PRTS

U.S. Auto Parts Network, Inc. (PRTS)

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U.S. Auto Parts Network, Inc. (PRTS)

Q1 2010 Earnings Call Transcript

April 28, 2010 5:00 pm ET

Executives

Ted Sanders – CFO

Shane Evangelist – CEO

Analysts

Jared Schramm – Roth Capital Partners

Richard Fetyko – Merriman & Co.

Christian Buss – Thomas Weisel Partners

Gary Prestopino – Barrington Research

Stephen Ju – RBC Capital Markets

George Kelly – Craig-Hallum Capital Group

Presentation

Operator

Welcome to the U.S. Auto Parts first quarter 2010 conference call. On the call today from the company are Shane Evangelist, Chief Executive Officer; and Ted Sanders, Chief Financial Officer. By now everyone should have access to the first quarter 2010 earnings release which when out today after market. If you have not received your release it is available on the Investor Relations portion of the U.S. Auto Parts Web site at usautoparts.net by clicking on the U.S. Auto Parts Investor Relations tab. This call is being webcast and a replay will be available on the company's Web site through May 12, 2010.

Before we begin we would like to remind everyone that the prepared remarks contain certain forward-looking statement and management may make additional forward-looking statements in response to your question. These statements do not guarantee future performance and speak only as of the date hereof. We refer all of you to the risk factors contained in U.S. Auto Parts annual report on Form 10-K and quarterly reports on Form 10-Q filed with the Securities and Exchange Commission for a more detailed discussion on the factors that can cause actual results to differ materially from those projected in any forward-looking statement.

U.S. Auto Parts assumes no obligation to revise any forward looking projections that may be made in today’s release or call. Please note that on today’s call in addition to discussing the GAAP financial results and the outlook for the company the following non-GAAP financial measures will be discussed, EBITDA and adjusted EBITDA. An explanation of U.S. Auto Parts use of these non-GAAP financial measures in this call and the reconciliation between GAAP and non-GAAP measures required by SEC Regulation G is included in U.S. Auto Parts press release today, which again can be found on the Investor Relations section of the company’s Web site.

The non-GAAP information is not a substitute for any performance measure derived in accordance with GAAP and the use of such non-GAAP measures has limitations which are detailed in the company’s press release.

And with that I would now like to turn the call over to Ted Sanders.

Ted Sanders

Thank you, Shannon, and good afternoon everyone. On today’s call I will provide a summary overview of the first quarter 2010 financial results and operating metrics. I will then turn the call over to Shane, who will provide his thoughts on the quarter and the progress we are making on positioning U.S. Auto Parts for long-term growth. We will then open the call up to take your questions.

Unless otherwise stated this quarter refers to Q1 2010 and last year refers to Q1 2009. And comparisons are Q1 2010 compared with Q1 2009. Also percentage and basis points discussed are calculated using net sales with the exception of advertising which is calculated using net Internet sales.

Adjusted EBITDA for this quarter was $5.4 million. This compares to adjusted EBITDA of $3.0 million last year, an 81% increase. Adjusted EBITDA excludes non-cash share-based compensation of $900,000 this quarter and $1.0 million last year. This quarter’s net sales increased 41.8% from last year. Online sales increased 42.0% and off-line sales increased 40.7%.

This quarter's gross margin was 35.2%, down from last year’s 36.9%; strategic pricing actions taken in the prior year and an unfavorable mix in common carriage freight versus parcel freight contributed to the margin decline.

This quarter's general and administrative expense decreased by 190 basis points to 10.1% primary from fixed cost leverage on higher sales partially offset by increased legal costs to enforce our intellectual property rights and increased amortization from software deployments.

This quarter’s marketing expense excluding advertising was 6.9%, unchanged from last year. This quarter's online advertising was 6.4% of Internet sales, down 70 basis points from last year due to improved efficiencies.

Fulfillment expense was 5.7% this quarter, a decrease of 100 basis points from last year primarily due to fixed cost leverage on higher sales. Technology expense was 1.8% this quarter, a decrease of 50 basis points from last year also due to fixed cost leverage on higher sales.

Amortization of intangibles for this quarter was 22 basis points compared with 92 basis points for last year primarily due to the full amortization of certain intangible assets.

Visitors increased for this quarter by 5.5% from last year to 28.6 million, which we attribute to greater online market penetration. Our conversion rate this quarter was 1.48%, a 31 basis point improvement over last year and a 1 basis point sequentially increase over the fourth quarter of 2009.

Orders placed through our e-commerce channel this quarter increased 34% to 423,000 and average order value declined by 0.8% to $119 from last year, both of which reflect consumer trends to in-source in tough economic times.

This quarter's customer acquisition costs decreased by $0.27 to $6.13 from last year from more efficient advertising spend.

Turning to the balance sheet, quarter-end cash and securities were $45.5 million, an increase of $3.9 million from Q4 2009. We generated $6.8 million of operating cash flow and invested $2.5 million in systems and equipment.

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