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| GSIC > SEC Filings for GSIC > Form 10-Q on 14-May-2009 | All Recent SEC Filings |
14-May-2009
Quarterly Report
• Net loss was $11.1 million in the first quarter of fiscal 2009, inclusive of a benefit for income taxes of $6.8 million, compared to a net loss of $10.8 million in the first quarter of fiscal 2008, inclusive of a tax benefit of $10.5 million. Loss from operations improved to $13.0 million in the first quarter of fiscal 2009 compared to a loss of $17.8 million in the first quarter of 2008.
2009 Outlook:
• For the remainder of fiscal 2009, compared to the same period in fiscal
2008, we expect a modest decrease in net revenues due primarily to the
termination of a client relationship of one our top ten contributors of
service fee revenues in fiscal 2008 as a result of the client's
liquidation, and the transition during fiscal 2009 of one owned inventory
client to a non-owned inventory deal structure. We believe that the client
transition will result in a decrease in net revenues from product sales
partially offset by an increase in service fee revenues and will have no
material effect on earnings. We also expect this transition will decrease
our cost of revenues from product sales and our marketing expenses. In
addition, we believe, due to the current economic environment, same store
e-commerce revenues for the remainder of fiscal 2009 will grow at a more
moderate rate than in fiscal 2008 and that capital expenditures will
modestly decrease in fiscal 2009. We continue to expect that we will have
a net loss in fiscal 2009.
Results of Operations
Three-month period ended April 4, 2009 and March 29, 2008 (amounts in tables in
millions):
Net Revenues
We derive our revenues from products we sell through our clients' e-commerce
business, from service fees we earn for developing and operating our clients'
e-commerce businesses, and from service fees we earn from providing interactive
marketing services.
Net Revenues from Product Sales. Net revenues from product sales are derived from products we sell through our clients' e-commerce Web stores, including outbound shipping charges for all clients for which we provide fulfillment services. Net revenues from product sales are net of allowances for returns and discounts. We recognize revenue from product sales and shipping when products are shipped and title and risk of ownership passes to the consumer. Service Fee Revenues. Service fee revenues include revenues we earn from providing e-commerce services and interactive marketing services. E-commerce service fee revenues are generated from a client's use of one or more of our e-commerce platform components, which include technology, fulfillment and customer care, as well as from professional services and gift card breakage. Interactive marketing service fee revenues are generated from online marketing, advertising, email and design services. Service fee revenues can be fixed or variable and are based on the activity performed, the value of merchandise sold, or the gross profit from a transaction.
First Qtr Fiscal 2009
vs.
First Qtr Fiscal 2008
First Qtr Fiscal 2008 First Qtr Fiscal 2009 Change Change
Net Revenues by Type:
Net revenues from product
sales $ 123.1 63 % $ 106.2 54 % $ (16.9 ) (14 %)
Service fee revenues 72.4 37 % 90.3 46 % 17.9 25 %
Total net revenues $ 195.5 100 % $ 196.5 100 % $ 1.0 1 %
Net Revenues by Segment:
E-Commerce services $ 187.5 96 % $ 178.5 91 % $ (9.0 ) (5 %)
Interactive marketing
services 12.1 6 % 25.1 13 % 13.0 107 %
Intersegment eliminations (4.1 ) (2 %) (7.1 ) (4 %) (3.0 ) 73 %
Total net revenues $ 195.5 100 % $ 196.5 100 % $ 1.0 1 %
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Net Revenues by Type
Net Revenues from Product Sales. Net revenues from product sales decreased
$16.9 million in the first quarter of fiscal 2009. This decrease was primarily
due to the transition during the first quarter of fiscal 2009 of one owned
inventory client to a non-owned inventory deal structure, a decrease in revenue
from our professional sports league clients, and a decrease in sales from one
consumer electronics client. Of this decrease, $11.0 million was due to a
decrease in revenues due to the client transition and from clients that ceased
doing business with us after the first quarter of fiscal 2008, and $5.9 million
was due to a decrease in revenues from clients that operated for the entirety of
both periods. Shipping revenue for all clients for which we provide fulfillment
services was $26.7 million for the first quarter of fiscal 2009 and
$24.8 million for the first quarter of fiscal 2008.
Service Fee Revenues. Service fee revenues increased $17.9 million in the first
quarter of fiscal 2009. This increase was primarily due to the addition and
growth of e-Dialog, Inc. ("e-Dialog"), which we acquired in February 2008, the
client transition discussed above, increased revenues from clients that operated
for the entirety of both periods, and increased revenues from clients that
initially began generating revenue after the first quarter of fiscal 2008.
Partially offsetting these increases was a decrease in revenues from clients
that terminated their relationship with us, including the liquidation of the
business of a client that was one of our top ten contributors of service fee
revenues for fiscal 2008.
For the remainder of fiscal 2009, we expect a continued decrease in net revenues
from product sales due to the client transition discussed above. We expect this
transition to continue to result in an increase in service fee revenues for the
remainder of fiscal 2009, but an overall decline in total net revenues.
Net Revenues by Segment
E-Commerce Services Segment Revenues. Net revenues from e-commerce services
decreased $9.0 million in the first quarter of fiscal 2009 due to a
$16.9 million decrease in net revenues from product sales which was partially
offset by an increase of $7.9 million in service fee revenues.
Of the $9.0 million decrease in net revenues from our e-commerce services
segment, $8.2 million was from clients that did not operate for the entirety of
both periods, including a client that was one of our top ten contributors of
service fee revenues for fiscal 2008 with which we terminated our relationship
as a result of that client's liquidation, and $0.8 million was from clients that
operated for the entirety of both periods.
Of the $7.9 million service fee revenue increase, $5.1 million was from an
increase in revenues from clients that operated for the entirety of both
periods, and $2.8 million was from clients that did not operate for the entirety
of both periods. See the discussion above under Net Revenues by Type - Net
Revenues from Product Salesfor an explanation of the $16.9 million decrease in
net revenues from product sales.
Interactive Marketing Services Segment Revenues. Net revenues increased by 107%,
or $13.0 million, due primarily to our acquisition of e-Dialog in February 2008
as well as from organic growth in our e-mail marketing, online marketing,
design, and digital photo studio services.
Costs and Expenses
Costs and expenses consist of costs of revenues from product sales, marketing
expenses, account management and operations expenses, product development
expenses, general and administrative expenses and depreciation and amortization
expenses. Starting in the second quarter of fiscal 2008 we replaced the former
expense line of sales and marketing with two separate line items: (i) marketing,
and (ii) account management and operations. We conformed all periods presented
to this presentation. This change was made to enable investors to analyze our
expenses in a manner consistent with management's internal view which is used to
manage the business.
Costs of Revenues from Product Sales. Costs of revenues from product sales
consist primarily of direct costs associated with (i) products we sell through
our clients' Web stores, and (ii) our shipping charges for all clients for which
we provide fulfillment services. All costs of revenues from product sales were
attributable to our e-commerce services segment.
Marketing. Marketing expenses consist primarily of net client revenue share
charges, promotional free shipping and subsidized shipping and handling costs,
catalog costs, and net advertising and promotional expenses. All marketing
expenses were attributable to our e-commerce services segment and generally
supported revenues from product sales.
Account Management and Operations. Account management and operations expenses
consist primarily of costs to operate our fulfillment centers and customer care
centers, credit card fees, and payroll related to our buying, business
management, operations and marketing functions.
Product Development. Product development expenses consist primarily of expenses
associated with planning, maintaining and operating our proprietary e-commerce
and e-mail platforms and related systems, and payroll and related expenses for
engineering, production, creative and management information systems.
General and Administrative. General and administrative expenses consist
primarily of payroll and related expenses for executive, finance, human
resources, legal, sales and administrative personnel, as well as bad debt
expense and occupancy costs for our headquarters and other offices.
Depreciation and Amortization. Depreciation and amortization expenses relate primarily to the depreciation or amortization of the capitalized costs for our purchased and internally-developed technology, including a portion of the cost related to the employees that developed such technology, hardware and software; furniture and equipment at our corporate headquarters, fulfillment centers and customer care centers; the office buildings and other facilities owned by us; and acquisition-related intangible assets.
First Quarter of Fiscal 2009
First Quarter First Quarter vs.
of Fiscal 2008 of Fiscal 2009 First Quarter of Fiscal 2008
% of % of
Net Net
$ Revenues $ Revenues $ Change % Change
Cost of revenues from
product sales $ 85.4 44 % $ 79.4 41 % $ (6.0 ) (7 %)
Marketing 16.9 9 % 10.9 6 % (6.0 ) (36 %)
Account management and
operations 59.1 30 % 57.3 29 % (1.8 ) (3 %)
Product development 22.4 11 % 28.0 14 % 5.6 25 %
General and
administrative 15.7 8 % 18.5 9 % 2.8 18 %
Depreciation and
amortization 13.8 7 % 15.4 8 % 1.6 12 %
Total costs and expenses $ 213.3 109 % $ 209.5 107 % $ (3.8 ) (2 %)
Cost of Revenues from Product Sales:
First Qtr First Qtr
Fiscal 2008 Fiscal 2009
Cost of revenues from product sales $ 85.4 $ 79.4
As a percentage of net revenues from product sales 69 % 75 %
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Cost of revenues from product sales decreased $6.0 million in the first quarter
of fiscal 2009. The decrease in cost of revenues as a percentage of net revenues
from 44% in the first quarter of fiscal 2008 to 40% in the first quarter of
fiscal 2009 was primarily due to the increase in service fees and the decrease
in product sales, because service fees have no associated cost of revenue. We
continue to expect a decrease in cost of revenues from product sales as a
percentage of net revenues as we expect service fee revenues to continue to grow
and net revenues from product sales to continue to decrease.
The increase in cost of revenues from product sales as a percentage of net
revenues from product sales from 69% to 75% was primarily due to an increase in
shipping revenue. Our cost of generating shipping revenue is higher than our
cost of generating revenue on sale of products.
Marketing:
First Qtr First Qtr
Fiscal 2008 Fiscal 2009
Marketing $ 16.9 $ 10.9
As a percentage of net revenues from product sales 14 % 10 %
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Marketing expense decreased $6.0 million in the first quarter of fiscal 2009. As
a percentage of net revenues, marketing expenses decreased from 9% to 6%. This
decrease was primarily due to the increase in service fees and the decrease in
product sales, because service fees have no associated marketing expenses.
As a percentage of net revenues from product sales, marketing expenses decreased
from 14% to 10% due primarily to the transition during fiscal 2009 of one owned
inventory client to a non-owned inventory deal structure and a decrease in net
revenues from product sales. Of the $6.0 million decrease in marketing expenses,
$2.3 million was due to a decrease in promotional free shipping and subsidized
shipping and handling costs, $2.1 million was due to a decrease in client
revenue share expenses caused by decreased sales from owned inventory clients,
$1.4 million was due to a decrease in marketing costs, and $0.2 million decrease
in other marketing expenses. We expect marketing expenses to continue to
decrease in absolute dollars during fiscal 2009 compared to fiscal 2008, because
of the expected decrease in net revenues from product sales. We continue to
expect a decrease in marketing expenses as a percentage of net revenues, as we
expect service fee revenues to increase and net revenues from product sales to
decrease.
Account Management and Operations. Account management and operations expenses
decreased $1.8 million in the first quarter of fiscal 2009. As a percentage of
net revenues, account management and operations expenses decreased from 30% to
29%. The decreases in absolute dollars and as a percentage of net revenues were
primarily due to decreases in fulfillment expenses, occupancy costs and credit
card fees, partially offset by the e-Dialog acquisition in February 2008. We
expect account management and operations expenses to be relatively constant in
absolute dollars during fiscal 2009 compared to fiscal 2008, as we believe our
fulfillment and call center capacity will be sufficient to accommodate the
growth of our domestic and international e-commerce businesses and our
interactive marketing services business.
Product Development. Product development expenses increased $5.6 million in the
first quarter of fiscal 2009. As a percentage of net revenues, product
development expenses increased from 11% to 14%. The increases in absolute
dollars and as a percentage of net revenues were primarily due to the e-Dialog
acquisition and increased personnel expenses to enhance our e-commerce
technology platform. Of the $5.6 million increase in product development
expenses, $5.2 million was due to an increase in personnel and related costs and
$0.4 million was due to an increase in other product development costs. We
continue to expect product development expenses to increase in absolute dollars
in fiscal 2009 compared to fiscal 2008, as we plan to continue to launch
additional client Web stores, invest in our e-commerce and interactive marketing
services platforms and expand our international operations.
General and Administrative. General and administrative expenses increased
$2.8 million in the first quarter of fiscal 2009. As a percentage of net
revenues, general and administrative expenses increased from 8% to 9%. The
increases in absolute dollars and as a percentage of net revenues were primarily
due to the e-Dialog acquisition and a $1.3 million charge for acquisition
related costs for a potential acquisition that terminated in the first quarter
of fiscal 2009. We continue to expect general and administrative expenses to
increase in absolute dollars in fiscal 2009 compared to fiscal 2008 as we expect
to add new clients, expand our e-commerce and interactive marketing services
platforms, and expand our international operations.
Depreciation and Amortization. Depreciation and amortization expenses increased
$1.6 million in the first quarter of fiscal 2009. As a percentage of net
revenues, depreciation and amortization expenses increased from 7% to 8%.
Depreciation expenses increased $1.1 million due to the depreciation of prior
and current year fixed asset additions. Amortization expenses increased $0.5
million primarily due to the intangible asset amortization related to the
e-Dialog acquisition. While we expect capital expenditures for fiscal 2009 to
decrease, we continue to expect depreciation expenses to increase in fiscal 2009
compared to fiscal 2008, as we continue to depreciate capital expenditures made
in prior years. We expect amortization expenses to decrease in fiscal 2009
compared to fiscal 2008 due a decrease in intangible asset amortization
associated with the Accretive and e-Dialog acquisitions.
Other (Income) Expense
First Quarter of Fiscal 2009
First Quarter First Quarter vs.
of Fiscal 2008 of Fiscal 2009 First Quarter of Fiscal 2008
% of % of
Net Net
$ Revenues $ Revenues $ Change % Change
Interest expense $ 4.4 0.6 % $ 4.8 0.5 % $ 0.4 9 %
Interest income (1.0 ) (0.1 %) (0.1 ) 0.0 % 0.9 (90 %)
Other expense 0.1 0.0 % 0.2 0.0 % 0.1 100 %
Total other expenses $ 3.5 0.5 % $ 4.9 0.5 % $ 1.4 40 %
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Total other expenses increased $1.4 million in the first quarter of fiscal 2009.
The $0.4 million increase in interest expense is due to the amortization of the
debt discount on our convertible notes in accordance with FSP APB 14-1. The
$0.9 million decrease in interest income was due to lower cash balances as a
result of the February 2008 acquisition of e-Dialog, as well as lower interest
rates earned in the first quarter of fiscal 2009. The $0.1 million increase in
other expense was primarily due to foreign currency exchange losses on
transactions denominated in currencies other than the functional currency.
Income Taxes
We recorded a benefit of $6.8 million in the first quarter of fiscal 2009. Our
tax provision for interim periods was determined using an estimate of our annual
effective tax rate which is 37.9% for fiscal 2009 plus any discrete items that
effect taxes that occur during the quarter. The effective tax rate is higher
than the 35% federal statutory tax rate primarily due to the benefit from state
taxes partially offset by permanent items.
As of January 3, 2009, we had available federal net operating loss carryforwards
of approximately $430.9 million which expire in the years 2009 through 2028. As
of January 3, 2009, we had available state net operating loss carryforwards of
approximately $187.0 million which expire in the years 2010 through 2028 and
foreign net operating loss carryforwards of approximately $8.5 million that
either begin expiring in 2021 or have no expiration date. A portion of these net
operating loss carryforwards are offset by a valuation allowance. Management
monitors all available positive and negative evidence related to our ability to
utilize our deferred tax assets. Should management determine that it is more
likely than not that these deferred tax assets will be utilized, we will release
a portion of the remaining valuation allowance. Should management determine that
it is more likely than not that these deferred tax assets will not be utilized,
we will increase the valuation allowance.
We have federal net operating losses of approximately $231.5 million which will
expire as a result of the Internal Revenue Code Section 382 limitation
regardless of the amount of future taxable income; and thus has a full valuation
allowance recorded against this deferred tax asset.
Seasonality
We have experienced and expect to continue to experience seasonal fluctuations
in our revenues from e-commerce services. These seasonal patterns will cause
quarterly fluctuations in our operating results. In particular, our fourth
fiscal quarter has accounted for and is expected to continue to account for a
disproportionate percentage of our total annual revenues. We experience less
seasonality in our revenues from interactive marketing services. We believe that
results of operations for a quarterly period may not be indicative of the
results for any other quarter or for the full year.
Liquidity and Capital Resources
As of
January 3, April 4,
2009 2009
(in millions)
Cash and cash equivalents $ 130.3 $ 48.1
Percentage of total assets 18 % 8 %
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We expect to generate positive cash flow from operations in fiscal 2009, the
substantial majority of which will be generated in our fourth fiscal quarter. We
believe that our cash flow from operating activities, cash and cash equivalents
balances, and borrowing availability under our $90 million secured revolving
credit facility will be sufficient to meet our anticipated operating cash needs
for at least the next 12 months.
Sources of Cash
Our principal sources of liquidity in the first quarter of fiscal 2009 were our
cash and cash equivalents balances. As of April 4, 2009, we had cash and cash
equivalents totaling $48.1 million, compared to $130.3 million of cash and cash
equivalents as of January 3, 2009. Our cash equivalents are comprised of money
market mutual funds.
We have experienced and expect to continue to experience seasonal fluctuations
in our cash flows. We generate the substantial majority of cash from our
operating activities in our fourth fiscal quarter. In our first fiscal quarter,
we typically use cash generated from operating activities in the fourth quarter
of the prior fiscal year to satisfy accounts payable and accrued expenses
incurred in the fourth fiscal quarter of our prior fiscal year. During our
second and third fiscal quarters, we generally fund our operating expenses and
capital expenditures from either cash generated from operating activities, cash
and cash equivalents, or financing activities.
As of April 4, 2009, we had no outstanding borrowings under our $90 million
secured revolving bank credit facility, compared with $15.0 million of
borrowings as of March 29, 2008. The credit facility contains financial and
restrictive covenants that limit our ability to engage in activities that may be
. . .
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