QVC Group Inc (QVCGA) 2005 Q1 法說會逐字稿

Good afternoon and welcome to the Provide-Commerce First Quarter Earnings Conference Call. At this time, all parties have been placed on a listen-only mode and the floor will be open for questions following the presentation.

It is now my pleasure to turn the floor over to your host, Ms. Jan Carol of Investor Relations. Ma'am you may begin.

Thank you, operator and good afternoon everyone. My name is Jan Carol and I'm the Head of Corporate Communications here at Provide-Commerce. We'd like to thank everyone for joining us today.

By now, you all should have received our press release which details results for our first quarter of fiscal 2005 end September 30, 2004. For those of you who have not yet received a copy of our press release it can be accessed at the Investor Relations portion of our website at www.prvd.com.

With me on the call today are Bill Strauss our Chief Executive Officer and Rex Bosen our VP of Finance and Accounting.

I will turn the call over to Bill to review today's agenda after I read the following statement.

I have to remind all of you today that during the course of this call various remarks we make about future expectations, plans and prospects for the Company may constitute "forward-looking statements," for purposes of the "Safe Harbor" provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from expectations, plans and prospects contemplated in any "forward-looking statement" as a result of various factors including those discussed in our filings with the SEC. I encourage all listeners to read our current SEC filings available on our website or the SEC's website as well as our Form 10-Q for the quarter ended September 30, 2004, which will be filed with the SEC no later than November 15th. I would also like to point out that we may be discussing certain measures on a historical and forward-looking basis during this conference call.

Today or in the future these may be non-GAAP in nature. The definition of non-GAAP financial measures such as pro forma earnings or loss and the importance of this measure to investors along with reconciliations of this measure to the most directly comparable GAAP measure can be found in the press release which again is posted on our website. While this non-GAAP measure is important to understanding our business, the disclosure is not intended to detract from the importance of comparable GAAP measures. With that, I'll turn it over to Bill Strauss our CEO. Bill.

Thank you and good afternoon everyone. On today's call we'll discuss our quarterly results and the underlying drivers of the business. We'll then review our statement of operations and balance sheet before moving onto guidance. We'll then wrap up the call with closing remarks and take your questions.

So to begin. We're pleased with our results for the first quarter. Although it's traditionally our lowest sales quarter of the year with no large flower gifting holidays, our direct business model, our everyday value proposition and our operational focus contributed significant percentage gains in both sales and gross margin.

Our financial performance continues to reflect growing demand for our floral, meat and food offerings for both new and repeat customers.

Net sales for the quarter increased 53.8% over the prior year's first quarter to $19.9 million and our pro forma loss was $189,000 or $0.02 per share compared to a loss of $324,000 or $0.06 per share for the first quarter of fiscal 2004.

These results were better than we expected for two main reasons.

One. Sales exceeded our expectations due to strong performance of our everyday business and our marketing and advertising efforts.

Two. Gross margin was higher than anticipated as we were able to take advantage of creative merchandising and up-selling while increasing operational efficiencies.

Our ProFlowers business continued to drive our results for the quarter and from all the feedback we get our team here at Provide just gets better and better at delivering high levels of customer satisfaction and loyalty.

For the period, we acquired approximately 117,000 new customers, a 30% increase from the 90,000 new customers we acquired during the same quarter last year. This brings our total customer base to roughly 3.2 million representing an increase of 45% or 1 million new customers from the 2.2 million we had just 12 months ago.

Furthermore, we experienced higher than anticipated response rates for marketing programs through our existing customers. This resulted in returning or repeat customers generating 68.1% of net sales during the first quarter compared to 62.7% during the same period last year. This increase speaks to our ability to retain and excite our customer base through high product quality, creative merchandising and everyday value pricing.

We continue to experience positive results in gourmet food business unit as we capped off our first 12 months of operations for Cherry Moon Farms and Up Town Prime. Net sales for the three months ended September 30th were driven by seasonal fruit offerings and also the demand for premium fruit and meat in the summer months specifically around the fourth of July and Labor Day holidays.

While we are still in the learning mode with our gourmet food business unit, we are seeing positive traction in these brands. We will continue to look at the next few quarters as an opportunity to test and optimize product selections and refine our value proposition and we believe that over the long run these could be significant contributors to both our top and bottom line as we stick to our competitive advantage, the direct business model.

Before I hand the call over to Rex to review the financials, I just want to take a moment to comment on one of the benefits of having a direct business model especially during these times of increased fuel costs.

Although fuel costs have increased dramatically over the past several months, our gross margin still increased 340 basis points to nearly 47% during the quarter. Our team has been able to offset these increased costs by implementing operational efficiencies and optimizing a supply chain through initiatives like he introduction of overnight ground delivery. We will continue to monitor fuel costs closely and have assumed continued high prices when arriving at our guidance for the second quarter and full year.

Furthermore, even though we spent more on sales and marketing as a percent of revenue for this quarter and the same quarter last year, we still expect sales and marketing to be between 21-22% of net sales for the fiscal year, essentially flat to fiscal 2004. We believe that making these investments in sales and marketing will drive continued growth and profitability by acquiring new customers and increasing repeat purchases.

So to sum things up, we were pleased with the quarter. The key customer, our direct business model and the team we have in place to execute and grow our business. With that, I will hand the call over to our Vice President of Finance and Accounting Rex Bosen. Rex.

Thank you Bill. Good afternoon everyone. I will now review the financial results for the fiscal first quarter.

Net sales for the first fiscal quarter were $19.9 million up 53.8% from $13.0 in the first quarter of fiscal 2004. Gross profit increased 65.9% to $9.3 million compared to $5.6 million in the prior year resulting in a gross margin percentage of 46.8% versus 43.4% in the first quarter of fiscal 2004.

The GAAP loss attributable to common stockholders for the quarter was $497,000 or four cents per share compared to the loss of $2.2 million or $0.39 per share in the first quarter of fiscal 2004.

Our GAAP net loss includes a $449,000 income tax benefit compared to no tax benefit or expense in the first quarter of 2004. The GAAP net loss also includes $626,000 of stock based compensation expense calculated under FAS 123 compared to 188,000 in the prior year.

Finally our first quarter of fiscal 2004 included a $1.5 million preferred stock dividend payment which was not present this year. We believe that the most accurate measure of our operating performance is our pro forma loss, which is calculated by excluding from the GAAP loss our stock base compensation and the taxes associated with it.

We are one of the few companies to have adopted FAS 123 and are reporting stock compensation on the fair value basis. In addition, stock base compensation is generally not deductible for purposes of our tax provision. As a result, or GAAP effective tax rate is significantly higher than that of companies without stock base compensation.

By eliminating the stock base compensation, we believe that our pro forma results give our investors the best apples-to-apples comparison of year-over-year performance, allowing for better comparability to our peers and to analyst earnings estimates. The definition of this measure is slightly different than the definition we used last quarter, in that we have now applied a 41% tax rate to our pro forma earnings or loss.

On this basis then, the pro forma loss for the first quarter of 2005 was $189,000, compared to a loss of $324,000 for the first quarter of fiscal year 2004. The pro forma per share loss was $0.02 for the quarter versus a loss of $0.06 for the same quarter last year. Our share count year-over-year increased from 5.8 million to 11.8 million shares as of September 30, 2004.

Back to the statement of operations, our total operating expense during the first quarter was $10.5 million compared to $6.4 million in the first quarter of fiscal 2004. Although the total dollars increased by 64%, as a percentage of net sales, the increase was only 370 basis points or 7.5%.

This net increase, again, on a percentage of net sales basis, includes increases in selling and marketing and stock base compensation and decreases in general and administrative and technology costs. Selling and marketing expense was $4.9 million in the first quarter, up from $2.8 million in the prior year.

As a percentage of net sales, this quarter's sales and marketing expense was 25% compared to 22% in the first quarter of last year. As Bill mentioned, we increased our marketing spend in the quarter to maintain long-term growth. This includes building our marketing team, expanding our mark in our advertising reach and launching our first summer catalogue.

Despite the bump this quarter, our expected marketing expense for the fiscal year is still 21 to 22% of annual net sales. However, please note that in any given quarter, we might identify opportunities to accelerate growth for the long term. In the future, we will continue to take advantage of these opportunities as they arise, and we've been very good at generating solid returns on these expenditures as demonstrated by our 53.8% growth in net sales this quarter.

General and administrative expense for the quarter was $3.9 million compared to $2.6 million a year ago. G&A was 19% of total net sales in the first quarter compared to 20% last year, a slight improvement. We are pleased with the decrease as a percentage of net sales despite increased expenses for depreciation of fixed assets necessary to support our growth and the additional cost of being a public company and of our retirement benefit plans.

In terms of taxes, as mentioned earlier, we recognized an income tax benefit of $449,000 in the first quarter this year as a result of our pretax loss, compared to zero expense or benefit in the first quarter of fiscal 2004. We anticipate that our GAAP effective tax rate for the year will be between 47 and 48%. Excluding the effect of stock base compensation, we anticipate a pro forma effective tax rate of 41%.

In terms of cash payments versus book taxes, our cash outlay for taxes will be significantly reduced for the foreseeable future due to our net operating loss carry forwards, which currently total approximately $25 million. Although we will pay some federal and state taxes this year, our actual cash payments will be significantly less than the income tax expense shown under statement of operations for the fiscal year.

Now let's review the balance sheet. As of September 30, 2004, we had approximately $55.9 million of cash, cash equivalence and marketable securities. We also had $64.3 million of stockholder's equity, total liabilities of $13.5 million with no bank debt. Our balance sheet also reflects low inventory of $1.2 million relative to our quarterly net sales of $19.9 million.

This is a result of our direct virtual business model. Capital expenditures during the quarter were approximately $1.5 million, which consists primarily of computer hardware and software to support our growth. We now expect CapEx for the year to be approximately $4.5 million.

I will now turn the call back to Bill to establish guidance for the remainder of the year and the second quarter. Bill?

Thank you Rex. Before I go to guidance and my closing remarks, I just want to spend a moment on some of our second quarter initiatives. As many of you may know and may have seen from our press release this morning, we have recently relaunched our ProFlowers brand.

Our company was founded on freshest in product quality, but as a brand to date, we have not been focused on conveying those qualities to customers. The rollout of this new positioning, which we have been working on since last December, will hammer home our direct business models advantage of going to the growers to get our flowers.

With our existing brand positioning, we were in the unique position of over-delivering and under-promising. Our superior product quality and the value needed to be communicated in a more effective way, and we believe that this new campaign will help us do that. Please note that this is not a traditional brand relaunch campaign with millions of dollars going towards TV advertising and the like.

Rather it is an effort focus on our millions of existing customer touch points to communicate our value proposition. Over the next couple of months, you will see changes to our website, our catalogues, our packaging and all of our marketing efforts. Now moving to guidance. As we've outlined in our press release today, we have raised our guidance for the fiscal year 2005.

Net sales are now expected to be between 166.5 and $169.5 million. GAAP net income is now expected to be between 7.9 and $8.1 million, or 57 cents and 59 cents for fully diluted share. Pro forma earnings are expected to be between 10.6 and $10.9 million, or 77 cents and 79 cents per fully diluted share. Fully diluted shares outstanding for fiscal 2005 are expected to be 13.8 million compared to 12 million for fiscal year 2004.

For the second quarter of fiscal 2005, net sales are expected to be between 31.7 and $32.3 million. GAAP net income is expected to be between 300,000 and $400,000, or between 2 and 3 cents per share. Pro forma earnings are expected to be between 800,000 and $900,000, or between 6 and 7 cents per share. And as Rex said, excluding the effect of stock base compensation, we anticipate a pro forma effective tax rate of 41%.

One last note; we expect stock base compensation expense to be approximately $2.9 million in fiscal year 2005. Before we go to Q&A, I just want to leave you with 3 summary points on Provide Commerce. First, we are dedicated to our direct business model that rewards our customers with a fresher, longer-lasting product at a great price.

It forces terrific word-of-mouth advertising that I believe will only increase with the brand relaunch I just described. We hope to continue attracting new customers and developing loyalty and lifelong repeat business. Next, I want to reiterate, as I did last quarter, that we expect to grow net sales in the mid to high 20% range for the foreseeable future.

We believe we have a clear path to grow to a half a billion dollars in net sales with pro forma earnings as a percent of net sales in the mid to high teens. Our healthy balance sheet will enable ongoing investments in infrastructure that enable greater operating leverage and scalability while further distancing Provide Commerce from its competitors.

Third, I am extremely fortunate to have a talented and dedicated team of employees who share a passion for creating an e-commerce company that can deliver value to both customers and stockholders alike, and I'm proud to share that earlier this month, we were selected as one of the best places to work in San Diego by the San Diego Chapter of the Society of Human Resource Management.

I believe that with this team, we can continue to revolutionize how perishable products are delivered in this country.

Lastly, I want to remind those of you who may be interested, that we are hosting an institutional investor and analyst day at our Miami facility on Friday, January 21st. If you are interested in attending and have not yet received the information, please contact Jen Carroll or Ashley Ammon for the details and to reserve your spot on the tour. Thank you for joining us today.

And with that, we will open up the call to questions.

Thank you. The floor is now open for questions. If you have a question, please press star, one, on your touch-tone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. Questions will be taken in the order they are received.

We do ask that while you pose your question, that you pick up your handset to ensure proper and sound quality. Once again, that's star, one, for any questions at this time. Please hold as we pull for questions.

Once again, that's star, one, for any questions at this time.

Thank you. Our first question is coming from Jeetil Patel of Deutsche Bank.

Hey guys. I have a couple of questions. First of all, can you kind of talk about how the newer categories are performing internally as you kind of looked at the business now for almost a year now in terms of the ramp up? Is it kind of hitting goal, exceeding goal or kind of still some work to do and how do you think those categories are developing for you?

Second, you were spending in some means in and around radio I think in the quarter. Can you talk about what kind of impact you saw in the quarter around some of the campaigns that you had - of the campaign you had out there? Is that why you're going to go after more of a branding element here in the very near term?

And what kind of impact does that have as you look at the seasonal strength in the back half of the fiscal year? Thank you.

OK Jeetil. In terms of the new categories, we have exceeded our internal goal for all 4 quarters that we've launched in so far, so we're very, very happy with the trajectory. However, there is some more to do as you also asked, so the answer is, we've hit our goals and there's still more to do. In terms of the channels, yes, we have invested more in radio and that's actually performed well for us.

But the branding initiative is completely separate from what we're doing from a channel perspective. We believe the branding is important to do and cuts across all channels in terms of communicating our value proposition to consumers. You know, as I just said, we have a superior product quality.

We have great pricing, but we haven't really communicated to the customers why we have great pricing, why we have a superior product. And that's what this branding will do and it will cut across all of our touch points to consumers.

And some of the radio, how has that performed for you in general?

It continues to perform in or above what we expected it to do.

Does that complete your question?

Yes it does. Thanks.

Thank you. Our next question is coming from Rusty Hoss of Roth Capital Partners.

Good afternoon. A couple of questions. One on the - it seems like in your guidance, you're being fairly conservative on the gross margin line and if you do get some gross margin benefit, then you'll spend some of those dollars on this branding relaunch. Is that kind of how you're thinking about things?

No. Let me just take a second about the branding relaunch. The branding relaunch is not effectively causes any incremental material dollars from our normal marketing. It's basically how our website looks, the messaging we put in our offers to customers. It just takes advantage of existing touch points with customers. We have spent some money over the last 6 to 12 months.

We hired an agency to help us. We did some customer research. We re-shot, from a photography perspective, our whole site, but it's not incrementally more money to market under this new brand, if you will, than it did under the old brand.

OK. And the catalogue, that initiative, you mentioned there's going to be a new summer catalogue. Is that going to be flowers only or is that going to include the premium foods?

The summer catalogue was launched this past summer and it did have some of the other - some products in the gourmet food business unit.

OK. And what kind of catalogue, in terms of the actual numbers of catalogues circulated, how will that compare this year versus last year?

We will circulate more catalogues this year than we did last year.

OK. Thank you.

Thank you. Our next question is coming from Jim Friedland, SG Cowen.

Thanks. Question on the gross margin as well, so it was very strong this quarter. Should we still be assuming that it will hold around 46% or is there any sort of material gains in the quarter that we should continue to see? And then I have a follow-up.

I would think for the year, based on what we know now, I would continue to model our business at a 46% gross margin. We do have pressures, as I mentioned, in terms of fuel surcharges, but we also can offset those and perhaps even more than offset the fuel surcharge into other things, but in that case, we will pass that savings back to the consumer and better product offerings, if you will.

OK. Thanks. And then on the new initiatives, the fruit and the meat. With the launch or as those start to ramp, are we going to see any pressures on a specific line item, whether it be G&A or marketing in a given quarter? Or is it still too small to make a difference?

The answer is both; (a) it's too small to make a different, and (b) even as we ramp it up, we don't believe that it's going to have any material difference on our percentages now of net sales.

OK. Great. Thank you.

Thank you. Our next question is coming from Laura Champine of Morgan Keegan. Ms. Champine, your line is live.

Hi. Can you hear me now?

Yes.

Great. Bill, it's clear to me that your sales growth is accelerating on a sequential basis and you've really outperformed expectations on the top line. It looks like your guidance factors then, a sequential slowdown in growth over the next few quarters. Is that conservatism or is there something that makes you feel that your order growth should slow?

We try to put guidance out there in terms of what we know sitting here today. So based on what we know, we think the guidance is fair and solid guidance, again, based on what we know sitting here right now.

OK. And did you say - I'm sorry.

And also, year over year is more important in sequential growth and I think as I've mentioned consistently so far, that our everyday business is growing faster than some of our holiday periods are. So as we start moving those holiday periods, we'll see what happens.

OK. And is there anything that you could do to take your respective tax rate down? Will it stay as high as it is at 48%?

As I mentioned, the effective tax rate is as high as it is because of the stock base compensation and especially because of the fact that it's a relatively large percentage of our pretax income. So as that becomes a smaller percentage of pretax income, then our effective tax rate will come back down.

And also, again, that's our book tax rate. It doesn't necessarily reflect the taxes that we will actually pay due to our NOL carry over.

Sure. Absolutely. And your gross margins are so much better year over year. Is that mostly fueled by moving to FedEx ground or is it leveraged from the sales, or how should I look at that improvement?

Yes. The answer is both. It has to do with our ability to procure flowers better and smarter, our ability to merchandise and merchandise by channel as well, and of course, the FedEx ground has been helpful as well.

OK. And last question, you did mention that you're pleased with some of the new business initiatives for a number of reasons. Is that still an immaterial percentage of sales? Are we talking still less than 5% of revenues?

Yes.

OK. Thank you.

Thank you. Our next question is coming from Steve Weinstein of Pacific Crest.

Great. Thank you. Just had questions on some of the metrics you provided. It's my understanding that you've been introducing some lower price point products, yet, on a year-over-year basis, the average price plan actually went up. So I wondered if you could just give us a little more color into some of those underlying trends and what's happening there? And then, you know, how should we think about that going forward?

Sure. That is actually in line with expectations, that we can continue to drop down the entry level price point to get people to buy, but then hook them with up sells and cross sales and things like that. So that strategy is paying off for us.

So would you expect that, on a year-over-year basis, to see continuations from incremental upticks or are you flattening out at some point?

No. I would think it's going to continue to grow incrementally, but as you can see from this quarter, it's pretty small growth year-over-year in terms of the quarter. And I would continue to expect again, increased AOV, but almost an immaterial kind of number.

Thank you very much.

Thank you. Our next question is coming from Mickey Strauss of Strauss Asset Management.

Hi Bill. I wanted to ask you about the number of new customers and types of acquisition, whether there's any material change there given the increased market expense?

So we were pleased with our customer acquisition for the quarter. It is one of our traditional lower net sales quarter, but we definitely tested a lot during the quarter so we can learn and roll it out in our bigger quarters.

So I think we're pretty much in line across the board in both, actually probably even acquired a few more customers than we thought and the cost was pretty much in line with what we expected. We saw the cost pressures in some of the channels as expected, but no real surprises for us during the quarter in terms of versus what we expected.

Thank you.

Thank you. Our next question is coming from Ty Carmichael of Gothic.

Thank you. I have a couple of questions. The first on administrative note and I think I'm relatively still kind of new to the company, but on the last quarter's press release, it says, the company adds guidance for the fiscal year ending June 30th, looked like some pro forma earnings are expected to be 16.7 to 17.3 million, and then when I compare that to the guidance in this press release, it's much lower.

So I'm just wondering if there was a typo in one of these press releases or if there's actually a change in the guidance there?

Rex, can you take it?

Yes. As I said, we did make a slight change in how we calculated that. The last quarter's press release, that was a pretax number.

OK.

A number of people said, hey, you really should tax this. So we did and this quarter, it's a tax number at 41%.

OK. It's just apples-to-apples with just how much that you increased that guidance?

Yes. I don't have that number right off hand, but ...

But you can say it's consistent with the rest of the increase in the guidance?

Yes. If you just take last year's and multiply by 41%, subtract that amount, you'll get the number.

All right. Fair enough. OK. On the market dynamics, when you look at this market, is it a national business yet? Are you seeing pockets of the country where maybe the demographics are a little bit more spewed towards more computer use being much stronger than other parts of the country?

It's very consistent with the general population distribution across the United States, so it's definitely national.

National, entirely a national business. OK. And for 2005, are there any plans, counting your 2005, are there any plans to launch new categories or are you just going to focus on the business at hand right now?

As of right now, just focusing on the businesses at hand.

OK. And then, on the competitor front, this business is performing quite remarkably. How do you get your arms around the potential for - you're still relatively small as a business, but at some point, if you continue to execute the way you are, typically someone will try to make a move.

And just given how remarkable the margins are and how strong the growth has been, how do you get your arms around any potential competitors trying to move into the market that may be bigger than you and maybe willing to spend a little bit more on the marketing? Maybe you can just provide an overview on where you feel your real competitive advantages are that will insulate you from that going forward?

Sure. I think we have numerous competitive advantage that I think it would stand larger competitors coming in. I mean, clearly, our existing competitors have tried to come after us as well. We execute our business model very, very well and we're basically flower experts.

In fact, I encourage you to come down to our Miami facility in January and you really get to visualize and experience how we are fundamentally different, not just order aggregators, but flower experts.

We have very deep flower knowledge in our company, what varieties of flowers, I mean, within red roses alone, there's 50 different kinds of varieties. How that product should be grown, how it should be post-harvested, how it should be hydrated, both in terms of length hydration and the hydration, you know, formula if you will. So a tremendous flower knowledge.

Our operational execution, our systems to make our growers be very, very efficient what they do. We've spent millions and millions of dollars and probably even more important than the money we've put into it is the expertise that we gained over the years and continue to get better at everything that we do.

So we are definitely on the lookout for competitors coming into this space, but we feel pretty comfortable with the hand that we're playing.

OK. And then the last question would be based on your guidance and in terms of your long-term guidance as well, the company is going to generate an enormous amount of cash relative to its overall capitalization and just wondering, as you take a step back, how you think about deploying that cash? Is there any risk that you go out and make acquisitions that may not be consistent with the overall business?

Because it seems like you can - as you're proving with the gourmet food business, you can roll out new category lines very cost-effectively through organic efforts without any material incremental capital requirements.

So I'm just wondering as you take a step back, how you think about the ultimate deployment of cash?

Right. So one thing I can answer really quickly is that just because we have cash doesn't mean that we're going to be stupid with the cash, so I don't think you'll see us frivolously wasting cash. But that is something that, it's a good position to have and we have a very nice war chest on our balance sheet and will be opportunistic with the cash.

But our growth is going to be mostly organic growth and to your point, it does not cost us much to launch these brands and we'll evaluate acquisitions as they come along. But because we're completely redefining the supply chain and value propositions for consumers, it's very hard for us to buy existing businesses because there's really nobody that we've seen doing business the way that we do it.

So it would have to make sense for us in a way to buy a customer that has the same customer demographics that we're looking for, more so than assets of a company or an existing business model.

I agree 100%. Just given how well you've operated your existing business. I guess at some point the cash just gets funneled back in the form of a dividend if the current outlook plays, you know, proves to be correct. Would that be the inclination of the management?

I mean, that would be a board decision. If the board believes that's the best use of our cash, that's what we'll do. But for now, we really have thought about building our business, being more profitable, and focus on execution. And it's a nice problem to have, to figure out what to do with our cash over time.

Just as long as you, as you pointed out, don't spend it frivolously. But congratulations on a great quarter.

Thank you very much.

Thank you. Our next question is coming from Jason Jones of J. Goldman.

Hi guys. Great quarter. I had a quick question about your sales and marketing. It came in a little bit higher than was expected, yet guidance remains at 21 to 22%. I'm curious how you're going to bring it down over the next 2 quarters?

Actually, it didn't come in higher than we expected it to be. It came in right in line. And if you look at the percent of marketing dollars that we'll spend this quarter, or spent this past quarter, compared to what we'll spend for the year, it's really not a big number. And as Rex said, a lot of that was building our marketing team over the past year.

So as you spend marketing dollars on people, you spend on the quarter 25% in each quarter, be it that's how you pay your people, but yet the revenue doesn't quite flow like that. So again, we're confident we'll come in between the 21 and 22%. That's what we expect. And the overall dollars, we didn't spend a ton of marketing dollars for the quarter.

OK. Thank you.

Thank you. Our next question is coming from Kim DePoli Gilder Gagnon.

Hi guys. My question was answered. Thank you.

Thank you. Our next question is coming from Rick Leggott of Arbor Capital.

Great job. My question is, did anything opportunistic arise over the last 90 days that related to the hurricanes? Were there periods when flowers were more than plentiful and people just had to dump them and did you benefit from that?

No. Actually, the hurricane and the way our business model is set up was effectively a non-event for us. It didn't affect demand. It didn't affect our ability to fulfill that demand, nor did it present itself with opportunities that you just suggested it might.

So what happened to the supply chain between South America, Miami and your customers while those were happening?

What we did was, we brought the flowers in a day or two earlier because we can predict the hurricane coming in. Everybody saw it. So we brought those flowers in a day or two earlier, and even having done that, by controlling the supply chain, all the varieties that I mentioned, we still got our flowers to consumers faster than they would have gotten them through the traditional supply chain.

It's just another advantage of a direct business model that we can do things like this.

Did orders slow down in those days because I mean, it was obviously a regional event. Your demand is national, so you just stocked up more flowers in Miami to handle those several day periods? Is that what you did?

The demand did not slow down in any kind of material way. As you mention, it was quite a regional event, the hurricane versus our business being national.

So you just put more inventory in Miami for a couple of days by buying in advance? That's how you did it?

Actually, what we did was we bought the inventory through Miami a day or two earlier, and then moved that to our distribution - a few of our distribution center partners, if you will, so it wouldn't, you know, so we could continue to service our customers in a very timely fashion.

OK. Another question following up with what a gentleman asked earlier about your cost to acquire new customers. You said it was in line with expectations. Was your expectation for it to rise or go down or go flat? Just what's the trend there?

The expectation for this quarter that it was going to go up slightly, but still remain in the range for the year that we've given out.

And if we want to calculate that, I don't think that's something you've given out in the past, but should we just look at your sales dollars and divide by new customers? Or how should we look at that?

No. You really can't calculate it and we don't share that information for competitive reasons.

And if we look out over the next 12-to-24 months, do you expect it to go up or stay flat or get less expensive?

As we look, we think we can maintain the current range that we're in and we do see a potentially trickling up slightly; however, with the brand initiative, maybe we can help bring that down as well. But I would expect a slight increase.

OK. Thank you.

Thank you. Once again, if you'd like to ask a question, please press star, one, on your touch-tone phones at this time.

Thank you. Our next question is coming from Jeb Besser of Manchester Management.

Hi guys. Great quarter. As far as the competitive environment, can you just talk about what you saw this quarter from FTD and 800-Flowers?

Sure. We continue to see them be very, very aggressive in their pricing in many of the channels to consumers. So they've definitely been aggressive and they've been out there.

OK. And with regard to the new initiatives, any competitive response from Omaha Steaks or Harry & David?

Not that we've noticed, no.

OK. Thank you.

Thank you. Our next question is a follow-up coming from Ty Carmichael of Gothic.

Yes. Just on the cash dynamics. Did you provide guidance as to what you expect your cash tax payments to be for the full year? And then, just on the working capital dynamics, it looks like in fiscal year '04, it was a pretty nice source of cash and I was wondering if that's going to be the same thing as you progress through the same order of magnitude in fiscal year '05?

Sure. As I mentioned, we have not given guidance on what our actual cash tax payments will be. As I said, we will pay some federal and state taxes, but we do an NOL to utilize. As far as working capital, cash from operations, we anticipate that we will generate approximately the same amounts as we did as a percentage of revenue. So as revenue increases, so will the working capital from operations.

OK. I guess it's fair to assume though that any tax payments this year would be pretty minor? Just given your NOL's? Is that fair?

I mean, relative to our overall income, it will be small and there are some rules in the tax law that will result in us paying some taxes, but they will be relatively small.

OK. Thanks a lot.

Thank you. There appear to be no further questions at this time. I will now turn the call back over to management for any further or closing remarks.

I just want to say thanks for your time today everybody. We look forward to the remainder of fiscal 2005 and believe that a significant opportunity still exists to provide Commerce to redefine their traditional Commerce and existing new categories, and hopefully, we'll see many of you in Miami in January.

See you all next quarter.

Thank you. This does conclude this afternoon's teleconference. You may disconnect your lines and enjoy your day.