QVC Group Inc (QVCGA) 2006 Q1 法說會逐字稿

Good day, everyone, and welcome to the Provide Commerce, Incorporated first quarter fiscal 2006 results conference. Today's call is being recorded. At this time, for opening remarks and introductions, I'd like to turn the call over to Mr. Gordon Bigler. Please go ahead, sir.

Thank you, operator, and good afternoon. My name is Gordon Bigler and I would like to thank you for joining the Provide Commerce conference call to discuss our fiscal year 2006 first quarter results. By now, you all should have received our press release, which details our first quarter results for fiscal 2006 ended September 30, 2005. For those of you 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; Eric Carlborg, our Chief Financial Officer; and Rex Bosen, our Vice President of Finance and Accounting. In a moment, I will turn the call over to Bill to review today's agenda, but first, some brief housekeeping.

Let me remind all of you today that during the course of this call, various remarks will be made about future expectations, plans and prospects for the Company may constitute forward-looking statements for purposes of the Safe Harbor provisions under Section 21-E of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from expectations, plans and prospects contemplated in any forward-looking statements 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, 2005, which will be filed with the SEC no later than November 8, 2005.

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 our 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 the call over to Bill Strauss, our Chief Executive Officer. Bill?

Thank you, Gordon, 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 on to guidance. Lastly, we will take your questions.

We are pleased with our results for the first quarter of this fiscal year. Provide Commerce was profitable on a pro forma basis during the first quarter. Okay, effectively break-even, but we were in the black for the first fiscal quarter for the first time in our company history.

Despite high fuel surcharges, we were able to achieve these strong operating results by executing on our direct business model, which provides our customers with superior value. As always, our management team was focused on balancing growth and profitability, and I am pleased with our ability to adapt and change the business challenges without sacrificing profit.

Net sales for the quarter increased 34.4% over the prior year's first quarter to $26.8 million, and our pro forma earnings were $3,000 or $0.00 per share, compared to a loss of $189,000 or $0.02 per share for the first fiscal quarter 2005.

We continued to show customer growth in the first quarter. For the three-month period ended September 20, 2005, ProFlowers added approximately 150,000 new customers, which is a 28% year-over-year increase, compared to approximately 117,000 new customers added in the first quarter of fiscal 2005.

With the addition of the new customers in the first quarter, our total customer base in ProFlowers is approximately 4.5 million customers, representing an increase of 39% or approximately 1.2 million new customers from the roughly 3.2 million at September 30, 2004.

In ProFlowers, returning or repeat customers generated approximately 67% of net sales compared to 68% in the year-ago quarter. This reinforces our ability to retain and serve our customer base through high quality product, creative merchandising and everyday value pricing. Average order value in our core consumer floral business increased to $49.32 in the first quarter of fiscal 2006 from $46.96 during the first fiscal quarter of 2005.

We continue also to be pleased with the results of our Gourmet Food business unit, which just completed its second full year of operations. Performance at the unit, which is comprised of our Cherry Moon Farms and Uptown Prime brands, was driven by seasonal fruit offerings and also the demand for premium fruit and meat in the summer months, specifically around the 4th of July and Labor Day holidays.

As you can imagine, we fielded many questions about fuel surcharges during the quarter, so I thought I would take a minute to explain our strategy in greater detail. Fuel prices are a consideration in everything we do. Rising prices directly and indirectly affect customer acquisition, conversion and retention, and thus, the lifetime value of a customer.

We work very hard to optimize our shipping infrastructure and partnerships to deliver our products to our customers in the most economic and efficient way possible. However, we do not look at shipping costs in isolation, but rather, we look at the total cost paid by the customer for the product they receive. Since our inception in 1998, we have consistently balanced the value that we deliver to customers with delivering strong financial performance for our stockholders. Today's rising fuel prices are just the latest challenge to that balance.

To combat rising fuel prices, we have several levers that we can adjust, including promoting different products and different price points to maximize value to our customers; adjusting shipping levels to the most cost-effective carrier; maximizing the use of our partners' ground networks, which is currently less impacted by today's fuel surcharges; and altering product and shipping prices.

As you know, we continuously adjust all aspects of our business to drive operational improvements. During the first quarter, we aligned and optimized these products and shipping options while maintaining our margins and, most importantly, the value experience to our customers.

While we cannot predict the future of energy prices, we will use all tools available to us to sustain a growth strategy that focuses on balancing growth and profitability. During the first quarter, which is traditionally our slowest, with no large flower gifting holidays, we made substantial progress on a number of strategic operating initiatives as we continue to build our foundation for the future. I will touch on four.

One, improved branding. As we discussed on the fiscal yearend call in August, we believe we have a major opportunity to continue to build brand equity. In that regard, we have recently engaged BBDO, a national advertising agency, to assist us with strategic and creative development efforts. Please remember that this effort focuses on our millions of existing customer touch points to communicate our value proposition. The next phase of our branding initiative was part of our strategic plan for this current fiscal year and the cost and impact are part of the existing financial guidance we have disclosed. We will keep you updated on our progress.

Two, customer satisfaction. Our goal is to delight every customer with every single order. Once again this quarter, we have been able to maintain industry-leading customer satisfaction scores. Our customer satisfaction is derived from our consistent ability to deliver the freshest products to our customers at a great value. We continue to focus on increasing the difference between us and our competitors, and feel we've done a solid job to date.

Three, infrastructure. We continuously evaluate and upgrade our infrastructure to ensure that we can support increased sales volume during the upcoming gift giving seasons. Last year, during our peak order hour for Mother's Day, we received more than 14,000 orders and we fulfilled more than 770,000 core consumer floral shipments during the entire Mother's Day period. We anticipate our peak order volume to increase this year and we are utilizing the first half of the fiscal year as an opportunity to prepare for the upcoming gift-giving season.

Four, our team is the strongest it's ever been. During the quarter, we hired key employees on many of our teams at almost every level of the organization. We believe we have as strong a team as we have ever had and we look forward to the challenges and opportunities for the coming year and beyond.

So, to sum things up, we are very pleased with our strong results and our operational progress during the quarter. As always, we believe that the keys to continued success are our focus on the 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 Eric Carlborg, our Chief Financial Officer. Eric?

Thank you, Bill. Good afternoon, everyone. It is my pleasure to participate in my first earnings call as the CFO of Provide Commerce. I look forward to working with you.

I will now review the financial statements for the fiscal first quarter of 2006. As Bill mentioned, net sales for the first quarter were $26.8 million, up 34.4% from $19.9 million in the first quarter of fiscal 2005. Gross profit increased 33.3% to $12.1 million, compared to $9 million in the prior year period, resulting in a gross margin percentage of 45% versus 45.4% in the first quarter of fiscal 2005.

The GAAP net loss for the quarter was $23,000 or $0.00 a share, compared to a loss of $497,000 or $0.04 per share in the first quarter of 2005. This quarter, the GAAP net loss includes $839,000 of stock-based compensation expense calculated under FAS 123-R, compared to $626,000 in the prior year quarter.

The GAAP loss also includes the benefit of $444,000 for the cumulative effect of a change in accounting principle resulting from the adoption of FAS 123-R. Regarding stock compensation, I want to point out that in prior quarters, we reported a single line item in the operating expense section of our quarterly and annual statements of operation and we separately reported the allocation of stock-based compensation expense to the operating line items.

FAS 123-R directs that stock-based compensation be reported on the statement of operations the same way that related cash wages are reported. Therefore, we have included stock-based compensation in the appropriate line on the statement of operations.

Pro forma earnings, which are calculated as GAAP earnings or loss, excluding stock-based compensation expense, the cumulative effect of a change in accounting principle, which also relates to stock-based compensation and the related tax effects for the first quarter of fiscal year 2006 was $3,000, compared to a loss of $189,000 for the first quarter of fiscal year 2005.

Pro forma earnings per share were $0.00 for the quarter versus a loss of $0.02 for the quarter ended September 30, 2005. Our basic share count year-over-year, increased from $11.8 million to $12 million as of September 30, 2005. Assuming full dilution, our fully diluted share count year-over-year decreased from 13.6 million to 13.5 million as of September 30, 2005.

Back to the income statement. Our total operating expense during the first quarter was $13.4 million or 50% of sales, compared to $10.3 million or 51.5% of sales in the first quarter of fiscal 2005. Selling and marketing expense was $6 million in the first quarter, up from $4.8 million in the prior year.

As a percent of sales, however, our expense dropped 197 basis points to 22.3% versus 24.3% in the prior year, and for the fiscal year, we are expecting selling and marketing expense to be 20-21% of annual net sales, and that's before stock-based compensation. Please keep in mind that this reflects the reclassification of the cost of promotional goods from marketing to cost of sales that we discussed on our fiscal yearend call in August.

General administrative expense for the quarter was $5.7 million, compared to $4.2 million a year ago. G&A was 21.3% of total net sales in the quarter, compared to 21.2% last year. The increase in G&A was primarily a result of investments in the organization.

In terms of taxes, we had an income tax benefit of $367,000 in the first quarter as a result of our pretax loss, compared to $449,000 benefit in the first quarter of fiscal 2005. We anticipate that our GAAP effective tax rate for the year will be 44%. Excluding the effect of stock-based compensation, we anticipate a pro forma effective tax rate of 41%.

We expect stock-based compensation expense under FAS 123-R to be approximately $4 million for the total fiscal year 2006. A couple of comments regarding the balance sheet and cash flow. During the first quarter, we repurchased 89,700 shares of our common stock on an average price of $25.03 per share. The aggregate repurchase amount was approximately $2.2 million.

Since the buyback was announced on May 3, 2005, we have purchased a total of 498,200 shares of common stock for $11.1 million at an average price of $22.27. We have approximately $13.9 million left of the $25 million buyback authorized by the Board of Directors in May.

As of September 30, 2005, we had approximately $60 million of cash, cash equivalents and marketable securities and no bank debt. As a result of the profitability over the last 12 months and our working capital model, we have generated $17.6 million of cash flow from operations over the last 12 months.

Capital expenditures during the quarter were approximately $1.1 million and we expect capital expenditures for the year to be approximately $5.2 million. I'll now turn the call back over to Bill to review guidance for the remainder of the year and the second quarter. Bill?

Thank you, Eric. Now moving on to guidance. Our business remains strong and we managed through a difficult environment with the focus on execution while balancing growth and profitability. The Company is confirming its net sales guidance and increasing pro forma and GAAP net income and earnings per share guidance for the fiscal year ending June 30, 2006.

Additionally, we are reducing our expected fully diluted shares outstanding for the fiscal year. Based on our current outlook for fiscal 2006, net sales are expected to be between $216 million and $224 million.

GAAP net income is expected to be between $10.9 million and $12 million or $0.79 and $0.87 for fully diluted share. Pro forma earnings are expected to be between $13.3 million and $14.6 million, or $0.97 and $1.06 per fully diluted share. Fully diluted shares outstanding for fiscal year 2006 are expected to be approximately $13.8 million, compared to approximately $13.7 million for fiscal year 2005.

For the second quarter of fiscal 2006, net sales are expected to be between $41.8 and $43.8 million. GAAP net income is expected to be between $300,000 and $600,000, or $0.02 and $0.04 per fully diluted share. Pro forma earnings are expected to be between $1 million and $1.3 million, or $0.08 and $0.10 per fully diluted share.

Before I open the call up for questions, I want to give a status for Jen Carroll. Many of you asked me this question. Jen, who most of you on the call, I know know, left a few weeks ago to have her baby and I'm pleased to announce that on October 21, Jen and Mike had baby Ellie Marie (ph). Jen is as happy as could be. I went to visit them last night and the only surprising thing was that Ellie Marie wasn't talking yet, and since I figured Jen came out of the womb talking, I figured her daughter would as well. Anyway, all is good on that front, and now, operator, we'll open up the call for questions.

Thank you.

(Operator Instructions)

And we will go first today to Jeetil Patel from Deutsche Bank Security.

Hi. This is actually Herman Leon (ph) calling for Jeetil. You talked a little bit about the brand building initiative, was wondering if you can comment on if you were testing that today and when you plan to fully roll out that part of the business and whether or not that's basically an online based model or a hybrid approach?

Well, we've been building and trying or attempting to build our brand equity for quite a while now. You know, we launched a new site in last November, November of '04 that would be, the new look and feel, new tag line, new fonts and we continue to do that.

The latest initiative is the hiring of BBDO and again, continue to see more testing that will be visible probably later this month and into December as you'll see more on our site, more on our packaging and areas like that. We're focusing on all the existing touch points that we currently have with customers.

Hey, Bill, it's Jeetil. As you look forward, you know, do you think that there's going to be a bigger change from a kind of brand building in the open market, using traditional media, as you look at kind of the major selling seasons for you?

Whatever we decide to do, Jeetil, we'll always test first, so it remains to be seen exactly how we'll do it. We're working more on the messaging right now, the look and feel, and then we'll be testing the different medium, as I mentioned. You'll see it in the catalog and the packaging coming up this quarter.

Second question is just on your repeat, on your orders from repeat customers, your repeat customers. You know, are you doing a lot today to market to these individuals, aside from just email marketing, or is that going to be part of the program as well from a branding standpoint?

Clearly, email marketing is probably the most important method that we use to reach those customers but we also do augment it with catalogs, postcards, areas like that, and of course, everywhere else that we do spend money to acquire new customers, existing customers, will probably see us as well.

Thank you.

We will go next to Craig Bibb from WR Hambrecht.

Hi. Could you talk about the second quarter a little bit? It looks like maybe it's some of the infrastructure spending is hitting in your earnings.

Yes, Craig, this is Eric. Yes, Q2 will be our lowest gross margin quarter. You know, I think Q2 will be 100-150 basis points lower than kind of annual target of 45% and that's really a reflection of a couple of things. We get annual flower cost increases in October. I think we'll feel shipping the most in this quarter, because our percentage air is pretty high in this quarter and it's also a reflection, frankly, of the Gourmet Food business doing pretty well. As it becomes a larger part of our business, it's got a slightly lower gross margin. It's still a very small piece, so there's about 1.5 point, 1-1.5 point, in gross margin.

And then, I think in the quarter sales and marketing will be about a point higher as a percent of sales than it was last year. The other thing I would like to say is this is very much consistent with plan. You know, we used the first half but particularly the second half of the year, or the second quarter to set up the second half of the year. So this is on target from what we thought 90 days ago. Is that helpful?

Yes. How big would -- I mean, (inaudible) to move the needle-

Again, you're right to say that that's not a big piece of it.

So the big piece is flower shipping or-

The big piece is really a flower cost increase and then the percent of shipping that goes air versus ground compared to our peak periods and then also just general product mix.

Yes, this is a period of lower price points. We've done well with seasonally oriented products that sometimes have lower gross margin, you'll see more of those this quarter. Again, as Eric said, this has been all planned since when we announced guidance 90 days ago.

Live plants are going to be a bigger part of the mix also this quarter?

That's correct.

And are they lower margin?

Potentially sometimes they are, yes. Sometimes the holiday-oriented products sometimes are lower-margin products.

And then, I mean, if you're getting then price increases for flowers in October, don't your margins go down for the rest of the year too? Unless you raise price?

It's a function of product mix during the quarter versus product mix throughout the full year.

Okay. And the stock compensation looks like it's about 100% of G&A. Is that close to accurate?

Bill Strauss; Say it again.

Stock, the stock compensation expense, you stuck it back up into the line items now according to 123. It looked like it was almost 100% of G&A. Is that fair?

No, and we show you exactly where it is in the press release, $4,000 in cost of sales, $281,000 in selling and marketing, $359,000 in G&A and in IT, $195,000, and we'll show that to you for a while here as everybody gets used to FAS-123R.

Okay, great. I didn't think you guys were allowed to show us. Thanks.

Okay.

And we have a question from Mark May from Needham and Company.

Hi, thanks a lot. It looks like the average order size in the quarter remained relatively flat sequentially, which was not the trend a year ago. I wonder if you can just give us some color behind that and how you see that trending throughout the year. I may have missed it, but how much were the revenues from the meats and fruits business?

All right, so the AOV for the quarter was a nice increase from the same quarter last year and that was due to two reasons. One was kind of a merchandising mix as we test merchandising higher price points and the second was we did bring up somewhat shipping during the quarter as well, and those two pieces were almost equal for the increase in year-over-year shipping.

In terms of the Gourmet Food business unit, we only disclose those on an annual basis and will do so on our yearend call next August.

Thanks, and wondering, the recent increase in the shipping price, is that going to more than offset some of the points that you made earlier that are going to impact your gross margins this current quarter?

The anticipated shipping increase is built into all of the guidance that we had given.

Okay, thanks. And, Bill, in your prepared remarks, I think it was even in the press release, you talk about we look forward to the challenges and opportunities ahead. I'm wondering if you could point out kind of one or two of the most significant challenges that you think you face?

Sure. I think, you know, the major challenge we've had since we started this business, you know, whatever, seven or eight years ago, and will continue to have is the ability to acquire, you know, customers cost effectively, you know, in the nature of our competitive space that we're in. And of course, you know, recently, with fuel surcharge and the price of fuel, those are two of the bigger ones that we're facing, day in and day out.

And we will go next to Jim Friedland from SG Cowen.

Thanks. Going back to the gross margin question, so you have a sequential decline this year and you're still targeting 45% for the full year, so obviously that implies that gross margins go up in the back half. So I'm assuming that this guidance, the guidance that you have in there, like you said, you've accounted for the FedEx shipping increase at the beginning of the year. Are you also saying, "Hey, you know, fuel surcharges are likely to go up x percent as well." Are you holding things constant or, you know, how are you looking at that and what are some of the items that positively impact the gross margin in the March and June quarters?

I mean, we clearly do put fuel surcharge assumptions in there, but we don't disclose those for numerous reasons. One is if fuel starts going down, people expect increased gross margins, if they go up they'll expect less gross margins and we try to manage the business to that 45%.

On an annual basis, again, you know, variations by quarter always happen in our business but we do target that 45% for the year, so in the face of fuel surcharges going up or down, we feel comfortable that we can deliver that over the period of the year.

And the second question is on the competitive front, if you look at the sales and marketing, you know, came in much more favorably in the fiscal first quarter year-over-year, and it just seems like especially with your guidance comments, that the implication here is that maybe that blip that was experienced on the upside in the March quarter, that you're feeling better about that being a blip versus sort of a regular occurrence. So, can you comment on the outlook that you have today versus where you thought you were coming out of Valentine's Day?

Sure, Jim. I mean, you know, you've heard us talk numerous times. We're always trying to allocate our marketing dollars, either by time of year or by channel, where they can work the hardest for us. So some of our learning, we'll have to take some of the dollars that we normally spend in the summer and we did move those into, you know, Q2.

Eric did mention that one of the reasons why the margin difference going into Q2 will be marketing, will be higher on a year-over-year basis by about 100 basis points than it was last year, that's because we moved some of our marketing dollars that we traditionally spend in Q1 into Q2. Still get the ability to acquire the customers in time to market back them (ph) into the busy season.

So it's a matter of -- the competitive nature isn't any less competitive now than it has been. It's still hyper-competitive. It's a matter of us trying to be smarter with every dollar that we spend every day.

Yes, one more question on that. Have you seen any kind of-obviously, always competitive, but have you seen any irrational behavior out there in terms of some of them, now that we're starting to head into the holiday season, in terms of, you know, key word pricing and what some of your competitors are willing to pay for either display or key word pricing ads?

No. So far, it's only been hype-competitive, not irrationally competitive, as of right now.

Okay, great. Thank you.

We have a question from Laura Champine from Morgan Keegan.

Bill, can you disclose the total number of orders in the quarter? Because I know I've got the average order value but since I don't have the precise breakdown between corporate and your new businesses, it's tough for me to calculate accurately a total order number.

I actually don't have that at the tip of my tongue here, Laura. I do believe if we do file it in the Q, you'll see it in the Q, which should get filed in the next, you know, before it has to. But I actually don't have it with me right here right now.

Okay, and this is kind of a tie-in to the last question, but are you seeing any change in competitors' pricing relative to yours, and do you think that you still have in general a discounted price on like-to-like items, relative to your competition?

You know, we've seen our competitors now for a couple of years try to continue to both, you know, copy the items that we sell, copy the way we photograph the product, you know, copy price points as well or match price points. It doesn't seem to have been all that much different to us over the last couple of years.

Is there still a discount on ProFlowers product, like to like, relative to the competition?

Yes, we believe there still is better value on our pricing. There might be some items or SKUs, bouquets, that our competitors will match, but if you look at the site in total, either, you know, when their price point does match ours, many times we'll have like higher-priced kinds of flowers in there versus filler flowers, and I think that trend is still continuing.

Thank you.

And we will go next to Oz Tangun from Southwest Securities.

Good afternoon. A couple two questions. Can you guys talk a little bit about maybe the incremental difference in the fuel surcharge? I know you said you're not going to talk about the fuel surcharge specifically, give us any sense as to you gave us two, three, four different ways of offsetting the fuel surcharge. Any flavor, any more added color as to how much of that fuel surcharge was offset by some of those things you mentioned?

Well, you can see our gross margins were very close to what it was last year. I think it was about 40 bp difference, which was more noise than anything. So I think, you know, we could frankly say due to those levers, that we did offset the impact or at least, a huge majority of the impact, of the fuel surcharge.

All right, and you feel comfortable that you're going to have the ability to do that going forward?

I don't know if I ever feel comfortable in this chair, but I can tell you that as an organization, we're doing everything that we possibly can to do that and, you know, so far, so good.

Oz Tangun. All right, and you mentioned about the gross margins in the second quarter, 100-150 basis points lower. Can you utilize some of the things you mentioned that, you know, you used to offset the fuel surcharge to maybe not have that 150 basis point hit on the gross margin? I guess you talked about the product mix as being the major factor there, but can you talk about that a little bit?

Well, you know, again, we try to do whatever we can. The most important thing that we focus on here is the customer value experience, and as I also mentioned in my prepared comments, we do understand the difference in cost prices, if you will, and the impact on conversions, lifetime value, and so by measuring all that, you know, again, that was the plan that we built going into the fiscal year back in August.

We think this is about the right place to be to balance all of those levers and to have the customers continue to come back to us, and you know, target our 45% gross margin goal for the year.

All right. And I don't know if you can answer this question, but you mentioned you pushed some of the dollars from the first quarter to second quarter in terms of selling and marketing. Excluding those or putting that back in, if you will, would you have had a leverage in your selling and marketing costs?

It's pretty -- you know, it's pretty consistent with plan. I mean, you know, programs may start a little bit later or a little bit earlier, so some dollars move around, but, you know, the overall dollars for the year seem to be, you know, kind of on target. So I guess, yes, if the dollars were spent earlier in the quarter, we wouldn't spend the same dollars, you know, we wouldn't spend the same dollars in October if we'd spent some dollars in September.

Right, and also, as we came into this fiscal year, again, according to the plan, we did eliminate a lot of those very expensive orders that we'd had traditionally in the first quarter. We could, and we did, eliminate those. And then you take those dollars that you save and you invest them back in this quarter where the dollars will work harder for us.

Sure. I mean, I guess you had a pretty strong top line growth, with almost a 200 basis points leverage in your selling and marketing. I'm just trying to figure out if you have potential to clear out that number on a longer-term basis?

I would say still for modeling purposes, we still believe that 20-21% marketing is the right number to continue to model at least for this fiscal year.

And I guess it is lower than the last guidance you gave, right?

No, no, exactly the same. Exactly the same.

I thought it was 21-22 or higher last time, but I guess-

That might have been before the accounting change.

Okay. And then finally, I guess, what gives you the confidence to increase guidance for the full year?

You know, if you look at that guidance from an earnings perspective, about a little more than $0.02 of it comes from reduced share count and then $0.02 is for the earnings that we picked up in Q1.

Okay, and the reduced share count, I mean, does that mean that you're going to get more aggressive with the share buyback? You weren't thinking you were going to do that a couple of months ago or is this---

No, no, no -- I'm sorry I interrupted you. That fully diluted share guidance does not anticipate any more stock buyback and you know, anything that we buy back will reduce that further.

Okay. Great quarter.

Thank you, Oz.

And we have a question from Rusty Hoss from Roth Capital Partners.

Yes. Just on G&A, once you back out the stock-based comp, there was still a pretty big increase in G&A. Is that just the infrastructure/headcount or is there anything else in there kind of nonrecurring?

There were some personnel changes throughout the quarter, you know. Adding a CFO wasn't the cheapest thing we've ever done and some other changes that cost us some money during the quarter.

He's got some pressure on him now, Bill.

Yes, there you go. I appreciate that.

And just to kind of clarify, if you could, the gross margin or product margin on the floral and then the non-floral, and then the seasonal floral, it sounds like that you're adding some non-floral product but you're also adding some more seasonal floral product and that mix is causing some of the gross margin contraction. Is that a fair statement?

Gross margin is, you know, you've got to think about gross margin in terms of product mix that we sell versus the product cost, and then also shipping in our percentage that we ship air versus ground. And so we have figured that into the guidance and that's how we've come up with our Q2 number and also incorporated all of those factors into the balance of the year.

During our peak periods, Rusty, like the second half of the year, some of the peak holidays, our ground percent could be more than 2X what it is during the normal time. So, you know, it's more efficient for us during the peak times, if you will, at least on the shipping line, hence the gross margin.

Right, and also, are you seeing consumers purchase closer to holidays? I mean, I would assume that a lot of it depends on where the holiday falls during the week and if somebody -- if the holiday falls on a certain date, somebody's going to order it a couple of days in advance and therefore, you can throw it through your ground carriers rather than air. Is that true, too?

I'm not so sure it's when the people order affects the ground, per se, because everything still is overnight. It's just a matter that at higher volumes, it gives us more scale to see the multiple carriers and multiple shipping methods.

Okay. Okay, thank you.

And we will go next to Jamie DeYoung (ph) from Gruber McBain.

Bill, my question has been answered, so great quarter, keep up the good work. Thank you.

Say hello to Eric for us.

I will.

All right.

We will go to Rebecca Kujawa from Stanford Group.

Hi, thank you. I wanted to talk a little bit about Cherry Moon Farms and Uptown Prime. I apologize if I missed the percentage of business in the quarter from those two. Could you give us that again if you did already? And then, secondly, is that included, are those two properties included in the brand building or are you focusing most on the ProFlowers side of the business?

So I'll take your second question first. So, the majority of the brand building efforts will be focused around ProFlowers, and then when the time is right to start building the brand on the others, you know, we'll take the learning.

In terms of breaking out more detail, Rebecca, we'll really only give right now our Gourmet Food business unit, which encompasses, you know, Uptown Prime and Cherry Moon Farm. Those numbers, on a annual basis, not on a quarterly basis, the numbers are pretty small still. Pretty small overall.

Okay. And what is your -- do you still maintain the same strategy of building internally or will you at some point start considering acquisitions of known brands within the non-floral business?

You know, we would entertain both. Whatever we think is the best for the longer term to deliver the best value to consumers, and that's how we think about it. So we're not married to internally developing them and we're not, you know, acquiring them. It's a matter of what's the best thing that we could do to ensure that we can own those customers over the long term and give them the best value that we can give them.

Thanks very much.

And we will go next to Ronald Bookbinder from Sterne Agee.

Good afternoon and congratulations. You've mentioned on the gross margin for Q2 product mix impacting it. Can you give us some color as to what you mean by product mix and how that changes from last year?

Sure. So, some of our seasonal offerings that are like Christmas related, normally are lower price points and also potentially lower gross margins. So it's that kind of product mix that is relatively unique to this quarter, and specifically, because of the Christmas, you know, all the greens for Christmas.

And that's more than you offered last year?

It looks like it's going to work that way, yes.

Okay. On the shipping costs, when you increase shipping costs, do you see that impacting conversion at all?

Yes. I mean, any time that we tweak shipping or pricing, there's usually impact that we can measure, both in conversions and lifetime value. I'm not going to go into detail what that looks like, other than to say that we're very aware that we kept it to the best of our ability. We're very methodical in our approach. But, oh, yes, it's definitely a very price-sensitive audience out there.

When you look at this past quarter conversion, how did that compare to last year?

Our conversion still remained very strong and the conversion number we usually do give out on an annual basis, but it's traditionally been a very high conversion number, averaging, you know, over 15%.

But you don't care to disclose whether it was higher or lower than last year?

Well, no, we just haven't. We haven't, to date.

Just lastly, would the-hurricanes, when you shift from the Miami distribution center to using a Memphis, how does that impact cost?

The costs are pretty flat across the board in terms of the different DCs, so it's really not a major cost difference for us. I mean, obviously, we had a few major hurricanes, we had two major hurricanes last quarter that affected September and again, we still managed to maintain our gross margins.

Okay, great. Thank you very much.

And we will go next to Frank Gristina from Avondale Partners.

Thanks, guys. The question about shipping and sensitivity I think was answered, but I'm just doing the math. We calculated customer acquisition costs based on sales and marketing spend and it looks like you gained efficiency for the first time in several quarters. Is that accurate by how you measure customer acquisition costs and what would you account that to?

So, Frank, as you know, the number we give out for customer acquisition, we've given a range out in the 15-17 range and we really only look at that on an annual basis. So, any quarter, you know, the noise can be different and it might have been a more efficient quarter, but as I mentioned, we also did away with some of our more expensive orders and taken those dollars and putting them back into this quarter more around the holiday season.

But we're still targeting that 15-17 range for the fiscal year and nothing we saw in the first quarter, you know, is going to have us take that number up or down at this point.

Let me ask it slightly different. I guess you guys track the source of your customers from using the site. You'll ask, you know, did you see a magazine ad, radio, how did you hear about us. Are you seeing more people cite a friend or a referral from a person?

You know, I did not look at that from for this past quarter, Frank, to be honest with you.

Okay. One more question. I guess with regard to the hurricanes, did you guys -- there was 97% of the subscribers in your county were without power. How did that impact that facility? And I apologize if you addressed this already.

Bill Strauss; No. You know, with the hurricanes, we do have the option of, you know, multiple distribution centers and growers here in the states that we can move that volume to. So it doesn't seem to materially impact our cost structure, nor our ability to fulfill demand.

Well, with regard to the inventory that was in storage or in the refrigerators, do you have generators that saved all that or were you able to get it out?

Our inventory on hand, especially this time of the year, is a very, very small number, just not a material number.

Great, okay. Thanks, guys.

Yes. One point is you can definitely see that coming, so you can move inventory before the hurricane comes.

And we have a question from Steven Joule from RBC Capital.

All my questions have been answered, thank you.

And we will go next to Ryan Randall (ph) from Canal Capital.

Hi, thanks for taking my question. I just have two quick ones. Just to clarify, I know there's been a lot of talk about the gross margin, but you're expecting the December quarter to be down, what, 100-160 basis points from the September quarter?

Correct.

Okay. So that's a 44 % margin, so that's like 300 basis points below what you guys did year-over-year without the change in the basis and such. Now you said that's due to product mix, what kind of mix shift difference year-over-year are you going to see that's going to make things better in the March quarter? Is that just purely the lack of holiday things?

Well, in the March quarter, it's basically back to roses and cut flowers, bouquets, et cetera. That's different than the Christmas quarter, which would focus a lot around greens.

Okay, so what percentage of the mix is due to product and what percentage is due to the high fuel surcharges?

We haven't broken that out. We just basically gave you a few different of the major reasons.

Okay, so probably 50-50?

We just haven't broken that out.

Just on the year-over-year comparison, it's not a 300 basis point decline, right, if you move promotional costs up to cost of goods sold, you know, it's 100-150 basis points year-over-year difference.

Okay, so you're referencing the year over year, not sequential?

It's the same number, right?

Correct. Our business is really focused year-over-year. Looking at our business sequentially is probably not the right way to do it because of the nature of the different holidays. So everything we do, internally as well, we look at year-over-year and we encourage everybody that follows our company to do the same thing we do.

Yes. No, no, that's why I was clarifying which number you were using for the guidance, and that's helpful. Thanks. And then, secondly, you made some commentary about your sales and marketing guidance and then that it may be impacted by the accounting change. Can you just re-clarify that? Because you guys did say 21-22% last time.

20-21 has been the sales guidance.

I think since post the accounting change, moving the freebies.

How would the accounting change affect that?

Well, it used to be when we would give out free -- Rex, why don't you take that one?

Okay, what we did, and this was effective actually last quarter at 6/30/05, is the cost of our promotional products had to be shown as cost of goods sold, so we moved it from marketing expense into cost of goods sold, so that reduced our marketing expense and increased our cost of goods sold. So you need to make sure that you're looking at our most recent 10-K to get the numbers for marketing and cost of goods sold.

Okay, great. Thanks very much.

And we will go next to Bill Gilchrist (ph) from C.C. Grove (ph).

Thanks for taking my call. Had a few questions for you. One was could you give us some sense of talking about the ground versus the air, what relationship there, the ratio ground versus air is for a normal shipping period right now versus the peak periods?

I don't know if we've disclosed that publicly yet. Let me just say that the majority of it is still air.

Okay. Can you give us a sense of year-over-year, how that's shifting?

Yes. It's definitely shifting more towards ground. We saw that shift continue in the first quarter.

Okay. And secondly, you talked about the information, the IT spend that you guys are doing, and you're building up for your peak capacity increase. Could you give us a sense of what is your peak period capacity, what can you run through all your -- what can your infrastructure handle?

Yes. I don't know if we said IT spending, but we did say that we're focusing on getting ready across the board in all of our operations and organizations to make sure we can handle the peak. And, you know, I think that we're very comfortable with whatever guidance and forecast internal that we have, that we can beat that by a material amount.

I would doubt that you'll see any of our systems or processes get bottlenecked by an inability, you know, to handle our peak periods. Something that we've done for years, we plan very diligently. I mean, the way we think of our business, we think of our business as preparing and planning for the peak hour of the peak day.

I mean, once you do that, everything else becomes easy, and we actually take our peak day and we put a decent amount of cushion on there as well in terms of more that we can handle. So we're confident in our ability and our proven track record to continue to handle these peaks.

Could you give me some sense when you start leveraging the IT operating expenses, then? Can you give me a sense of what you're spending that on and when you actually start reaping the benefits of that?

Well, IT spend is, as you saw last year, it was broken out about 3%, if I'm not mistaken.

Yes, that's right.

So it's not -- I mean, it's not a ton of money that we spend and a lot of it is on people to continue to maintain all of our systems. So I don't know when, you know, we'll be able to leverage it. Our main emphasis is focusing on giving the customers a great experience.

Okay. Okay. That's all I had, thanks.

And we have a question from Steve Weinstein from Pacific Crest.

Okay, thanks a lot. I just wanted to clarify something. I think you made the comment that your sales and marketing would be up year-over-year by about a percentage point, and I guess my question is, is that because you're trying to do some additional branding or is that because of some other initiatives, or is that just because marketing costs are a little higher?

It could be partially due to all three of the above, but I think the majority of that would be in kind of new marketing, testing some other channels that we've not done previously, would be the majority of that. In terms of branding, we're really not spending much money at all. It's an immaterial amount in the next quarter, like the branding you'll see is in our catalog. You know, you'll see some of our new tag lines, some of our new messaging are on the web site, but that's not really material dollars to do that.

Okay. Thank you.

And we have a question from Eric Beder from Brean Murray.

Good afternoon, guys. I came to the call late, so I will apologize if I repeat questions. I would like to talk a little about - because we seem to have beaten the Christmas quarter to death - about Valentine's Day. And last year Valentine's Day was on Monday. This year, it's somewhat easier in terms of delivering product. Do you think that there are leverage opportunities in the Valentine's Day quarter to really start to kind of once again get a significant operating leverage going forward, and what are they, if you believe there are?

We're certainly very sensitive and aware of the day of the week that the holidays fall on and it factors into all our planning, and I can tell you that, so we do know that it's on a Tuesday and a Monday and that is baked into the fiscal year guidance that we gave.

Okay, and in terms of the buyback, what is kind of the logic, what is the trigger or is there a return that you do need in a buyback to buy back additional shares in terms of the stock? How do you kind of look for that in terms of your cash usage?

Yes, the buyback is a discretionary program. This quarter the window closed earlier than we thought and so we look at our alternative uses of cash and we don't disclose the metrics that we use to buy the stock, but we try to take into account our alternative usage for that capital.

Okay. Thank you.

(Operator Instructions) We will take a follow-up from Craig Bibb from WR Hambrecht.

Hi. I'm actually not done beating the Christmas quarter to death, so you didn't have a gross margin hitfrom mix in the second quarter a year ago because you weren't selling wreaths and live plants last year?

We just believe one of the things will be the product mix, that it would be more of that kind of product this year, based on some patterns and trends we saw last year?

Are you going to promote lower margin goods?

Well, we'll promote the goods that the consumers want, like we don't necessarily promote higher margin or lower margin. We really try to give consumers what they tell us they want, both with their wallet in terms of what they order and also according to the research that we do as well.

And are wreaths and live plants, is that - are those incremental product lines versus a year ago?

The depth and the amount very well could be, yes.

So, I mean, could that be a kicker to sales?

Potentially, but again, all of that has been built into the guidance that we give them.

And then you're pushing sales and marketing dollars from the first quarter into the second quarter, wouldn't that cause sales to accelerate in the second quarter relative to the first quarter?

Again, what we did is we just took some of the higher cost orders from the first quarter that we didn't do this year, took those dollars and are doing some numerous tests in this quarter.

But you're not spending more marketing dollars than you would have?

Would have if what?

Would have if you hadn't moved those dollars out of the first quarter. You're going to do more marketing spend in the second quarter.

You know, potentially. It's hard to say. As you know, you probably heard in my prepared remarks, I said probably at least a half a dozen this time. It's that constant balancing of growth and profitability, how much you invest back and (inaudible) for the future versus how much profitability you take, and you know, we have those conversations all the time. So we think we have the proper balance in Q1 and that resulted in marketing being slightly under what it was a year ago.

We think we have the proper balance now going into Q2, and the rest of the year and in Q2, it's going to result in a slightly higher spend of marketing. It's just balancing that growth and profitability.

Okay. So your implied guidance is like 25, 28% growth. What causes it to decelerate, given the new product lines and the extra spending?

You know, what we've been saying pretty consistently, we believe we're a mid to high-20 growth company, and if we see opportunities to grow faster while balancing growth and profitability, we'll continue to do that. So I think that's very consistent.

All right. And then, to hit your 45% gross margin with the lower margin in the second quarter, you've got to do 45% for the year and you've got to do kind of 45.5% in the second half. Is that plan doable?

Yes, that's the right math.

Okay. Great, thanks.

Thanks, Craig.

And that does conclude our question-and-answer session. At this time, I'd like to turn the call back over to Bill Strauss for any additional closing remarks.

Okay. Well, thank you, everybody, for your time today and we do look forward to the remainder of fiscal 2006 and believe that it's a significant opportunity still exists for Provide Commerce to redefine traditional commerce in existing and new categories. Goodbye and thank you, everybody.

That does conclude today's conference call. Thank you for your participation. You may now disconnect.