Carparts.Com Inc (PRTS) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the U.S. Auto Parts First Quarter 2011 Earnings Conference Call. During today's presentation all parties will be placed in a listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions). This conference is being recorded today Monday, May 2nd of 2011.

Now I would like to turn the conference over to Miss Shannon Roarke. Please go ahead ma'am.

Welcome to U.S. Auto Parts first quarter 2011 conference call. On the call today from the Company are Shane Evangelist, Chief Executive Officer and Ted Sanders, Chief Financial Officer.

By now everyone should have access to the first quarter 2011 earnings release, which went out today at approximately 4 PM Eastern time. If you have not received your release it is available on the Investor Relations portion of the U.S. Auto Parts' website at usautoparts.net by clicking on the U.S. Auto Parts Investor Relations tab. This call is being webcast and a replay will be available on the Company's website through May 16th, 2011.

Before we begin, we would like to remind everyone that the prepared remarks contain certain forward-looking statements and management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance and speak only as of the date hereof. We refer all of you to the risks factors contained in U.S. Auto Parts annual report on Form 10-K and quarterly reports on form 10-Q filed with the Securities and Exchange Commission for a more detailed discussion on the factors that can cause actual results to differ materially from those projected in any forward-looking statements. U.S. Auto Parts assumes no obligation to revise any forward-looking projections that may be made in today's release or call.

Please note that on today's call, in addition to discussing the GAAP financial results and the outlook for the Company, the following non-GAAP financial measures will be discussed; EBITDA and adjusted EBITDA. An explanation of U.S. Auto Parts use of these non-GAAP financial measures in this call and the reconciliation between GAAP and non-GAAP measure required by SEC regulation G is included in U.S. Auto Parts' press release today, which again can be found on the Investor Relation's section of the Company's website.

The non-GAAP information is not a substitute for any performance measure derived in accordance with GAAP and the use of such non-GAAP measures have limitations, which are detailed in the Company's press release.

With that, I would like to now turn the call over to Ted Sanders.

Thank you, Shannon. Unless otherwise stated, this quarter refers to consolidated Q1, 2011 and last year refers to Q1, 2010 and comparisons are Q1, 2011 compared with Q1, 2010. Legacy business refers to U.S. Auto Parts exclusive of J.C. Whitney. Also, percentage and basis points discussed are calculated using net sales. However, for advertising we'll discuss comparing net Internet sales.

Adjusted EBITDA for this quarter was $6.7 million compared to adjusted EBITDA of $6.1 million last year. Adjusted EBITDA for this quarter was negatively impacted by an estimated $900,000 from eBay policy changes that reduced online marketplace sales for this quarter. Adjusted EBITDA excludes non-cash, share-based compensation expense of $681,000 this quarter and $860,000 last year.

Adjusted EBITDA for our legacy business was $6.5 million, up 6.3% from last year, exclusive of legal expenses to protect our intellectual property in both years. Adjusted EBITDA for the quarter for J.C. Whitney was $200,000 exclusive of $1.3 million of restructuring and transaction related expenses.

This quarter's net sales were $87 million compared to $56.3 million last year. Legacy sales of $63.8 million were up 13.3% over last year resulting from a 13.5% increase in online sales and an 11.4% increase in off-line sales. Had our online market place channel not been impacted by eBay policy changes, legacy sales for this quarter would have been $3 million higher, up 18.7% over last year. The increase in net sales resulted from an 11% increase in conversion an 8% increase in traffic and a 3% increase in revenue capture, partially offset by a 3% decline in AOV.

This quarter's gross margin was 35%, down from last year's 35.2%. Legacy margin was 34.6%, down 60 basis points from last year but increased 120 basis points from Q4 resulting from the seasonal mix shift and pricing initiatives that we discussed on last quarter's call. The decline in legacy margin for this quarter compared with last year resulted from a mix shift to branded product because of faster growth rates.

This quarter's marketing expense excluding advertising was 7.4%, up from last year's 7%. Legacy marketing expense exclusive of advertising was 7.1%, an increase of 10 basis points from last year resulting from higher amortization costs related to software deployments. This quarter's advertising, which includes online and catalogues, was 8.9% of Internet and catalogue sales. Legacy advertising expense was 6.6%, up 20 basis points from last year.

This quarter's general and administrative expense, which includes 1.4% of Whitney integration and restructuring expenses, was 9.5% down from last year's 10.2%. Legacy G&A expense was 8.3%, down 190 basis points from last year's 10.2% because of fixed-cost leverage on higher sales.

Fulfillment expense was 5.8% this quarter, the same as last year. Legacy fee fulfillment was 6.1%, an increase of 30 basis points from last year because of higher depreciation and amortization expense.

Technology expense was 2.2%, up from 1.8% last year. Legacy telephone was 2% this quarter and our technology was 2% this quarter, up 20 basis points from last year from higher telephone and web hosting expenses from sales growth.

Visitors for the quarter were 41.1 million. Orders placed through our eCommerce channel this quarter was $702,000 and average order value was $125.00. Legacy visitors were 30.9 million, up 8% from last year. Legacy conversion was 1.64%, up 11% from last year. Legacy revenue capture was 87.1%, up 3% from last year and AOV was down 3% from last year.

This quarter's customer acquisition cost was $9.63. Legacy customer acquisition cost for the quarter was $5.95, a decrease of $0.18 or 3% from last year from more efficient advertising spend.

Turning to the balance sheet, quarter-end cash and securities were $24.1 million and debt was $22 million. Cash and cash equivalents and investments increased by $1.3 million over the previous quarter, primarily from improved results and reductions in inventory partially offset by debt repayments and capital expenditures including those related to the integration of J.C. Whitney.

Finally, we have filed an S-3 Shelf Registration statement today for $200 million. When the SEC declares the S-3 effective the Shelf will provide us with a flexible mechanism to access equity capital for the next three years. The size of our shelf, as a percentage of market cap, is the average for other public company filings. A Shelf is a common tool that prudent companies have in their toolbox should they desire to raise capital.

The timing of our filing is to minimize accountant and legal fees associated with filing a Shelf by leveraging work recently completed in conjunction with filing of our 10-K. Company currently has no immediate plans to take down the Shelf.

And, with that, I would like to turn the call over to Shane.

Thank you, Ted, and thanks to all for joining the call. We are extremely pleased to report the Company's strongest ever quarterly adjusted EBITDA results, especially given the aggressive rate of investment we make in the business. And, while I like our top line growth to match or exceed the growth rate results of previous quarters, I believe that over the long term it will.

Meanwhile, our earnings performance metrics are really starting to show good results. For example, our legacy business produced $6.5 million in adjusted EBITDA and a 10% adjusted EBITDA margin flow through. This is up sequentially from $3.7 million and a 6.7% flow through in our legacy business in the fourth quarter of 2010.

The incremental $8.8 million of sequential revenues flowed through at 32%. About a quarter of that incremental operating margin was a result of gross margin expansion and three-fourths was driven by fixed cost leverage.

We believe this demonstrates the scale of the business and the opportunity that lies ahead, as we continue to grow our legacy business. To further highlight the profitability opportunity that lies ahead, we have two means of improving profits that we believe are very attainable as we execute our plan for the rest of the year.

The first is completing the integration of WAG, which as we have stated in the past we believe will deliver over $2 million in quarterly adjusted EBITDA. In addition, we believe once we capture the new opportunity we are creating for eBay, [financial] results and an incremental $500,000 to $1 million in adjusted EBITDA per quarter. Taking these opportunities along with the quarter's results, one can see how the business could push $9 million to $10 million in first quarter adjusted EBITDA.

Continuing on the subject of profitability improvements, gross margin in the quarter for the legacy business increased sequentially by 120 basis points from fourth quarter of 2010. About a third of that was due to the mix shift from branded to private label and two-thirds was a result of optimized pricing.

Moving to revenue for the quarter, we ended the quarter in our legacy business up 13%. The quarter was really a tale of two stories. We began the quarter on a very strong note in our legacy business with year-over-year traffic up 10% and year-over-year website conversion up 13%, resulting in total comps being up 23% through end of February. We did see a decrease in traffic from Google in late February.

However, we also experienced an initial increase in conversion at the same time. Traffic basically went from up 10% on a year-over-year basis to flat year-over-year and website conversion initially increased 18% and then stabilized up 11% at the end of the quarter.

It's not unusual for our business to be impacted short term, both positively and negatively by algorithm changes and [surcharges]. In fact, one of our strengths is our agility and ability to react to these changes. Our team is working to keep our site fresh and unique and to address these types of changes. And, if history repeats itself, we should see the work we are doing now pay off in coming quarters.

I would also like to reiterate our strategy through our business continues to be focused on improving the end-to-end customer experience through better front-end navigation as well as great customer service and fast shipping. I would add here that the Better Business Bureau recently rated Auto Parts an A+ and this is up from a C- when I started with the Company a little over three years ago.

I want to thank the entire team at U.S. Auto Parts for their efforts and a maniacal focus on the customer experience, which has resulted in this Better Business Bureau upgrade. We should all be very proud.

We're also focused on improving the supply change to be the most competitively priced in the market and to that point we ended the quarter with over 6,000 private-label engine parts and we looked at another 4,000 to 5,000 private-label engine parts and accessory parts annually.

We will continue to increase SKU selection by at least 250,000 SKUs annually and finally continue to grow visitors which, as I indicated earlier, we are focused on and hope to see our return to year-over-year visitor growth in coming quarters.

Moving on the acquisition of WAG, we continue to make good progress. We have cut over two of the three main sites and anticipate starting the initial cutover of dcwhitney.com at the end of the second quarter and completing it in the third quarter.

We continue to believe that once integration is complete, the WAG assets should return to growth and produce annualized adjusted EBITDA around $8 million to $10 million on annualized sales of $115 million. We will begin to recognize the majority of those benefits in the back half of 2011.

Moving to AutoMD, we continue to have unique visitors trending just over 500,000 per month and we have recently launched a new service to help people to save money on auto repair. The service is called the AutoMD Negotiator and it does pretty much what the name suggests, negotiates auto repair pricing for customers.

At a high level the customer inputs their vehicle, the problem that needs to be addressed, their location and the date and time they would like the service performed. Our AutoMD customer service agents use the information to call over 400,000 shops we have in our find-the-shop database to get the customer great quotes. The customer then can select job cost versus location versus shop rating to determine the right service center for them.

We believe this service has potentially great benefit for all involved. First, customers will have market pricing transparency, which will lead to lowering repair costs. To put how compelling this consumer benefit is in perspective, on roughly 2,000 price quotes we have captured to date the average price quote variance between the lowest quote and the highest quote for the same job for the same customer is over $250.00 or 44%. Said differently, if a customer picked the lowest shop for service they would have paid $322.00 and had they picked the highest shop for service, the same service that is, they would have paid $575.00. Of course, without the AutoMD Negotiator, a customer wouldn't know which shop to select.

From a service shop perspective the AutoMD Negotiator will provide shops with the opportunity to bid on and reach a significant amount of customers that they would have otherwise not been able to reach. And finally, we believe AutoMD will benefit from generating revenue through lead generation.

Moving to the current quarter, our legacy business is trending up 6% quarter-to-date over last year. As I addressed earlier, eCommerce traffic is trending roughly flat year-over-year and website conversion is up around 8%. Our online marketplace revenue is trending up about 1% year-over-year so we have made some good initial progress here, especially since it was down 14% in the first quarter.

While these revenues are down 23% year-over-year, we anticipate year-over-year growth to begin in the back half of the year once integration is completed.

In closing, we had an all-time high adjusted EBITDA for the quarter but even more important we demonstrated the leverage of our business model and the incremental EBITDA that can be generated on incremental sales. Additionally, we believe we have a clear path to significant EBITDA growth once integration of WAG and our eBay strategy is implemented.

We have seen a decrease in traffic. However, our Company has core expertise to adjusting and detaining the growth traffic. We continue to make good progress on the integration of WAG and we will see the benefits of that integration in the second half of the year. And finally, we have launched what we believe to be a real difference maker in the lives of consumers when it comes to getting their vehicle serviced and look forward to the progress of the AutoMD Negotiator.

Thanks again for all participating on the call and, operator, we will now open up the call for questions.

(Operator Instructions). Our first question comes from the line of Gene Munster with Piper Jaffray.

Good afternoon and congratulations. Shane, I'll start actually with an eBay question is when should we anniversary some of the changes to eBay and some of their listings?

Gene, I think that's going to be in November. That would be the anniversary of when they implemented their changes and we should see sort of by the end of this quarter sort of our new implementation or our new strategy in market. As you can see, we've actually had some pretty good success in some changes we've already made to date and look forward to more changes to come.

So we shouldn't -- it should not be thought of as a headwind for the next couple quarters because you guys can make some changes to accommodate that. It's more of kind of a quarter and a half of an impact? Is that the right way to think about it?

Well what I think, Gene, is we didn't anticipate being back to flat at this point. We thought we'd be a little bit below that but our team has done a good job of sort of adapting. I would say though that we saw the largest part of our growth on eBay last year in the back half of the year prior to the reduction in November. So, I think we feel good about this sort of flat number here through the end of the second quarter and hopefully by that time we've got our strategy in place and we should be comping back to where we were at the end of last year.

Okay, two more quick questions in terms of gas prices. How should we think about that impacting your business? I know that gas prices have been kind of going up steadily throughout the entire quarter. Did you see an impact as we progressed through the quarter?

Yes, so Gene, so it's kind of a funky quarter for us so far. One, the holiday is off by about three weeks and so we saw sort of flat revs, I mean flat traffic, which was really a result of what we saw earlier in the Google change. But we didn't see any impact to traffic and we saw conversion dip slightly but nothing major and, again, I'm not sure that's an impact of the gas pricing or if that was impact of Easter falling three weeks later than it did previously.

Now, I'll say this. Historically when gas price gets above $4 we see a reduction in miles driven and we've seen a reduction in spending on parts. With that said, that was two years ago and so now you're two years later. The average age of the car is much older so we're not sure we're going to see the same impact we saw previously and then finally, we still have a good market share opportunity to pick up so the high level [entrants] I don't know. We don't have a great answer for you but we're monitoring it and, if anything, it might have impacted us slightly in the quarter.

Okay one final question and that's helpful is in terms of AutoMD the negotiator side of that, how are you going to market this?

So initially we're marketing AutoMD right now and I would tell you that we've got a number of operational stuff to work through and we're doing that so we're excited about that and when we feel really good about that work and then you'll probably see us market a little bit off site but you'll see us push it across our network of sites as well so you'll start with optimizing it today and making sure we like the operations of it and then we'll extend it out to our existing sites, make sure we still like it and then from there, depending on the metrics and the measurements we'll figure out how to move forward.

Okay great. Thank you.

Shawn Milne, Janney Capital Markets.

I just have a couple. First, Shane, you've been working on some pricing initiatives and you've been working price against the growth rates of the Company and it looks like gross margins were nicely up quarter-over-quarter. I mean, can you maybe give us a little color on what you've learned so far and how you think about that going forward?

And then I wanted to follow-up on obviously Google made some big algorithm changes in the middle of the first quarter. What were they seeing there trying to clean up basically some of the search content and improve the quality there? What were they seeing from some of your online search efforts that were not really favorable? Perhaps some of your AutoMD content can improve how you fit in within the new Google search algorithm, if you can kind of add some color around that? Thanks.

Yes so, Shawn, let's first address the pricing. First, we're very pleased with our ability to move the margin and I realize that you've seen a decrease in revenues and you'd say well that must be the margin impact. In fact, I don't think that to be the case because if you look at our year-over-year conversion pre and post these increases in margin expansion it's very similar, maybe a couple of points down but certainly 100 basis points tick up would offset any sort of decline in rate of growth from a revenue perspective. And so we're -- when we measure this we measure what the conversion rate looks like out in these SKUs and frankly we're pleased that the team has been able to make so many adjustments to see some margin expansion without (inaudible) deterioration to sales growth.

The thing that got us in the quarter or that impacted us in the quarter from a revenue perspective, is this Google algorithm change. And so we were down about 10%. Fortunate for us we're pretty good at this. I will admit this was the largest impact we've seen since I've been here but pretty good at changing to it. Shawn, I don't want to go into specifics around what we've seen for competitive reasons because we're going to react to what we've seen and adjust. But overall we'll move ahead, as we always have.

And you're saying 10%. You're saying your search channel was actually down 10% after the change?

The traffic.

The traffic being generated was down about 10% post the change.

And is that where it is? Where does it stand currently?

It hasn't changed since.

And then just to -- I know you don't give specific forward guidance. You talked a little bit about where the business was so far during the quarter but I do believe we begin to at [least] anniversary some of the toughest comps through that April/May time frame. Is that correct?

Yes that's right so we ran up against some of the toughest comps through March. April started to come down a little bit. I think the second quarter last year was up 26% so it's still -- I mean, I wouldn't say the easiest comps but they weren't as tough.

No I don't think -- I think, Shawn, had we not been impacted by this most recent change, you would see growth rates in the upper teens and you would have seen them climb from there once we get the eBay thing addressed. I would also note this, that we will anniversary this date in February and we'll continue to see growth again and the question that I challenge my team with is how fast can we get that growth back prior to the anniversary? And hopefully this team can execute quickly, as they've done typically with what we just saw in the eBay deal.

Is there beyond some of these internal work that you're going to try to do, you think about the fixed cost leverages of businesses, are there other ways to spend from a marketing standpoint to get to traffic that will still deliver the revenue growth and some fixed cost leverage or is it primarily going to be coming from the work you do really for the search perspective?

Well, so our marketers are consistently testing whether it's competitive shopping or comparative shopping or different means of [observing] so we do those consistently and when they work we'll turn them on. But yes, as of right now, we're focused on where we know we can get the traffic and we'll go -- we'll keep executing that way.

Mitch Bartlett, Craig-Hallum.

Yes I was interested in why the -- by the way excellent quarter -- why the conversion rate was so strong when the traffic dipped down. What's the offset? What goes on there?

Well, Mitch, some of it's that you've got some people in the pipeline that are already in the funnel to acquire and then some of it could be whether it's gas or whether it's external factors impacting that. So initially if you've got some folks in the funnel when you lose traffic you'll see a little bit of an increase in conversion and then you'll see it kind of come back down.

So the conversion should come back down as traffic goes back up?

Short-term though and it would be for two or three weeks. It wouldn't be long term. No conversion will just subside where it's subsides. It's just there's a short-term period where you're actually in a funnel itself.

And the negotiator, it sounds like you've had 2,000 quotes, you've worked on 2,000 quotes for folks?

That's right. Yes we're pretty excited about this product. It's -- I would first simply say it's very complicated to do right because first you've got to be able to qualify shops that would be able to bid on your service but second, you've got to be able to capture the information from the customer to get a good quote. And then we've got a bunch of standards that the shop has to quote into and they've got to be certain parts so we can make sure we've got uniformity across the quotes.

And the combination of all that, it's a little complicated so what's great about what's going on right now is the team is doing a great job learning about those operation fixes. What's even greater is the demand we've seen from customers when we turned it on. And initially we turned it on and we got too much demand. We had to pull it off because we didn't have the back end infrastructure to handle it. We got people to call. We brought some more people on board to make some phone calls and now we're marketing again on the website pretty prominently and then again, as we just discussed earlier, as we get more and more operationally efficient and more confident in the service, we'll roll it out and get more aggressive.

Sounds great. Thanks very much.

Jared Schramm, Roth Capital Partners.

Could you provide a little color on the pricing improvements on your end? I recognize there were some significant gains during the quarter. How much further do you think you can take these and how -- where would you say you're positioned at right now?

Well, first we've done a lot of pricing judgment so I wouldn't say that you've got significant upside at this point, although there's clearly opportunity to optimize but we've done a lot of optimization to date. But we'll continue to do it, Jared. You will see a mixed shift down a little bit in margin over the next couple of quarters as we shift a little bit away from body or what I should say private label and into more branded product. But I would take an opportunity to really hit home on this strategy we've got, which is to continue to push more and more private label product, basically because that helps drive the margin up.

We've talked about for some time the need for us to grow our accessories and our engine product from a private label perspective. I think the team has done a phenomenal job executing on that and hopefully we don't see as much seasonality mix shift going forward as we bring more of those private label products in for the engine accessory category. But right now we're still a little bit more in the body side. So I would expect to see margin come down a little bit just from a seasonal perspective but then over the long term, as we look very long term, hopefully have that mix shift change over time as we bring more and more of that product in house.

And, you know, actually when the acquisition gets more and more integrated here are you seeing any interest from a greater extent from the brick and mortar players by going on line?

Yes well, they've been on line for a while. We have seen them get a little bit more aggressive as it relates to some consumer propositioning, some price testing. For the most part, with the exception of one of the brick and mortars that their pricing on line is consistent with their in-store pricing, of course these stores also service local shops and so they've got some price sort of constraints around how deep they can go on line or at least that's what we've seen in the past. One of them has been a little bit more aggressive. We continue to watch them. We'll see what they do over time.

(Operator Instructions). [Alex Castillo], Barrington Research

Hey, Shane, congrats on the quarter. I wonder if you'd just provide a little more color on the J.C. Whitney acquisition? I know you mentioned that you're pushing it back from Q2 to Q3 for the conversion and just curious on if the Chicago headquarters was closed. Thanks.

Yes I think, Alex, I think on the Whitney acquisition we just want to be careful and do it right and so this is an asset that's going to be very valuable to us long term and we want to make sure we cut it properly and we've got a strategy to do that and some of it is to direct some traffic over to make sure everything is good before we cut it all over and that just takes a little bit of time and so we're saying that it might push into the third quarter but we're going to do it with the right focus and we're excited about it. And we're excited it's coming up. We're still making very good progress on it.

And the second part of the question was the Chicago office. Yes it's June/July time frame.

Ted, for Q3 then on integration costs we shouldn't see much then?

Yes it depends on when the actual, for example, the closure of Chicago takes place. Some of that will affect the timing as to when those integration expenses come through. It's all depending on that. Once we actually exit the office that's when we record some of these expenses.

And then with the auto negotiator is that right now just being tested in California or anywhere specific or just all across the country?

No, Alex, I would encourage you to go on line and try to get something filled out. It's -- the nice thing about the negotiator is that it rolls out nationally immediately. We have spent the last two years calling shops and collecting information on shops. We know their hourly rates, what types of service they work on, what types of cars they do, if they have a shuttle service, if they have an early bird pick up service, what hours of operation they have, how many bays they have and wee have collected a lot of information on shops for the sole reason of lead generation. And we hadn't quite figured out the right exact way to do lead generation and then in the first part of this quarter we came up with this idea and frankly it's we think it's an idea that's got legs.

I would certainly, again, caution everyone that there's a lot of operational work to work through but the consumer proposition is extremely strong. The whole concept of having an expert be able to call shops that they know do work for you and try to figure out the best place for you, whether you're interested in price or whether you're interested in location or whether you're interested in sort of quality of service based on other customers' responses, we think it's powerful.

Just one last question, the capacity over at the Philippines to handle this, I am assuming most of it's being -- a lot of it is being done there and you mentioned prior that you had additional headcount towards this. If you could provide any more color on what additional things need to be done on that at all or--?

Yes so, Alex, we had to add some resources to make phone calls so it took a little bit of time to bring them on, to train them, to get them up on the software platform that we built for it and so that's essentially what we brought up. I don't want -- for competitive reasons I don't want to go into the number of resources we have against it. It won't have a meaningful impact to EBITDA so it's not a huge number but it's enough for us to make sure we really get the operations worked out.

Ross Sandler, RBC Capital Markets.

Just two quick questions, you guys saw pretty much no de-leverage in on line ad expense in 1Q. I think it was like 6.6% if you strip out Whitney despite some of the traffic issues with Google, so is that just because it's a partial quarter impact or was it the improved conversion rate offset the need to go out and spend a little bit more on marketing and what should we expect there going forward?

And then second question is just on the eBay stuff. Can you give a little bit more color on what you're doing differently in 2Q versus 1Q? Does the current run rate reflect some of the new initiatives you've been working with some of your partners on the eBay side, just a little more color there? Thanks.

Yes the cost to acquire customer, Ross, went down but our marketing spend for the legacy business was up a little bit and the reason for that is we had a contract change in on-line market plays and so our rates were a little bit higher this year than last year so it's not really an issue of efficiency necessarily to drive more traffic. It's more of a rate change on line marketplace rate.

Yes I'd also say, Ross, going forward you may see that number increase a little bit. Some of our organic traffic went down and you're going to have a little bit more of a mixed shift to pay for a little bit until we get that traffic back. I don't know if that's -- we've seen it fluctuating between 20 basis points to 80 basis points during any one given week. So that's that piece.

On the eBay side, and frankly I think Ted has also indicating to me that it does go up a little bit seasonally in the second quarter, so if you go back and kind of look at the seasonal shift you see it up a little bit in the second quarter from a market spend perspective

On eBay side we won't -- we haven't, for competitive reasons, gone into the changes we've made. The initial changes we've made are great from an optimization perspective and our team has done a phenomenal job reacting but I think the bigger changes are going to come in this quarter. And I know I am not giving you a lot of what that is but, for competitive reasons, we simply don't want to get into it.

Got it. Thanks.

(Operator Instructions). Shawn Milne, Janney Capital Markets.

Yes I just wanted to follow up on the question about the Whitney integration timing. I mean, it sounds like -- has this been pushed off by about a month? I am just trying to think through sort of the flow through there in the third quarter. And then one other quick follow-up too Ted, there was a question earlier about gas prices but I think you guys addressed it on the demand side. What about basically from a fuel surcharge and cost side, any pressure there? Thanks.

Yes from an integration perspective, Shawn, it may end up being in the second quarter. It may push into the third quarter and I would tell you that it probably if you guys want to adjust the model down a little bit because you don't have 100% flow through in the third quarter, that's probably prudent. With that said, I don't think the long-term impact of a couple of months is -- our main focus is the long-term impact and making sure we get this thing integrated properly and that's about as transparent as I can be on that one.

Gas prices?

Yes on the gas price, Shawn, we have been passing along those increases to our customers through our freight rates so we don't really expect on the cost side of this to impact us that much because we are passing it along through pricing.

Thank you. And at this time I would like to turn the conference back to management for closing comments.

Well, first we appreciate everybody getting on the call. I will tell you we're extremely excited with the quarter and, more importantly, sort of the leverage that got demonstrated in this model. Certainly had a couple of bumps and we are working through them and excited about coming out the other side even stronger than we are today and we're excited about this new proposition we've got in the market with the negotiator so look forward to talking to you guys again and thank you for joining the call.

Ladies and gentlemen, this does conclude our conference for today. We thank you for your participation and you may now disconnect.