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Edited Transcript of FTD earnings conference call or presentation 8-Nov-17 10:00pm GMT

Thomson Reuters StreetEvents

Q3 2017 FTD Companies Inc Earnings Call

DOWNERS GROVE Nov 11, 2017 (Thomson StreetEvents) -- Edited Transcript of FTD Companies Inc earnings conference call or presentation Wednesday, November 8, 2017 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian S. Cooper

FTD Companies, Inc. - Interim CFO & Interim Principal Accounting Officer

* John C. Walden

FTD Companies, Inc. - CEO, President and Director

* Katie M. Turner

ICR, LLC - MD

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Conference Call Participants

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* Anthony Chester Lebiedzinski

Sidoti & Company, LLC - Equity Analyst

* Linda Ann Bolton-Weiser

D.A. Davidson & Co., Research Division - Senior Research Analyst

* Mark Alan Rosenkranz

Craig-Hallum Capital Group LLC, Research Division - Associate Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to the FTD Companies, Inc. Third Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Katie Turner, for opening remarks. Thank you, Ms. Turner. You may begin.

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Katie M. Turner, ICR, LLC - MD [2]

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Thank you. Good afternoon, and welcome to the FTD Companies Third Quarter 2017 Earnings Conference Call and Webcast. With me today on the call are John Walden, President and Chief Executive Officer; and Brian Cooper, Interim Chief Financial Officer.

Before we begin, please remember that during the course of this call, management may make forward-looking statements within the meaning of the federal securities laws that address the company's expected future business, financial performance and financial condition. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those expressed in our forward-looking statements. In addition to the company's reports filed with the Securities and Exchange Commission, please refer to the text in the company's press release issued today for a discussion of the risks and uncertainties associated with such forward-looking statements.

Also, please note that on today's call, management will refer to certain non-GAAP financial measures, including adjusted EBITDA, free cash flow and constant currency comparisons. The company believes these non-GAAP financial measures provide useful information for investors. Please refer to today's press release for definitions and calculations of these non-GAAP performance measures as well as reconciliations of the non-GAAP performance measures to the company's GAAP financial results.

And now I'd like to turn the call over to Brian Cooper, Interim Chief Financial Officer.

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Brian S. Cooper, FTD Companies, Inc. - Interim CFO & Interim Principal Accounting Officer [3]

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Thanks, Katie. We appreciate all of you joining us on today's call. I will discuss our 2017 third quarter financial results and our full year 2017 outlook. John will then provide a brief business review; and after that, we will be available to take your questions.

I'm excited to have joined FTD's team in September as interim CFO. I'm thoroughly impressed with the great team of people here who are passionate about building a bright future for the company. As John will explain, the team has been actively engaged in our strategic review of the business and in developing a plan to reestablish innovation and growth at FTD.

Our financial results for Q3 were generally consistent with our outlook for the full year aside from an impairment charge, and our outlook is basically unchanged. Please keep in mind that the third quarter routinely makes the smallest contribution to our full year financial results, primarily due to the holiday calendar.

Consolidated revenues for the third quarter were $161.3 million, down 6.7% compared to $172.9 million for Q3 last year. The decrease in revenues reflects a $7.6 million decline in Consumer segment revenues, a decrease of provide segment revenues of $2.5 million and a decrease in Florist segment revenues of $1.9 million. Foreign currency exchange rates had little impact on our consolidated revenues this quarter.

Net loss was $76.3 million compared to a net loss of $10.3 million for Q3 last year. The net loss this year includes a pretax impairment charge of $82.7 million or an after-tax amount of $67.5 million. Excluding the impairment charge, our net loss would have been $8.8 million for the third quarter of 2017 as compared to the net loss of $10.3 million in the prior year third quarter.

The smaller loss resulted primarily from lower amortization expense, partly offset by lower revenues and the associated gross profit and increased general and administrative and sales and marketing expenses. These expenses included costs associated with our strategic planning efforts and marketing tests.

The impairment arose as an -- from an analysis we performed as a result of the decline in FTD's market capitalization during the quarter. This decline, combined with trends in our 2017 business performance, required the company to revalue and impair certain intangible and long-lived assets. I would like to emphasize that the impairment charge does not affect our cash flow nor our view of the value-creation opportunities available to the company.

Adjusted EBITDA for the third quarter decreased $12.5 million to $1.9 million. As a percentage of consolidated revenues, Q3 adjusted EBITDA was 1.2% compared to 8.3% in the third quarter of 2016. The decrease in adjusted EBITDA was due to reduced revenues and the associated gross profit along with higher SG&A and marketing expenses.

Moving to our segment results. In our Provide Commerce segment, revenues were $54.6 million or 4% lower in Q3 last year, primarily due to a 3% decrease in consumer orders and a 1% decrease in average order value. Within the segment, a 7% increase in our Personal Creations business and a 2% increase in our Gourmet Foods business were offset by an approximate 11% decline in our ProFlowers business compared to the same quarter last year.

The Provide Commerce segment produced an operating loss of $6.3 million for the third quarter of 2017 compared to a loss of $1.8 million in the prior year period. The larger operating loss resulted from lower gross profit on lower revenues and from an increase of $2 million in operating expenses. Sales and marketing expense increased $2.6 million, partially offset by a $1.4 million decrease in general and administrative expenses, which primarily reflects lower personnel-related costs, facilities cost and legal expenses.

In our Consumer segment, revenues were $43.6 million, a 15% decrease compared to the same quarter last year, primarily due to a 14% decrease in order volume and a 1% decrease in average order value. The decrease in average order value was primarily due to a less favorable product mix and an increase in orders through our Gold program, which is a membership-based loyalty program that offers reduced shipping fees.

Consumer segment operating income was $3.2 million or 7.4% of segment revenues compared to $5 million or 9.8% of segment revenues for the third quarter of 2016. The decline in operating income margin was primarily attributable to negative fixed cost operating leverage on lower revenues, partially offset by lower operating expenses.

Q3 revenues for the Florist segment were $34.7 million, down 5% compared to the prior year period, primarily due to a shift of holiday container shipments into the fourth quarter of 2017, while comparable sales in 2016 occurred during the third quarter. Technology system sales also declined in the segment.

Florist segment operating income was $9.6 million versus $11.4 million in the prior year quarter. Segment operating margin was 27.6% for the third quarter of 2017 compared to 31% in the same period last year. The decline resulted in part from an increase in bad debt expense.

International segment revenues for the third quarter of 2017 were $31.5 million, an increase of 0.4% on a reported basis and 0.6% on a constant currency basis compared to the third quarter of 2016. International segment operating income was $3.4 million. Looking at everything on a constant currency basis, this represents a $0.5 million decrease compared to the third quarter of 2016. Similarly, operating income margin was 10.8% in the current period compared to 12.3% in the prior year period. The operating income decrease was due to higher operating expenses of $0.7 million.

Now to focus on our balance sheet and cash flows. Our free cash flow for the 9-month period ended September 30, 2017, was a use of $19.5 million compared to a use of $12 million in the prior year period. We typically experience use of cash through 9 months because of seasonality in the business. The year-over-year decline primarily reflects lower 2017 operating income adjusted for non-cash items.

Cash and cash equivalents were $28 million compared to $81 million as of December 31, 2016, and total debt was $252 million as of September 30, 2017, compared to $276 million at December 31, 2016. Lower debt in 2017 primarily reflects the reduced cash holdings, which we used to reduce debt, partially offset by higher use of cash for operating activities in 2017.

I'd like to finish with some comments on our full year outlook for 2017. As I indicated earlier, third quarter financial results were generally consistent with our outlook for the full year. Considering our year-to-date financial results and our near-term outlook on the business, we are reiterating our outlook as follows. Consolidated revenues for 2017 are leaning toward the lower end of our previous range of a 3% to 4% decline compared to 2016, which translates to a decline of approximately 2% to 3% on a constant currency basis. We expect net income to be approximately $8 million to $12 million, excluding the effects of the impairment charge, and adjusted EBITDA margin to be in the range of 7.25% to 7.75% of consolidated revenues for the full year 2017.

Finally, we now expect capital expenditures of up to about $22 million. Most of our incremental CapEx has been technology related. Please note, this is at the low end of our previous expectations for CapEx, which was a range of $22 million to $25 million.

That concludes our financial review. I'd now like to turn the call over to John for a brief update on our business.

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John C. Walden, FTD Companies, Inc. - CEO, President and Director [4]

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Thanks, Brian. Good afternoon, everyone, and thank you for joining us today. It is a pleasure to formally welcome Brian to FTD. For those of you that have not had the chance to connect with him, Brian is a seasoned finance executive with more than 30 years of experience across a variety of industries, working extensively with public companies. We are pleased that he was able to step into the role of interim CFO, and we greatly appreciate his contributions.

As Brian discussed, our third quarter results generally met our expectations, and we remain on pace to achieve the full year outlook we have previously provided. In each earnings call since I joined FTD in March, I have mentioned my early impressions that FTD chose, for many years, to prioritize short-term EBITDA while withholding investment in its future: brand building, customer acquisition and management, customer experiences, technology, and florist partner relationships to mention a few.

Our results in Q3 and our guidance for 2017 reflect this challenge. In the face of this, my principal priorities have been, first, to complete a comprehensive review of the business and develop a new strategic plan designed to restore FTD's growth; and second, to aggressively pursue testing and innovation in an attempt to uncover near-term opportunities for performance improvement.

With these goals in mind, the third quarter has been an incredibly productive period for the company. The executive team and I along with many of our company colleagues continued to work diligently on our comprehensive strategic review of the business, initiated only 5 months ago, to better understand our challenges and opportunities across all aspects of our business: markets and consumers, customer propositions, our florist network and key capabilities such as marketing, technology, supply chain and culture. Further, on the basis of the review, we have made substantial progress in the development of the strategies we believe will lead to long-term growth.

With respect to 2017 performance, we have been clear that overcoming years of underinvestment and customer declines could not be reversed in the near term. Nevertheless, we have aggressively pursued quick wins where available, hired ambitiously to elevate our key capabilities and prioritize investments, particularly in marketing and technology, that we believe will benefit 2018 and the longer term.

Specifically, we have seen a number of important improvements, including we tested numerous innovative marketing alternatives, including new targeting technologies across mobile, web, social, search, chat and email. We've used data analytics and market testing to begin recasting our product assortment and pricing and adding customer-focused content. We initiated aggressive replacement of mobile and web technologies and improvements to customer experiences. We launched an enterprise-wide customer satisfaction measurement system across brands and all customer touch points. We consolidated our supply chain operations across the company and identified opportunities for cost reduction and service improvements. We simplified product requirements and customer service for our florist partners. We launched new products in Gourmet Foods to test the breadth of our well-regarded Shari's brand. And finally, we identified effective new customer acquisition channels for Personal Creations and improved its product ranges in preparation for the holiday season, which is its busiest time of the year.

In summary, I continue to be impressed with the energy and enthusiasm, which the FTD team has brought to our 2017 performance challenges and to our strategic review process. I am pleased to report that our work on the review and the development of our multi-year strategic plan is largely complete. I am personally excited about the strategic opportunities for FTD and the long-term value that I believe we can create. The executive team and I look forward to sharing our plans with you in January.

That concludes our prepared remarks. Brian and I are available for your questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Mark Rosenkranz with Craig-Hallum.

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Mark Alan Rosenkranz, Craig-Hallum Capital Group LLC, Research Division - Associate Analyst [2]

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You mentioned in the press release some regional disruption from the hurricanes. Wondering if you could give a little more color and perhaps quantify the impact you saw in the third quarter and if you expect any drag through to the fourth quarter.

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Brian S. Cooper, FTD Companies, Inc. - Interim CFO & Interim Principal Accounting Officer [3]

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You want to know about the hurricane impacts? We were able to [work through] most of those, so I think we didn't have a specific measurement of them. And our teams did a really good job of working around them, and we were very proud of that.

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Mark Alan Rosenkranz, Craig-Hallum Capital Group LLC, Research Division - Associate Analyst [4]

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Okay, that's fair enough. And then shifting gears. You mentioned the continued elevated marketing spend. Just wondering the response you're kind of seeing through that for the third quarter and how you see the promotional environment kind of shaping for the fourth quarter. Do you expect to kind of see that continued elevated expenses as we go through the holiday season here?

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John C. Walden, FTD Companies, Inc. - CEO, President and Director [5]

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Yes. I'm not sure -- we will elevate our expenses in the holiday season as a normal course of things, but they're very different periods. Q3 is a very quiet period. We don't -- the level of spending against marketing is much less than the rest of the year, and so it's -- we won't have gotten much of a signal in this third period that might give us a clue in the fourth. We're not sure, at least based on what we've seen this year so far, that we should anticipate a much more promotional environment than we've already seen. I mean, back in Q2, it was highly promotional, so we would expect it to be very similar. And then as well, we will -- as you would expect the level of marketing spending we will take into the fourth quarter will be higher than you would normally see in a third quarter because of the volumes associated with it.

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Operator [6]

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Our next question comes from the line of Linda Bolton-Weiser with D.A. Davidson.

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Linda Ann Bolton-Weiser, D.A. Davidson & Co., Research Division - Senior Research Analyst [7]

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Just going back to the hurricane effects. 1-800-Flowers actually had many of the florists in the affected regions that were unable to operate for a period of time, and they actually waved their fees because if they can't operate, why should you be charging the florists there their set fees. So if they were being charged of the fees by you and they were not by BloomNet, would that kind of make a bad impression on those florists in terms of your approach toward the florist network versus 1-800-Flowers?

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John C. Walden, FTD Companies, Inc. - CEO, President and Director [8]

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Yes. I'm sorry, I don't want to suggest we didn't do anything and it didn't have some impact. We're not using it as a material excuse for revenue. I'm sure it had an effect, but we haven't quantified it to the point where we feel it's a reliable number. But without a doubt, it had an impact. And we take care of our of florist members. So we had several florist members that were out of business. We offered support. We waived fees. We offered support well beyond just sort of the normal business exchange because we care about their success. So we did a lot of those kinds of things to make sure that our florist members were up and going and functional. So we certainly did do that, and certainly, it did affect demand and fulfillment abilities in the areas that were affected. So I didn't mean to suggest there was no effect or that we didn't treat our florists appropriately. But we just haven't quantified it to degree we feel like it's a reliable number.

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Linda Ann Bolton-Weiser, D.A. Davidson & Co., Research Division - Senior Research Analyst [9]

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Okay. And then you say your strategic plan for 2018 is complete. Is there some reason why you can't give us some insight into that rather than waiting until January? What's the purpose of waiting to disclose some of that?

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John C. Walden, FTD Companies, Inc. - CEO, President and Director [10]

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Well, a couple of things, Linda. One is it's certainly not a 2018 plan. It's a 5-year plan, so it's a pretty substantial and rigorous plan. There are a few bits and bobs left to be finalized, but for the most part, it is finished. The real issue is we want a proper forum to be able to spend time with our analysts and our shareholders and explain the level of detail and rigor behind it. And so we want to pick an opportunity to do that in a proper way, and it's just our view that during the holiday trading season, which is now upon us, it's not appropriate either for our business to spend the time on it or for us to expect our shareholders and analysts to make the time. So we just felt that it was a more convenient time for us to share early in the year when people have a little more time and we've got a little more time.

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Brian S. Cooper, FTD Companies, Inc. - Interim CFO & Interim Principal Accounting Officer [11]

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Yes. And Linda, in addition to that, with all of the activity we've had around the strategic plan, the budget is not finished, so we wanted to try and complete a 2018 budget, really, to have that as part of the foundation of what we're communicating in more detail than what the plan itself has put together for that period of time.

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Linda Ann Bolton-Weiser, D.A. Davidson & Co., Research Division - Senior Research Analyst [12]

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Okay, great. And then I know you've talked about this before in terms of a CapEx projection, and you've lowered it from the original expectations. Can you just remind us, is it that you've actually changed your view point of what might need to be invested on the IT side, on the CapEx side? Or is it that you're just not ready to implement it yet? So it's more likely amount of spending is the same, but it's pushed out more. I can't quite recall what you had said was going on there.

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John C. Walden, FTD Companies, Inc. - CEO, President and Director [13]

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Yes. No, certainly not that we're through spending or there won't be future capital invested. I think it's really a function that we put those numbers in place with the idea that this year was not really a year when we were building on the solutions we knew would solve the business challenges. We knew we would be planning this year and trying to build the strategic plan, so the investments we intended to make, marketing, technology and other areas, were really investments that were against -- activities we would come across that we felt like were no-regrets moves that would make a potentially short-term impact but also impact 2018 and forward. But the fact was we didn't know what those things were until we had time to get into the business. So we put some holding numbers in place. And so as we've gone through the year and identified specific things that we felt we needed to get after, notwithstanding the plan wasn't finished, we put those in the pipeline. It just happens that it didn't require the full amount of CapEx on technology that we originally invested. So when you hear more about our plans, you will have a much better sense for our future spending and what that will go against in specific detail against the projects that we intend to put into motion. But for this year, it was more of an opportunistic approach against things we discovered as we went that we felt like could make a difference.

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Linda Ann Bolton-Weiser, D.A. Davidson & Co., Research Division - Senior Research Analyst [14]

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Okay. And then finally, one last thing. I know that in developing this kind of -- your e-commerce strategy, there's just tons of testing involved. And I think you've even said that, that's a lot of what you're doing this year. Can you just comment on do you think the vast majority of that testing type of work will be done by the end of 2017? Or is there still going to be some phases of that testing that you're going to have to carry out in early 2018 before you can really feel like you're investing properly to get the right returns?

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John C. Walden, FTD Companies, Inc. - CEO, President and Director [15]

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Yes. I think testing in a business like ours will, in general, will be an ongoing activity. So whether we're testing marketing, tactics and their effectiveness, whether we're testing consumer experiences and whether particular changes on websites or mobile sites improve or don't improve conversion, testing different elements of our proposition, whether it's merchandise or content or pricing, those things will be ongoing activity. Because the market changes quickly, the things that at one point were effective as a marketing vehicle all of a sudden get priced out of the market or get increased and now we have to find something else. So in general, we will always be doing testing. But I do appreciate that, in this year, we have said we would spend more on marketing than people expected or that had been -- certainly had been the case in recent years and that it wasn't clear what the effectiveness of that would be, so we would have to test our way into it. So it would be fair to say that a lot of the -- that there'll be a fair amount of the testing to try to find options for marketing that expand the range of options the company has historically used, particularly in FTD. A lot of that -- we would have finished a very rigorous program in that area by the end of this year, but it would be unfair to say that we'll have it figured out and that the future marketing spending is really then just about a more predictable model because I don't know that we'll be -- have the luxury of having it be predictable until we get to the point where the customer experiences are where we want them, the propositions are where we want them. We, therefore, are starting to get the consumer response that we feel like is appropriate for the money we spent, and at that point, we will start to see much predictability in our marketing spending. So it will -- we'll still be at it for a bit of time.

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Operator [16]

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(Operator Instructions) Our next question comes from the line of Anthony Lebiedzinski from Sidoti & Company.

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Anthony Chester Lebiedzinski, Sidoti & Company, LLC - Equity Analyst [17]

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First, I just wanted to address the partnership programs that you have previously spoken about on your prior conference call. So can you give us an update as to how that trended in terms of volume during the third quarter, please?

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John C. Walden, FTD Companies, Inc. - CEO, President and Director [18]

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Yes. Anthony, it's -- I think we may have talked about this after the second quarter when we provided a little more detail about the partnership programs. I think we mentioned that we really are expecting that trend to continue through the year, and that's a trend of partnership programs being -- and I would categorize that not just as sort of partnership but sort of third-party marketing of the kind that FTD -- ftd.com had historically relied on for substantially all of its marketing. Those programs have been coming -- becoming less effective over the last couple of years, and we expect that trend to continue. And so it in fact has through third quarter, and we expect to continue through the year. Meanwhile, as certain marketing vehicles, whether we call them partnership programs or affiliate program or search or whatever the program might be, as some things become less effective, you hope you can find other things that are more effective. So the marketing trials that we just talked about to Linda's question and that had been a big part of our efforts this year and will continue are an effort to find vehicles that are more effective than our historic vehicles. So it just happens, unfortunately, as we've explained before, that at least in the ftd.com area, it's a bit different in the provider, the ProFlowers business. But in the ftd.com business, because it historically relied almost exclusively on free marketing vehicles, direct mail or database mining, search engine optimization through natural search, direct-to-site kinds of things, partnership that pays on a variable basis, because that was predominantly its entire program, it didn't really build much of a deep marketing capability to find other things. So we've got a bit of work to do to dig out of the hole to figure out how to replace those less effective programs.

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Anthony Chester Lebiedzinski, Sidoti & Company, LLC - Equity Analyst [19]

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And so as you look to dig yourself out of the hole, and I'm using your choice of words, so how do you intend to do that? I mean, is it just more marketing spending? And -- or do you plan to be more promotional? I mean, can you just give us a frame as to how you're thinking about this so you can dig yourself out of the hole as you said?

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John C. Walden, FTD Companies, Inc. - CEO, President and Director [20]

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Sure, yes. And I've said it a few times, and so I apologize if it feels like I'm repeating myself. But we've got to be clear that marketing effectiveness is not just a function of do we spend the money on the right marketing. Marketing effectiveness is a function of whether the combination of the customer experiences you offer and the propositions you offer and the marketing effectiveness generate the kind of repeat purchase and purchase rates that justify a certain level of marketing, therefore, in other words, lifetime value or value within a reasonable return time frame. And when that happens, you can get a process going where you spend on marketing. You know you can count on getting it back because all of those things are working together. So it would be misleading for me to suggest that all we have to do is find the new marketing tactics from agency X, Y, Z and our challenges are solved. We have to solve those three-pronged problems of experience, proposition and marketing, and then we'll start to see this machine work. And we are confident it will, but we've got to take the time to do all of those. So meanwhile, we will certainly keep testing the marketing effectiveness part of that stool. And we think we -- and we know we can improve and are starting to see some evidence that we can see improvement in new tactics that we're finding and new opportunities to market. We will keep doing that to optimize the things we can control currently, while we work on the other legs of the stool, which we're looking forward to telling you a lot more about in January.

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Anthony Chester Lebiedzinski, Sidoti & Company, LLC - Equity Analyst [21]

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Okay. So out of these buckets that you mentioned, experience, proposition, I think, value may have been the third one, but the -- which one is the easiest to tackle? Or which one is sort of the easiest or lowest hanging fruit that you can -- you think you can solve near term? And which one is more challenging? Which one will take more time to (inaudible)?

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John C. Walden, FTD Companies, Inc. - CEO, President and Director [22]

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Yes. I think they all do work together, but I think the customer experience part of the equation is always more difficult because it relies a lot on technology. It relies on effective supply chains. It relies on cost. And so there's a number of elements that have to come together, relies on quality of execution. So I think that one is not a quick fix, and it will take a little bit more time. But we think we certainly have confidence that we can get after that. With that in place, we think that we'll learn a lot more about marketing. We'll learn a lot more about the propositions customers want and we feel like we can make improvement. But that probably of the 3, that one will be the one that will be the most challenging.

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Anthony Chester Lebiedzinski, Sidoti & Company, LLC - Equity Analyst [23]

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Right. Okay. So I guess, at this point, it's fair to say -- even from a high-level perspective, I mean, can you even share with us sort of how you're thinking about 2018? Or is it just simply too early that you've (inaudible) at all at this point?

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John C. Walden, FTD Companies, Inc. - CEO, President and Director [24]

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Yes. Anthony, it is too early. I think we're looking forward to doing this, as I said before, in a proper way. We want to share our strategic plan. We want to share why the strategic plan makes sense, and we want to give you some sense for what you can expect in 2018. And so it'll be a comprehensive discussion, but we want to do it in the right way at a time line.

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Operator [25]

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Thank you. I'd like to turn the floor back to management for closing comments.

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John C. Walden, FTD Companies, Inc. - CEO, President and Director [26]

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Okay. Well, thanks, everybody, for your questions and for your interest in FTD, and we look forward to the next time we have together.

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Operator [27]

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This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.