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Edited Transcript of FTD earnings conference call or presentation 8-Aug-17 9:00pm GMT

Thomson Reuters StreetEvents

Q2 2017 FTD Companies Inc Earnings Call

DOWNERS GROVE Aug 13, 2017 (Thomson StreetEvents) -- Edited Transcript of FTD Companies Inc earnings conference call or presentation Tuesday, August 8, 2017 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John C. Walden

FTD Companies, Inc. - CEO, President and Director

* Katie M. Turner

ICR, LLC - MD

* Stephen Tucker

FTD Companies, Inc. - CFO, Principal Accounting Officer and EVP

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Conference Call Participants

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* Alex Joseph Fuhrman

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

* Anthony Chester Lebiedzinski

Sidoti & Company, LLC - Equity Analyst

* Linda Ann Bolton-Weiser

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

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Presentation

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Operator [1]

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Greetings, and welcome to FTD Companies Second Quarter 2017 Conference Call. (Operator Instructions) And as a reminder, this conference is being recorded.

I would now like to turn the conference over to Katie Turner.

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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 Second Quarter 2017 Earnings Conference Call and Webcast. With me today on the call are John Walden, President and Chief Executive Officer; and Stephen Tucker, Executive Vice President and 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 than 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, on today's call, management will refer to certain non-GAAP financial measures, including adjusted EBITDA and 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 with that, I'd like to turn the call over to Steve Tucker, CFO.

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Stephen Tucker, FTD Companies, Inc. - CFO, Principal Accounting Officer and EVP [3]

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Thanks, Katie. We appreciate you joining us on today's call. I will discuss details of our 2017 second quarter and 6 months financial results as well as our updated full year 2017 outlook. John will then provide a business review and finally, we will be available to take your questions.

Consolidated revenues for the second quarter were $328.1 million compared to $338.2 million for 2016. The decrease was primarily due to revenue declines in the Consumer segment and the impact of foreign currency exchange rates in the International segment. The decrease in revenues reflect a $10.8 million decline in Consumer segment revenues, coupled with a negative impact of $3.5 million for the British pound devaluation to the U.S. dollar, partially offset by an increase in Provide segment revenues of $3.1 million and an increase in Floral segment revenues of $0.7 million. On a constant currency basis, our consolidated revenues were down 2%.

Net income was $9.7 million for the second quarter of 2017 compared to net income of $11.8 million for the prior year period. The decrease was primarily due to the lower year-over-year consolidated revenues, increases in sales and marketing expenses as well as the provision for income taxes, partially offset by a decrease in amortization of intangible assets. Adjusted EBITDA for the second quarter decreased to $31.2 million or 9.5% of consolidated revenues compared to adjusted EBITDA of $45.1 million or 13.3% of consolidated revenues in the second quarter last year. The decrease in adjusted EBITDA was primarily due to the increase in sales and marketing expenses of $10.3 million as compared to the second quarter of 2016.

Now to review our quarterly operating segment performance in more detail. In our Provide Commerce segment, revenues were $179.7 million or 1.8% higher than our Q2 last year, primarily due to a 1.3% increase in average order value and a 0.6% increase in consumer orders. Second quarter 2017 consumer orders increased, primarily due to the shift in the Easter holiday from the first quarter of 2016 to the second quarter this year, partially offset by lower volume related to Mother's Day and non-holiday periods. Within the segment, a 15.2% increase in our Personal Creations business and a 4.4% increase in our Gourmet Foods business was partially offset by a 2% decline in our ProFlowers business as compared to the same quarter last year, reflecting lower Mother's Day related volume.

The profit increase from our -- from higher Provide Commerce segment revenues was more than offset by an increase in -- $10.8 million in operating expenses, primarily as a result of an $8.8 million increase in sales and marketing expense. Provide Commerce segment operating income was $14.5 million or 8.1% of segment revenues for the second quarter of 2017 as compared to $22.2 million or 12.6% of segment revenues in the prior year period. In our Consumer segment, revenues were $80.1 million, an 11.8% decrease compared to the same quarter last year due primarily to a 10.7% decrease in order volume and 1.4% decrease in average order value.

We continue to see the partnership marketing programs underperform. As compared to the second quarter of last year, we experienced a 21% decrease in partnership marketing program order volumes, including reduction in orders from group buying, sympathy and airline marketing partners. Partnership marketing programs have historically been a principal source of order for the Consumer segment and represent approximately 38% of the Consumer segment orders in the recent quarter as compared to 43% in the second quarter of last year. The decrease in average order value was primarily due to lower service fees related to Mother's Day holiday promotions and an increase in orders through our Gold Program, which is a membership-based loyalty program that offers reduced service and shipping fees.

Consumer segment operating income was $6.6 million or 8.2% of segment revenues compared to $10.9 million or 12% of segment revenues for the second quarter of 2016. The decline in operating income margin was primarily attributable to lower revenues from service fees, coupled with an increase in the sales and marketing cost as a percentage of revenue.

The Florist segment reported revenues for the second quarter of 2017 of $44.1 million, up 1.7% compared to the prior year period, primarily due to an increase in product revenues from the sales of fresh flowers. Florist segment operating income was down 2.4% versus the prior year quarter to $12.2 million for the second quarter of 2017. Segment operating margin was 27.8% for the second quarter of 2017 compared to 28.9% for the same period last year, primarily as a result of increased volumes of fresh flowers and higher sales and marketing expense.

International segment revenues for the second quarter of 2017 were $29.2 million, a decrease of 11.8% on a reported basis, and 1.3% on a constant currency basis compared to the second quarter of 2016. On a constant currency basis, International revenues increased $0.2 million. The profit decrease from lower second quarter International revenues was partially offset by lower operating expenses of $3 million. International segment operating income was $3.1 million, a $0.6 million decrease compared to the second quarter of 2016 on a constant currency basis. Operating income was 10.5% in the current period compared to 12.0% in the prior year period.

Now to quickly recap our 6 months 2017 year-to-date results. Consolidated revenues were $644.6 million for the 6 months ended June 30, 2017, compared to $668.5 million in the prior year period. Changes in foreign currency exchange rates negatively impacted the 2017 6-month consolidated revenues by $10.6 million, with the remaining decrease primarily attributable to the Consumer segment. Net income was $18.7 million compared to $13.5 million for the 6 months ended June 30, 2016. And we reported adjusted EBITDA of $62.3 million, or 9.7% of consolidated revenues, for the 6 months of 2017, compared to $75.7 million, or 11.3% of consolidated revenues, for the prior year period.

Now focusing on our balance sheet and cash flows. Our free cash flow for both of the 6-month periods ended June 30, 2017 and 2016 was $18.6 million. Cash and cash equivalents were $79.4 million, a decrease of $1.6 million from $81 million as of December 31, 2016. Debt outstanding, excluding unamortized debt issuance cost, was $265 million, of which $150 million is term debt and $115 million is associated with the revolving credit facility.

And now turning to our annual outlook for 2017. As a result of our year-to-date financial results and our near-term outlook in business, we are updating our guidance for 2017. We now expect consolidated revenues to be down between 3% and 4% on a year-over-year reported basis and down between roughly 2% and 3% on a constant currency basis. Net income of approximately $8 million to $12 million, consolidated adjusted EBITDA margin of 7.25% to 7.75%, driven largely by a reduced outlook for consolidated revenues and increased investment in marketing and market testing compared to fiscal 2016. And finally, we expect capital expenditures of approximately $22 million to $25 million due primarily to technology-related customer experience improvements.

That concludes our financial overview. I would 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, Steve. Good afternoon, everyone, and thank you for joining us today. It has been approximately 5 months since I joined FTD. I am pleased to have had the opportunity during this time to learn about the business, while also mobilizing our comprehensive strategic business review. I have spent a great deal of time with colleagues across our U.S. and international businesses, including visiting office locations, distribution and manufacturing facilities and meeting with customers and florist partners. I recently visited several of our South American flower farms and floral partners and Miami-based importers to better understand our floral supply chain. I've also interviewed hundreds of FTD company colleagues in one-on-one or small group sessions. I have been pleased with the goodwill among our partners and employees to address FTD's challenges and help restore its leadership.

In May, following the Mother's Day peak, I kicked off a formal program to conduct a comprehensive review of our businesses and develop a strategic plan designed to restore FTD's growth. The executive team, along with hundreds of FTD company team members and outside experts are helping to evaluate our capabilities against relevant benchmarks, identify opportunities to improve our propositions and consider strategic options. Although the review is ongoing and our strategic plans are not fully developed, I'm pleased with the energy with which the FTD team has embraced the strategic review.

The strategic review is a central focus for the company with the aim of completing the review near the end of the year and embarking on a new path forward early in 2018. Meanwhile, our near-term financial results remain challenged, as indicated by our second quarter results and outlook for 2017. As I have previously suggested, the company's current performance challenges stem from a history of underinvestment in customer experiences, technology and marketing, which will require a multifaceted long-term solution. Nevertheless, we have undertaken near-term improvements to both address immediate trends and to prepare the company for the plan ahead.

In Q2, in connection with Mother's Day trading, we increased marketing spending as we began a program of testing and evaluating new order acquisition vehicles. Although FTD is experiencing some unique marketing challenges, including the rapid decline in the effectiveness of our traditional order acquisition vehicles, the general marketing environment for all consumer businesses in the U.S. is becoming more challenging. With increased ad demand, the rise in mobile traffic and increased pricing from online advertising gatekeepers, digital media advertising costs are higher. Mother's Day was my first holiday with the company and the beginning of our active efforts to improve marketing effectiveness. This program will continue as we also build our internal capacity to test and learn.

Recently, we have also undertaken important steps to add expertise in key executive leadership roles, and position an executive team with best-in-class capabilities that can lead our ambitious plans over time. We are very pleased that Jeff Severts and Simha Kumar have joined FTD Companies at a critical stage in our strategic review. Both Jeff and Simha are proven executives with track records of success, and are uniquely experienced in areas critical to our future. Jeff, our new Chief Marketing Officer, has a diverse set of marketing skills with particular depth in customer and brand strategy, customer experience and analytics. Jeff will lead our newly integrated enterprise strategy and marketing functions.

Simha, our new Chief Operating Officer, will lead FTD's U.S. consumer businesses, including ftd.com, ProFlowers, Shari's Berries and Personal Creations. Simha has key experience leading the growth of e-commerce businesses with particular strength in customer-driven analytics along with extensive turnaround and operating leadership experience. Both Jeff and Simha will report to me and be valuable partners and enterprise leaders as we shape and execute an ambitious strategic agenda.

In connection with the organizational decisions and in order to position the leadership team for the long term, Helen Quinn, Executive Vice President, U.S. Consumer Floral, will leave FTD to pursue a new career opportunity. In addition, Steve Tucker, will also leave the company to pursue a new career opportunity. Both will support FTD in the smooth transition through mid-September. I want to thank both Helen and Steve for their contributions to FTD and wish them well in their future endeavors.

In summary, in a very short period of time, we have made meaningful progress to better identify our challenges, opportunities and the strategic path ahead and have begun positioning our capabilities and leadership team for the future. I am increasingly optimistic about FTD's future and look forward to sharing more with you upon the completion of our review later this year.

That concludes our prepared remarks. Steve and I are now 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 Alex Fuhrman with Craig-Hallum.

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Alex Joseph Fuhrman, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [2]

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I was hoping to get a little bit more color on the FTD Consumer segment. It looks like all of the other divisions, your florist sales and Provide Commerce, it looks like everything kind of at least on a revenue basis got sequentially better in the second quarter, presumably due to some of the shifting of the calendar there. I'm just curious what kind of happened that was specific to FTD consumer? Why that would go the other way? And wondering perhaps a related question, if you can comment a little bit on the response you got from some of the TV marketing and other increase in marketing spending around the ProFlowers business for Mother's Day? And if that perhaps had more impact on FTD than you would have thought?

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John C. Walden, FTD Companies, Inc. - CEO, President and Director [3]

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Yes, I'll take a shot at that. Thanks for your question. I think on FTD, I mean, the real story at FTD is headwind. Steve mentioned in his comments that partnership orders, which comprise around 40% of all ftd.com orders are down 21% year-on-year, and that's not a new trend that's been going on. When we look at our marketing spend that we increased in the second quarter, largely around Mother's Day, nearly all of that went into Pro, the ProFlowers and the Provide business. And that's largely because the challenge at FTD is a little bit less obvious to solve with partnership business comprising such a big chunk. And actually, another large piece has traditionally been e-mail -- active e-mail solicitations off of a customer file, largely free or marginal cost kinds of vehicles. We hadn't really built out the kind of capability to do digital marketing or other marketing in FTD as we had in Provide. So in Provide, we felt like we could make more impact as well the marketing decreases have been greater. So in FTD, in the second quarter, we didn't really increase materially the marketing spending. So we really saw the effect of the headwinds largely partnership marketing, as I mentioned. We continue to test things in FTD, and we will address that decline. But I think, largely, that's more of a trend continuing than might otherwise appear. In the Pro business, I'm not sure the Pro necessarily had a direct impact on FTD. It's possible they do have some levels overlapped. But I think you're right in observing that the other businesses were much less obvious and I think arguably, saw some material improvement. In the Pro business, although we did put more of the marketing into Pro, which certainly affects EBITDA, we were able to stem to a fare degree some of the customer erosion. So for example, you may recall in the Pro business, Pro's new customer counts were down I think 2015 to 2016, over 25%. And this last quarter, they were up 7%. And in terms of active customers, it's also materially better. So I think we are seeing some benefit of that marketing. Now we need to translate that into sort of EBITDA line as well, but we did see some positive impact from the marketing.

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Operator [4]

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Your 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 [5]

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So in the Consumer segment, you said that 21% was the decline in order volume from partnership and that, that was 38% of the revenue. So I'm just kind of doing the math here. If your overall orders were down 11%, does that mean the 62% that was non-partnership-related was actually up quite a bit? Or can you tell me what the math? And, like, what was that number?

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John C. Walden, FTD Companies, Inc. - CEO, President and Director [6]

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Yes. Steve, do you want to take a shot at that one?

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Stephen Tucker, FTD Companies, Inc. - CFO, Principal Accounting Officer and EVP [7]

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Yes. So Linda, the 38% and the 43% are of orders, and so not every order is the same. So it's hard to translate 38% of orders into exactly 38% of revenue. We haven't in the past given you exact kind of the magnitude of the partner program, so we wanted to do that on this call. But I will tell you that, overall, for marketing channels that we control, they were not up but they were down much less than our partner program decline of 21% year-over-year. So they were down kind of low single digits versus prior year on more direct to site channel, so that's e-mail, search engine, those type of things.

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Linda Ann Bolton-Weiser, D.A. Davidson & Co., Research Division - Senior Research Analyst [8]

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So and based on your commentary, it sounds like the increased marketing, you said, it was put more towards ProFlowers and not much so much FTD. So I mean, is it fair to say that once you strategically start putting the spend toward increasing that non-partnership revenue stream, that will grow and your percentage from partnership revenue will continue to decline? Is (inaudible)...

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John C. Walden, FTD Companies, Inc. - CEO, President and Director [9]

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Linda, I think, that's right. We will -- we definitely are actively looking for alternatives for marketing in FTD. But I have to admit, we are a little slow off the draw given how embedded those practices are. But yes, the objective over time is to find alternatives to the partnership marketing, which is declining, and we expect it to continue to decline. That may mean alternative kinds of partners should we find those that will be more effective than those that we've used historically. But it will definitely include other vehicles that we continue to test, and we'll find a way to apply them to the FTD business.

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Linda Ann Bolton-Weiser, D.A. Davidson & Co., Research Division - Senior Research Analyst [10]

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Okay. And then just in -- again in the Consumer segment, the average order value, I think it was down for the first time in, like, any quarter that I have seen. So just why is the average order value down?

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John C. Walden, FTD Companies, Inc. - CEO, President and Director [11]

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Yes. So it has a bit to do with some of our promotional activity. In particular, we increased our membership to a fairly large degree in our loyalty program, our Gold Program. And Gold Program, as you may know, provides customers with free shipping and discounts on shipping and handling charges, so that has an effect on order value as well. Steve, you have anything to add to that?

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Stephen Tucker, FTD Companies, Inc. - CFO, Principal Accounting Officer and EVP [12]

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No. I think, that's the largest driver of the AOV change year-over-year.

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Linda Ann Bolton-Weiser, D.A. Davidson & Co., Research Division - Senior Research Analyst [13]

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So is there something that you anticipate will get worse? Or this level of down 1.4% average, or is that kind of where we're going to see it? Or I mean, can you anticipate how that might go?

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John C. Walden, FTD Companies, Inc. - CEO, President and Director [14]

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Yes, it's hard to tell at this point. I think -- I guess, maybe in the near term, I would expect the trend to continue. But I think there is a much more fundamental question for us over time, which is how we decide to position our proposition, to what degree loyalty program and free shipping and handling will be part of the mix, will that take the place of other kinds of promotions. So I think there's some bigger questions going forward. But I think, in the near term, we don't have a plan to change what we have seen in the recent quarter.

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Linda Ann Bolton-Weiser, D.A. Davidson & Co., Research Division - Senior Research Analyst [15]

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Okay. And then, just the actual decrease in CapEx guidance, I think it was $28 million previously. Is that a pushing out? I mean, in other words, it's not that you've lowered your expectations with spending you're just pushing it out into 2018 because you're getting a slower start on spending it, is that the right idea?

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John C. Walden, FTD Companies, Inc. - CEO, President and Director [16]

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Yes, truly, I mean, honestly, when we put our expectations out there for CapEx at the beginning of the year, we didn't have a very clear idea where it would go. We knew we needed to make some progress this year, but I was a week into the role and Steve was pretty new as well. And so we had some preliminary ideas of what we intended to improve. What we found is that we're doing a little bit more on the marketing testing side, which turns out to be operating expense. In terms of making near-term improvement, we're doing a little bit less in terms of technology and customer experience, changes that are capitalizable. And so it's a bit of a change in the mix. I think in terms of whether it's just a deferral, as we finish the plan, we'll have a much better idea of the things that we'll need to fix going forward, and what that will look like in terms of CapEx. And it's certainly true that we will have some capital spending going forward, but it's really hard at this stage until the plan is finished to put numbers against that.

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Linda Ann Bolton-Weiser, D.A. Davidson & Co., Research Division - Senior Research Analyst [17]

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Okay. And then my understanding is that Google changed some of its search algorithms or something in May. Would that have affected you at all?

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

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With Google's algorithm, I'm sorry?

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Linda Ann Bolton-Weiser, D.A. Davidson & Co., Research Division - Senior Research Analyst [19]

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Yes, Google's search algorithms.

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

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Yes, I think, it's affecting everybody. What we're seeing and you're probably hearing this from others of your consumer business clients. But we're seeing the dynamic of online marketing change a fair amount. As more and more of the business goes mobile, that becomes less and less simple for Google and others to monetize. And as that happens, they then look to monetize more and more of the traffic as paid ads and paid vehicles. And so if you go on a mobile device or even the web, it's very difficult now to find on the first page anything that's not an advertising or paid vehicle. So yes, there's -- not only is the competition for those vehicles increasing, but the price of those vehicles is increasing. And so that's part of what's making it difficult for all businesses, not just FTD to get the same kind of effectiveness on marketing as we may have gotten in the past.

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Operator [21]

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Our next question comes from the line of Anthony Lebiedzinski with Sidoti & Company.

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Anthony Chester Lebiedzinski, Sidoti & Company, LLC - Equity Analyst [22]

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So first, I just wanted to clarify, Stephen, you mentioned that the consumer business, excluding the partnership programs, was down low single digits. Did you mean that in number of orders or sales or both?

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Stephen Tucker, FTD Companies, Inc. - CFO, Principal Accounting Officer and EVP [23]

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That was in order. It would be both, but the number I was referring to directly was orders. But revenue would be down directionally the same as well.

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Anthony Chester Lebiedzinski, Sidoti & Company, LLC - Equity Analyst [24]

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Right. Okay. And then is it because -- as far as the reason for that, is it just because you perhaps lost additional market share or what would you attribute that to?

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Stephen Tucker, FTD Companies, Inc. - CFO, Principal Accounting Officer and EVP [25]

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Well, I think that we kept our marketing spend -- our direct marketing spend relatively flat. And with prices kind of being pressured, we just lost a little bit of share of voice, and I think that impacted us a little bit. Also, as John mentioned, the customer accounts, the active customer accounts are declining. And so that had an impact on our e-mail or our retention marketing efforts, which are near or free effective orders. And so we had some pressure there as well.

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Anthony Chester Lebiedzinski, Sidoti & Company, LLC - Equity Analyst [26]

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Okay. And also, just wondering, so looking at your revised revenue outlook, can you give any color by segment as to how you think the rest of the year will shape up?

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John C. Walden, FTD Companies, Inc. - CEO, President and Director [27]

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The only color I could give and then maybe Steve you can add is, I think, we are not expecting massive or any material change sort of in trajectory, and 2/3 of the year is behind us now in the first half, in terms of orders given in the holiday period. So I think our approach for the rest of the year is continued to test and learn on the marketing side at a similar rate proportionately to what we saw in the first half. And we are not expecting to see material changes in what you'll see segment-by-segment. Our real focus here is to learn and make sure that we're in a position for next year to be a lot smarter about what we can do with our marketing spending to be more effective. And then as well, obviously, finish up our strategic review and be in a position to move aggressively towards our new plan. But I don't think we would expect to see any material change in pattern from any of the segments for the rest of the year. Steve, would you add anything to that?

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Stephen Tucker, FTD Companies, Inc. - CFO, Principal Accounting Officer and EVP [28]

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No. I think that was -- you hit the nail on the head there, John.

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Operator [29]

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Thank you. This ends our question-and-answer session. I'd like to turn the floor back to John Walden for closing comments.

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John C. Walden, FTD Companies, Inc. - CEO, President and Director [30]

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Okay. Thank you for your questions. We appreciate your interest in FTD, and thank you for joining us this afternoon.

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Operator [31]

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Thank you. This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.