e8vk
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): August 14, 2007
PFSweb, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
(STATE OR OTHER JURISDICTION
OF INCORPORATION)
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000-28275
(COMMISSION FILE NUMBER)
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75-2837058
(IRS EMPLOYER
IDENTIFICATION NO.) |
500 NORTH CENTRAL EXPRESSWAY
PLANO, TX 75074
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(972) 881-2900
(REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE )
N/A
(FORMER NAME OR ADDRESS, IF CHANGED SINCE LAST REPORT)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the
filing obligation of the registrant under any of the following provisions:
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Written communication pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
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Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
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Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR
240.14d-2(b)) |
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Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR
240.13e-4(c)) |
INFORMATION TO BE INCLUDED IN THE REPORT
ITEM 2.02. Results of Operations and Financial Condition
On August 14, 2007, PFSweb, Inc. hosted a conference call announcing its financial results for
the quarter ended June 30, 2007. Attached to this current report on Form 8-K is a copy of the
related conference call transcript dated August 14, 2007. The information in this Report on Form
8-K, and the exhibit hereto, shall not be deemed filed for purposes of Section 18 of the Exchange
Act or otherwise subject to the liability of that Section.
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Exhibit No. |
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Description |
99.1
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Conference Call Transcript Issued August 14, 2007 |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned hereunto duly authorized.
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PFSweb, Inc.
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Dated: August 15, 2007 |
By: |
/s/ Thomas J. Madden
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Thomas J. Madden |
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Executive Vice President,
Chief Financial and
Accounting Officer |
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exv99w1
Exhibit
99.1
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PFSweb, Inc.
Company▲
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PFSW
Ticker▲
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Q2 2007 Earnings Call
Event Type▲
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Aug. 14, 2007
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MANAGEMENT DISCUSSION SECTION
PFSweb, Inc.
Q2 2007 Earnings Call
August 14, 2007
Operator: Good morning. My name is Caretta and I will be your conference operator today. At this
time I would like to welcome everyone to the PFSweb Second Quarter Earnings Conference Call.
[Operator Instructions]
It is now my pleasure to turn the floor over to Mr. Todd Fromer of KCSA Worldwide. Sir, you may
begin your conference.
Todd Fromer, Managing Partner, KCSA Worldwide
Thank you. Good morning, and thank you for joining us for PFSwebs 2007 Second Quarter Conference
Call. Before we begin I must state that the information discussed on this conference call consists
of forward-looking information under the Private Securities Litigation Reform Act of 1995 and is
subject to an involves risks and uncertainties, which could cause actual results to differ
materially from the forward-looking information. PFSwebs annual report on Form 10-K for the
year-ended December 31, 2006, identifies certain factors that could cause actual results to differ
materially from those projected in any forward-looking statements made and investors are advised to
review the Annual Report and the risk factors described therein.
These factors include our ability to retain and expand relationships with existing clients and
attract and implement new clients, our reliance on fees generated by the transaction volume or
product sales of our clients, our reliance on our clients projections or transaction volume, or
product sales, our dependence upon our agreements with IBM, our dependents upon our agreements with
our major clients, our client mix, their business volumes and the seasonality of their business,
our ability to finalize pending contracts, the impact of strategic alliances and acquisitions,
trends in the e-commerce, out-sourcing, government regulation both foreign and domestic and the
market for our services.
Whether we can continue and manage growth, increase competition, our ability to generate more
revenue and achieve sustainable profitability, the effects of changes in profit margins, the
customer and supplier concentration of our business, the unknown effects and possible system
failures and rapid changes in technology, foreign currency risks and other risks of operating in
foreign countries, potential litigation, potential delisting, our dependency on key personnel, the
impact of new accounting standards and changing in existing accounting rules or any interpretations
of those rules, our ability to raise capital or obtain additional financing, our ability and the
ability of our subsidiaries to borrow under current financing arrangements and maintain compliance
with debt covenants, relationship within our guarantees and certain of the liabilities and
indebtedness of our subsidiaries, whether outstanding warrants issued and prior private placement
will be exercised in the future, our ability to successfully implement the anticipated benefits of
the merger, eCOST potential indemnification obligations to its former parent, eCOSTs ability to
maintain existing and build new relationships with manufacturers and vendors and the success of its
advertising and marketing efforts, eCOSTs ability to increase its sales revenue and sales margin
and improve operating efficiencies, any cost ability to generate a profit and cash flow sufficient
to cover the values of its intangible assets.
PSFweb undertakes no obligation to update publicly any forward-looking statement for any reason
even if new information becomes available or other events occur in the future. There may be
additional risks that we do not currently view as material or that are not presently known. With
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www.CallStreet.com 646.442.0270 Copyright © 2001-2007 CallStreet
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PFSweb, Inc.
Company▲
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PFSW
Ticker▲
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Q2 2007 Earnings Call
Event Type▲
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Aug. 14, 2007
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nothing further I would like to now turn the call over to Mr. Mark Layton, Chairman and Chief of
PSFweb. Mark, the floor is yours.
Mark C. Layton, Chairman, Senior Partner Chief Executive Officer
Thank you, Todd. Thats a wonderful job on that part there. Thanks. Id like to also add my
welcome to everyone this morning. Along with me here are Tom Madden, our CFO; Mike Willoughby,
President of our Services Division and both will have some prepared comments for you in a few
minutes and then well be happy to address questions at the end of the call.
This mornings call as Todd mentioned is related to our second quarter, fiscal year 2007 and the
first half of the year and well kind of give you some highlights to be begin with and then get
into the details of each of the divisions to provide you some background information.
So Ill start with just a summary on the second quarter results, which we obviously released this
morning. Obviously Im real happy that since the first time since our merger activity with eCOST
last year that were back generating a positive net income on a consolidated basis. This is also
coupled with strong growth in our EBITDA performance on an adjusted basis. Last year in the same
quarter, we generated about $3,000 of EBITDA; this year in the quarter we just finished, $3.4
million worth of EBITDA. Fantastic results, so my congratulations to our teams here, in LA,
Manila, throughout the world.
We see these results as a testimony to the execution and the focus that weve maintained since the
merger was completed almost 18 months ago. And its consistent with our vision and strategy that
we communicated when we consummated the merger. Most important, we believe that returning the
company to profitability after completing the integration and transition of the merger is a
starting point, not an end point, in our evolution as a public company. Everyone in our
organization is energized by our recent accomplishments, but the overall excitement here and at
eCOST is clearly about the future and theres good reason for that.
The eCOST business continues to show a substantial improvement trend. Revenue for eCOST increased
sequentially in each of the last 3 quarters and clearly this is a business that you would see the
fourth quarter as its seasonal peak. Gross profit margins have also improved, costs have trended
down versus the prior year and just the overall energy and morale of the business is really solid
at this point. All of these things together has led to a sharp reduction in eCOST losses versus
the second quarter of 2006 and were trending to see continued improvements in that area.
Our Services division also showed continued revenue growth. We are encouraged by the recent
improvements in our sales lead pipeline, which are relatively significant, and Mike will give you
some highlights on that in a minute. We had really strong proposal activity for new business in
this last quarter.
We are on target for the guidance that we communicated early this year for fiscal year 2007, that
being a revenue range of 420 to 435 million and a consolidated EBITDA, adjusted EBITDA, of 8 to $10
million.
So with that information as a broad overview, lets go into the segments. Ill turn the call over
here to Mike, who will give you some overview on the Services business. Michael?
Michael Willoughby, Senior Partner President of Priority Fulfillment Services
Thanks, Mark, and good morning everyone. Before I begin my prepared comments, Id like to remind
you that Ill be referring to our Services business segment, which includes both the Supplies
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PFSweb, Inc.
Company▲
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PFSW
Ticker▲
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Q2 2007 Earnings Call
Event Type▲
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Aug. 14, 2007
Date▲ |
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Distributor and the PFS Service Fee business, since both of these businesses have essentially the
same operating business model, although they have different financial models behind them.
First, Id like to echo Marks earlier comments regarding the level of excitement within the
company around the accomplishment this quarter of returning the company to profitability. But more
importantly, were just real excited about what the future holds for us as well. As Mark said, we
see the successful transition of the eCOST.com business onto the PFSweb world-class infrastructure
as a starting point in the accelerating evolution of our company.
From the Services business segment perspective, we believe PFSweb has been leading the evolution of
outsourcing in our BPO space for many years, as weve continued to leverage the solid foundation of
world-class technology, proven certified business processes and many creative experienced business
professionals, on behalf of all of our valued clients. And today we service over 40 clients,
offering a wide range of services structured to meet the diverse needs of our customer base.
In order to provide you with a better understanding of the large volume of business activity that
we moved for this segment, we use a measurement called merchandise sales. Merchandise sales
reflects the estimated value of all the fulfillment activity that flows through our company.
Merchandise sales for the company includes activities where PFSweb is the seller of record for the
product as well as activities where we dont actually sell the merchandise but instead provide
warehousing and fulfillment and other services for fulfillment of the product to our clients
customers. Merchandise sales for the 3 months ended June 30, 2007, for this prior quarter was $649
million and total merchandise sales for the 6 months ended June 30, 2007, in other words for the
first half of our fiscal year equaled $1.3 billion.
Overall were very pleased with the results of the service business segment in the June quarter and
they reflect and improvement over the prior year as well as an improvement from our seasonally low
March quarter. During the second quarter of 2007 service fee revenues increased 9% to $17.6
million as compared to the same period for the prior year. Our results for the second quarter
include approximately $2.6 million of revenue from new contracts. And this is the first full
quarter that includes fees that are applicable to the work that weve performed for our LEGO brand
retail and Riverbed Technologies clients, both of those, which were implemented during the first
quarter.
In fact next week were hosting a ribbon-cutting ceremony at our Memphis distribution center with
members of the LEGO worldwide executive team. This event commemorates the launch of our LEGO
program, which ramped up to full capacity in the June quarter. The LEGO solution was designed to
effectively handle steady business throughout the year while we scaled to the substantially higher
demand of the holiday season for this LEGO business. And were looking forward to a very
successful holiday season with this outstanding LEGO organization and the partnership that weve
built between the 2 companies.
In last quarters Conference Call I noted that we signed a letter of intent with a new client that
is a major US retailer. And Im pleased to announce as we anticipated that weve signed the
contract and statement of work to provide product fulfillment and customer care services for this
companys new online store initiative. However weve agreed with our client not to formally
announce the identity of this new client until their site goes live. And currently were planning
to support the launch of this site in the third quarter of 2007, in other words towards the end of
this quarter just in time for the 2007 holiday season. This latest addition to our growing
portfolio of premiere direct to consumer clients helps confirm the validity of our goal to
strengthen our presence in this online retail space.
Back to our new, recent new business acquisition operation experience in all 3 of our target
vertical markets, high tech manufacturers, spare parts logistics and direct to consumer brands and
retailers, gives us reason to be optimistic about our ability to continue to compete for and win
new
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PFSweb, Inc.
Company▲
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PFSW
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Q2 2007 Earnings Call
Event Type▲
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Aug. 14, 2007
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business in 2007 and beyond. Im particularly encouraged by the activity in our current new
business pipeline as Mark mentioned in his opening comments. Particularly from the direct to
consumer vertical market. Our prospective new business pipeline is currently valued at
approximately $38 million based on client projected volumes. Compared to a pipeline value of about
$25 million we reported in our first quarter Conference Call. So a significant improvement in the
value of our pipeline quarter-over-quarter.
Many of the potential clients in our new business pipeline are premiere direct-to-consumer brands
with new or existing online initiatives. This increasing activity along with the quality of the
leads in the pipeline help confirm our objective to continue to focus on providing end-to-end
global solutions for online retailers and brands. Also as I indicated in the last conference call,
several of our current prospects are US retailers and brand name companies looking to us to provide
global solutions to support their expanding online initiatives. We believe our global
infrastructure and experience positions us to effectively compete for and win business in this hot
segment of our direct-to-consumer vertical market.
Now for some highlights from our growing eCOST business, Ill turn the floor back over to Mark.
Mark?
Mark C. Layton, Chairman, Senior Partner Chief Executive Officer
Okay. Thank you, Mike. Let me just now give you some highlights on the eCOST segment and a little
bit of additional operating data as weve done in the previous quarters. Now before I get into
specifics for eCOST, just a quick update on the opening of our multi-lingual customer call center
in Manila in the Philippines. We opened this facility during the second quarter of 2007 early on.
I think weve discussed this with you already but just a recap. The center is now fully
operational. It houses a team of trained representatives right now primarily handling customer
service calls for eCOST. The new operation was built really with an objective in mind in order to
allow us to expand the scope of the operations over the coming months into a number of PFSweb
related service activities as well. We believe this will provide us a competitive edge in pricing
on the Services side as we propose new deals and allow us also to potentially obtain certain cost
efficiencies in the PFSweb business in the quarters to come. So that facility is doing well and we
welcome that team on board.
Specifically on the eCOST front I hope that each of you are following the almost daily progress and
enhancements were implementing on the eCOST.com store site. During the second quarter we went
live with a number of new enhancements that we believe will help drive increased revenues and gross
margins as were seeing. The incremental enhancements include the launch of a new home and outdoor
products category, a lot of improvement to the product detail pages. We now have multiple images
of products and a lot more detailed merchandising information than weve had before.
Weve added a related accessories tab to the product detail page so if youre buying a lap top from
us you can now see the battery chargers, the cigarette lighter adapters, specific mice, a screen
enhancements and a variety of things that go along specific to that product now in an easy fashion.
Similar products and also products that we highlight are now available on our new shopping cart
jump page and a lot of enhancements related to featuring hot products in each of our major product
categories. The eCOST team in LA is working night and day to really continue to drive activities
in the sites as well as our IT team here in our facilities in Plano and in Manila developing the
enhancements that youre seeing out there and my thanks and congrats to them as we continue to make
huge strides in this area.
We also completed the addition of three new virtual warehouses, that brings our total SKU offering
now to over 110,000 products that are completely merchandised and well displayed. As previously
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PFSweb, Inc.
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PFSW
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Q2 2007 Earnings Call
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Aug. 14, 2007
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discussed, virtual warehousing give us a lot of significant benefits. Most importantly it does not
require a large sum of capital for inventory as the name proposes. We dont have the regular
expenses with a warehousing facility and which we combine that with the potential to offer higher
margins, we see this is a very important strategic move for us. As of today, weve got 12 virtual
warehouse agreements fully functional. Were targeting to add 2 to 4 additional partners before
the start of the holiday season that will allow us to continue to expand our product offer.
Through the VW expansion and the addition of a new section of our proprietary bargaining countdown
store, eCOST recently expanded. Its offering great deals with a much wider selection of home and
outdoor products as I mentioned earlier. Just briefly, these brand name manufacturers are some of
the most recognizable brands in the category that include Coleman and KitchenAid, Cuisinart,
Salton, Braun, Dirt Devil, Eureka, Taylor Made, Black & Decker, and I can go on and on. This
allows us to expand our demographic reach beyond computers and consumer electronics and into a
product category we believe will aid our efforts to improve our gross margins down the road.
On the marketing front and as youll see of some of the data Ill give in a minute, its probably
one of the top 5 or 6 significant changes that have been to the business over the last year. Weve
simply put a much greater emphasis on e-mail and viral marketing activities through our advertising
of limited time, limited quantity deals. The eCOST site really is becoming known as the deal site
to find multiple deals on a daily basis. This focus on finding great deals is a cornerstone of
what we believe the eCOST.com shopper seeks; why they return and even better, why they tell their
friends about us. With the new site enhancements in place, we are capitalizing on selling
incremental products with these deals on the original order as well as resulted in much higher
average order size over the last year than what we were previously earning.
Probably most importantly, weve got a much better picture about the like value of our customers,
our customer acquisition cost and where to acquire customers profitably and than we did at this
time last year. While our new customer count is down, the result is our losses are down. Our
financial performance is improving as well because were a lot more focused on being certain that
we attract customers who will repeat buy and that we pay to acquire these customers in a manner
thats profitable. So our focus is on producing an appropriate financial model out of the
acquisition activity, not just driving top line growth. With this better information, we believe
were much better armed. Our marketing teams making great strides in driving site traffic and new
customers in a manner that as I said makes long-term financial sense for us.
In terms of the deals, be sure you check us out. Right now, all LCD TVs and our refurbished HP
laptops, desktop systems, laptops and desktops this month are just fantastic. So be sure you check
us out from there.
Let me give you an overview quickly on the eCOST operating metrics for the quarter ended June 30
07. In the second quarter, eCOST had approximately 1.7 million total customers on the list. That
compares to about a 1.6 million in the prior period a year ago. Active customers for the quarter
ended June 30 were 231,600. That compared to 351,200 for the same period last year. However, that
speaks to my point of more focused acquisition activity. New customers for the second quarter of
2007 totaled 25,400. Thats versus 70,600 a year ago. But again, focus on the acquisition cost
and the like value of the customers that were acquiring. We believe were being much smarter with
that than we had been in the past.
For the 3 months ended June 30th, eCOST reported a total of 64,100 shipped. Our average order
value was $422. That compares to 89,900 orders shipped in the second quarter of 06 and an average
order value of $340. So as you can see the average order size is growing as we focus on different
product sets and the deals that were talking about going forward.
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PFSweb, Inc.
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PFSW
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Q2 2007 Earnings Call
Event Type▲
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Aug. 14, 2007
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Ad expenses for the second quarter were $303,900. That compares to $986,300 for the second quarter
of 2006, a pretty dramatic change, and as I mentioned a lot on the life value customer. The cost
to acquire a new customer for the second quarter of 2007 was $9.76. That compared to $13.97 in the
same period last year. The cost to acquire a new customer is calculated by taking the total ad
expenses during the period, subtracting our costs related to reactivation of existing our previous
customers and then dividing it by the total number of new customers during that period.
In 2007 we continue to closely monitor spending on advertising for eCOST. With those details
behind you lets turn the call over to Tom. Hell take you through the financial highlights on a
consolidated basis. Thanks Tom
Thomas J. Madden, Senior Partner Chief Financial Officer and Chief Accounting Officer
Thank you, Mark. Let me first providing a brief overview of our consolidated operating results for
the quarter ended June 30th, then Ill provide some operating highlights for each of our business
segments as well as an overview of key balance sheet items.
As reported in our press release our consolidated revenues for PFSweb for the quarter-ended June
30th, were 108.4 million as compared to 109.3 million for the second quarter of 2006. Gross profit
for the second quarter of 2007 was 11.9 million or 11% of net revenues compared to 10.0 million or
9.2% of net revenues in the second quarter of 2006. The increased gross profit and gross profit
margins in the current year is primarily attributable to the improved performance at eCOST.com.
As we have discussed previously we utilize adjusted EBITDA as the key metric in evaluating our
operational performance and potential. In the second quarter our consolidated adjusted EBITDA was
nearly $3.4 million, a significant increase versus the $3,000 of adjusted EBITDA in the prior-year
period.
For the second quarter net income was $154,000, which equated a 0 cents per basic and diluted share
as compared to a net loss of 3.2 million or a loss of 7 cents per basic and diluted share for the
same period last year.
We are pleased with the results for this quarter especially our consolidated positive net income
results. We believe this clearly illustrates the progress that we are making throughout our
businesses.
Let me now talk about the performance of our selected business segments for the quarter ended June
30th. First, service fee revenue increased 9% to 17.6 million from 16.2 million in the prior-year
quarter. This increase is primarily due to incremental revenue attributable to the implementation
of custom solutions for new clients such as LEGO brand retails, Riverbed and others within the past
few quarters.
Gross margins for our service fee business remain within our targeted range of 25% to 30%, though
down somewhat from the prior year due to less project activity, which often comes at a slightly
higher margin, and incremental costs due to new contract start-up activity thats occurred. Gross
margins earned on new contracts are generally lower in the first few quarters of operations as we
work to employ the appropriate long-term infrastructure solution for the client.
SG&A for the Service Fee segment increased approximately $500,000 over the prior year, primarily
related to incremental facility costs and personnel related expenses. The net result for the
Service Fee business was an adjusted EBITDA for the Service Fee business of 1.9 million, which was
approximately level with the 2.0 million of adjusted EBITDA in the prior year. Overall, were
pleased with the performance of our Service fee business segment and as Mike indicated, we are
targeting the solid pipeline of potential new business leads for the second half of the year.
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PFSweb, Inc.
Company▲
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PFSW
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Q2 2007 Earnings Call
Event Type▲
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Aug. 14, 2007
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For our Supplies Distributor business segment, revenue was 57.6 million, which was a decrease of
3.2 million as compared to the prior year. This decrease was primarily related to the impact of
reduced sales volumes, as well as the impact of foreign currency fluctuations which impacted
certain customers buying activities. Gross margin for the Supplies Distributor business increased
year-over-year to approximately 8% from 6.7% in the 2006 second quarter. The increase in gross
margins is primarily due to the impact of certain incremental inventory cost reductions that
occurred.
Lets turn now to our eCOST.com business. We continue to evaluate the effectiveness of the
incremental improvements to eCOST.com operations since our merger date by looking at the sequential
quarter-to-quarter results, as well as the comparisons to the prior year. In the second quarter of
2007, eCOST.com revenue increased 25% to 27.1 million, from 21.6 million recorded in the first
quarter 2007, and increased 28.4% from our fourth quarter of 2006, which has traditionally been our
strongest quarter due to seasonality from the holiday season. The gross margin for the second
quarter was approximately 8.1%, compared to 8.4% during the first quarter.
While were pleased with eCOST.coms gross margins for the period, we still see room for
improvement in the next few quarters. We continue to work toward achieving the near-term gross
margin goal we have established of approximately 9 to 10%. Also, in relation to Marks comments
earlier, this is one more reason why we are looking to increase the number of virtual warehouse
agreements, as they generally operate with higher gross margins.
We also continue to focus on controlling SG&A cost within the eCOST business. We maintained a
consistent cost level this quarter as compared to the March 2007 quarter, even on a much higher
revenue base. In addition, as noted previously, our costs are down significantly from the levels
experienced in the prior year. The net results of the increased revenue, along with the gross
margin and cost focus, is a significant improvement in eCOST.coms bottom-line performance.
eCOST.coms adjusted EBITDA reflects a loss of 0.6 million for the June 2007 quarter, a continued
improvement over the last 2 sequential quarters and a dramatic improvement over the prior year.
Now lets discuss some balance sheet highlights. Our consolidated cash positions remain solid with
cash, cash equivalents and restricted cash balances approximating 16.9 million as of June 30, 2007.
Our accounts receivable and inventory levels continue to reflect solid turnover results as well
during this period.
From a banking standpoint, we believe our banking relationships remain quite strong. As indicated
in last quarters conference call, in March and April of this year we renewed, extended or amended
all of our asset based financing facilities for our Service Fee, Supplies Distributors and
eCOST.com business segments. All of these new agreements have terms that are either at or somewhat
improved from the prior levels resulting in increased working capital, financing ability for the
businesses.
Now Id like to turn the call back over to Mark for closing remarks.
Mark C. Layton, Chairman, Senior Partner Chief Executive Officer
Okay. Thanks, Tom. Before we go for questions I just want to reiterate something I said in the
opening remarks. The improvements that weve made in the eCOST business and the overall strength
of our Services business enabled us to achieve profitability in the second quarter but the real
excitement in the story lies in the momentum were seeing in our business and the positive
opportunities available to operate these businesses in a way that will extract the most value for
our shareholders. When we conceived the merger, we understood that our know how and world-class
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infrastructure would give us the best chance of resurrecting the eCOST brand and business. While
that transformation is still a work in progress, the momentum is building and were now in our
third straight quarter of sequential revenue growth and operational improvements at eCOST.
As we continue to breathe new ideas and opportunity into eCOST we see greater opportunities for our
vision for growth and profitability to be realized at all levels well above where we are today and
we believe that will translate into stronger returns for our shareholders many of which have
supported us through a difficult transition.
This concludes our prepared comments. Operator, well now open the call up for any questions.
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QUESTION AND ANSWER SECTION
Operator: [Operator Instructions] Your first question is coming from John Fitzgerald of
Bishop, Rosen and Company. Please go ahead.
<Q>: Gentlemen, good morning and that is indeed an exceptionally quarter quarter. A little
bigger overview-type of question, Mark. Where do you see you guys in a year? Youve got a game
plan going forward, we tend to look at these companies under a microscope, week to week, quarter to
quarter. What is your bigger plan going out a year with the consolidated companies?
<A Mark Layton>: Well, John, when we set this up we really did create leverage on top of
the infrastructure that weve got. So I mean the key for us just to continue to grow and to drive
profitability out of the growth. So Im hopeful that we can continue to maintain the momentum in
top line growth and in gross profit growth that will result in expanded earnings capability. So
growth is the focus and specifically for eCOST as Ive mentioned we want to continue to expand the
number of products that we offer. Some of that expansion wed like to see come from higher margin
product categories that were not into today so it increases the overall gross margin of the
business. On the services side Mike has got a very specific focus on three industry segments. Our
marketing activities remain focused in those areas. Growth there is harder to predict, it always
has been thats one of the reasons that we made the decision to move direct into the product
ourselves is that so we could balance some of the growth and I think its somewhat business as
usual in terms of the services side. And continuing to focus on bringing in blue chip client
names. So in summary growth in revenue and in gross profit to drive leverage into our bottom line
performance.
<Q>: Okay. One other quick question here, Mark. On the existing gross margins you have
presently how much more room is there to work on improving those, forgetting bringing any new
higher profit margin people in business in, but the margins you have presently how much more
room is there to work on those on an improvement level?
<A Mark Layton>: Well on the services side theres always opportunities to improve cost
efficiencies so thats an ongoing thing. But theres not a 10% improvement in that area. So you
can see 100 to 200 basis points of fluctuation and improvement potential in the services side based
on operational improvements, and to some degree mix of the products, the services that we provide
in that area.
<Q>: Okay. One last question, the present credit situation and the credit markets et cetera,
whatever you want to call it credit cards etcetera, is it having any effect, do you see foresee it
having any effect on your underlining bsn?
<A Thomas Madden>: No, not at this time. As I indicated our banking relationships remain
strong. Most of our debt facilities are asset-based facilities that are secured by the underlying
receivables and inventory assets so the banking partners are well-secured in those facilities. As
we move forward the primary needs that well have based on what we see today would be capital
expenditure requirements. Were been pretty successful in the past of being able to obtain
equipment financing to help support those capital expenditure needs.
<Q>: Okay. So you have revisited your banking relationships and all of you guys are on the
same page here and comfortable?
<A Thomas Madden>: Thats correct.
<Q>: Okay. Thank you very much. Thats all I have, Mark. Thank you.
<A Mark Layton>: Thanks, John.
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Operator: Thank you your next question is coming from George Walsh of Gilford Securities. Please
go ahead.
<Q>: Thank you and congratulations on a really great quarter. Thats tremendous sequential
improvement.
<A Mark Layton>: Thank you.
<Q>: I just wanted to ask and also thats just very nice growth in that service fee pipeline.
I wonder if you could just perhaps give a little more elaborate a bit on maybe the historical
perspective of that pipeline versus where thats been in the past? Do you know is that a record
number or how does that fit in there? Also can you give a breakdown of, is there an international
versus domestic component to that or is there kind of breakdown to give us a sense of how that
works? And well start with that.
<A Michael Willoughby>: Sure well I can give you some details around the pipeline first to
answer the question about the size. It is a significant improvement over the past couple of
quarters in the value of the new business pipeline, which is something that obviously were very
excited about seeing. One of the things I mentioned in my comments was that we really believe the
quality of the pipeline is also much improved. If I look at the leads that are in there that were
actively working that we are proposing on or have proposed there are some excellent opportunities
in there for us particularly in the direct-to-consumer vertical market segment, which is where
were seeing really a lot more activity over the past quarter than we had over the past couple of
quarters. So Im not exactly sure what you attribute that activity to. One of the things I know
that are present in that activity is this globalization move where particularly domestic US
companies are looking to expand either existing online initiatives that they have or brick and
mortar operations that they may already have in say Europe to augment that with an online
initiative. So were seeing a lot of activity expanding those domestic business models in Europe
and into the rest of the world. So that is a part of the pipeline. The other thing that were
seeing is that there seems to be an even ever more increasing trend within that direct-to-consumer
vertical looking for true end-to-end solutions where the client is looking for both the front end
technology component, the e-commerce site and the functionality goes with that as well as the
services that go around an e-commerce site such as direct marketing, campaign management that sort
of thing as well as what we kind of view as the back office function such as product fulfillment,
call center operations, electronic payment fulfillment that sort of thing all bundled into one sort
of seamless deliverable with one provider that they can rely on to be responsible for the whole
operation. That really is very well suited for our strength. We have the ability with this global
infrastructure I think to really compete for aggressively and win a lot of that business. So were
very sort of optimistic about the pipeline that we see in front of us now and I think that bodes
well for the next couple of quarters as we look to win some of the proposals that are out there.
<Q>: Okay. Is there any kind of closing rate versus pipeline number that you deal with or is
that a fair question?
<A Michael Willoughby>: It is a fair question and we certainly have internal metrics that
over the past four or five years that weve really gotten fairly disciplined about measuring and I
can tell you that were on track with our objectives. Im not in a position I guess at this point
to go into a lot of detail around that frankly because it can get kind of confusing when you look
at all the stages we take our pipeline through, but were definitely performing as we would expect
internally to our objectives.
<Q>: Okay. Very good. Ill get back in queue and come back.
<A Michael Willoughby>: Thanks, George.
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Operator: Thank you. [Operator Instructions] Your next question is coming from Josh Goldberg of
Intrepid Capital. Please go ahead.
<Q>: Hi guys. A couple quick things. One is in terms of just the Service Revenue business I
saw the EBITDA number was down this year versus last and I know you talked a lot about some of the
bigger customers coming online which probably caused a little bit of a delay in terms of
profitability, but is there any reason to believe that that number shouldnt continue to go higher
through the back half of the year? And then I have a follow up.
<A Michael Willoughby>: The Services business is sometimes hard to compare just on a
quarter-by-quarter standpoint because our client have product movement characteristics that may not
be consistent year to year. For example, one of our largest clients has various product drops
throughout the year and they can move things from Q2 to Q3 and have, you know, so the comparability
between this years Q2 and prior year Q2 is not important, is not as important to me as in taking a
look at the full year performance of the business. So while you see what we did mention is that
the gross margins for this June 2007 quarter were slightly lower than where we would have targeted
primarily put flow to the fact that we had some new client activity at a somewhat reduced gross
margin performance level and also our project activity on a year-to-date basis, have probably been
a little bit less than where our project activity was last year, but were starting to see some of
the project activity opportunities to be evaluated toward as we look out to the rest of the year.
<Q>: Okay. And, Mark, it sounds like this quarter based on the commentary that you had as
well as the analysts. You know, youre significantly ahead of where you originally thought going
into the quarter and obviously, the eCOST business was a big surprise as well. Im just wondering
why you dont feel more comfortable kind of getting more to the high end of your EBITDA guidance or
raising it at this point, since youre seeing so much momentum in your business.
<A Mark Layton>: I think that were trying to be conservative about the numbers; we really
didnt even have a discussion, at this point, about changing the guidance and then we put out
annual guidance for the first time in 5 years, I think. So, I think were just trying to focus on
over-performing and not over-promising, so, you know, thats just kind of where were at with that.
<Q>: Okay. Great. Thanks.
Operator: Thank you. Your next question comes from George Walsh of Gilford Securities. Please go
ahead.
<Q>: Mark, I wonder if you could talk about the great quarter with eCOST up to 27 million,
but what is the break-even revenue point for you at this point? I think we were kind of looking
about 8.5 million a month previously, but it looks like its a little higher. But the volume
driving is the important thing; whats the real break-even rate as you see it right now?
<A Mark Layton>: Well, the issue that weve got is we still dont have the selling margins
as high as we need them to be. The mix of products is not accelerating as quickly in the
higher-margin areas as I would have hoped. The flip side to that is that the deal side of our
business is driving traffic and growing more quickly than we thought. So weve got basically a
mixed issue related to where were at on that end of things. Our B2C segment is growing nicely;
again, it had been experiencing declines really up until it obviously grew during the fourth
quarter, but, you know, we had some concerns about our consumer business and where we were at
really up until, kind of, February or so when things began to get traction again. The B2B side has
really carried us up until, I dont know, just recently; the last few months has the B2C piece
really begun to show a lot of life in that area. But obviously the direct, the
business-to-business side is the lower gross margin business, so again, a mixed issue related to
that. The break-even point, Id say, you know revenue-wise, 9 to 10 million and a majestic gross
margin percentage of around 9 to 10% is where
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we need to be at. Thats a little higher than I talked about before, but, you know, we need to go
from there. Just as a note: when we discuss break-even, were excluding the purchase price
allocation, the amortization related to that and thats about $200,000 a quarter. So Im not
including that in my break-even kind of statement.
<Q>: Okay. And just revenue-wise: when you quote a spike here, was there something that, I
mean, is that a run rate you think you can keep going quarterly or is there some deals there that,
just, as you mentioned, might have helped you along to kind of overachieve a little bit?
<A Mark Layton>: Once a little bit of a surprise about how strong the second quarter was
for us as frankly you know, we were pleasantly surprised about how the first quarter went. We
would have expected revenue to come down some degree you know, after the fourth quarter. So I
think its indicative with the fact that weve made improvements in service. Weve got good
marketing activity going on thats driving activity in the site. Our July activity was solid again
on the eCOST side. So at this point, I think weve got you know, a reason to believe that weve
got a solid base underneath this and we should continue to accelerate from there. I would expect
that you know, in the third quarter, the summers a little bit softer so I dont know that Im
going to sit here and say were going to do 35 million in the third quarter. I dont think Id
expect that activity. I am optimistic about where were at with the fourth quarter. So well have
to kind of see where things go from there and then, you know, the first quarter and next year
depending on where were at. Expect we probably will go back to a bit more reasonable seasonal
trending on things from there. So the big focus is on deals. As I mentioned, LCD, refurbished PC,
you know, from there and in really continuing to try to drive an improvement in mix of the
products, selling higher margin products along with those deals. And a lot of these enhancements
that weve done to the website, I think helps to do that.
<Q>: Okay. And your entering the new product line, the house and homewares. Is that
something that takes a lot of the ramp-up and make the contribution?
<A Mark Layton>: It will. We need to get it better highlighted on the site. Right now,
it still, it isnt as prevalent as Id like it to be. We got some plans underway in the next
couple of weeks to make some adjustments to our tab, our main index tabs on the page itself. We
need to make a better highlight on memory which is an area that we do quite well and that its not
highlighted enough. And home and outdoors is an area that we want to at least try to highlight
more than its at to see you know, what we can do with the category. Clearly, it doesnt have to
be as big in revenue as some of the other categories because its got a much higher gross margin
percentage to it. So it will take some time for it to ramp up. Its a pure VW model so for the
most part, not inventory product. In that category, theres a few deals in vacuums that we will
inventory. But for the most part, were relying on VW partner, a couple of VW partners, to move
these categories for us. Wed like to continue to expand in that area. Its a category thats not
hugely well served and not overly competitive on the web. And we believe its got some reasonable
adjoining demographics to our existing customer base as well, at least inside the same household.
So thats the area that we want to try to kind of focus on and not have to spend the ton on
marketing expenses to try to bust into a new demographic area.
<Q>: And you look forward to be large against this category to help your margins on the
business?
<A Mark Layton>: Yes, its certainly in that category that can help mix-wise if we can
grow it. Its got 15 20-point margin capability to it, some cases a little higher versus the
commodity pricing we see on technology products. So the key is weve got a good scale on the
revenue side in order to make it work.
<Q>: Okay. And just on the services side with the new retailer, are you ramping up most of
the third quarter? So thats where the costs are going to be? Or are those going to be
capitalized or hows that going to work out?
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<A Michael Willoughby>: Well this quarter is the quarter that we will complete the
implementation work. We will, as with most implementations ramp up in operations doing some, some
of the services such as receiving product into our warehouse for which we get paid fees prior to
the deal completely going live and, and just going into sort of steady state. So I think you would
see the most of the activity, implementation activity and cost related to that would be in this
quarter. As far as the accounting treatment, it, its a combination of things. There are costs
that sort of roll into the contract and are amortized over the life of the contracts and theres
some costs that would be expensed, and that would be reflected in our forecast that we have
internally. The other thing is and I think Toms eluded to this before even in this conference
call, as we implement a deal, the very first month or two is typically at slightly below the
margins that we would target for the contract over the life of that contract, just as we are sort
of fine tuning the operation and maybe to an extent babysitting that operation, and that will
certainly be the case here. Especially if this client is launching this site right before the
holiday season. So we will certainly have a lot of activity around making sure that the launch
goes extremely well and that theyre very prepared for a successful holiday season. But were
definitely looking forward to this being a very good opportunity for us both from a growth
perspective as well as a profitability perspective.
<Q>: Okay. Great. All right, Ill get back in queue and come back. Thanks.
Operator: Thank you. Your next question is coming from Russ Cleveland of Ren Capital. Please go
ahead.
<Q>: Hi. Russell stepped out. This is Eric Stevens. Once you get your product mix where
you want it to be and eCOST gets its new product line in place, what do you think your gross
margins might be after all that settles in?
<A Mark Layton>: Well we set a target when we put the merger together trying to get
margins in the adjusted margins in the 10 to 12% range, so
<Q>: Gross? Gross margins?
<A Mark Layton>: Yes, yes. Adjusted gross margins, yes. So the you know we at this
point see a couple of hundred basis points of improvement opportunity in that area, then well take
a look and sit back and see what other products we can add. I mean Id clearly like to continue to
drive that up over time. But Id say that the nearer term goal is to get in the 10 to 12% range.
<Q>: Okay. By near term, what do you mean?
<A Mark Layton>: 12 months.
<Q>: Okay. Thank you.
<A Mark Layton>: Operator? Any other questions?
Operator: Thank you. Your next question is coming from Chris Cerniglia of Stifel Nicolaus.
Please go ahead.
<Q>: Hey guys, great quarter. How much additional revenues can the facilities handle?
Currently you said you have $38 million in the pipeline. How much additional revenue without
having to go back to the marketplace to raise additional capital?
<A Thomas Madden>: Thats going to be dependent on the which contracts were successful
in winning. There are certain clients that are on the pipeline that can fit into our vested
infrastructure. Others well have to build a new solution for. So its kind of dependent on that
but
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we feel like weve got the with the contracts that weve added over the last 12 months, weve
continued to gain the experience of either adding the new facilities as needed to support the
contracts when they come on board on a timely basis to meet the clients requirements.
<A Mark Layton>: Just to re-cap that, for our existing clients we take on for the most
part responsibility for dealing with their growth and some of the clients are tied to that growth
space and others of them is our organic responsibility but well deal with primarily with existing
client growth. We dont look to operate over capacity or have capacity in inventory for deals.
Most of the larger deals that were focused on today we will tie the client to that contract
will be tied to space and capital equipment that we have to acquire to do the deal. So with new
contracts for the most part we will build incremental solutions for them to do that. This year we
built out a new facility in Memphis, completely gutted a building and rebuilt a facility there and
added 170,000 feet of capability that we didnt have at the beginning of this year. And so LEGO is
the primary client in that facility. So the model is really we take responsibility for growth
requirements. When new customers come on board we add new facilities.
<Q>: How many square feet are we currently operating on?
<A Michael Willoughby>: Im sorry, a little bit over youre talking about distribution
facility space?
<Q>: Correct.
<A Michael Willoughby>: A little bit over 2 million square feet globally and those
facilities are in Memphis primarily, which is the hub for our domestic distribution activity as
well as Grapevine, Texas and Toronto, Canada and in Liège, Belgium currently.
<Q>: Mike, you said that new retailer that you guys are acquiring they currently have zero
online business?
<A Mike Willoughby>: Thats correct. This is a brand-new online initiative for this brick
and mortar retailer.
<Q>: Great thank you.
Operator: Thank you. Your next question is coming from George Walsh [ph] of Gilford Securities.
Please go ahead.
<Q>: Mike, with eCOST and your marketing initiatives going forward are there you went into
what youre doing now. Is there any future initiatives youre looking at? You see yourselves
staying on this same plan or is there other things youre looking at in terms of various marketing
ideas to drive traffic?
<A Mark Layton>: Well were constantly evaluating things. I believe and this is personal
opinion that there has to be some macro change in the way some of the components of Web customer
acquisitions being done currently. The cost, at least for our category of retailers to acquire a
customer using the shopping box and some of the search engine activity out there is not economical
for us as a group at this point. And I think probably the distress that we were in last year maybe
led us to do more work and figure out that earlier than some of the other retailers in the category
have gone. But the likes of a Google of PriceGrabber and shopping.com, Shopzilla, these guys
models are going to have to adapt to make this work for us. So we constantly see new programs.
The cost per click model itself doesnt work well. Its hard to control what people do with
clicks, the conversion percentages are not high enough and the cost to acquire a customer that way
for us and that category is way too high. So youre beginning to see some trial programs come
along that are oriented towards actual cost to acquire a customers, you know a flat fee to be paid
or
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a percentage to be paid on an order basis and those can be more potentially more economical for us
and easier for us to predict outcomes of things from there. So I think youre going to see a macro
change in that and as a result, if it works, well put more money in it and acquire more customers
in that way. Its clear, based on just looking at the differences a year ago, that you can pour
money in it and acquire customers, the problem is that if you paid $30 to acquire a customer thats
going to do $20 with you in gross margin over the life of the customer, obviously youre $10 in the
whole and I think that is what is going on a lot out there at least in the product categories that
were involved in. So if that macro shift happens in that area then we will advertise more and
well acquire more customers with that. In terms of the model of what were doing here, Ive said
in the past that Id be interested in the possibility of doing other acquisitions in this area,
its a bring in higher margin product categories or additional products. Were not in a position
to evaluate that today at all but its certainly something that as you look out into a longer
horizon that we would consider as well to help us continue to drive growth. The key here and it
comes back to this, the core assets that we, as shareholders own here, have to do with the
infrastructure that weve created over the last 15 or 20 years. Our technology, our distribution
capability, our customer service capability and all the things that tie this together and our
people around it are the core value of the business. Theyre the gem cells and we have to find
ways to deploy those in fast growing marketplaces that can drive scale and leverage to the bottom
line. So we need to grow.
<Q>: Okay. Great. Thanks a lot.
<A Michael Willoughby>: Thank you.
Operator: Thank you. There are no further questions in the queue, sir.
Mark C. Layton, Chairman of the Board, Senior Partner Chief Executive Officer
Okay. I appreciate everybodys time this morning. Talk to you next quarter. Thank you operator.
Operator: This concludes todays PFSweb Second Quarter Earnings Conference Call. You may now
disconnect and have a wonderful day.
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