GSI Commerce Reports Fiscal 2008 Second Quarter Operating Results

KING OF PRUSSIA, Pa., July 23 /PRNewswire-FirstCall/ -- GSI Commerce Inc.
(Nasdaq: GSIC) today announced its financial results for its fiscal 2008
second quarter ended June 28, 2008.
Fiscal 2008 Second Quarter Compared to Fiscal 2007 Second Quarter
-- Net revenues increased 47 percent to $193.2 million from $131.3
million.
-- Non-GAAP net revenues increased 85 percent to $102.9 million from $55.8
million.
-- Loss from operations was $17.2 million compared to $9.0 million and
included $2.2 million in amortization expense related to e-Dialog and Zendor,
which was not included in the company's guidance for the quarter.
-- Non-GAAP income from operations was $6.7 million compared to $0.7
million.
-- Net loss was $19.0 million or $0.40 per share compared to $5.0 million
or $0.11 per share. The company's effective tax rate for the second quarter
was 3.2 percent, bringing its effective tax rate on a year-to-date basis to
26.3 percent. The year-to-date tax rate approximates what the company
currently expects for its full-year tax rate. The primary reason for the
change in expected tax rate from the first quarter was the inclusion of
amortization expense from e-Dialog and Zendor in the company's projected
full-year results.
Beginning with this news release, the company is disclosing the non-GAAP
metric, non-GAAP net revenues and reporting the former expense line of sales
and marketing as two expense lines, marketing and account management and
operations.
Non-GAAP net revenues are calculated by subtracting cost of revenues from
product sales and marketing expenses from net revenues. A more thorough
definition and discussion of the importance of non-GAAP net revenues to GSI's
business as well as a definition and discussion of the importance of non-GAAP
income from operations to GSI's business can be found under "Non-GAAP
Financial Measures" provided later in this news release.
"GSI's second quarter performance was excellent. Our strategy had us well
positioned, we executed strongly, and industry trends were favorable --
clearly a winning formula," said Michael G. Rubin, chairman, president and CEO
of GSI. "Net revenues grew close to 50 percent and above our guidance range.
Non-GAAP income from operations of $6.7 million exceeded our guidance of $1.0
million to $2.0 million and was meaningfully greater than our previous best,
non-fourth quarter performance for non-GAAP income from operations of $3.8
million. The momentum in our business along with our focus on capital
efficiency should enhance free cash flow in 2008."
Key Events Since April 23
-- GSI launched five new Web stores, three in the United States and two
internationally. The U.S. launches were Quiksilver
(http://www.quiksilver.com), which joins Roxy (www.roxy.com) to become the
second Quiksilver brand to launch with GSI; Kenneth Cole
(http://www.kennethcole.com); and Iomega U.S. (http://store.iomega.com).
Internationally, GSI launched Web stores for iRobot in the United Kingdom
(www.iroboteurope.co.uk) and in Germany (www.iroboteurope.de). Year-to-date,
the company has launched 12 Web stores for nine e-commerce partners.
-- GSI signed two new, multiyear, e-commerce agreements, both with
companies that will be transitioning existing e-commerce businesses to the GSI
platform. One agreement is with a regional department store chain, scheduled
to launch its Web store in the fourth quarter of this year, and the other is
with a national, specialty retailer of women's apparel, scheduled to launch
its Web store in the first quarter of 2009.
-- GSI extended multiyear agreements with five partners, including Polo
Ralph Lauren Corporation and The Warnaco Group Inc., which also expanded its
agreement to add a third apparel brand to the GSI e-commerce platform and to
add marketing services.
-- e-Dialog Inc. signed new e-mail services deals with 8 customers,
including Oakley, Course Advisor, Lifetime Networks and Hickory Farms.
Additionally, two GSI partners, both of which were added through the Accretive
Commerce acquisition, The Warnaco Group Inc. and Cost Plus World Market,
signed on for e-mail solutions powered by e-Dialog.
-- gsi interactive signed new business with 17 customers, including
e-commerce partners and other customers not on the GSI platform, for services
that included search engine optimization, site design, paid search, affiliate
marketing, studio photography and strategic e-commerce site assessment and
planning. Included in these marketing services agreements was a significant
extension and expansion of business with Toys "R" Us, which named gsi
interactive as its agency of record and also included an e-mail solution from
e-Dialog.
Fiscal Year 2008 and Third Quarter Guidance
The following forward-looking statements reflect GSI's expectations as of
July 23, 2008. Given the potential changes in general economic conditions and
consumer spending, the growth rate of e-commerce and various other risk
factors discussed in our forward-looking statements disclosure and in our
public reports, actual results may differ materially.
Fiscal Year 2008 Guidance
The company provides the following guidance for fiscal year 2008:

-- Net revenues are expected to be approximately $1.0 billion.
-- Loss from operations is expected to be in a range of $6.5 million to
$9.5 million. (a)
-- Non-GAAP income from operations is expected to be in a range of $80.0
million to $83.0 million. (b)
-- Capital expenditures are estimated to be approximately $65.0 million,
revised from our previous guidance of $70.0 million, and include
acquisition-related integration capital expenditures of approximately $8.0
million, revised from our previous guidance of $11.0 million.
(a) Included in the guidance for loss from operations is amortization of
acquisition-related intangibles for e-Dialog and Zendor.
(b) The following is a reconciliation of GAAP loss from operations to non-
GAAP income from operations: add to projected GAAP loss from operations
estimated depreciation and amortization of $67.0 million (inclusive of
amortization from acquisition-related intangibles of $13.6 million), estimated
stock-based compensation of $17.5 million, and acquisition-related integration
costs of approximately $5.0 million.
Fiscal 2008 Third Quarter Guidance
The company provides the following guidance for fiscal 2008 third quarter:
-- Net revenues are expected to be approximately $188.0 million to $193.0
million.
-- Loss from operations is expected to be in a range of $18.5 million to
$19.5 million. (a)
-- Non-GAAP income from operations is expected to be in a range of $3.5
million to $4.5 million. (b)
(a) Included in the guidance for income from operations is amortization of
acquisition-related intangibles for e-Dialog and Zendor.
(b) The following is a reconciliation of GAAP loss from operations to
non-GAAP income from operations: add to projected GAAP loss from operations
estimated depreciation and amortization of $17.0 million (inclusive of
amortization from acquisition-related intangibles of $3.9 million), estimated
stock-based compensation of $4.6 million, and acquisition-related integration
costs of approximately $1.4 million.
Conference Call Today
GSI has scheduled a conference call for 4:45 p.m. EDT today to discuss the
company's 2008 fiscal second quarter operating results and its 2008 fiscal
year and third quarter guidance.
Live Conference Access:
-- Phone - Dial 1-888-680-0869, passcode 48017103 by 4:30 p.m. EDT on July
23. For quicker access to the audio conference call the day of the event,
investors can pre-register for the conference call by going to:
https://www.theconferencingservice.com/prereg/key.process?key=PE7XNNJMM.
-- Web - Go to http://www.gsicommerce.com, and click on the Webcast tab
provided on the home page, or go to http://www.streetevents.com, where the
conference call will be broadcast live. Please allow at least 15 minutes to
register, download and install any necessary audio software.
Conference Replays:
-- Web - Go to http://www.gsicommerce.com, and click on the Webcast tab
provided on the home page. Access will remain available through Aug. 25.
Non-GAAP Financial Measures
GSI's consolidated financial statements are prepared and presented in
accordance with GAAP. To supplement our consolidated financial statements, in
this release and on the conference call, we use the non-GAAP financial
measures of non-GAAP net revenues, non-GAAP income from operations and free
cash flow. We also discuss certain ratios that use those measures. The non-
GAAP measures and ratios presented are not intended to be considered in
isolation of, as a substitute for, or superior to our GAAP financial
information. We have included reconciliations later in this release of the
non-GAAP measures to the nearest GAAP measure.
We use these non-GAAP financial measures for financial and operational
decision making and as a means to evaluate our performance. In our opinion,
these non-GAAP measures provide meaningful supplemental information regarding
our performance. We believe that both management and investors benefit from
referring to these non-GAAP financial measures in assessing our performance
and when planning, forecasting and analyzing future periods. These non-GAAP
financial measures also facilitate management's internal comparisons to our
historical performance and liquidity as well as to the operating results of
comparable companies. We believe these non-GAAP financial measures are useful
to investors both because (1) they allow for greater transparency with respect
to key metrics used by management in its financial and operational decision
making and (2) they are used by institutional investors and the analyst
community to help them analyze the health of our business.
Non-GAAP net revenues. We define non-GAAP net revenues as net revenues
minus cost of revenues from product sales and marketing expenses. Marketing
expenses principally include partner revenue share expenses, net advertising
and promotional expenses, subsidized shipping and handling expenses, and
catalog expenses. We consider non-GAAP net revenues to be a useful metric for
management and investors because (1) it provides a metric for our investors to
understand and analyze our company and (2) it provides investors with one of
the primary metrics used by the company for evaluation and decision making
purposes. We and many of our investors view us as a technology and business
services company. Since most technology and business service companies
generate their revenues from service fees and do not have product sales, we
believe that by subtracting cost of revenues from product sales and marketing
expenses from our net revenues from product sales, the company and investors
will be better able to assess our revenues on a basis that more closely
approximates the net revenues of other technology and business services
companies. Further, management uses this metric for evaluating the performance
of our business, making operating decisions and for budgeting purposes.
Non-GAAP income from operations. We define non-GAAP income from operations
as income from operations excluding stock-based compensation, depreciation and
amortization expenses and acquisition-related integration expenses. We
consider non-GAAP income from operations to be a useful metric for management
and investors because it excludes certain non-cash and non-operating items.
Because of varying available valuation methodologies, subjective assumptions
and the variety of award types that companies can use when valuing equity
awards under SFAS 123R, we believe that viewing income from operations
excluding stock-based compensation expense allows investors to make meaningful
comparisons between our operating performance and those of other businesses.
Because we are growing rapidly and operate in an emerging and rapidly changing
industry, we believe that our level of capital expenditures and consequently
the level of depreciation and amortization expense relative to our revenues
could be meaningfully greater today than it will be over time. As a result, we
believe it is useful supplemental information to view income from operations
excluding depreciation and amortization expense as it provides a potential
indicator of the future operating margin potential of the business. We believe
the exclusion of acquisition-related integration expenses permits evaluation
and a comparison of results for on-going business operations, and it is on
this basis that management internally assesses the company's performance.
Free cash flow. We define free cash flow as net cash provided by operating
activities minus cash paid for fixed assets, including capitalized software
development. We consider free cash flow to be a liquidity measure that
provides useful information to management and investors about the amount of
cash generated by the business that, after the acquisition of property and
equipment, including information technology infrastructure, can be used for
strategic opportunities, including investing in the business, making strategic
acquisitions and strengthening the balance sheet. Analysis of free cash flow
also facilitates management's comparisons of our operating results to the
operating results of comparable companies. A limitation of using free cash
flow as a means for evaluating our performance is that free cash flow reflects
changes in working capital which is impacted by short-term changes in cash
flow and the seasonality of our business which may not be indicative of long-
term performance. Another limitation of free cash flow is that it excludes
fixed assets purchased and placed in service, but not paid for during the
applicable period. Our management compensates for this limitation by
providing supplemental information about capital expenditures accrued, but not
paid for during the applicable periods on the face of the cash flow statement
in our Forms 10-K and 10-Q.
About GSI Commerce
GSI Commerce(R) (www.gsicommerce.com) is a leading provider of services
that enable e-commerce, multichannel retailing and interactive marketing for
large, business-to-consumer (b2c) enterprises in the U.S. and internationally.
We deliver customized e-commerce solutions through an e-commerce platform,
which is comprised of technology, fulfillment and customer care. We offer each
of the platform's components on a modular basis, or as part of an integrated,
end-to-end solution. We also offer a full suite of interactive marketing
services through two divisions, gsi interactive(sm) and e-Dialog
(www.e-Dialog.com).
Forward-Looking Statements
This news release contains forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. All statements made
in this release, other than statements of historical fact, are forward-looking
statements. The words "look forward to," "anticipate," "believe," "estimate,"
"expect," "intend," "may," "plan," "will," "would," "should," "could,"
"guidance," "potential," "opportunity," "continue," "project," "forecast,"
"confident," "prospects," "schedule," "designed," "future," "discussions,"
"if" and similar expressions typically are used to identify forward-looking
statements. Forward-looking statements are based on the then-current
expectations, beliefs, assumptions, estimates and forecasts about the business
of GSI Commerce. These statements are not guarantees of future performance and
involve risks, uncertainties and assumptions which are difficult to predict.
Therefore, actual outcomes and results may differ materially from what is
expressed or implied by these forward-looking statements. Factors which may
affect GSI Commerce's business, financial condition and operating results
include the effects of changes in the economy, consumer spending, the
financial markets and the industries in which GSI Commerce and its partners
operate, changes affecting the Internet and e-commerce, the ability of GSI
Commerce to develop and maintain relationships with strategic partners and
suppliers and the timing of the establishment, extension or termination of its
relationships with strategic partners, the ability of GSI Commerce to timely
and successfully develop, maintain and protect its technology, confidential
and proprietary information and product and service offerings and execute
operationally, the ability of GSI Commerce to attract and retain qualified
personnel, the ability of GSI Commerce to successfully integrate its
acquisitions of other businesses, and the performance of acquired businesses.
More information about potential factors that could affect GSI Commerce can be
found in its most recent Form 10-K, Form 10-Q and other reports and statements
filed by GSI Commerce with the SEC. GSI Commerce expressly disclaims any
intent or obligation to update these forward-looking statements.
Contact:
GSI Commerce, Inc.
Corporate Marketing
610.491.7474
Fax: 610.265.2866
news@gsicommerce.com

GSI COMMERCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)

December 29, June 28,
2007 2008

ASSETS
Current assets:
Cash and cash equivalents $231,511 $49,558
Accounts receivable, less allowance
for doubtful accounts of $1,833
and $2,154 64,285 57,658
Inventory 47,293 40,957
Deferred tax assets 14,114 14,771
Prepaid expenses and other
current assets 12,459 15,809
Total current assets 369,662 178,753

Property and equipment, net 156,774 166,069
Goodwill 82,757 171,591
Intangible assets, net of accumulated
amortization of $4,972 and $10,757 16,476 54,937
Long-term deferred tax assets 45,234 58,986
Other assets, net of accumulated
amortization of $14,545 and $16,044 22,737 21,594
Total assets $693,640 $651,930

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $85,667 $54,429
Accrued expenses 98,179 71,260
Deferred revenue 17,588 24,804
Current portion - long-term debt 2,406 2,861
Total current liabilities 203,840 153,354

Convertible notes 207,500 207,500
Long-term debt 27,245 56,350
Deferred revenue and other long-term
liabilities 5,634 5,995
Total liabilities 444,219 423,199

Commitments and contingencies

Stockholders' equity:
Preferred stock, $0.01 par value,
5,000,000 shares authorized; 0
shares issued and outstanding
as of December 29, 2007 and
June 28, 2008 - -
Common stock, $0.01 par value,
90,000,000 shares authorized;
46,847,919 and 47,426,300 shares
issued as of December 29, 2007
and June 28, 2008, respectively;
46,847,716 and 47,426,097 shares
outstanding as of December 29, 2007
and June 28, 2008, respectively 468 474
Additional paid in capital 366,400 374,173
Accumulated other comprehensive loss (156) (100)
Accumulated deficit (117,291) (145,816)
Total stockholders' equity 249,421 228,731

Total liabilities and
stockholders' equity $693,640 $651,930

GSI COMMERCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)

Three Months Ended Six Months Ended
June 30, June 28, June 30, June 28,
2007 2008 2007 2008

Revenues:
Net revenues from product sales $89,004 $107,055 $197,754 $230,175
Service fee revenues 42,260 86,154 79,793 158,577

Net revenues 131,264 193,209 277,547 388,752

Costs and expenses:
Cost of revenues from product
sales 65,782 78,444 142,584 163,861
Marketing 9,709 11,853 21,930 28,729
Account management and
operations, inclusive of $753,
$1,311, $1,310 and $2,445 of
stock-based compensation 31,598 57,497 63,551 116,607
Product development, inclusive of
$343, $656, $631 and $1,083 of
stock-based compensation 15,074 25,184 28,812 47,620
General and administrative,
inclusive of $950, $2,188,
$1,702 and $4,248 of
stock-based compensation 10,405 18,609 19,816 34,333
Depreciation and amortization 7,691 18,826 14,615 32,635

Total costs and expenses 140,259 210,413 291,308 423,785

Loss from operations (8,995) (17,204) (13,761) (35,033)

Other (income) expense:
Interest expense 925 2,347 1,767 4,524
Interest income (1,739) (168) (3,683) (1,207)
Other expense, net 8 208 23 353

Total other (income) expense (806) 2,387 (1,893) 3,670

Net loss before income taxes (8,189) (19,591) (11,868) (38,703)
Benefit for income taxes (3,156) (631) (4,490) (10,178)

Net loss $(5,033) $(18,960) $(7,378) $(28,525)

Basic and diluted loss per share $(0.11) $(0.40) $(0.16) $(0.61)

Weighted average shares outstanding
- basic and diluted 46,391 47,364 46,195 47,144

GSI COMMERCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

Six Months Ended
June 30, June 28,
2007 2008

Cash Flows from Operating Activities:
Net loss $(7,378) $(28,525)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation 13,820 26,827
Amortization 795 5,808
Stock-based compensation 3,643 7,776
Loss (gain) on disposal of equipment 66 (282)
Deferred income taxes (4,590) (8,553)
Changes in operating assets and liabilities:
Accounts receivable, net 9,098 15,248
Inventory 8,185 6,336
Prepaid expenses and other current assets (1,850) (2,081)
Other assets, net 392 915
Accounts payable and accrued
expenses and other (62,555) (68,115)
Deferred revenue 2,382 7,181

Net cash used in operating activities (37,992) (37,465)

Cash Flows from Investing Activities:
Payments for acquisitions of
businesses, net of cash acquired - (145,001)
Cash paid for property and equipment,
including internal use software (22,716) (29,866)
Proceeds from disposition of assets - 1,500
Purchases of marketable securities (102,041) -
Sales of marketable securities 119,955 -

Net cash used in investing activities (4,802) (173,367)

Cash Flows from Financing Activities:
Borrowings on revolving credit loan - 30,000
Debt issuance costs paid - (550)
Repayments of capital lease obligations (249) (1,004)
Repayments of mortgage note (90) (110)
Proceeds from exercise of common stock options 4,838 572

Net cash provided by financing activities 4,499 28,908

Effect of exchange rate changes on cash and
cash equivalents 14 (29)

Net decrease in cash and cash equivalents (38,281) (181,953)
Cash and cash equivalents, beginning of period 71,382 231,511

Cash and cash equivalents, end of period $33,101 $49,558

GSI COMMERCE, INC. AND SUBSIDIARIES
NON-GAAP INCOME FROM OPERATIONS AND RECONCILIATION TO GAAP RESULTS
(In thousands)
(Unaudited)

Three Months Ended Six Months Ended
June 30, June 28, June 30, June 28,
2007 2008 2007 2008
Reconciliation of GAAP loss
from operations to non-GAAP
income from operations:
GAAP loss from operations $(8,995) $(17,204) $(13,761) $(35,033)

Acquisition related
integration expenses - 957 - 2,072
Stock-based compensation 2,046 4,155 3,643 7,776
Depreciation and amortization
(1) 7,691 18,826 14,615 32,635

Non-GAAP income from operations $742 $6,734 $4,497 $7,450

(1) Includes amortization expense of acquisition related intangibles of
$3,899 and $5,785 for the three- and six-months ended June 28, 2008 and $383
and $774 for the three- and six-months ended June 30, 2007.

GSI COMMERCE, INC. AND SUBSIDIARIES
NON-GAAP NET REVENUES AND RECONCILIATION TO GAAP RESULTS
(In thousands)
(Unaudited)

Three Months Ended Six Months Ended
June 30, June 28, June 30, June 28,
2007 2008 2007 2008
Reconciliation of GAAP net
revenues to non-GAAP
net revenues:
GAAP net revenues $131,264 $193,209 $277,547 $388,752

Cost of revenues from
product sales (65,782) (78,444) (142,584) (163,861)
Marketing expenses (9,709) (11,853) (21,930) (28,729)

Non-GAAP net revenues $55,773 $102,912 $113,033 $196,162

GSI COMMERCE, INC. AND SUBSIDIARIES
FREE CASH FLOW AND RECONCILIATION TO GAAP OPERATING CASH FLOW
(In thousands)
(Unaudited)

Twelve Months Ended
June 30, June 28,
2007 2008
Reconciliation of GAAP operating cash
flow to free cash flow:
GAAP cash flow from operating activities $44,372 $58,661

Cash paid for fixed assets, including
capitalized software development (51,023) (61,346)

Free cash flow $(6,651) $(2,685)

GSI COMMERCE, INC. AND SUBSIDIARIES
RESULTS BY SEGMENT
(In thousands)
(Unaudited)

Three Months Ended June 30, 2007

Interactive
E-Commerce Marketing Intersegment
Services Services Eliminations Consolidated
Net revenues $128,446 $6,098 $(3,280) $131,264

Operating expenses
before depreciation,
amortization and
stock-based compensation
expense 128,340 5,462 (3,280) 130,522

Operating income before
depreciation, amortization
and stock-based compensation
expense $106 $636 $- $742

Three Months Ended June 28, 2008

Interactive
E-Commerce Marketing Intersegment
Services Services Eliminations Consolidated

Net revenues $175,936 $21,529 $(4,256) $193,209

Operating expenses
before depreciation,
amortization and
stock-based compensation
expense 173,861 17,827 (4,256) 187,432

Operating income before
depreciation, amortization
and stock-based compensation
expense $2,075 $3,702 $- $5,777

Six Months Ended June 30, 2007

Interactive
E-Commerce Marketing Intersegment
Services Services Eliminations Consolidated

Net revenues $272,943 $10,913 $(6,309) $277,547

Operating expenses
before depreciation,
amortization and
stock-based compensation
expense 269,186 10,173 (6,309) 273,050

Operating income
before depreciation,
amortization and
stock-based compensation
expense $3,757 $740 $- $4,497

Six Months Ended June 28, 2008

Interactive
E-Commerce Marketing Intersegment
Services Services Eliminations Consolidated

Net revenues $363,535 $33,614 $(8,397) $388,752

Operating expenses
before depreciation,
amortization and
stock-based compensation
expense 362,752 29,019 (8,397) 383,374

Operating income
before depreciation,
amortization and
stock-based compensation
expense $783 $4,595 $- $5,378

SOURCE GSI Commerce, Inc.

GSI Commerce, Inc., Corporate Marketing, +1-610-491-7474, or fax,
+1-610-265-2866, news@gsicommerce.com