentioned were apparel, health and beauty. But nothing really too significant earlier in the first quarter, just kind of pretty broad based that we are seeing that we are better than we had planned to be which is something we are obviously pleased about.

Christa Sober Quarles - Thomas Weisel

And then just one quick follow-up and the last question around cost cutting? You obviously have not done or announced anything I guess very formally but I guess is there is a point at which you look at your overall headcount and kind of rethink. And I guess I'm just trying to get a sense as to the magnitude range of sort of where you might be willing to take more dramatic action or sort of how you are thinking about preserving the profitability thanks?

Michael Conn

Sure as I mentioned we are focused as I think all companies are on our operating cost structure and we have certainly done a lot of good things with respect to that.

In 2008 we had a very significant focus, again at 2009. At the same time I think what's important to note is we still really, we are seeing the underlying secular trends and business specific trends that really point to us still being a growth company. We are adding business, our clients for the most part are growing. We have good growth opportunities in marketing services and in international.

So we are cognizant of the need to be responsible in the environment. We need to plan conservatively in the environment, but the same time we are making sure that we are not choking up, but we still see a great opportunities for rest of the company.

So from a corporate perspective we haven't done any corporate wide layoffs nor are we planning to we have certainly adjusted staffing levels in the field as we always do. But really we are still in growth mode but certainly managing the business conservatively.

Christa Sober Quarles - Thomas Weisel



Your next question comes from the line of Jennifer Watson with Goldman Sachs. Please proceed.

Jennifer Watson - Goldman Sachs

Great. Thank you. Two questions, first, if you are going to talk out customer response to the free shipping offers versus commercial discounts on actual item prices. If there was one that really kind of made the consumer actually transact more frequently or boost up conversation rates? And then also as you look at 2009 in your customer base, are there any customers that you are concerned about in terms of their vitality or their health at this point in time?

Michael Rubin

Sure, I will answer the first part of the question and then turn it over to Michael Conn on the second part. As far as what really drove business, I think both shipping promotion and overall discounts drove business during the fourth quarter. And I have always been a part of the business. Off bid I think there was more value in Q4 then it had been historically. I think what we did see is that many of our clients moved forward and did earlier in the season promotions whether it was shipping promotions or discount promotions or friends and family book programs, they did these things earlier. So I will not say that one was more significant than the other. What I would say is that people are probably little bit more aggressive earlier in the season this year.

Jennifer Watson - Goldman Sachs

Okay. Thanks.

Michael Conn

With respect to client health, I think that we did see some dislocations in 2008, we are watching things closely and I think that is, result that we attempted to plan conservatively for 2009 because we recognized its an ongoing risk. But there is not a specific client that if you were that we have an acute concern about that we are planning around. But generally just cognizant of the fact that its difficult operating environment, retailers have been under duress, and as result we are planning the business conservatively.

Jennifer Watson - Goldman Sachs

Alright. Thank you.


Your next comes from the line of Shyam Patil with Raymond James. Please proceed.

Shyam Patil - Raymond James

Hi. Good evening. Thank you. Could you guys talk a little bit about what the 1Q revenue guidance assumes in terms of comp store sales growth? And what gives you confidence in that specific range?

Michael Rubin

Sure. It's not something that we have broken out specifically, the one of the things that I did highlight is our expectations when we built that plan for 2009. During the fourth quarter of 2008, was that we would see a lower rate of comp store growth in the first quarter and really the reason for that is what we saw in the fourth quarter of 2008, although it was a difficult operating environment. There really was quite a bit of promotional frenzy, retailers owned their inventory for the quarter, needed to push it out. But at the same time, we are planning more conservatively for 2009.

So, we expected to see a moderating trend in the first quarter, the other facter that we expect is we just I think it was clear to us and we certainly see a play out in the first quarter that you would see early in the quarter just a wave of layoff announcements and that certainly impacts consumer confidence. At the same time, we plan to be conservative, we thought we would see a slow down that we have been pleased that it has not been as severe as we thought we have been running better than we thought. So we are overall pleased relative to how we planned the business that we are seeing things run a little bit better.

Shyam Patil - Raymond James

Great. Just a follow-up question. You mentioned in your prepared remarks that inside industry analyst that pointed to 11% ecommerce growth in '09 potentially. When you look at your 10% EBITDA growth guidance for the year, what sort of the base case for which you know if revenue growth drops below in that 10% EBITDA growth, it might become more difficult to achieve?

Michael Rubin

Yeah I would say some a planning perspective we are more conservative than the industry growth estimate that is cited. Underlying point beyond the industry growth statistic is really, it's still a growth industry. I think it's hard peg with the full year growth could be. I think its one of the reasons why, like a lot of other companies we have provided specific first quarter guidance and just spoken more generally about the year. So, I think we are planning more conservatively so that we are not dependent upon that kind of growth to be able to achieve the numbers.

Shyam Patil - Raymond James

Great, thank you and congrats on the quarter.

Michael Rubin



Your next question comes from the line Herman Leung of Deutsche Bank. Please proceed.

Herman Leung - Deutsche Bank Securities

Hi. Great quarter guys. I guess from your, I think in your February shift from the Dick's Sporting Goods in the first quarter basically impacts some of the first quarter revenues that you guys are putting up in terms of revenue. Any ideas how that basically impacts the model longer-term in terms of purchase efficiencies and potentially additional client that could potentially shift from the product to the service base model like a Sports Authority or so?

Michael Conn

Sure, so I think, as Dick's transitions and starting February 1st the deal did transition there now seller record they are responsible for assortment and pricing and we are in the process of transitioning. So that is still a combination of GSI inventory sold two Dick's on flash basis as well as our own inventory then that will continue to evolve over the course of the year and become increasingly their inventory.

We have assumed from a planning perspective as a result of that then we will see some impact in terms of buying discounts not all that significant but certainly there is straight volume based discount that we get. We factored that impact, there is a lot of puts and takes in terms of other efficiencies that we pick up on the buying side. So net net we do not view it as a real change in the underlying marketing structure the business or negative drag on the margin structured business.

Herman Leung - Deutsche Bank Securities

And then on Sports Authority potentially shifting to this model as well, is there a chance that could basically happen sometime in 2009 or have you guys not to talked to them yet?

Michael Rubin

I think, client specific negotiations I think as we've always said, we try to sort of not air on a forum such as this. That being said I think that the Dick's model, we are excited about we think its a really good model for them as a retailer to really be able to focus on the areas of strength for them as a retailer and leverage our infrastructure and capabilities with respect to ecommerce. So we think it’s a good model, we would not rule out that other clients of ours in the sporting good side to adopt similar model overtime.

Herman Leung - Deutsche Bank Securities

Yeah, and if I on the quick follow up if I may, I guess on your contract side have you think about your contracts the recurring nature and variability of your contracts longer term what type of visibility do you have on the recurring basis on your contracts if you look into 2009 loner-term and as you have signed some of these long-term contracts out there?

Michael Conn

So I think 2008 we really had a significant accomplishment. I think historically one other things that people always asked about GSI was, did partners get to a certain size. And then long-term, they would take this business in.

And really, as we exited 2007 and entered 2008, we had several of our top-ten partners that had contracts that were coming up over the next couple of years, two, three, four years. They really had to decide what they wanted to do long-term with their business.

And I think one of the things they are most proud at 2008 is that all of our big partners that went through this process decided that long-term GSI was the right business model for them, and that we could ultimately give them better capabilities and more scale and more expertise and what they could do on their own.

So if you look at the business today, we have never had more predictable revenue, more long-term deals. At the same time, we have never had a more diversified base of partners. I think our largest individual partners less than 10% of our non-GAAP net revenues.

And at the same time again, we extended so many of our big partners during 2008. So historically the question again, what are you going to do long-term. I think today, we look to proving to that, long-term people are going to be with GSI. This is the best business model the best way for them to purchase their e-commerce businesses.

Herman Leung - Deutsche Bank Securities

And last question I guess your debt is trading on $0.80 or $1, any chance on taking down some of that debt, and also on the balance sheet looks like that debt came down $40 million or so, is that just a shift in accounting or did you can you guys take down some debt there? Thanks.

Michael Conn

Yeah, I say as far as general uses of free cash flow. I think it's something that we continue to evaluate, and I think without any possibilities nor try to create the expectation that any one thing was going to happen.

I think obviously that type of thing that we would just discuss overtime as any thing would unfold. As far as the seasonality of debt, we did pay down the entire amount that was outstanding on our credit line at the end of the third quarter and during the fourth quarter. So as we generate cash in the fourth quarter, we pay that line down. And that's really just what the change was.

Herman Leung - Deutsche Bank Securities

Got it, thanks.


Your next question comes from the line of Mark May with Needham. Please proceed.

Mark May - Needham & Company

Okay. Thanks for taking my questions. I had a couple. The marketing services segment had, if I remember 27% EBITDA margins. Is that a sustainable level of profitability, or is that more a function of seasonality?

And can you help us quantify for modeling purposes roughly what the impact of Dick’s and Linens-N-Things will be on the GAAP and may be also non-GAAP revenue line and for the full year?

Michael Conn

So on the marketing services question, it's clearly a less seasonal business than overall business but there is a seasonality to it, particularly because we have good businesses and performance based marketing email release, performance based marketing, we have a good search marketing practice.

Those clearly see an up tick in the fourth quarter. So I think if you look at the margin that we achieved for the year, which was I think 17.6%, I think that's a good base to look at. I think that's the margin that we can grow overtime. But I would look at really that annual margin in terms of how I would model that going forward.

We are not breaking out any client specific impacts on the business. So certainly all of those as you mentioned are drags for revenue perspective, but certainly, I would look at the first quarter guidance as reflection of kind of the run rate that we think those have on us.

Mark May - Needham & Company

Okay, and a couple of quick follow-ups. Historically your sales and marketing line increased pretty materially from the third to the fourth quarter. It was much less though this year. Is that more of a function than years past you are making investments that you have now reached a certain level of scale, or was there something else going on there? I guess there ultimately the question is how sustainable is the kind of leverage that you had in that particularly line item, you have going forward?

Michael Conn

Sure, I think a lot of it reflects just the changing nature of the business as we become much more service provider, much less principal operator with our business. And that line item really reflects money that we spend to service our owned inventory business.

So that trend that you see there is something that I really would expect to be sustainable and I think it was in absolutely dollars down year-over-year in the fourth quarter, and I think that you will likely see that again in all 2009, compared to 2008.

I think some of that needs to really be taken into account when you think some of the changing revenue dynamics of the company. And so you as you look at the net revenue guidance and we are saying it's likely to be down moderately for the year, and it's guided down a little bit in the first quarter.

So reverse of that is, if you look at the non-GAAP net revenue which is really an important metric in terms of how we mange the business internally, because it strips outs some of those factors. And that's a number that grew more quickly than net revenues in 2008. And is a metric that we would expect to increase in 2009 despite the fact that net revenues would be down slightly.

Mark May - Needham & Company

And can I get away with asking one more?

Michael Conn


Mark May - Needham & Company

Okay, the way that I modeled historically on your services businesses taking an estimate of GMB and then some flat at least simplistically looking at it?

One question I have is the way your contracts are set up for modeling purposes, in the fourth quarter we have heavy seasonality on the GMB side does that fee in essence kind of get ratcheted down on a quarter-by-quarter basis, particularly in the fourth quarter?

Michael Conn

It does not, so it is really typically going to be something that's just fairly steady throughout, so there is not a big change in that dynamics.

Mark May - Needham & Company

Okay thanks


Your next question comes from the line of Colin Sebastian with Lazard Capital Markets. Please proceed.

Paul Beaver - Lazard Capital Markets

Hi this is Paul Beaver for Colin, thank you for taking my question. How do guys characterize the demand for interactive marketing services given the macro environment? And then secondly, does the termination of the Innotrac acquisition require any new investments and fulfillments of call center capacity this year?

Michael Conn

Sure I’ll answer the first question. I think demand for the interactive services has been really as good as we could have ever hoped it to be, and maybe even better, I think which really worked well. And really the thesis behind the e-Dialog acquisition and the building of the gsi interactive, business was that we could provide great walk-in services that were fully integrated into our e-commerce services offering and really provide a better experience to our partner and what they could do if they were not picked individual companies to work with.

I think what we have seen as we have gone through many of the big extensions that we have done in 2008 is a desire by the partner to add many more incremental services. So if you look a deal that we announced in the fourth quarter, GNC, they added GSI as their email provider and their agency of record, when we did the new 15-year deal with Dick’s Sporting Goods, they also named us agency of record.

When we did the big expansion with Aeropostale, they named us as their email partner, so I think we have seen an amazing ability to be able to cross-sell interactive marketing services to our partners, and then have those services provide more transaction to our partners.

So, I think the strategic rationale behind really building a big marketing services business is going to really pay off for GSI, and if we are going to service our partners better and we are not only going to make money by offering these interactive services, but also by creating greater transactions and taking a percentage of this revenues.

Michael Rubin

Hey, Paul with respect to the Innotrac termination, we don't see that creating any additional investment needs in 2009. Thinking all the things I noted is certainly Linen n Things and BabyCenter freed up some capacity, so we’re well positioned from a capacity perspective for the year.

Colin Sebastian - Lazard Capital Markets

Great, thanks for taking my question.


This concludes today's Q&A session. I will now turn the call back over to Mr. Michael Conn for closing remarks.

Michael Conn

I just want to thank everybody for joining us today, and I look forward to reporting to you throughout 2009.


Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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