Welcome to the PetMed Express Incorporated d/b/a 1-800-PetMeds conference call to review the financial results for the third fiscal quarter ended on December 31, 2017. At the request of the company, this conference call is being recorded. Founded in 1996, 1-800-PetMeds is America's largest pet pharmacy, delivering prescription and non-prescription pets medication and other health products for dogs and cats direct to the customer. 1-800-PetMeds markets its products through the national advertising campaigns, which direct our consumers to order by phone or on the Internet, aimed to increase the recognition of PetMed family of brand names. 1-800-PetMeds provides an attractive alternative for obtaining pet medication in terms of convenience, price, ease of ordering and rapid home delivery. At this time, I would like to turn the call over to the company's Chief Financial Officer, Bruce Rosenbloom. Please go ahead.

Thank you. I would like to welcome everybody here today. Before I turn the call over to Mendo Akdag, our President and Chief Executive Officer, I would like to remind everyone that the first portion of this conference call will be listen-only until the question-and-answer session, which will be later in the call. Also, certain information that will be included in this press conference may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 or the Securities and Exchange Commission that may involve a number of risks and uncertainties. These statements are based on our beliefs as well as assumptions we have used based upon the information currently available to us. Because these statements reflect our current views concerning future events, these statements involve risks, uncertainties and assumptions. Actual future results may vary significantly based on a number of factors that may cause the actual results or events be materially different from future results, performance or achievements expressed or implied by these statements. We have identified various risk factors associated with our operations in our most recent annual report and other filings with the Securities and Exchange Commission. Now, let me introduce today's speaker, Mendo Akdag, our President and Chief Executive Officer of 1-800-PetMeds.

Thank you, Bruce. Welcome everyone and thank you for joining us. Today, we will review the highlights of our financial results. We'll compare our third fiscal quarter and nine months ended on December 31, 2017 to last year's quarter and nine months ended on December 31, 2016. For the third fiscal quarter ended on December 31, 2017, our sales were $60.1 million compared to sales of $52.9 million for the same period the prior year, an increase of 13.7%. For the nine months ended on December 31, 2017, sales were $206.5 million compared to sales of $186.1 million for the nine months the last year, an increase of 10.9%. The increases in sales were due to increases in new order and reorder sales. The average order value for the quarter was approximately $86 compared to $81 for the same quarter the prior-year. For the third fiscal quarter, net income was $9.1 million or $0.44 diluted per share compared to $4.8 million or $0.24 diluted per share for the same quarter the prior-year, an increase to net income of 88%. For the nine months, net income was $27.1 million or $1.33 diluted per share compared to $16.3 million or $0.80 diluted per share a year ago, an increase to net income of 66%. The accelerated increase to net income was mainly due to higher gross profit margins. In addition, the new tax law helped boost our earnings for the quarter, by approximately $1.7 million or $0.08 diluted per share. New order sales increased by 15.5% to $9.2 million for the quarter compared to $7.9 million for the same period the prior year. For the nine months, the new order sales increased by 12.7% to $36 million compared to $31.9 million for the same period last year. Reorder sales increased by 13.4%…

[Operator Instructions]. Our first question is coming from Mr. Kevin Ellich from Craig-Hallum. Kevin, your line is now open.

Thank you. Good morning, guys. Mendo, I guess, I just wanted to start off with the gross margin. Another really strong quarter. It doesn't seem like we're seeing much seasonality in the business these days, but should we start thinking that gross margins are going to continue expand by 200, 300, 400 basis points each quarter?

We're in our off-peak season and typically gross margins are higher in off-peak season than the peak season. So, the comparisons are going to get tougher as we go along. So, our gross margins increased in the last four quarters, like, 500 basis points, I guess, for the year. So, it will be tougher to continue that going forward.

Got it. I would think in the off-season, you're not seeing as much in terms of the sales of the new generation or next generation products, but that trend has continued. Would you say that's true?

That is correct, yes. In the flea and tick category, there is a shift in sales from low-margin topicals to higher margin, next-generation medications, and that's really the main reason for increasing the gross profit margins.

Okay. Yup, that makes sense. And then, customer acquisition costs was up about 22% this quarter. Do you think that trend is going to continue? I think you gave the reason being this higher advertising expense.

Yes. There is a cost increase per impression. So, I would anticipate that there is going to be some increase compared to the last year.

Okay, great. And then, I guess, one quick one for Bruce. Obviously, we're all expecting tax rate to come down in the next calendar year, but can you explain what the benefit was this quarter? How that happened?

Sure. As you know, we were a full 35% federal taxpayer. What we have been applying has been a 35% rate for the first half of the year, for the first six quarters. Once the tax law was enacted, we're allowed to prorate that rate. So, we had nine months of 35%, one month at 21%, which is a prorated 31.5%. We're able to apply that to the nine months and that's going to be the federal rate moving forward for the fourth quarter. Once our fiscal year ends at March 31, 2018, we'll then apply for that full year of fiscal 2019 a 21% federal rate.

Okay. But for fiscal 2019, you want us to use 24%.

Right. That's the blended effective rate that includes state tax as well.

Okay, great.

Yes. That includes state income tax.

Okay. One last one for me. Are you seeing any changes in the competitive dynamics or increased competition from any of the other online retailers?

It's similar to the, I would say, prior two quarters. It's impacting our cost in advertising a little bit. That's one of the reasons the cost is up in advertising.

Okay, great. Thanks, guys.

Our next question is coming from Erin Wright from Credit Suisse. Erin, your line is now open.

Great, thanks. How would you characterize your current relationship with third-party distributors as well your direct relationship with any on the vendor side? I guess, have you been able to establish any sort of direct manufacturer relationship? Has anything changed meaningfully on that front to facilitate a, I guess, greater access to a more diverse portfolio? Thanks.

Our relationships with our vendors are very good, I would say. There is some changes happening, but we may disclose that in our 10-K in May.

Changes as it relates to third-party distribution or manufacturer direct relationships?

Direct relationships.

Okay, thanks.

As far as access to products, we carry a full line of all the most popular pet medications. So, access isn't necessarily the issue. You're just talking about more direct relationships.

Right, okay. Great, thanks. I guess, has anything changed in sort of your advertising strategy since the advertising spend has come up or is it just sort of a competitive response to the market at this point?

With higher margins, we can afford to pay more to acquire a customer. So, our thresholds have changed a little bit due to the high margins.

And then, on tax reform, I guess, I see the dividend hike today, but how should we think how this will impact your capital deployment priorities overall? Thanks.

We're in maintenance stage now as far as capital deployment is concerned, so as far as our infrastructure is concerned. But during normal course of business, we do look at opportunities. So, if something happens, obviously, you guys will hear about it.

Do you anticipate that you will be active from an M&A standpoint? Are there opportunities or pipeline out there?

I wouldn't call it an active. I would just say during normal course of business, we always looked at opportunities and will continue to do that.

Okay, great. Thank you.

You're welcome.

[Operator Instructions]. Our next question is coming from Anthony Lebiedzinski from Sidoti & Company. Anthony, your line is now open.

Thank you. Good morning. And thank you for taking the questions. So, obviously, you've had a few quarters of very positive shift towards the higher-margin next generation medications. Do you have any sense, Mendo, as to what percentage of your customers have already made that shift to the next generation medications?

We do have some sense, but I'm not going to share that with you. So, I think the shift probably will continue for another couple of years.

Okay, great. Thanks for that color. And I was wondering if you could any sort of sense as to how much of your sales are coming from your mobile app and are there any planned improvements to the app that could perhaps make it even easier to customers to order?

We're working on the second-generation of the app, which should go live, I believe, within the next six weeks. It's growing, but it's still not – still it's in the infancy. But as the consumer using more and more of the mobile phone, we think it's going to be important for the future.

Got it. Okay. Thanks very much.

We show no further questions in queue at this time. I would like to hand the call over to the speakers. Go ahead.

Thank you. For the remainder of fiscal 2018, we'll continue to focusing on increasing sales and improving our service levels. This wraps up today's conference call. Thank you for joining us. Operator, this ends the conference call.

And that concludes today's conference. Thank you for participating. You may now disconnect.