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 17, 2009
PFSweb, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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000-28275
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75-2837058 |
(STATE OR OTHER JURISDICTION
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(COMMISSION FILE NUMBER)
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(IRS EMPLOYER |
OF INCORPORATION)
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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 8.01. Other Events
On August 17, 2009, PFSweb, Inc. hosted a conference call announcing its financial
results for the quarter ended June 30, 2009. Attached to this current report on Form 8-K is a copy
of the related conference call transcript dated August 17, 2009. 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 17, 2009 |
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 20, 2009
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By:
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/s/ Thomas J. Madden |
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Thomas J. Madden
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Executive Vice President, |
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Chief Financial and |
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Accounting Officer |
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exv99w1
Exhibit 99.1
Operator: Good morning. My name is Christy, and I will be your conference operator today. At this
time I would like to welcome everyone to the PFSweb Second Quarter 2009 Earnings Conference Call.
[Operator Instructions] After the speakers remarks, there will be a question-and-answer session.
[Operator Instructions]
Thank you. I would now like to turn the conference over to Todd Fromer. Please go ahead, sir.
Todd Fromer, KCSA Strategic Communications Investor Relations
Thank you, Christy. Before I turn the call over to management, Id like to make the following
remarks concerning forward-looking statements. All statements in this conference call other than
historical facts are forward-looking statements. The words anticipate, believe, estimate, expect,
intend, will, guidance, confident, target and other similar expressions typically are used to
identify forward-looking statements.
These forward-looking statements are not guarantees of future performance and involve and are
subject to risks, uncertainties, and other factors that may affect PFSwebs business, financial
condition, and operating results, which include but are not limited to the risk factors and other
qualifications contained in PFSwebs annual report on Form 10-K, quarterly reports on Form 10-Q,
and other reports filed by PFSweb with the SEC, to which your attention is directed. Therefore,
actual outcomes and results may differ materially from what is expressed or implied by these
forward-looking statements. PFSweb expressly disclaims any intent or obligation to update these
forward-looking statements.
During this call, we may also present certain non-GAAP financial measures such as EBITDA, adjusted
EBITDA, non-GAAP net income, free cash flow, merchandise sales, and certain ratios that use these
measures. In our press release with financial statements issued last Friday, which is located on
our website at PFSweb.com, you will find our definitions of these non-GAAP financial measures, a
reconciliation of these non-GAAP financial measures with the closest GAAP measures, and a
discussion about why we think these non-GAAP measures are relevant. These financial measures are
included for the benefit of the investors and should be considered in addition to and not instead
of GAAP measures. At this time, it is now my pleasure to turn the floor over to Mr. Mark Layton,
Chairman and CEO of PFSweb. Mark, the floor is yours.
Mark C. Layton, Chairman, Senior Partner and Chief Executive Officer
Thank you, Todd. Good morning, everyone. Id like to welcome you to our 2009 Second Quarter
Conference Call. With me here today at our Plano headquarters is Mike Willoughby, President of our
Services business; and on the phone offsite is Tom Madden, our Chief Financial Officer. Again, good
morning, everyone. Today Ill provide you with an overview of our financial results for the second
quarter and add some color on the events that shape that quarter. Following our prepared comments,
Tom, Mike, and I will be available for some questions.
When comparing this years results to last years or to 2007, its important to kind of stand back
and consider the economic challenges and the changes to our client mix that are currently affecting
our business today. Overall, Im pleased with the way our management team has forecasted certain
issues ahead of time and adjusted our operations and costs accordingly. Over the past six months,
we have reduced our cost of operations significantly.
First, the flexibility of our business model allowed us to successfully shed variable costs
associated with the rather significant changes we have seen in our client mix here. Second, we have
also made various adjustments to react to changes in our existing client activity levels as the
economic slowdown began to perpetuate itself earlier this year. Our Service Fee clients have been
great partners in this process giving us early and valuable insight to their own forecasts of
activity. This information allowed us to better prepare and execute necessary adjustments in our
activities and expense levels in order to ensure we were aligned with their forecasts. We believe
that a keen ability to read and react early to challenges is cornerstone to ensuring longstanding
financial viability, and Im pleased thus far with our management teams execution during this most
recent period of economic challenge.
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As Mike will cover in further detail shortly, Im very excited about the work that the Services
segment of our business has done in getting our End2End solution up and running over this past
year. Not only have we proven its capabilities with our client Roots Canada and in two sites
launched earlier this year for the Luxury goods retailer that weve discussed in the past. But this
new solution has also help put us in the running for a significant amount of new business that is
currently in different phases of implementation and or contract finalization. Also, our eCOST.com
team has done a solid job in coming up with new ways to battle the economic slowdown in consumer
spending through various creative promotional activities while also driving strong growth in our
club memberships where we find our most frequently buying and profitable customers.
We currently believe our Q2 results, as we have announced them today is our low water point in
terms of our overall financial results. As Ive mentioned, the economic challenges combined with
our change in mix have required us to react with various actions to address our cost structure in
order to ensure acceptable ongoing financial results. We are beginning to see a steadying in the
economic trends. And combined with the upcoming seasonal trends we expect in Q3 and Q4 and with the
solid contribution we expect from various new customer implementations in the next couple of
quarters, we believe our overall financial results will show solid improvements from this low point
in the quarters to come.
While there is still some heavy lifting to do, were pointed in the right direction. We know that
the next couple of quarters will continue to be challenging as we seek to balance growth with the
disciplined cost control measures that we have put in place. However, were confident that PFSweb
will persevere and that we will emerge an even stronger company with a healthier client portfolio
and a stronger service offering than we have ever had in our past.
With this as a backdrop, let me turn the call over to Mike who will give you some details about the
Services business segment specifically. Mike?
Michael Willoughby, Senior Partner and President, Services Division
Thank you, Mark, and good morning, everyone. Before beginning my prepared comments, Id like to
remind you that when I refer to the Services business segment, that Im including both the Supplies
Distributor and our PFSweb Service Fee businesses. And both of these businesses have essentially
the same operating model although they have a different underlying financial model.
As Mark just mentioned, our Services business has been able to adjust to the impact of the economic
downturn and a non-renewal of a large U.S. government contract. And as mentioned in last quarters
conference call, as we prepared our 2009 plan, we recognized that there would be a financial trough
for our business in 2009. This is due to the change in client mix and the sluggish economy. Our
plan has required financial adjustments to be made to our business, to minimize the depth of the
trough, and to focus on managing our financial resources appropriately so we can ensure our
financial foundation remains strong. These adjustments along with our drive to continue to add
significant new business activities we believe will be a successful formula for improving financial
performance in the quarters to come.
As Mark mentioned, I believe the June quarter represents the low point of this financial trough,
and whats most exciting for us is that we believe we are making important changes in our business
offering that will have the potential for accelerated growth in the future. We see our business
strategy very well aligned with the desires of our potential clients, and were excited by the fact
that several of these new client engagements are utilizing our new End2End solution. We believe
this is a solid indication of success from the big advances that we have made in our service
offering over the past 16 months.
Let me recap some positive news that we had during this past quarter. Earlier this year we signed a
five-year $15 million Services contract with Army & Air Force Exchange Service. Under this
agreement, we support their print catalog as well as the AAFES exchange online store. Our
customized solution includes warehousing and order fulfillment services, technology services
required to create multiple technology interfaces with the AAFES systems, and this solution was
fully implemented in Q2, utilizing one of our existing Memphis, Tennessee facilities. And were
optimistic there are future expansion opportunities within this client engagement as well.
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Also in the June quarter, and as mentioned on the last conference call, we successfully launched
the second brand under the previously announced master agreement with a Luxury goods retailer. We
believe this second program speaks to the maturity of our End2End product offering and visibly
demonstrates our ability to quickly launch successive brands on a common platform and a common
infrastructure while we still are able to deliver a completely customized consumer experience to
every single one of the customer touch points in the eCommerce program.
We still have one additional brand under the initial agreement that well launch on our End2End
program early next year. This master agreement with this Luxury brand leverages all the components
of our End2End programming including our Demandware eCommerce platform, our advanced order
management technology services, logistics and fulfillment, high-touch customer care, financial
services, and interactive marketing services to support each of these brands with your unique
requirements. We have now rolled out multiple End2End programs including the two programs under the
master agreement as well as the Roots Canada program launched in August of 2008.
We believe our End2End eCommerce solution which was introduced a little more than a year ago has
made us more competitive for new business contracts. We believe this End2End solution is uniquely
positioned in the industry. No other provider that we are aware of provides a completely client
branded global solution that offers a single solid infrastructure, tremendous leverage, and
economies of scale. We believe that we are alone in competing at this level for global business. In
fact, the benefits of our solution were just highlighted by Roots Canada.
As we look to celebrate their first year under the End2End eCommerce solution this month, we found
the Roots feedback was overwhelmingly positive. Not only have we offered them more capabilities to
operate their business, but these improvements have helped them grow their business and improve
their customer service. As you may have read in the joint release we issued at the end of July,
Roots has credited our solution with helping them evolve their business and remain a market leader.
We continue to work closely with Roots to evolve their program, including a current collaboration
with Roots and iCongo to extend our Demandware base End2End programs to include the multi-channel
features supported by the iCongo solution. This project was unveiled in a recent press release by
iCongo and Roots, and the combination of our End2End eCommerce solution with iCongos platform and
services will create a powerful multi-channel solution for Roots that seamlessly weaves store
operations and the eCommerce site into a unified consumer experience, regardless of where that
consumer chooses to shop.
Concerning new client agreements for 2009, Id like to update you on the information we reported
during our May conference call. We reported the signing of one new agreement with the Fortune 100
Company, and at that time we were in the final contracting stage with four additional
opportunities. Since the May conference call, we have entered the contracting stage with two more
opportunities, and we finalized contracting with two of the four deals recorded last time. That
brings the totals for new client agreements for 2009 to three deals signed and currently in various
stages of implementation and four deals currently in the contracting stage.
Concerning the two new deals that have entered the contracting stage, one opportunity is with the
same Fortune 100 Company I referred to in the last call, although this deal is an entirely
different direct-to-consumer initiative with this very large company. Were very excited to see our
End2End program enjoy such acceptance with large successful companies that bring multiple brands
within their brand portfolio on to our Demandware based program. This new deal is already being
implemented based on a letter of intent and funding from the client.
The second opportunity that has entered the contracting stage since our May call is with one of the
leading board sports brands in the world seeking to take their apparel and accessories business
online for the first time. We also have a letter of intent with this company although we have not
yet begun implementation of their program. This is also an End2End eCommerce deal leveraging all
the components of our End2End program. Well formally announce these new relationships and other
specific new agreements as were permitted by our clients. However, our clients are often hesitant
to disclose their decisions to outsource major portions of their business, and were sensitive to
their wishes as we back up our commitment to be the brand behind the worlds leading brands.
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Im pleased to say that including the four clients still in the contracting stage, the value of our
new business pipeline is still approximately $35 million in potential annual contract value, which
is down slightly from the prior quarter, partially due to the previous pipeline amounts now being
fully contracted. We continue to believe this is one of the most exciting new business pipelines we
have seen in years, and Im proud of our entire team for their hard work during a difficult time to
create these significant new potential opportunities for us.
To summarize, we have made many important advances for our business over the past year. We have
stepped up to the challenges that we face. The recent round of new client programs rolled out over
the past nine months as well as our pipeline of pending proposals I believe demonstrates the strong
demand for our global solution in the U.S. and European marketplace. Our plan for 2009 was to make
necessary adjustments to the base business, to accommodate the changes in client mix, and to adjust
for the sluggish economy while we leverage the opportunities created by our new End2End program.
This will enable us to grow out of the current financial trough. Im pleased that were on track to
accomplish our plan, achieve overall positive or breakeven cash flow for the year, and I look
forward to improved financial results in the two quarters remaining in the year.
And now for some highlights from the eCOST.com business, Im going to turn the floor back over to
Mark. Mark?
Mark C. Layton, Chairman, Senior Partner and Chief Executive Officer
Thanks, Mike. Appreciate your comments. Now, lets turn to the eCOST segment here for just a few
minutes. Obviously there is no doubt that the economic slowdown has had an impact on the entire
retail segment here in the U.S. As I reported to you in our Q1 call, eCOST.com continued to show
strong growth even in light of the economic challenges in its business-to-consumer segment while
many other retailers were reporting significant slowdowns.
However, the macro trends did begin to catch up with us in the second quarter of this year as we
look at the year-on-year revenue comparison being generally flat. When I reflect on the industry as
a whole, though, I remain pleased with these results given what appears to be greater challenges
and impact in the retail industry overall. We remain hopeful that improving economic conditions
will allow us to see a solid up tick in business activity as we look at Q3 and Q4 of 2009 in our
eCOST segment.
New customers and optimizing the cost to acquire them is cornerstone to success for all web
commerce retailers. eCOST.com remains keenly focused on this activity. Im really pleased with the
progress we have made in engaging and attracting new customers and retaining those customers during
the past nine to 12 months. In the second quarter, new customers were up 67% when compared to the
prior year. We had 49,192 new customers during the second quarter of this year. Our active
customers were up 30% based on a year ago, with our active customer count through the second
quarter of 2009 being at a little more than 222,000 customers. So when you reflect on the long-term
value of 67% growth in new customers resulting in 30% growth in buying customers over the last
year, its pretty impressive in terms of where were at in the economic climate at this point.
Whats also impressive is that our programs have been successful in terms of focusing on the cost
to acquire new customers. During this quarter, our estimated cost to acquire a new customer dropped
to $4.44 compared to $5.69 for the second quarter of 2008, and if we go back into 2007 and 2006, we
had customer acquisitions costs that in most cases were in excess of $10, $12, $14. So we have made
very significant strides in terms of reducing our non-catalog related customer acquisition
expenses. And were having obviously greater success in terms of driving new customers to the site,
so altogether this has worked quite well for us.
Over the past nine months, we have also focused our promotional activity heavily towards increasing
active customers in our club membership program. We call it platinum premium club. We have tuned
our membership program to be sure that we offer some great benefits to our members. Members get
access to our best product deals first, access to free freight programs, and most importantly only
our members gain access to our twice weekly outrageous offers promotions where huge deals are
available on a limited quantity basis. We believe our membership programs forms a stronger and
longer customer bond with the company. And we have seen that as we contrast it to the other
acquisition channels like shopping bots, for example that we used pretty heavily two years ago.
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As we look at some recent historical data about our club members, we have found that our club
members are buying three times more frequently than our average non-club members. And as such,
were excited about the customer life value potential of this large group of new club members. Im
pleased to say that our club memberships in the second quarter of 2009 was up 525% compared to the
same period last year. And keep in mind that we started the club focus and retuned that program
during the latter part of the fourth quarter of 2008, so were seeing significant year-on-year
benefits. Those percentages will begin to flatten out not flatten, but begin to right size
themselves, I guess I would say, as we reach the fourth quarter this year.
Also while weve seen a total drop in total revenue, gross margin percentages improved measurably
from 8.3% to 9.7% on an overall basis, and gross profit dollars, when we look at the Company as a
whole, eCOST segment as a whole, sorry, were flat year-over-year. This is attributable to a more
focused effort on higher margin business to our consumer channel and an improved mix of higher
margin product categories, including the for the home and sports and leisure categories that
were added over a year ago. These expanded categories and other categories that weve added have
now pushed our product offering to over 300,000 SKUs compared to about 170,000 SKUs for the same
period last year.
We believe that the decisions we have made to strengthen eCOST.com have helped us weather this
tough economy. With a stronger marketing strategy that concentrates on low customer acquisition
cost and the like value of the customer, along with a greater number of products and categories
that offer higher margins and greater selection to our customers, and a keen focus on controlling
costs, we have been able to manage our business effectively even on lower revenue levels.
This quarter EBITDA improved by about $250,000 on $2.3 million less in revenue. Were continuing to
refocus, transition, evolve, and react to a rapidly changing web commerce marketplace, and we
remain encouraged with the progress and steady financial improvements we have made in this segment
of our overall business. While we all would have ideally liked to have seen this progress quicker,
we believe we continue to show progress towards sustainable financial contribution as we look to
the future.
As mentioned earlier, another positive trend that carried over in the second quarter was our steady
Business-to-Consumer segment. While we did see the Business-to-Business segment start to level off
this quarter as compared to the prior year, the B2C segment continues to offer higher gross margins
and more repeat shoppers. Our B2C segment this past quarter represented about 55% of eCOST.coms
total revenue.
We certainly have not abandoned the B2B segment, and in fact weve seen some recent encouraging
signs in that piece of our business as well. And were focused on continuing to improve the
financial characteristics of eCOST.com business by expanding the B2C segment but also by improving
the characteristics and mix in that B2B segment as well.
As weve discussed on previous calls, its important to note the additional intangible value that
the eCOST segment has for our Services business in terms of its pioneering and innovation. eCOST,
in addition to being its own business, serves as sort of a development laboratory for new
capabilities, be it check-out methods, customer acquisition model, life cycle analysis, virtual
warehouse partnerships, and many, many other things. As we find successful tools and methods, and
they become fully developed at eCOST, we then can offer additional products and capabilities that
we have developed at eCOST into our Services business segment as well. This has been increasingly
important as we expand the End2End solution which directly applies to these additional products and
capabilities.
In summary, eCOST continues to evolve in what I believe to be a positive direction. When you peel
back the layers of our Q2 results as Ive laid out for you here, it shows significant positive
development and progress in many areas.
Now let me turn the call over to Tom wholl cover the details on the financials for the quarter.
Tom?
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Thomas J. Madden, Senior Partner, Chief Financial Officer and Chief Accounting Officer
Okay, thank you, Mark. Let me first start by providing a brief overview of our consolidated
operating results for the June quarter. Then Ill provide some select operating highlights for our
individual business segments and as well as an update on some of our banking relationships as well.
As reported in our press release, our consolidated revenue for PFSweb in the third quarter ended
June 30, 2009, was $82.3 million. This compares to $110.7 million reported in the second quarter of
2008. Gross profit for the second quarter of 2009 was $8.2 million or 10.5% of net revenue
excluding pass thru revenue, as compared to $12.8 million or 12.3% of net revenue excluding pass
thru revenue in the second quarter of 2008.
As we have discussed previously, we utilize adjusted EBITDA as a key metric in evaluating our
operational performance. In the second quarter, our consolidated adjusted EBITDA was a loss of $0.7
million compared to an income of $2.5 million in the prior year period. For the second quarter, net
loss was $2.5 million or $0.25 per basic and diluted share compared to GAAP net income of
approximately $62,000 or $0.01 per basic and diluted share for the same period last year.
Another key metric we use in evaluating our financial performance is non-GAAP net income. To
calculate this, we exclude from net income calculated in accordance with GAAP the impact of stock
based compensation, goodwill, and intangible asset amortization. For the second quarter of 2009,
non-GAAP net income was a loss of approximately $2.4 million or $0.24 per basic and diluted share
as compared to non-GAAP income of about $391,000 or $0.04 per basic and diluted share for the same
period last year.
Turning now to the performance of select business segments for the three months ended June 30,
2009. First, from a Service Fee revenue basis; our Service Fee revenue decreased approximately 42%
to $12.4 million from $21.3 million in the prior year. This decrease is attributable to the economy
as well as the non-renewal of a large U.S. government contract effective at the end of January
2009. Although we did continue to perform some project work under this U.S. government contract
through the beginning of the second quarter. This decrease was partially offset by new client
programs.
SG&A decreased in 2009 in this business unit versus the prior year primarily due to certain cost
reduction activities implemented throughout the fourth quarter 2008 as well as the first half of
2009. Adjusted EBITDA for this business for the June quarter was a loss of $1.3 million compared to
an income of $1.0 million for the same period in 2008.
For our Supplies Distributors business segment, revenue declined to $45.3 million in the second
quarter of 2009 as compared to $60 million in the prior year quarter as Supplies Distributors saw a
decrease in demand during the quarter which is primarily attributable to the overall global
economic pressures and inventory rationalization by our customer base. Adjusted EBITDA for the June
2009 quarter was $1.0 million compared to $2.1 million for the same period last year.
As for eCOST.com, revenue in the second quarter of 2009 was $20.3 million compared to $23 million
for the same period last year. As Mark indicated earlier here, our enhanced focus and success in
the Business-to-Consumer segment was partially offset by the revenue decline in the
Business-to-Business segment. However, our bottom line results for eCOST.com improved significantly
as a result of the higher margins in the B2C business as well as continued cost focus with an
adjusted EBITDA loss of $388,000 for the June 2009 quarter as compared to a loss of about $641,000
in the prior year same quarter.
If you recall, our target at the beginning of the year was to operate at a break even to positive
cash flow performance for the consolidated business for calendar year 2009. We continue today to
keep that same target as we look to maintain our solid cash position to support our business on an
ongoing basis. As Mike and Mark discussed earlier, our expectations for this June quarter were for
it to be a lower quarter than what we had previously and what we expect for the rest of the year.
As we deal with the sluggish economy and the loss of the previously large Service Fee client
relationship, however, with our continued focus on costs, the exciting developments that Mike
referred to in new contract
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activity and the expected continued progress in our eCOST business unit, we expect improved
performance as we look ahead to the rest of the year. The bottom line results were also generally
inline with what we had provided to our banking partners earlier this year.
We continue to maintain a proactive communication channel with all of our banking partners to
ensure that they are continually updated on our business developments and we are currently in
compliance with and expect to maintain compliance with all of our existing financial covenant
requirements.
Now Id like to turn the call back over to Mark for closing remarks.
Mark C. Layton, Chairman, Senior Partner and Chief Executive Officer
Thank you, Tom. So to recap, despite the tough economy, our results for the second quarter were
within our expectations. Weve made the necessary adjustments to our business in order to emerge
from these challenging times a stronger company, we believe.
This concludes the body of our prepared comments for today. And, operator, well now be available
for some questions.
Q&A
Operator: [Operator Instructions] And you have a question from George Walsh.
<Q>: Good morning, gentlemen.
<A Thomas Madden>: Hi, George, how are you?
<Q>: Good. Mark, I wonder if you could go into the as the best you can see the ramp-up
with the new clients in the Services side, the kind of EBITDA youre looking for the balance of the
year. Is it really a matter of getting to break even these next couple of quarters, in the second
half in Services? Or its just a matter of still having some negative EBITDA there for a couple of
quarters?
<A Mark Layton>: Tom, you want to handle that, please?
<A Thomas Madden>: Sure. George, Im not going to give any specific guidance on the
individual quarters here. Again, I think our general guidance for the year so far has been on the
free cash flow break even to positive performance. I think we all have alluded to the fact that we
expect improvements as we look at the Services business unit, and that would include both the
Services and Supplies Distributors business unit combined as we look out into Q3 and then further
strengthening in Q4 not only because of continued new clients being added on, but also we get the
seasonal up tick from some of our Business-to-Consumer holiday activity as well.
<Q>: Okay. Any special trends youre seeing in Services as far as a lot of brick-and-mortar
and malls are going by the wayside. Is there more activity there thats going to increase the
pipeline?
<A Michael Willoughby>: So, George, I think that I mentioned in the past couple of
conference calls that we had seen a real increase in the number of brand manufacturers finally
going direct to consumer with their own eCommerce initiatives. Its amazing the number of
particularly prestige and luxury brands that have yet to put up even their first eCommerce site
prior to this year. And were now seeing I think with the pressures on the brick-and-mortar
channel, with pressures on maybe traditional catalog sales that this is an area of the economy that
still shows signs of growth, and these folks are jumping at the chance to go online.
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I think that our program, with its relatively quick ramp-up characteristics and relatively low
entry price and pay-as-you-go kind of model that all on-demand programs bring is really perfect for
those brand manufacturers to catch the wave in 2009 when they really need that impact to their
bottom line.
So thats the biggest trend; brand manufacturers going online for the first time. I think we also
see a fair trend with folks that have an existing eCommerce initiative where it may have been
insourced or it may have been outsourced to a regional provider that doesnt have national or
global capabilities needing to re-platform and then reassessing their decision to insource or
outsource to a lower cost regional provider coming onboard with our higher end global End2End
strategy. Those are the two things we continue to see which I think are real positive for us right
now.
<Q>: Okay. And anything updating-wise with Demandware in terms of that relationship? And any
other initiatives youre looking at with them?
<A Michael Willoughby>: We continue to be very excited about the relationship. We have a
very strong working relationship with Demandware. A lot of coordination between our sales and
marketing efforts, and if you go to some of these tradeshows like Shop.org, youll see us working
very tightly with them to respond to this increase in the End2End demand. Were excited about their
roadmap and the features that they continue to put into their platform. Theyre very aggressive
about adding capabilities at a time when a lot of other software vendors seem to be kind of holding
pat.
So our End2End offering just strengthens quarter after quarter as Demandware make these R&D
investments, and which is great for us. And we see that really reflected in the response that were
getting increasingly in this marketplace where were very frequently involved in the early stages
of a companys investigation into their alternatives. And thats huge for us to be involved in the
early part of the sales cycle with these companies, being able to discuss with them not only the
eCommerce aspect but the rest of the parts of the eCommerce initiative.
And I think that when we talk about Demandware, one of the things that we really see as a key
differentiator is the fact that this is a true tier one eCommerce platform with all of the features
and requirements that really anybody would want in a platform compared to our competitors with
their in-house developed proprietary platforms which locks them in to certain features and
functionality and is not developed to be a sort of multi-client platform.
And it also differentiates us from software platforms where you have to bring those in-house and
create this huge infrastructure and all the computing resources that are required to operate an
expensive tier one platform in-house. So we think really its the best of both worlds. Tier one
functionality, off-the-shelf software packages, but available on-demand instead of having to bring
that in-house and use up all the resources to support it.
<Q>: Okay. And one more thing, Mike, how are things with InfoPrint Solutions and that joint
venture? Any other developments there in your relationship with them?
<A Michael Willoughby>: Well, I would characterize that relationship as pretty much status
quo at this point, which is fine with us. They value the services that we provide. I think as Tom
indicated, their business is showing the effects of the sluggish economy. There are less pages
being printed out there in the commercial world, and InfoPrint Solutions has always competed in a
marketplace for printer placements. We believe they still have strong product offering. It is
showing some of the signs of that sluggish economy. We still believe it to be a long-term
relationship. All the signs are there that they continue to appreciate the offering that we have
for them. And so other than the sluggish economy, Id say that its status quo.
<Q>: Okay. And just a quick question on eCOST, the average order value was about $200; and
thats down from last year. Could you go into a little more detail on that perhaps versus the B2B
versus the B2C or the consumer, since thats where more of the growth is, how are the consumer
average sales trends there?
<A Mark Layton>: Okay, George, this is Mark. Theres two pieces to that from there.
Obviously as we get a higher mix of the B2C segment in the business on an overall basis, it does
drive the average order size down. We havent really seen much change in terms of the average order
size trend in the B2B side. Thats still well over $2,000 on that piece of it. But the B2C segment
is obviously growing, so that impacts the amount overall.
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The second piece is, and I didnt get into any detail on this on the call, but this past quarter we
have one of the channels that weve been using and has helped us a fair bit in our new customer
strategy has been a new relationship that we struck with eBay, the new eBay Marketplace area thats
out there. Youll see generally once or twice a week eCOST is featured as the deal of the day.
Those features produce a lot of activity. But the buyers of those products and the ideal products
to present, at least from the success that weve had so far have been on lower price point
products. So they might be $4.99 USB flash drives or Bluetooth headsets at $13 and things along
that area in there. So weve seen kind of an influx of new customer activity that have been
acquired using these low-end products.
Now, our belief and we need time to measure it yet but is that we can use the eBay
Marketplace to acquire new customers for us that will then come back to us directly in the future.
And we would expect their second and third orders to be more towards our average than that first
order that were using to acquire them. But its a pretty effective customer acquisition strategy,
quite low cost with the arrangement that we have made.
<Q>: Okay. All right. Great. Thank you.
Operator: [Operator Instructions]. Your next question comes from Alex Silverman.
<Q>: Hey, good morning.
<A Mark Layton>: Hi, Alex.
<Q>: I really do apologize. I got on the call very, very late. Did you guys break out what
the loss of your large government customer represented from Service revenue in the quarter?
<A Thomas Madden>: We do not break it out specifically. I can share that with you. Hold
on. If youd give me one second?
<Q>: Okay. Is it fair to say I did some back of the envelope using information out of your
March and June 10-Qs. Is it fair to say that it was little over $8 million?
<A Thomas Madden>: It would have been a little more than that, yes.
<Q>: Okay. Therefore is it fair to say that excluding Mint service revenue year-over-year was
down just slightly less than $0.5 million without Mint, without the government contract?
<A Thomas Madden>: I believe that the numbers youd actually see that we would have had
some existing activities that may have been down a little bit, excluding the U.S. Mint, but the
other new contracts have helped offset that.
<Q>: Okay.
<A Thomas Madden>: So excluding the Mint Im trying to look for last years number here
real quick, because Im not getting it right at my fingertips. Give me one second, and hopefully we
can go on to the next question and Ill have that answer for you here.
<Q>: That would be great. Thank you. My next question is historically you guys have given an
indication of what your selling pipeline looks like. That was not in this press release. Have you
spoken at all about that on the call?
<A Michael Willoughby>: We did, Alex. We referred to a $35 million number, which is the
size of the current new business pipeline which reflects some contracting activity we had since the
last conference call, so the number is just slightly down. But thats because weve actually closed
some of those deals.
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<Q>: Okay. And then is it fair to say and again I apologize but is it fair to say that
if you were to strip out the loss of B2C at
eCOST Im sorry, if you were to strip out B2B at
eCOST, the number was up year-over-year on B2C?
<A Mark Layton>: The B2C segment in the second quarter, Alex, was about flat year-on-year.
<Q>: Flat. Okay. So the $3 million differential year-over-year is almost exclusively B2B?
<A Mark Layton>: Thats correct.
<Q>: Very good.
<A Thomas Madden>: Okay. And, Alex, I have your answer now. For the U.S. Mint activity in
the last years June quarter, we had approximately 8.5 million of revenue, and this year we would
have had, in the June quarter we had a little bit of activity still in April, but it was about two
or $300,000 worth of activity, so a little over eight million -
<Q>: So it was about 8.3 is the difference, and I think Service revenue, the difference in
Service revenue was about 8.9, so its almost all Mint-related?
<A Thomas Madden>: Yes.
<Q>: Fair enough. Thank you very much, guys.
<A Thomas Madden>: Yeah.
<A Mark Layton>: Thanks, Alex.
Operator: At this time, there are no further questions. Are there any closing remarks?
Mark C. Layton, Chairman, Senior Partner and Chief Executive Officer
I just want to thank everybody for your time, and well talk to you again next quarter. Have a
great day.
Operator: Thank you. This concludes todays conference call. You may now disconnect.
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