GSI Commerce, Inc. Q1 2006 Earnings Conference Call Transcript (GSIC)

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GSI Commerce, Inc. (NASDAQ:GSIC)

Q1 2006 Earnings Conference Call

April 26th 2006, 4:45 PM.

Executives

Michael Conn, Senior Vice President, Chief Financial Officer

Michael Rubin, Chairman, Chief Executive Officer

Analysts

Anthony Noto, Goldman Sachs

Paul Keung, CIBC

Shawn Milne, Friedman, Billings, Ramsey

Colin Sebastian, Lazard Capital Markets

Jim Friedland, SG Cowen

Robert Peck, Bear Stearns

Mark May, Needham & Company

Operator

Good day, ladies and gentlemen, thank you for standing by and welcome to the fiscal 2006 First Quarter Operating Results of GSI Commerce. My name is Carlo and I will be your coordinator for today's presentation. Operator Instructions As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today’s call, Mr. Michael Conn, GSI Commerce's Chief Financial Officer. Please proceed, sir.

Michael Conn, Senior Vice President, Chief Financial Officer

Thank you, and good afternoon everyone. Welcome to GSI's call for first quarter ended April 1, 2006. This is Michael Conn, I'm GSI's Chief Financial Officer, and I'm here with Michael Rubin, our CEO.

Let me first comment 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”, 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 filings with the SEC. GSI Commerce expressly disclaims any intent or obligation to update these forward-looking statements.

During this call, we will also present certain non-GAAP financial measures, including adjusted EBITDA and merchandise sales and certain ratios that use these measures. In our Form 8-K, which is located on our website at http://www.gsicommerce.com/ in the Press Room section, you will find our definitions 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.

With that let me start by saying that the year is really off to a great start with strong first quarter results, three partner launches and really good underlying business momentum. Net revenue on a GAAP basis was up 25% versus LY and was above plan. Non-GAAP merchandise sales, which is total transaction volumes through our platform increased 40% versus LY.

Sales momentum was well-balanced throughout the quarter with notable drivers including January clearance activity, gift card redemptions, New Year's resolution-related health and wellness purchases, the Pittsburgh Steelers Superbowl win and Valentine's Day gift giving. Sales trends were also boosted by launches of two additional partners, while the NFL launch which occurred at very end of the quarter, did not have an impact on the quarter's results. Overall, our sales growth reflected strong comp. store trends and solid contribution from new stores that were not on our platform for the entirety of the first quarter of 2005.

From a category standpoint, sporting goods, apparel, and health and beauty were our strongest performers. Our largest category, which is sporting goods, grew 42% for the quarter and represented 35% of merchandise sales with the same percentage as it represented last year. No other category accounted for more than 20% of merchandise sales in the period. We saw favorable trends in terms of partner concentration, as our top five partners represented 47% of merchandise sales in the quarter compared to 60% in the first quarter of last year. Our largest partner accounted for 13% of first quarter merchandise sales volume, and that compares to our largest partner representing 24% of first quarter merchandise sales volume last year.

Product sales, which is from our owned inventory, represented 48% of merchandise sales in the first quarter and that compares to 56% from last year. The 20% growth that we experienced in owned inventory sales was achieved with average inventory of $33 million this year, versus average inventory of $36 million last year.

Our gross margins were very strong in the quarter, driven by an improvement in owned inventory margins, as well as strong service fee growth. Owned inventory margins benefited from a favorable mix between sporting goods and electronics, as well as improved buying terms within our sporting goods business, which is driven by the growth of that business. Service fee growth benefited from strong merchandise sales increases for non-inventory owned partners as well as momentum in our marketing services efforts.

Looking at our sales and marketing expenses, we saw good trends in terms of variable operating efficiency in both our fulfillment and customer care operations as we continue to benefit from increased sale. On the last call, I noted some level of disappointment with operational execution from a cost perspective, and I'm excited to note that first quarter saw excellent performance in this area. Purchasing efficiencies also positively impacted variable expenses in areas such as packaging, supplies and communication costs that are also included in sales and marketing expense. In addition, as a portion of our sales and marketing expense, such as account management is fixed in nature, the strong sales trends create a leveraging effect on this line item.

Offsetting some of the favorable trends in sales and marketing is the amount that GSI subsidizes for freight and online marketing, especially in our sporting goods business that has a little bit of bump planned for the quarter, but we view the ROI associated with this incremental spend as favorable. Consistent with our expectations, product development expense, which is where we expense our technology, was up meaningfully versus last year with an increase of 25% as we continue to invest to enhance our underlying technology architecture, enhance our suite of features and functions, and launch new partners. While overall product development spending is up year-over-year, we're seeing some benefits from purchasing efficiencies in the technology area. I would also note that while we saw some delays in cost overruns on major launches last year, a normal accomplishment in 1Q was the signing and subsequent launch of the NFL in the same quarter, with an on-time and on-budget performance.

Looking at G&A expenses, which were up year-over-year, and that largely reflects growth in our overall business and includes increased headcount in finance and human resources, and also increased legal and tax expenses were factors in the increase in G&A expense in the quarter.

Also as part of our quarterly results, we recorded a charge of $1.6 million related to our investment in Odimo Incorporated. Odimo is a public company that operates in the e-commerce jewelry sector. We received the shares in 2002 when we sold certain assets of ashford.com to Odimo and we valued them at the time based on the private value of the shares. The impairment of non-cash is not something we view as reflective of our operating trends. Prior to the charge, (indiscernible) investment was $2.9 million and the charge takes it down to $1.3 million, which is the market value at the end of the quarter.

Overall, adjusted EBITDA, which excludes the impairment charge I just discussed, grew 126% for the quarter to $2.7 million, and that's up from $1.2 million last year. Adjusted EBITDA as a percentage of net revenue increased from 1.3% to 2.4%. Our net loss for the quarter was $4.4 million and that's versus a net loss last year of $1.6 million. However, if you exclude the stock-based compensation and the impairment charge related to Odimo, our net loss would have been narrower than a year ago. I think, as people are seeing it across the board, our increase in stock-based compensation largely reflects the adoption of 123R, and the fact we had a benefit last year from the mark to market of variably priced options. Under 123-R we'll no longer have the volatility in our stock-based compensation caused by mark to market of our variably priced options.

Looking at our balance sheet on a year-over-year basis, cash and marketable securities increased $89 million from $43.2 million to $132.1 million largely as a result of approximately $80 million raised last year in our concurrent stock and convertible debt offering. And our typical negative season working capital swing in the quarter, which follows our seasonal fourth quarter cash build. Also there are a few minor items which impacted cash in the quarter, including closing the acquisition of Aspherio, making an investment in a private company called WebCollage, and also the receipt of a grant from the State of Pennsylvania, and also receipt of cash from stock options. These four items essentially netted themselves out. As I mentioned, we had a good performance in inventory, which declined year-over-year, again strong growth in inventory sales, and annualized inventory turns for the quarter were 6.6 versus 5.4 last year.

Turning to our guidance, we're raising the low end of our EBITDA range for the year to $32 million for a new range of $32 million to $35 million compared to our previous guidance of $30 million to $35 million. This reflects the upside in Q1 and relatively consistent expectations for the balance of the year. Although we expect higher sales, offset somewhat by more investment spending particularly in technology as we're adding more resources to further enhance the platform, and also with the expected opening of the second call center this year, and because we're expanding our in-house product customization capabilities.

With respect to the call center, while we believe we could handle our current business with our existing call center plus work-at-home agents which we already used and some third-party support, the strength of our business allows us to take advantage of current market opportunities in the call center area to open a second call center to support our anticipated growth. This will also give us the added advantage of having additional redundancies from a call center perspective, which we believe is a value to our partners, as well as our overall business.

With respect to incremental investments in customization efforts, we've talked about for a while that we view product customization as a meaningful e-commerce trend and something that's a strategic priority to the company. With the addition of the NFL business, it really gives a lot of incremental volume on the licensed product side and that really affords us the opportunity to invest in increased overall customization capabilities. Also as a side note on the investment front, although not something that won't impact this year, is that we have begun a search for a third fulfillment center. And consistent with our expectations, we do expect to now open a third fulfillment center in 2007.

If you look at our guidance range for net income, the top end has come down a little bit. And that really reflects the impairment charge related to Odimo, plus as we invest a little bit more we're expecting a little big higher depreciation expense, and also slightly higher stock-based compensation expense.

The second quarter, we're expecting to see similar volume levels as 1Q, which is consistent with our typical seasonality. Although we expect higher fixed expense levels in 1Q as our investment spending for the year starts to kick-in more fully than we saw in the first quarter. As a result, we expect to see slightly lower levels of adjusted EBITDA in the second quarter than we saw in the first quarter. Although these expectations for second quarter are the same as we had when we first issued our guidance for the full year on our last earnings call.

With that, let me turn it over to Michael Rubin.

Michael Rubin, Chairman, Chief Executive Officer

Thanks, Mike. Overall, I'm very pleased with our performance for the first quarter and outstanding growth we continue to exhibit. We beat the top end of our net revenue guidance and the top end of our merchandise sales guidance as well. Additionally, our adjusted EBITDA was significantly higher than forecast, and had it not been for impairment charge we took related to Odimo, we would have had been ahead of our net guidance as well. The first quarter's results have provided us with a great start to this year, and I remain encouraged by our positive business momentum and our strong pipeline of prospective partners.

Operationally, the first quarter ran smoothly. All of the sites we launched during last year's crunch of the third and early fourth quarters, along with the three partner sites we launched this year are performing well on our platform. It is also important to continue to highlight that GSI Commerce continues to grow faster than e-commerce. Our merchandise sales climbed 40% in the first quarter fiscal 2006 compared to first quarter of fiscal 2005. This is more than doubled to 2005 from 2006, 18% estimated annual growth rate of the online retail sales projected by Jupiter Research. Today, we updated our guidance and increased our estimated annual merchandise sales from our February guidance.

In April, we signed an e-commerce agreement with NFL and launched a new web store at shopnfl.com. Not only are we operating the site at shopnfl.com, we're also managing the production and mailing of the NFL Shop catalog and managing merchandise sales for NFL's direct response television promotions. Given the historic success we've had with professional sports organizations and leagues, Major League Baseball, NHL, and NASCAR, the NFL/GSI partnership is an exceptional fit for both organizations.

Also in the sporting goods front, this quarter we began to sell Nike merchandise on tibs sporting goods website. Adding this merchandise is a great example of how we continue to find ways to grow our sporting goods business.

During the quarter, we announced our first new international partner, Iomega International, since closing our acquisition of Aspherio in January. In the second quarter, we expect to launch web stores for Iomega in the UK, Ireland, France, Germany, Italy, Netherlands, Spain and Switzerland, as well as a multi-lingual e-commerce store that will service the remainder of Europe, Israel and South Africa. The platform will support multiple languages, currencies and payment methods. This was a nice win for our international platform and we remain committed to offering this capability to current and perspective partners that want to expand e-commerce reach with online stores outside of North America, or in the case of our Iomega, enhance an existing international e-commerce business.

As we continue our growth, our largest challenge remains managing this growth. To pursue the opportunities in front of us, we must keep pace with the competitive landscape, manage risk and make strategic investments when we see opportunities to move ahead of the curve and improve our e-commerce offering. Part of that means continuing to hire talented people, forging new alliances and extending the reach and the services offered by our marketing services organization.

An example of this is that during the quarter, we made a minority investment and created an alliance with WebCollage, a content syndication company. We anticipate this alliance will further increase the value of our solution by offering our partners more control, a broader scope and larger scale for providing and receiving online brand of product content. Why is this important? (indiscernible) have noted that retailers are investing in online content because it's an effective tool that influence drive to sales, regardless of the purchase channel. The Online Publishers Association found that more than 90% of people ages 18 to 54 use the web to research product online. When you look at the trends, we believe that by adding a content syndication capability to our platform, our partners will easily be able to add important informational content about branded products and their web stores, which in turn we believe will drive more sales. Adding this premium service is an example of how our marketing services organization helps to strengthen the company's value proposition, which is to help our partners grow their direct-to-consumer business faster and more profitably than they could do on their own.

As we build a leadership position in e-commerce, the company continues to expand its base of talent. To accommodate that growth, we purchased a new corporate headquarters in 2004. Since we purchased the headquarters, which will be two years ago this June, we've added more than 100 people in headquarters. This is important to know because as a result of planning for growth, we were able to achieve state grants totaling approximately $3.75 million from the Commonwealth of Pennsylvania for economic development and employee job training. Currently, the Company is using the first round of the approved funding to train eligible employees in several areas including management, leadership, communication, and programming.

Before we take questions, I want to take a few minutes to provide some interesting tidbits from the quarter. These are anecdotal items that demonstrate the power of our e-commerce platform. Last quarter, over first quarter sales of fitness and exercise equipment from our top four vendors showed increases ranging from 83% to 148%.

Sales of Superbowl related merchandise, which did not include the NFL because the site was not launched until the end of the first quarter, and was accomplished through our other sporting goods sites such as Dicks Sporting Goods and the Sports Authority topped $2 million in the quarter. Prior to our stream sports category, led by Hellys Skateboard and In-line Skates did very well as sales were up almost 80% quarter-over-quarter.

Just a few weeks ago, we helped Ace Hardware launch a micro site for promotion Ace is doing in conjunction with NBC's hit show, The Apprentice. The site highlights the Apprentice's first season winner, Bill Ransick, and he tours high schools across America on behalf of Ace Hardware. The site also allows visitors to enter the Apprent/Ace Sweepstakes, where the winner receives a trip for two to see the final episode of the show.

First quarter over first quarter utilizing our marketing services group as its agency, one of our partners generated 71% more revenue through the use of paid search, while spending 25% less to achieve the increased results. This marks an overall increased return on paid search of 115% for this partner.

March 13th was the first quarter's peak day, and we recorded more than 4.6 million web store visits on March 13th. We mailed approximately 5.4 million catalogs for our partners during the first quarter. First quarter 2006 over first quarter 2005, the shipped unit volume of our two fulfillment centers in Kentucky grew by 60%. To support the fulfillment business of new partners, we added during the last 12 months, we added more than 92,000 product bins during this year's first quarter. This was 20% of total bins.

In summary, the results we achieved for the first quarter of the fiscal year are good. And we're very encouraged by what we see in front of us, both in terms of our continued revenue growth and the pipeline of prospects. As we move forward, we will continue to build ahead of our anticipated growth and keep an eye on improving efficiencies wherever and when possible. And with that, I would like to turn the call over to you for questions.

Question-and-Answer Session

Operator

Operator Instructions And sir, our first question is from the line of Anthony Noto with Goldman Sachs.

Q - Anthony Noto

Thank you very much. Michael, Michael, I have a couple of questions, but I'll ask them one at a time. The first question is, you're obviously doing extremely well in beating your revenue and profitability in the first quarter with significant gross profit growth, which is the thing that was most notable to me. I just wonder as you go into the second quarter and you increase your investments, could you give us a little bit of clarity of when the expenses that you indicate here in the increased investments will hit? And if any of those expenses have anything to do with entering an entirely new category like toys?

A - Michael Conn

I think that the expenses that we talked about is acting incrementally, we saw start in the first quarter, we'll see them more in the back half of the year spread through the quarters. I think that they're focused on the general areas that we've talked about investing in, including the technology platform, including marketing services, including opening new and now we've added opening a new call center. So, beyond getting more specific than that, I think it's an overall support of growth for the business.

Q - Anthony Noto

Right, well, let me ask you another way. Has there been a request for a proposal from Toys 'R Us?

A - Michael Conn

Yeah, in general -- and we're just consistent with how we've always handled it. We don't want to comment on any specific prospective partner or situation out there, I think it's always been our practice and something we plan to stick with.

Q - Anthony Noto

Fair enough. The other question I had was maybe Michael Rubin you could comment on. Could you give us more detail on the marketing services? There was a comment in the introductory remarks that that business is ramping nicely. Could you talk about some of the products and maybe some of the additional opportunities there? And then finally, while the overall results are very strong, the other revenue line declined and I was wondering why?

A - Michael Rubin

Sure, I'll hit the first part of the question and leave the last part to Michael. As far as the marketing services definitely Q1 was a very strong quarter. And we're seeing tremendous momentum, I think year-over-year and really quarter-over-quarter in just more of our partners working with us on these services, both from a website development perspective, from a placing online marketing, from a CRM perspective, from a GSI Studios where we do a lot of content, I mean all of these area are really growing nicely. Last year, as we indicated, when we started this business, it was a pretty small business and a first year business. And the business will have significant growth this year. And again, add strategic value to our partners, which is probably the thing that we're most excited about because it's just making our partners that much more aligned with us, getting that much more consistent with the business and really investing and building, ultimately, a more successful business and one that is more integrated.

A - Michael Conn

And just on the other product revenue line, something I think we talked a little bit about in the last call. I think there's a particular driver of that line for us, which is the electronics products that we own, and we'd mentioned a year ago in first quarter, just having a really strong quarter base, really very product-specific driven, so, it's a tough anniversary quarter. So I think if you look at the overall results, both merchandise sales and sports, and other categories I think you can see really pretty well balanced, strong growth reflective of just, I think, good job on the executional front for us, but also really good trends in e-commerce. I think even with that though, when you get down to specifics you're always going to have ups and downs in any given quarter at the partner level based on dynamics in new businesses. And there's a lot of that drove the other product revenue for us this quarter.

Q - Anthony Noto

Got it, thank you.

Operator

And sir, our next question is from the line of Paul Keung with CIBC.

Q - Paul Keung

Good afternoon. A question about this the increase spending. We've seen it with the Iomega deal, the number and it's an extension to your acquisition materials. I was wondering, how much of your incremental expenditures is really a function of moving more internationally and abroad? Is that part of the reason for the increased spending? Can you quantify that? And then another follow-up.

A - Michael Conn

Sure. The increased spending this year is probably a few million dollars over and above what we had projected last quarter, say $2 million to $3 million. And that's really, from my perspective one of the things that I've talked about consistently over the past year that our goal this year is kind of a, guidance is $30 million to $35 million, and we certainly wanted to achieve our guidance today, kind of reconfirm that, it’s a low and up a little bit. But certainly, it's been our desire if we could to continue to make certain investments. So I think just based on the strength of the business and being really ahead of plan, both in the first quarter and that trend will continue, we want to take that opportunity to just move certain investments up. So it's again $2 million to $3 million. It's because we have the money to spend based on the strength of the business to beat Q1 in kind of what we were kind of, the run rate we were running on. And it's really between the call center and the technology platform and bringing all of the customization in-house. And all of these are probably things that we plan to do, we just didn't think we had the opportunity to do them as quickly as we now are going to be able to do them.

Q - Paul Keung

Is there still an ongoing list and it could go on too in the next quarter, if sales continue at this pace?

A - Michael Conn

I mean I think certainly -- absolutely it could. And certainly, we're very committed and have every intention of making the financial numbers that we've set out. But certainly business just continues to be very strong. There certainly could be other things that we could continue to move up that will just better position us for the future, absolutely.

Q - Paul Keung

Okay. And then the other question on sort of the gross margins and trends in e-commerce, whether the Amazon or its across the board, public or private companies, mentionings of either strategic moves or aggressive pricing, whereby gross margins in many categories, and sporting goods is one of them, have been coming down. So I'm curious if you could give me color in terms of what trends are you seeing on a gross margin line? And to what extent is that something that you've driven? Or to the extent it's market driven?

A - Michael Rubin

I think that we've seen real strength in gross margins. I think if you look at our product sales, of which the biggest component is sporting goods. We're seeing real positive year-over-year trends there. And I think that for us, it's a reflection of, as we become a bigger business, we're able to get purchasing efficiencies, doing more business with vendors and we're seeing that flow through. And I think that, for our business in general, if you've looked at sort of what has driven purchases with the types of companies that we're working with, we've really always played much more into the e-commerce trends of consumers purchasing for convenience, consumers purchasing for unique products. So our platform has really been less about the deep discounting that other e-commerce platforms are about. I think that's helped us to have strong gross margin trends on the product sales side. The other real benefit that we have that really drives a tailwind from a gross margin perspective for us has been the growth of service fees. And that's both the non-owned inventory partners, which is where we've added more partners, certainly over the last few years. But also now, as we start to see marketing services accelerate, that also really provides positive benefit to service fees, which that in turn benefits our gross margins.

Q - Paul Keung

Okay, and one more quick housekeeping, the state grant that you talked about, how is that being flowed into the P&L and into your model?

A - Michael Conn

The state grant, the $3 million, which is the biggest piece of the state grant was recorded as an offset to fixed assets from the balance sheet, so, and really attached to the building and leasehold improvements. So it will lead into the income statement over a long period of time as reduced depreciation and amortization. But really an immaterial amount in any given year just based on that the life of those assets being as long as they are, 15 years on leasehold improvements and 30 years on the building. So, really not a material P&L impact as a result of that. The training money that we received really is just, it affords us the ability to do training for employees without having an expense at the P&L, but there's really no P&L impact because that's incremental training that we're doing where there's just not an expense for it so, for both cases really effectively no P&L impact.

Q - Paul Keung

Thank you.

Operator

And sir our next question is from the line of Shawn Milne with Friedman, Billings, Ramsey.

Q - Shawn Milne

Good afternoon, and good quarter. I just have a couple of questions. You had previously, when you had given your full year guidance, you had talked about having some room in your model for new businesses or for expectations for new partners. If you look at the growth in the quarter, which was much better than expected and even without the Palm being down and you've added the NFL, which is a pretty sizeable business on its own. Seems to me like that -- if you can quantify what you think the potential gap is that you need to fill with new partners, if there's any left? And secondly, on the Nike new relationship which at least you rolled out on Dicks, any lift from that? Any early color on that relationship? Thanks.

A - Michael Rubin

Let me take the first part the question. I'll let Michael answer the second piece. As far as an from an expectation perspective, we believe at this point in time that we can hit the guidance that we have out there without signing any additional partners. And I think that, there really with the strength of the year that we've gotten off to from a pipeline and signing perspective, we really feel that we're there with the guidance that we have out there. So, you are correct as we look at last quarter, the initial guidance we put out there we did have sort of some plug for new business in there. But that's really -- that's something that we consider filled at this point in time. So something we obviously feel good about.

A - Michael Conn

And as it relates to Nike, Dick's Sporting Goods is our first sporting goods partner to get started with Nike, and we started with them probably sometime in late March. And certainly, it's exciting in that, one of the things that I think we're most positive about is that when we look at the Nike sales, we're finding it to be just about all incremental. When we measure the categories that Nike supplies merchandise in primarily footwear, and you look at the rest of the footwear business, there's been no impact to our existing business and all the Nike sales had gone up, really for the most part been incremental. So, we feel good about it, certainly Nike and Dick's is the first partner that is currently we are working with. We are hopeful that we work with additional partners in the future but certainly definitely feel good about the relationship and what it means from a sales potential perspective.

Q - Shawn Milne

Just one follow-up. On the new partner front, if you think about my first question then, if there's no more gap to be filled, you've announced four partners this year. Michael, do you still have expectations of five to ten? Are you still leaning on the higher end, if you can just talk a little bit about the pipeline? Thanks.

A - Michael Rubin

Sure, the pipeline is – I feel like I've said this in the last couple of calls, but the pipeline is definitely as strong as it's ever been. We're certainly very comfortable with the five to ten partners. And certainly believe that it will be certainly at the high end of that range for how many partners we signed. There's always a little bit of flexibility and timing for when we launch partners. But certainly our expectation would be to in calendar '06 to sign five to ten partners, and hopefully we'll be at the high end. And certainly there could be some additional launches beyond what we've already forecasted for in the existing guidance.

Q - Shawn Milne

Thanks a lot.

A - Michael Rubin

Thanks, Shawn.

Operator

And sir, our next question is from the line of Colin Sebastian with Lazard Capital Markets.

Q - Colin Sebastian

Good afternoon and good quarter. Curious if you could talk to some of the trends in the upfront costs of getting new partner and sites up in running? I guess particularly given that you might be bringing on some larger partners. And also I imagine partners are expecting more features and functionality now on their websites. And a couple of follow-ups, thanks.

A - Michael Rubin

Sure. I think as it relates to overall features and functions, it's one of the areas that we are strategically investing most heavily in the business. If you look at the incremental dollars that we kind of talked about that we were spending today, based on the strength of the business and our ability to do so. We made a big chunk of that spend was in technology, which is all in features and functions within our overall roadmap. Also within our thinking going to the next year we expect and it's already kind of in our road for financial plan to again meaningfully increase that, because we want to make sure that we're just moving the platform forward at the fastest possible pace. As it relates to specific costs for an individual partner, I would say the costs are at this point steady. They had gone up a little bit last year on an individual partner basis because we had to start to work with bigger partners. But I think now we have got experience working with pretty big partners, and I think the average cost of launch is pretty steady at this point. And I don't see, on average going up from this point forward.

Q - Colin Sebastian

Okay. And out of the five to ten new partners you expect to add this year, what do you anticipate the mix might be between say the big partners and then the smaller and mid size partners?

A - Michael Rubin

I think certainly the partners that we've announced so far, I think, are a good flavor, but certainly, the mix could always change. And when we always -- we're happy to give general outlooks on partners and the quantity, but certainly don't want to talk specifically about the mix or categories or specific partners.

Q - Colin Sebastian

Okay. And then lastly, anything you can talk about in terms of sales trends thus far in April? And I will get off line. Thank you.

A - Michael Conn

Yeah. And I think that if you look at what we talked about up front in the remarks, I said sales were pretty well-balanced throughout the quarter. And I think that we really sort of good trends throughout. And I think that we feel confident that we've seen a continuation of that so far. And I think that if you look at our overall merchandise sales, expectations and net revenue expectations for the year, I think you've seen them move up. So I think that's reflective of good overall trends that we're seeing in the business.

Q - Colin Sebastian

Great, congratulations.

A - Michael Rubin

Thank you.

Operator

And we have a question from the line of Jim Friedland with SG Cowen.

Q - Jim Friedland

Thanks, question on competition in the market. Amazon has had a couple wins in the quarter, I think Timex was one and then there was a European company, if you could talk about, are they getting more active? And what are you seeing on the competitive front? And then as a second part of that question, so when you talk about some of these unique or these technologies, the new features that you're working on, are there some specific areas the things that's you're doing for customers that Amazon or other competitors just haven't rolled out yet or can't offer? Or is it just a question of somebody launching something and then the other guy's a fast follower and it's pretty much the quality of service that's getting you the contracts? Thanks.

A - Michael Rubin

Sure. As it relates to Amazon and the competitive front, Amazon's been a viable competitor for the last several years. And I think they continue to be a viable competitor, certainly we have a lot of respect for Amazon. But certainly believe that within the e-commerce platform and kind of outsourcing business, we certainly believe that we're the leader in the business by far and away. And we think that we continue to build our lead in the space. So while we have a lot of respect for Amazon, I think they do a good job, I think our leadership position is continuing to grow and the gap is widening relative to GSI versus Amazon and others. Certainly, there's always going to be competition, if it is not one company, there's always another. And that's just been the same way since we started the business in 1999. As it relates to new features and functions, I think there are a lot of things that we can do that other companies can't do. One of the things I'm most excited about are as a lot of companies try to start up and get into this business and new competitors try to come here. We're looking at an R&D budget that will be bigger, I think we're looking at a features and functions development budget and R&D budget that could be bigger than a lot of companies that are trying to get into space next year and their total revenue versus what we're going to spend in development. So that's what they were excited about, I think that our size and ability to invest really does matter. I think what it does is, put us in a real competitive advantage. And I think really we've been increasing our spending each year to building a better road map. And I think our size is really helping us now and it's just going help us to further the gap. I've always said since we started this business, the name -- what really would make a success would be scale. And today we are roughly $1 billion dollars in transactions going to the platform versus $700 million last year and a run rate that continues to grow very quickly, all of that is helping us to invest more in the platform and going to continue to further our leadership position.

Q - Jim Friedland

Okay great, thanks a lot.

Operator

And sir, our next question is from the line of Robert Peck with Bear Stearns.

Q - Robert Peck

Hey guys, congratulations on good quarter. Michael, I wanted to ask you a bigger picture question. As you think about where all of the various internet companies are heading and how they're colliding more and more into each other, that you get the idea of consolidation or becoming bigger parts of bigger media companies. As far as your relationship with Liberty -- does it make any sense in the future to remove the poison pill? Is there a chance there for an acquisition? How do you look at the Company's ultimate future? Is it ultimately a part of a larger company? Or do you think independence, at least in the next 12, 18 months makes the most sense?

A - Michael Rubin

Sure. I mean I think the way certainly it's our job as a public company to, it's always our fiduciary responsibility to always evaluate anything that's put in front of us. But it’s certainly my belief, and I believe the Board's belief that we've worked really hard over the last seven years to kind of set ourselves up for what I believe over the next several years is going to be incredible growth and incredible leverage. And I believe that being an independent company for the foreseeable future, next couple of years is definitely how we'll create the most value for shareholders. It doesn't mean that couldn't change at anytime but that’s definitely what my belief is today. Certainly Liberty, who is our largest shareholder, is a great partner and a strategic investor. And we're thrilled to have them as a 20% owner of the business. We just don't believe today based on how much upside we believe is in the business, that being part of a bigger company makes sense. Again, anything can change at anytime. But we're certainly very focused on growing the business to be a bigger percentage of overall e-commerce. And being a multi-billion dollars of business and going through our platform, and at the same time getting the operating leverage that should come with that.

Q - Robert Peck

Could you maybe quickly comment on the financial advisory firm you hired for the acquisition in '06, Project Blueroot? Could you talk about, you probably can't reveal what that company was, but what aspect it would bring or would have brought to GSI. Was it more of a tech company? More of something related to expansion? Can you comment on what you were looking at there? Or what would have been a synergistic fit?

A - Michael Rubin

Sure. It was a company that would have helped to give us more scale and operating efficiencies within part of our business. And that's really the way we're approaching it.

Q - Robert Peck

Okay and as far as you know, is there anything that would prevent any sort of Toys 'R Us announcement until they settle the litigation with Amazon?

A - Michael Rubin

Again, it's always been our policy, since we started the business not to comment on anything specific to any partners.

Q - Robert Peck

Well congratulations, good quarter.

A - Michael Rubin

Thank you.

Operator

Operator Instructions And sir, we have a question from the line of Mark May with Needham & Company.

Q - Mark May

Thanks for taking my question. I recall on the last earnings call that you talked at least for a short time about how your incremental fixed overhead investments tended to occur earlier in the year. I apologize I wasn't able to listen to the entire part of this call, you may have addressed this, but, and you were talking about seasonality in your investments in the business. It looks as though from the numbers that maybe you've pushed some of these investments out. And I'm just wondering if you could elaborate a little bit about that? And the second question would have to be with CapEx. It was, I believe, between $3 million to $4 million in the quarter and you've, for a number of quarters now reported at least $6 and in some quarters $10 million or $11 million in EBITDA. I guess if you could talk a little bit about that number if it was artificially low for some reason? And what your expectations for CapEx for the full year? Thanks.

A - Michael Conn

Sure, I think as far as investments, I wouldn't say we pushed anything out, I think we're on our typical seasonality from an investment perspective, which really sees things hit the hardest in the second and third quarters. And I think as you go into every year from a planning perspective, it always takes a little bit of time for investments to ramp-up. That's not really outside of what we expected or would see in the past. I think in terms of incremental investments, if we've added some new investments or accrued some new investments that weren't in our original plan and those will hit later in the year, but still really in advance of the fourth quarter just based on the seasonality of our business, that's really where we need to get things in place. So, I think we have added to investments, we're not seeing anything different from a seasonality perspective. I think, again, because that seasonality and taking a little bit time to get going, that's where you see a little bit less CapEx in the first quarter for us this year. We still expect to be -- have a significant capital spending year. We had originally guided to $25 to $30 with the incremental investments we're making, there's a capital component to those as well. We're looking for $28 to $30 right now. So really, actually just a little bit higher on the low end of the range than we were before.

Q - Mark May

Okay. Thanks for answering my question, appreciate it.

A - Michael Conn

Sure.

Operator

And sir, we have no further questions. Back over to the group for any further comments.

Michael Rubin, Chairman, Chief Executive Officer

Thanks everybody for joining us and look forward to talking to you next quarter.

Operator

Ladies and gentlemen, we thank you. This concludes today's presentation and conference call for the Fiscal 2006 First Quarter Operating Results of GSI Commerce. Thank you for your participation and interests. And have a good evening.

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