GSIC Gsi Commerce, Inc. (MM)

GSI Commerce Inc. (Nasdaq: GSIC) today announced its financial results for its fiscal first quarter ended April 2, 2011.

Fiscal 2011 First Quarter Compared to Fiscal 2010 First Quarter

• Net revenues were $323.5 million compared to $272.6 million.
• Loss from operations was $27.9 million compared to $12.9 million and includes $7.3 million of expenses related to the pending acquisition of GSI by eBay, $3.5 million of expenses related to the acquisition of Fanatics, Inc. and $3.3 million of earn-out expenses related to the acquisition of Fetchback, Inc.
• Non-GAAP income from operations (NGIO) was $14.8 million compared to $17.4 million.
• Core NGIO was $19.3 million compared to $18.5 million.*
• Emerging NGIO loss was $4.6 million compared to $1.2 million.**
• Net loss was $13.6 million or $0.20 per share compared to net loss of $8.1 million or $0.13 per share.
• Trailing 12 month loss from operations was $32.2 million compared to income from operations of $11.9 million.
• Trailing 12 month NGIO was $132.1 million compared to $114.5 million.
• Trailing 12 month Core NGIO was $144.6 million compared to $114.3 million.
• Trailing 12 month Emerging NGIO loss was $12.6 million compared to NGIO profit of $0.2 million.
• Trailing 12 month cash flow from operating activities was $132.8 million compared to $127.7 million.
• Trailing 12 month free cash flow was $59.3 million compared to $76.2 million.

*Core includes Global e-Commerce Services, Global Marketing Services and corporate overhead.

**Emerging includes Rue La La and ShopRunner without allocation of corporate overhead.

The definitions of non-GAAP income from operations, free cash flow, and a discussion of the importance of these non-GAAP financial metrics to GSI’s business can be found under “Non-GAAP Financial Measures” provided later in this news release.

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, we use the non-GAAP financial measures of 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. 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. These measures may be different from non-GAAP measures used by other companies.

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 the following expenses relating to acquisitions: transaction expenses, due diligence expenses, integration expenses, non-cash inventory valuation adjustments, the cash portion of any deferred acquisition payments recorded as compensation expense, changes in fair value of deferred acquisition payments, and goodwill and intangible asset impairment charges. 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 ASC 718 / 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 our business and operate in an emerging and 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 the following acquisition-related 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: transaction expenses, due diligence expenses, integration expenses, non-cash inventory valuation adjustments, the cash portion of any acquisition earn-out payments recorded as compensation expense, changes in fair value of deferred acquisition payments, and goodwill and intangible asset impairment charges.

Free cash flow. We define free cash flow as net cash provided by operating activities minus cash paid for fixed assets, including internal use software. 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® enables e-commerce, multichannel retailing and digital marketing for global enterprises in the U.S. and internationally. GSI’s e-commerce services which include technology, order management, payment processing, fulfillment and customer care, are available on a modular basis or as part of an integrated solution. GSI’s Global Marketing Services division provides innovative digital marketing products and services comprised of database management and segmentation, marketing distribution channels, a global digital agency to drive strategic and creative direction and an advanced advertising analytics and attribution management platform. Additionally, GSI provides brands and retailers platforms to engage directly with consumers through RueLaLa.com, an online private sale shopping destination, and ShopRunner.com, a members-only shopping service that offers unlimited free two-day shipping and free shipping on returns for a $79 annual subscription.

  GSI COMMERCE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) (unaudited)     January 1, April 2, 2011 2011 ASSETS Current assets: Cash and cash equivalents $ 242,146 $ 109,624 Accounts receivable, net 96,382 72,151 Inventory, net 62,412 92,099 Deferred tax assets 16,439 19,235 Prepaid expenses and other current assets   16,984     21,497   Total current assets 434,363 314,606   Property and equipment, net 188,829 212,282 Goodwill 318,179 494,822 Intangible assets, net 132,972 204,953 Long-term deferred tax assets 2,279 - Other assets, net   30,540     39,283     Total assets $ 1,107,162   $ 1,265,946     LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 144,323 $ 84,387 Accrued expenses and other 197,417 154,277 Deferred revenue 23,808 28,088 Current portion - long-term debt   11,136     17,985   Total current liabilities 376,684 284,737   Convertible notes 123,391 125,107 Long-term debt 32,287 183,793 Deferred acquisition payments 1,750 4,673 Deferred tax liabilities - 6,450 Deferred revenue and other long-term liabilities   10,017       9,300   Total liabilities 544,129 614,060   Stockholders' equity: Preferred stock, $0.01 par value: Authorized shares - 5,000 Issued and outstanding shares - none - - Common stock, $0.01 par value: Authorized shares - 180,000 and 180,000 Issued and outstanding shares - 66,984 and 72,246 670 722 Additional paid in capital 765,857 867,195 Accumulated other comprehensive loss (1,378 ) (306 ) Accumulated deficit   (202,116 )   (215,725 ) Total stockholders' equity   563,033     651,886     Total liabilities and stockholders' equity $ 1,107,162   $ 1,265,946         GSI COMMERCE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited)       Three Months Ended April 3, April 2, 2010 2011   Revenues: Net revenues from product sales $ 159,275 $ 178,940 Service fee revenues   113,317     144,554     Net revenues 272,592 323,494   Costs and expenses: Cost of revenues from product sales 117,474 129,100 Marketing 10,807 14,691 Account management and operations 77,694 91,284 Product development 34,317 46,587 General and administrative 24,397 46,519 Depreciation and amortization 18,761 23,165 Changes in fair value of deferred acquisition payments   2,074     -     Total costs and expenses   285,524     351,346     Loss from operations (12,932 ) (27,852 )   Other (income) expense: Interest expense 5,208 5,248 Interest income (234 ) (65 ) Other (income) expense   474     (1,098 )   Total other expense   5,448     4,085     Loss before income taxes and equity-method investment earnings (18,380 ) (31,937 ) Benefit for income taxes (10,255 ) (17,874 ) Equity-method investment earnings   -     (454 )   Net loss $ (8,125 ) $ (13,609 )   Loss per share- basic and diluted $ (0.13 ) $ (0.20 )   Weighted average shares outstanding - basic and diluted   60,446     68,156         GSI COMMERCE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)       Three Months Ended April 3, April 2, 2010 2011   Cash Flows from Operating Activities: Net loss $ (8,125 ) $ (13,609 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 14,646 18,024 Amortization 4,115 5,141 Amortization of discount on convertible notes 2,809 1,716 Changes in fair value of deferred acquisition payments 2,074 - Stock-based compensation 6,931 5,012 Foreign currency transaction losses (gains) 475 (1,006 ) Equity-method investment earnings - (454 ) Deferred income taxes (11,191 ) (18,598 ) Changes in operating assets and liabilities: Accounts receivable, net 16,420 27,221 Inventory, net (2,621 ) 4,739 Prepaid expenses and other current assets (561 ) (1,114 ) Other assets, net 149 (1,706 ) Accounts payable and accrued expenses (110,530 ) (117,402 ) Deferred revenue   238     (465 )   Net cash used in operating activities (85,171 ) (92,501 )   Cash Flows from Investing Activities: Payments for acquisitions of businesses, net of cash acquired - (169,875 ) Cash paid for property and equipment, including internal use software   (15,868 )   (18,485 )   Net cash used in investing activities (15,868 ) (188,360 )   Cash Flows from Financing Activities: Proceeds from long term borrowing - 115,000 Borrowings on revolving credit loan - 40,000 Debt issuance costs paid (856 ) (5,674 ) Repayments of capital lease obligations (1,473 ) (2,832 ) Repayments of mortgage note (50 ) (53 ) Excess tax benefit in connection with exercise of stock options and awards 978 856 Proceeds from exercise of common stock options   6,933     448     Net cash provided by financing activities 5,532 147,745   Effect of exchange rate changes on cash and cash equivalents   (520 )   594     Net decrease in cash and cash equivalents (96,027 ) (132,522 ) Cash and cash equivalents, beginning of period   228,430     242,146     Cash and cash equivalents, end of period $ 132,403   $ 109,624       GSI COMMERCE, INC. AND SUBSIDIARIES NON-GAAP INCOME FROM OPERATIONS AND RECONCILIATION TO GAAP RESULTS (In thousands) (Unaudited)             Three Months Ended Twelve Months Ended April 3, April 2, April 3, April 2, 2010 2011 2010 2011 Reconciliation of GAAP (loss) income from operations to non-GAAP income from operations: GAAP (loss) income from operations $ (12,932 ) $ (27,852 ) $ 11,868 $ (32,238 )   Acquisition related integration, transaction, due diligence expenses, inventory valuation adjustments, and the cash portion of deferred acquisition payments recorded as compensation expense 2,547 14,441 8,095 24,930 Stock-based compensation 6,931 5,012 24,739 25,924 Depreciation and amortization (1) 18,761 23,165 66,755 88,167 Changes in fair value of deferred acquisition payments 2,074 - 3,025 (63,037 ) Impairment of goodwill and intangible assets   -     -     -     88,318     Non-GAAP income from operations $ 17,381   $ 14,766   $ 114,482   $ 132,064     GAAP income (loss) from operations as a percentage of GAAP net revenues (4.7 %) (8.6 %) 1.1 % (2.3 %)   Non-GAAP income from operations as a percentage of GAAP net revenues 6.4 % 4.6 % 10.6 % 9.4 %  

(1) Includes amortization expense of acquisition related intangibles of $5,123 and $21,116 for the three- and twelve-months ended April 2, 2011 and $4,105 and $12,379 for the three- and twelve-months ended April 3, 2010.

              Three Months Ended April 2, 2011 Twelve Months Ended April 2, 2011 Core(2) Emerging(2)   Consolidated   Core(2) Emerging(2)   Consolidated Reconciliation of GAAP income (loss) from operations to non-GAAP income (loss) from operations: Income (loss) from operations $ (20,249 ) $ (7,603 ) $ (27,852 ) $ 12,676 $ (44,914 ) $ (32,238 ) Acquisition related integration, transaction, due diligence expenses, inventory valuation adjustments, and the cash portion of deferred acquisition payments recorded as compensation expense 14,354 87 14,441 23,226 1,704 24,930 Stock-based compensation 4,888 124 5,012 25,666 258 25,924 Depreciation and amortization 20,328 2,837 23,165 76,308 11,859 88,167 Changes in fair value of deferred acquisition payments - - - - (63,037 ) (63,037 ) Impairment of goodwill and intangible assets   -     -     -     6,769   81,549     88,318     Non-GAAP income (loss) from operations $ 19,321   $ (4,555 ) $ 14,766   $ 144,645 $ (12,581 ) $ 132,064               Three Months Ended April 3, 2010 Twelve Months Ended April 3, 2010 Core(2) Emerging(2)   Consolidated   Core(2) Emerging(2)   Consolidated Reconciliation of GAAP income (loss) from operations to non-GAAP income (loss) from operations: Income (loss) from operations $ (5,452 ) $ (7,480 ) $ (12,932 ) $ 22,296 $ (10,428 ) $ 11,868 Acquisition related integration, transaction, due diligence expenses, inventory valuation adjustments, and the cash portion of deferred acquisition payments recorded as compensation expense 983 1,564 2,547 3,973 4,122 8,095 Stock-based compensation 6,931 - 6,931 24,739 - 24,739 Depreciation and amortization 16,077 2,684 18,761 63,255 3,500 66,755 Changes in fair value of deferred acquisition payments - 2,074 2,074 - 3,025 3,025 Impairment of goodwill and intangible assets   -     -     -     -   -     -     Non-GAAP income (loss) from operations $ 18,539   $ (1,158 ) $ 17,381   $ 114,263 $ 219   $ 114,482    

(2) Core results include the Global e-Commerce Services segment and the Global Marketing Services segment. Emerging results include the Consumer Engagement Segment.

  GSI COMMERCE, INC. AND SUBSIDIARIES FREE CASH FLOW AND RECONCILIATION TO GAAP RESULTS (In thousands) (Unaudited)         Twelve Months Ended April 3, April 2, 2010 2011 Reconciliation of GAAP operating cash flow to free cash flow: GAAP cash flow from operating activities $ 127,663 $ 132,799   Cash paid for property and equipment, including internal use software   (51,464 )   (73,530 )   Free cash flow $ 76,199   $ 59,269             GSI COMMERCE, INC. AND SUBSIDIARIES RESULTS BY SEGMENT (In thousands) (Unaudited)       Three Months Ended April 3, 2010 Global Global E-Commerce Marketing Consumer Intersegment Services Services Engagement Eliminations   Consolidated   Net revenues $ 201,372 $ 38,371 $ 44,454 $ (11,605 ) $ 272,592   Segment costs and expenses (1)   192,164   29,040   45,612     (11,605 )   255,211   Segment profit (loss) $ 9,208 $ 9,331 $ (1,158 ) $ -   $ 17,381   Three Months Ended April 2, 2011 Global Global E-Commerce Marketing Consumer Intersegment Services Services Engagement Eliminations   Consolidated   Net revenues $ 231,768 $ 50,322 $ 57,587 $ (16,183 ) $ 323,494   Segment costs and expenses (1)   219,404   43,365   62,142     (16,183 )   308,728   Segment profit (loss) $ 12,364 $ 6,957 $ (4,555 ) $ -   $ 14,766  

(1) Segment costs and expenses are GAAP costs and expenses excluding stock-based compensation expenses, depreciation and amortization expenses, and the following expenses related to acquisitions: transaction expenses, due diligence expenses, integration expenses, non-cash inventory valuation adjustments, the cash portion of any deferred acquisition payments recorded as compensation expense, changes in fair value of deferred acquisitions payments, and goodwill and intangible asset impairment charges.