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): November 15, 2010
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:
o Written communication pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR
240.14d-2(b))
o 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 November 15, 2010, PFSweb, Inc. hosted a conference call announcing its financial results
for the quarter ended September 30, 2010. Attached to this current report on Form 8-K is a copy of
the related conference call transcript dated November 15, 2010. 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 November 15, 2010 |
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: November 18, 2010 |
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
Company: PFSweb, Inc. (Nasdaq: PFSW)
Subject: Q3 2010 Earnings Call
Date: November 15, 2010
Operator: Good morning. My name is Tina and I will be your conference operator today. At this
time, I would like to welcome everyone to the PFSweb Third Quarter 2000 (sic) 2010 Earnings
Conference Call. All lines have been placed on mute to prevent any background noise. After the
speakers remarks, there will be a question-and-answer session. [Operator Instructions]
I would now like to turn the conference over to Todd Fromer, with KCSA Strategic Communications.
Mr. Fromer, you may begin your conference.
Todd Fromer, Managing Partner, KCSA Strategic Communications
Thank you, Tina, and thank you all for joining us today for the PFSweb third quarter
conference call. Before turning the call over to management, I would 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, project
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 tables issued today, which is located on our website
at pfsweb.com, youll 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 and Chief Executive Officer
Thank you, Todd, and good morning everyone. Id like to welcome you as well for our third
quarter 2010 conference call. Present with me today is Tom Madden, our Chief Financial Officer.
Our President, Mike Willoughby, who normally participates in these calls is away today on a client
visit.
This morning, Tom and I will provide you with an overview of our financial results, and then add
some color on the events that shaped the quarter ended September 30th of this year. Following
prepared remarks, well be available for questions.
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As color and summary for our overall business activity through September 30th, Im very encouraged
by the outstanding momentum we have in our PFSweb core services segment. While our eCOST.com and
Supplies Distributors segments turned in some tempered results for this quarter that Ill describe
in a little bit, and that impacted our overall revenue growth, I believe its most important for us
to focus today on the 25% growth in Service Fee during quarter three, and the strong new business
pipeline that our Services segment is currently boasting.
Our Services business has always been our core strategic segment, keenly focused on capturing the
large opportunity to deliver End2End web commerce solutions to the rapidly growing manufacturer
direct-to-consumer web commerce marketplace. Not only did we see strong growth in our Services
segment this past quarter, but weve also seen our new business pipeline continue to be large and
attractive, and as attractive as really any point in our history. Collectively, this provides an
outstanding barometer from my perspective, as we look at the exciting opportunity for growth that
we have, as we look towards the next year or two.
As I mentioned, both our eCOST.com and Supplies Distributors segments turned in softer results this
quarter when compared to last year. On the eCOST side, issues surrounding e-mail deliverability, as
we discussed last quarter, impacted this segment negatively. However, we did begin to see an
improving trend late in the quarter, as the actions that we undertook to address e-mail
deliverability began to have impact.
On our Supplies Distributors segment, it also experienced a reduction in revenue this past quarter.
This was partially due to certain inventory supply shortages during the quarter that were related
to this segments largest clients transition to a new ERP systems platform as well as impact of
changes in currency rates. The migration from an ERP perspective of this client is now generally
completed and supplies inflows returned generally to normal towards the end of the quarter. As
such, we currently expect the overall business levels to improve during the fourth quarter.
Id also like to briefly remind everyone that each of these businesses offer the our Services
segment substantial additional benefits. So speaking of the Supplies Distributors segment and our
eCOST segment do provide kind of additional benefits to our Services segment. These benefits
include bringing a significant amount of scale to our operations as well as a platform for the
development of new technologies, which are carried over to
our Service Fee business, and benefit our Services clients. In turn, this has helped us sign new
Service Fee clients. So while the results in these segments are mixed, we do gain substantial
benefits that are not directly in the reflected in the segments financial numbers.
Overall, I am quite pleased with the direction of the company, we believe we are on the right path
for the future, we are evolving our offering to stay in line with the rapidly expanding and
evolving web commerce marketplace by continuously offering additional services and by staying
abreast of the rapid development of technologies and features that this incredible frontier
continues to spawn.
We have our hands around some exciting growth sectors within the rapidly expanding eCommerce
industry, and were successfully seizing upon those opportunities, particularly as we look at the
fashion, apparel and accessories, beauty and fragrance, and the consumer packaged goods industries,
where a lot of our new business focus has been recently.
So with this summary information as backdrop, let me now spend a few minutes providing you some
additional commentary on each of the three business segments and their results for this quarter.
First on the Services segment, were now servicing approximately 40 total clients in this segment,
including great names like Procter & Gamble, LEGO, the family of Liz Claiborne brands, including
Lucky Brand Jeans, Carters, Roots, The Home Depot, Chanel, Tractor Supply, and many more.
The past few months, weve launched several new client relationships, including Volcom, a large
board sports brand; Juicy Couture, another brand in the Liz Claiborne family; and a couple of
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others. With these new launches, we now have 14 client programs operating that are utilizing our
entire End2End eCommerce offering suite featuring the Demandware software platform.
Many of the remaining clients are utilizing a vast range of this suite services as well, but have
elected to contract directly with Demandware for their eCommerce platform or operate one or two
business functions in-house or operate with another web commerce platform entirely. This really
indicates the flexibility of the solution that we have developed, where we can work with the client
in many different ways on many different technology platforms.
Our collection of great brand names and the vast range of services we are providing to them is a
clear testament to the value of our Services offering. The flexibility of our web commerce solution
plays a huge role in our success, and its allowed us to sign numerous other clients that have
heard about our End2End solution, but realized after discussions with us, that they only needed the
program featuring a select group of the services that fit their business operating strategy. Its
this flexibility that separates us from our competitors, and makes us a preferred partner to work
with.
As I mentioned earlier, this segment, our Services segment grew this last quarter 25% over the
previous year. During the past three months, weve also been successful in closing a couple of new
client agreements and are in the contracting stage with a couple of others. Our new business
pipeline now exceeds $40 million in size, and is nearly as robust as any time in our past not only
in dollars, but also in the terms of the attractiveness of the brand names and their underlying
revenue opportunities that are contained therein.
Moving onto more recent announcements in this segment, as I mentioned earlier, we successfully
launched several new client programs during the third quarter 2010, including a full End2End
eCommerce program for Volcom that you can find at www.volcom.com. Volcom is a leading mens and
womens board sports brand. Revenues for this program started towards the end of the third quarter,
but we believe it will continue to ramp up over the next couple of quarters. Its a very unique
site, features a lot of the Demandware functionality on it, and was an exciting site to develop for
Volcom. Take a look when you get a chance.
We also expanded relations with a number of existing partners during the last three months as well,
including support of several eCommerce sites under our previously announced master agreement with
the Liz Claiborne company geared mostly towards women, and we launched an End2End eCommerce
solution for multiple brands under our master agreement with the leading fragrance and beauty
company that weve not yet disclosed the name.
Almost all of these custom-branded eCommerce sites features the Demandware eCommerce platform
contracted either though us or directly with Demandware, as well as our Logistics and Fulfillment
capabilities, our High-Touch Customer Care, our Financial Services capabilities, and various
interactive marketing services that we are providing.
Shifting over to the European segment, we launched earlier this year a site for Havaianas, and that
is now running successfully and reporting very positive feedback. One of the things that is
exciting for us is that the overall market opportunity for eCommerce growth in Europe has begun to
show some significant life for us. We are continuing to expand with a number of additional brands
there, and weve become aware of the innovative online marketing capabilities that we can provide.
We believe were well prepared to capitalize on the European marketplace and its potential growth
as we look over the next year, given that weve been in the marketplace there now for about 12
years. After years of lower than originally expected web commerce activity, the Europe market is
really now showing good signs of growth and were excited about the number of new exciting
opportunities that have arisen in our business pipeline over the last six months.
So from a summary standpoint of the Services segment, our growth is doing very well, the new
business pipeline is quite strong, weve got new additional activities in Europe
that we havent seen
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in the past, and its pretty difficult not to be very excited about the
opportunities in this segment, this core segment of our business.
Now, let me shift to some highlights on our eCOST.com segment. As I mentioned at the beginning of
this call, revenues for the eCOST segment were down on a year-over-year basis. This decrease
primarily relates to the unforeseen challenges with our sales and marketing strategy around e-mail
campaigns that we began to experience last quarter, and as I discussed with you the last time we
were together.
As I mentioned on that call, the e-mail filtering algorithms that are constantly being evolved by
the various leading Internet service providers had recently begun to have the adverse impact on the
amount of customers that were able to reach via our e-mail marketing strategies. This has also
impacted several, sorry, has severely impacted the viral impact of our e-mail programs as well
simply because were reaching fewer individuals who then can pass along e-mail to fewer, fewer
individuals as well.
Because such a large portion of our target customer base is reliant on this method of e-mail
communication, weve simply not been able to reach them near as frequently as we were in the past,
which in turn reduces overall visitor activity to our site. Obviously, fewer visitors results in
lower revenue, less product purchases and so forth. So this has been quite an impact for us.
Weve undertaken a number of efforts to overcome the deliverability challenges and resume sales
growth. We spent a lot of time during the third quarter modifying our current e-mail practices, and
using a broader mix of marketing tools. These initiatives included first, working closely with each
of the major ISPs to educate them on our need to frequently communicate with our customers, given
the daily deal nature of our business and to educate them that customers that purchase in these
segments may only make one or two purchases every year, and that these characteristics may lead
automated filtering programs to conclude that the relevance of our e-mail is low when in fact its
simply the nature of the products being offered.
Secondly, we increased our offline marketing activities once again with an eye towards reaching
customers through this channel, which included the use of postcards, flyers and an additional
catalog that we had not done in a couple of years.
Third, we expanded our paid online advertising activities to help offset the impact that I just
described. However, many of these channels do not offer an attractive cost to acquire ratio for new
customers. So we have to continue to watch this portion of our advertising activity very carefully.
Fourth, weve worked more precisely segment our e-mail list in order to improve our deliverability
relevance in each of the major ASPs (sic) ISPs. Now, while these actions have improved our overall
e-mail deliverability, were currently sending less than half of the total e-mails we were sending
previously. Maintaining these reduced e-mailing levels or e-mail quantity levels are necessary in
order to keep our relevant scores above
acceptable levels at the major ISPs and ensure that our e-mail that we are sending is getting
through.
While I believe personally that the actions of the ISPs are a restriction of trade and Im probably
not the only CEO out there who feels this way, we do have to recognize that a group of just a few
major ISPs control the e-mail playing field and we have to play by their rules or suffer the
consequences that little to none of our e-mail gets delivered. Its a challenging trend, but we
will continue to evaluate the landscape and take actions as we see appropriate.
As painful as it is, this e-mail deliverability issue is another example of how we gain intangible
benefits from having our own retail web commerce presence in that the significant experience that
weve now gained over the last few months about e-mail deliverability is allowing us to inturn in
our interactive marketing services area and our Services segment assist our services clients with
similar e-mail issues that they may well be experiencing as well related to this topic.
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Now the good news for the eCOST.com segment is that our actions have now begun to show improvement.
As we look towards the end of month of September, we did begin to see an improvement in revenue
activity, and we believe were now well positioned to capture the upcoming holiday spike that is a
very important part of the financial performance from an annual standpoint for the eCOST.com
segment.
Now, while Im encouraged by the improving trend in the last few weeks, as I mentioned last
quarter, and I want to reiterate again, I do remain disappointed in the overall financial results
of the eCOST.com division this year. Theres no doubt weve learned and continue to learn a lot
from the business and that theres a lot of intangible benefits that we gain. But as I said last
quarter, the cost has to be reasonable and historically its been too high.
The low gross margin characteristics of the traditional eCOST.com product range, being technology
and consumer electronics products, we have a little room to absorb challenges like this when they
arise.
While I was encouraged by the improved financial results during 2009 and into early 2010 at
eCOST.com, the more recent financial results have let us again to carefully review each area of the
eCOST.com business operations, and evaluate various strategic options in this particular business
segment.
I remain hopeful that with these significant changes weve made in the business recently as Ive
just described along with the expected uptick that we get from the holiday peak in Q4 that we will
show a return to an improving financial trend as we finish out the year. But I do want to make it
clear that one way or the other, it is our objective to take actions to ensure we improve the
financial impact from the eCOST.com segment during 2011.
Speaking of the holiday season, be sure to put eCOST.com on your shopping agenda; once again this
season, you can expect to see the best online selection of new close-out and recert merchandise
anywhere at prices that you just wont find anywhere else. Manufacturers continue to see this
platform as a very attractive way to move large quantities of products.
This holiday season, eCOST will showcase the hottest in computer and electronics deals in the
industry and will be presented by our patented Bargain Countdown showcase technology, and will
include thousands of limited quantity, limited time offers that manufacturers are making available
to us many times on an exclusive basis. We expect high-definition televisions, netbooks, gaming
products like the Kinect product, HD cameras and camcorders will lead the way this holiday season
in terms of the hot products that consumers are seeking.
We are also excited about certain free shipping offers that we put together this year and they will
be showcased in the Secret Sale campaign and also the platform that we announced late last year
called Make-an-Offer has also began to grow this last few months. So be sure to subscribe to the
daily HotSheet from eCOST.com, so that you get the latest offers and are prepared for your holiday
shopping.
Let me shift now just a minute to talk about how we are evolving the eCOST segment, and how we see
the eCOST model as we look towards the future. As Ive discussed previously, during 2009, we began
to see opportunities to deploy the significant web commerce retailing skills and expertise of our
eCOST.com team in our interactive marketing services and product merchandising, sorry let me say
that again, to deploy the retailing skills and expertise of our eCOST.com team and these skills
being in interactive marketing and product merchandising acumen and deploying those in the Service
Fee opportunities as a different model in our PFSweb Services segment.
Early in 2010, we launched a new division with eCOST called eStore Retail Services to formalize
this offering. As we disclosed previously, our relationship with the Procter & Gamble Company and
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the launch of the P&G eStore was the first client to utilize this new business model. Since this
time, we have continued to see outstanding opportunities for the use of the business model, where
the client either in an effort to minimize channel conflict or because of limitations in their own
business models prefer a buy/sell model as their approach to outsourcing their web commerce
activities.
This new business lead pipeline in our Services segment that I spoke of, sorry, the new business
pipeline in our Services segment that I spoke of earlier contains a number of new opportunities for
the eStore Retail Services model. This model allows our clients to create a fully branded
direct-to-consumer presence, control the look and feel of the site and its product offering, while
also direct all the while also directing all of the creating creative aspects of the site as
well, but they also then are able to have the site operate within its business like a traditional
retailer who buys and then resells the products. The beauty of this model is that it can be quicker
and cheaper to implement for our client,
because it generally requires less IT and other systems integration work when compared to the
traditional Service Fee business warehouse model.
As the Retail Services division grows, we are targeting to generate increased product revenue and
gross profit margin in our eCOST.com segment reporting. As we look to the future, the results of
this trend may lead us to a diminished focus on electronics and technology products thats the
traditional eCOST.com product range, and a greater emphasis on utilizing our retail acumen and
expertise to assist our clients in growing their branded website through this Retail Services
model. So its important that you understand strategically where were thinking there.
Let me just repeat that, as we look to the future, the result of the trend may be a diminished
focus on electronics and technology products and a greater emphasis on utilizing the retail acumen
of the eCOST segment, and our expertise in that area will assist our clients in growing their
branded website through the Retail Services model. Its simply another way for us to leverage the
retail commerce expertise and our investment in our eCOST.com business, and to do so in a manner
that we believe may help mold the financial model of the eCOST.com segment into a model that has
faster growth characteristics and an improved overall financial complexion.
Again, we want to avoid as much as possible comments about specific client business activities, but
I will give you just a little bit of back our update on the P&G eStore. The store is continuing
to grow and operate well. We saw a number of highly successful marketing campaigns this past
quarter, and these successes are driving greater awareness and the opportunities to utilize the
online space through various Procter & Gamble brand channels, which we believe will result in even
greater momentum as we look to the future.
As I mentioned last quarter, Procter & Gamble is taking a very plotted approach to the eStore, and
while near-term growth may be may continue to be modest, the opportunity in this virtually
untapped industry segment not only with Procter & Gamble with other large consumer packaged
manufacturers that we do have in our business pipeline, we believe is very significant as we look
out over the next few years.
So with that information as a backdrop, let me now turn the call over to Tom, wholl cover the
financials for the third quarter and also give you a little bit of background on the Supplies
Distributors results. Tom?
Thomas J. Madden, Senior Partner Chief Financial Officer and Chief Accounting Officer
Thank you, Mark. As Mark previously discussed, our overall financial results for the September
2010 quarter reflect mixed results from our three business segments. Our Service Fee business
performed quite well with a significant increase in revenue of 25%, and a $1.1 million improvement
in Adjusted EBITDA as compared to the prior year. This was offset by tempered results in our
Supplies Distributors and eCOST.com businesses. We continue to take a number of positive steps
toward improving our short and long-term financial results for the company. The key here continues
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to be new client growth in our Service
Fee and Retail Services segment as well as strong cost management and ongoing sharp focus on our
balance sheet including our cash, and we believe were well positioned to do just that.
In addition to Marks prior comments on the segments operating results, I wanted to share some
additional insights into some of the components of our business units performance this quarter. As
weve stated, our Service Fee business experienced 25% growth this quarter as compared to the same
period in the prior year. This growth was generated primarily from growth of existing business to
consumer clients, and revenue from new clients, which have come on board over the past 12 months,
both of which were partially offset by the impact of reduced service fees related to the previously
disclosed non-renewal of one of our large Service Fee segment business-to-business client
relationship, which ended in July of this year.
In our September quarter, our Service Fee business generated approximately three-fourth of its
business from our business to consumer client, and this component of the Service Fee business was
up more than 50% as compared to the third quarter of 2009. Clearly, we have seen significant growth
in our business to consumer client activity, and as we look forward, we continue to target strong
growth here, especially in the consumer packaged goods, fashion and apparel, and beauty and
fragrance industries.
In our Supplies Distributors segment, our Adjusted EBITDA performance was $1.0 million for the
September 2010 quarter, as compared to $2.2 million in the prior year.
In addition to the reduced profitability caused by the revenue decline year-over-year, which Mark
discussed earlier, our Adjusted EBITDA profitability for this business segment was also lower as
compared to the prior year, as a result of the 2009 quarter benefiting from a higher level of
incremental inventory cost related adjustments than in the current year. Our Adjusted EBITDA
results for this business in the third quarter of 2010 is much more consistent and in line with the
financial performance for this business in each of the quarters earlier this calendar year.
Our eCOST.com business was negatively impacted by the continued e-mail delivery issues to our
customer base, as Mark discussed. The softness in the traditionally higher gross margin
direct-to-consumer segment of this business impacted the overall gross margin reported for the
quarter. While we continue to make strides and have been successful in further reducing cost in
this business, the softness in the revenue and gross profit resulted in a reduced Adjusted EBITDA
for this business of $0.3 million as compared to the prior year third quarter.
We continue our focus on our SG&A costs for the entire consolidated business while at the same time
making investment in areas in the business where we see strong growth potential. During this
quarter, while our consolidated SG&A costs show a slight increase of $0.2 million as compared to
the prior year, the 2010 third quarter amount reflects a $650,000 charge applicable to a PFSwebs
executives disability benefits.
This executive was recently diagnosed with an illness resulting in his subsequent retirement, and
this charge relates to various salary and benefit costs including estimated future medical costs as
per the terms of this individuals employment agreement. However, if you exclude the impact of this
charge, our SG&A cost would have been decreased on a year-over-year basis as we look at a
quarter-over-quarter basis.
Now turning to the balance sheet, just a quick recap here. Our cash, cash equivalents and
restricted cash remain quite strong here with an aggregate balance for the period ended September
30th, 2010, of $20.4 million, which compares to approximately $17 million as of December 31, 2009.
Our cash balance, as you know, will have benefited from our capital raise that we did earlier this
year.
Now, Id like to turn the call back over to Mark for some closing remarks.
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Mark C. Layton, Chairman and Chief Executive Officer
Okay. Thank you, Tom. So to recap, obviously, you can hear our excitement as it relates to our
Services segment, both in terms of our growth that were seeing as well as our new business
pipeline that we have that we believe is important as we continue to look for how the growth will
come in the future. As I stated before, very excited by our ability to persevere through
challenging times, but Im equally excited about our ability to evolve and seek out new
opportunities as the world of web commerce continues to change rapidly around us.
We look forward to prosperous times ahead, and that concludes our prepared comments for today.
Operator, well now be available for questions.
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QUESTION AND ANSWER SECTION
Operator: [Operator Instructions] Your first question comes from the line of Mark Argento with
Craig-Hallum Capital.
<Q Mark Argento>: Yeah. Good morning, guys.
<A Mark Layton>: Hi, Mark.
<A Thomas Madden>: Hi, Mark.
<Q Mark Argento>: Could you talk a little bit about I know you said, the B2C business
up 50% on a year-over-year basis. Could you talk a little bit about how many clients the B2C, I
think you alluded to it, but maybe how many clients you have that are in the B2C camp right now.
And then maybe talk a little bit more about, where they are in the life cycle meaning, I know you
have some that are fully deployed that are ramping, some that are still at very early stages, so
kind of giving a better feel for what that growth rate can continue look like and then kind of
maybe we could circle back then and talk a little bit more about the pipeline?
<A Mark Layton>: Okay. Of the approximately 40 total clients we have right now, Mark, in
terms of the ones that are active and working, I would say, roughly 25 or 30 of those are
direct-to-consumer manufacturer sites. And so its seen a pretty significant kind of evolution of
our client base over the last few years, where if you had asked me that question three years ago, I
probably would have said 25 to 30 of the clients were business-to-business related clients, maybe
not quite that many but well say half were business clients in there. So we have had some clients
leave and as we replace them and certainly the growth has come out of that direct-to-consumer
segment as we look forward.
In terms of the portion thats ramping, again, this would be a very rough estimate, but I would say
8 to 10 of those are still recently launched sites that we see a significant ramp on. Obviously,
the underlying growth of the web commerce industry overall should be driving significant tailwind
for all of our clients in terms of their sites, and organic growth is something that we continue to
hope and expect going forward.
Youll see some clients that because of customer assets that they already possessed, have really
significant shots out of the gate. If you turn to the Carters site, for example, Carters is a
leading provider of baby and youth clothing, and their results have been very successful from a
launch in March or April of this year and a lot of that is predicated on the fact, they had a very
active e-mail campaign even before they web commerce enabled their site. As a result, theyve
seen very, very quick and ramping results in there and theyve in their public comments have kind
of stated what their outlook for the next few years is like in terms of growth.
But, thats one client example of information that kind of talks about what the opportunity is like
here and what could be done with these direct-to-consumer branded
sites. Consumers really like the manufacturer sites and as long as pricing is within reason, the
presentation of range, the fact that consumers typically find better images and better information
about products, a fuller range of sizes, better in-stock positions that may have come to experience
at many of the traditional retail sites is really driving growth in manufacturer direct-to-consumer
sites and visitor activity.
<Q Mark Argento>: Sure. And then when you think about the new pipeline, I know youve
touched about touched on and you said it kind of was $40 plus million in the kind of pipeline
value, but when you look at the kind of the size and quality of these customers, it sounds like the
you got a pretty big pipeline of really good clients, large clients that could become really
good customers of your, maybe you can touch on the competitive environment, kind of how you guys
are winning this how youre winning this business, how youd mentioned the flexibility of
your
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model, but where are we, are there still bunch of big RFPs out there, I mean, how much longer
will you continue to expect the pipeline to continue to be pretty robust?
<A Mark Layton>: Okay. Its important as you evaluate the new business pipeline, and we
look at this a couple of ways. The first part of this is that, when we make a quote of $40 million,
recognize that all were taking is the first years annual fees that we expect to earn from the
client. So on the sites that are ramping, that would be a relatively modest perspective of what the
annual value might be in three years out for a particular client depending upon the success that
they have from a growth perspective. So thats the first thing, I think, thats exciting as a lot
these are new generation sites, may be there are rework of an existing site, but I would say for
the most part, a lot of them are early in their web commerce evolution, but theyre all for the
most part major brand names that are very, very prevalent in the demographic segment that theyre
focused.
So as an example you talk about Volcom, Volcom is a start-up site, they had a brand page before, it
was not web commerce enabled. Some people dont know the Volcom brand, but they are very present in
their demographic age set, which is typically younger much younger age set. So these are the
an example of the types of brands that were working with. So our pipeline is really full of those
kinds of deals, I would say, the average annual size that we have in our pipeline hasnt really
changed all that much, in terms of what we may have seen a year ago, but the quality, the names
that are in there are much better.
And then if you were taking that pipeline and saying, well, let me do a mathematical evaluation of
what a year two or a year three or a year four value of that pipeline might look like, thats where
I see the real excitement is, is in the potential of what years two to four might look like for
these clients, given where they are in the cycle and the kind of the attractiveness of the brand
itself.
<Q Mark Argento>: Got you. And I think Tom you had mentioned in the quarter that you had a
customer that came out of the that did not renew, could you quantify for us on an annual basis
what kind of run rate theyre doing?
<A Thomas Madden>: Okay. Okay. And this was a the client that we had previously
disclosed in our 10-Q informations earlier this year, excuse me, with the business-to-business
client relationship with a technology company, it previously represented a little bit over 10% of
our Service Fee revenues. So I think last years number was somewhere in the 12% range of our
Service Fee revenues for that client relationship.
<Q Mark Argento>: So you are still able to grow service fees 20 plus percent to slightly a
10% customer?
<A Thomas Madden>: Yes. We did have the client in place for one-month of the quarter. So
there was still some activity in this quarter that helped us, but still significant growth.
<Q Mark Argento>: Got it. Okay. And then just quickly eCOST, I mean, Mark, it sounds like
you guys are focused on making sure thats not a drag, is that a business you think you need to be
in long-term? I know there is some ancillary benefits, but if its taking too much time and energy
and focus, is that something that youd think about either divesting or figuring out a way to move
away from?
<A Mark Layton>: Well, I think you just come back to our commitment, were going to do
everything we can and its our objective to be certain that the drag as you say is not there for
2011, that is, I mean our eyes are open to all of the options that are there, but I think whats
important in this is that everybody understand the way that we are going to take the acumen and the
knowledge that we have in that business and we are evolving it into a product that our Services
segment can utilize being this eStore Retail Services piece. Add those components, which are
basically the operating knowledge of the business and a number of key people in that business area
and they have become very advantageous to our services offering, and so were certainly want to
maintain
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and grow those areas of our business, because our clients are finding it very attractive.
Whether or not we stay in electronics or technology products, really its predicated on whether we
can, to find a financial model or an attractive option for that segment of the eCOST business if
you will that makes sense for us. So our eyes are wide open there and suffice to say, we its
our objective to be sure that we dont have the same kind of financial impact during 11 that we
had in 10.
<Q Mark Argento>: Sure. Okay. And then just last question, more of a high level question.
I know Amazon just acquired Quidsi, which owns Diapers.com and a handful of other sites, clearly
Amazon didnt buy them for their revenues, but probably, for some of their expertise in terms of
moving CPG that have products. Any thoughts on kind of what youre seeing going on out there in
terms of, the eCommerce landscape again is a competitive environment and maybe any thoughts around
that transaction?
<A Mark Layton>: Well, that the CPG industry in the U.S. is a I dont know the exact
numbers, but Ive heard $2 $3 trillion industry in terms of size. According to Forrester, the
adoption rates during 2008 for CPG products was less than a 0.5% over the web. So you have a giant
marketplace that has very small Internet adoption. There is no
reasons why with the improvements that weve made in freighting and packaging and in technology
that this segment wont move substantially and maybe its not going to reach a 50% benchmark that
you might see in technology products or in sporting goods, its certainly an industry that you can
make a very good argument about the fact that over the next 10 years, it may move from 0.5% to 10%
or 20%, but even a 10 or 20% over the web given the industry size, its a huge opportunity. So
unfortunately, were not exclusive in seeing this opportunity. So obviously Amazon has seen that as
well, and I think thats probably the crux behind their, very large payment they made for the
acquisition that you mentioned.
<Q Mark Argento>: Great. Well, congrats on a good services business quarter. Its
unfortunate the other parts of the business are kind of working against you, but Services business
is what we care and it looks like a really good quarter, so good work there.
<A Mark Layton>: Thanks, Mark. Yeah, we were happy just been able to obtain our overall
objectives for the quarter even given the drag out of the other two units. So and we should see an
improvement certainly out of the Supplies Distributors segment in Q4, and if the holiday pike
peak is where we expected then we should see some improvement with eCOST as well. So weve got good
outlook for Q4, so thank you, Mark.
<Q Mark Argento>: Thank you.
Operator: [Operator instructions] Your next question comes from the line of Marco Rodriguez with
Stonegate Securities.
<Q Marco Rodriguez>: Good morning, guys. Thanks for taking my call here.
<A Mark Layton>: Hi, Marco.
<Q Marco Rodriguez>: Hi, I was wondering if you could help quantify the Supplies
Distributor business that got impacted from the ERP switch in Forex (foreign currency impact)?
<A Thomas Madden>: Okay, Ive got amounts that, they are rough, but its approximately $2
million or so was applicable to the inventory supply matter that we talked about and probably about
a million that related to the euro conversion issue.
<Q Marco Rodriguez>: Okay, and then what can you kind of help us understand what are
your expectations for that business going forward, I mean, are we expecting revenue to kind of, to
grow, to decline, how should we be thinking about that?
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<A Mark Layton>: Yeah. This is Mark. So Marco, just to clarify what Tom was saying, so
those quotes that he just made were revenue impacts, to give you a feel for the two, the two things
that impact the SD business. In terms of criticalness of the business, this one is a very important
piece of business for us, as we as Ive mentioned in my
comments. We get intangible benefits out of many of our entities and this one obviously brings us
scale, because of the size of the business thats out there. The business is now fully our
largest client is now fully owned by Ricoh, this was previously an IBM Printing deal that weve
had, since 1995 through a joint venture with IBM. They created InfoPrint Solutions, which is now
wholly-owned subsidiary of Ricoh through the terms of the agreement that was there. Ricoh is the
manufacturer of many of the printer engines that are used in this business model thats out there,
and they own a lot of technology and capability in that. So we understand that they are very
committed to the space. There is an ongoing effort to freshen the product offering thats out there
and to increase market share for InfoPrint Solutions as it looks to the future.
Weve seen relative flat results over the last few years in terms of the consumables that these
printers use. The good news is, is that because consumables are kind of a trailing-edge technology
when printer replacement/placement slowdown, there is still an existing base that are using these
products that are out there. Now that doesnt go on forever, but it trails a long for many years
behind that because of the legacy use of equipment thats already placed.
Clearly, were hopeful that Ricoh and our other clients in this segment will continue to grow as we
look forward to the future, but weve got pretty a pretty modest outlook on our sales in terms
of where we expect things to be with that piece of the business, but because of its scale and the
nature of the way the contract is oriented, it is strategically important and as a strong financial
contributor to us as we look to the business going forward. Now, transitioning into that while this
one is a business-to-business deal, as I mentioned in my prepared comments, we are seeing a lot of
clients in our direct-to-consumer channel interested in a similar buy/sell model.
Now, the arrangements would probably be somewhat different from a financial perspective in terms of
how the buy and the sell happen, if you will, but I would expect that we would see over the next
few years, a growing product revenue component of our overall financial results with a higher gross
margin component to it than what we see in the Supplies Distributors segment or frankly even in the
eCOST technology portion of its business today. So were reacting to what clients are asking us to
do. We have a very flexible platform, weve got a very flexible attitude towards working with our
clients and customizing the way we work with them in order to be certain that we can be the partner
that they want us to be.
<Q Marco Rodriguez>: Okay. Thats helpful. And then in regard to the eCOST business, I was
kind of interested that you mentioned in prepared remarks kind of a movement away from technology,
electronics towards more consumer type products. Do you have any sort of a timeline when you think
that might transpire?
<A Mark Layton>: Well, again, the only backdrop I would provide is what I provided in the
prepared comments, which is that we want to make this segment financially the financial impact
of it much better for us in 2011 than what its been in 2010. So our eyes are open to all the
options that are available out there, and our team in L.A. are working
very hard to have a successful fourth quarter in this business, and well continue to look for all
strategic options that we have with this, but the timeline is improved financial impact for 2011.
<Q Marco Rodriguez>: Okay. And then kind of a housekeeping item here, can you discuss a
little bit the DSOs or your account receivables in your balance sheet, theyve been kind of picking
up here the last three quarters, and then also the cash flow from operations and CapEx for the
quarter?
<A Thomas Madden>: Hold on a second. For the quarter, Ive got the net actually, one
second, the net free cash flow for the quarter was use of 1.2 million, let me with a I think
the
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capital expenditure was about that amount, and the cash flow from cash flow above before
CapEx was about breakeven. Ill get you the exact numbers here in a minute. The other question on
the DSO performance for our business units, our Supplies Distributors activity has stayed
relatively stable. Usually it kind of depends on the timing of the sales activity during the
quarter, but the performance there has generally been in the 40-day window from a DSO performance
standpoint, which is quite good. Weve got a good strong position of power there with our
customers, because we are the only source of product for them to go to. So that stayed relatively
stable.
Our eCOST business, the DSO has increased a little bit, but that relates to the fact that weve got
some additional business-to-business client relationships there that have term accounts, that have
increased that somewhat. And then our and our Service Fee business, that stayed relatively
constant over the years, its generally operating with a DSO of about 45 days or so on billed
activities.
Got it? And again, from just clarification, just confirm what I mentioned earlier. Cash flow
from operations for Q3 was breakeven with capital expenditures of 1 point negative, sorry, 1.2
million to get to a free cash flow of negative 1.2 million for the quarter.
<Q Marco Rodriguez>: Okay. All right. Great. Thanks a lot guys.
<A Mark Layton>: All right, Marco.
Operator: At this time, there are no further questions. I would now like to turn the conference
back over the Mr. Layton for closing remarks.
Mark C. Layton, Chairman and Chief Executive Officer
Okay. We appreciate everybody and keep eCOST.com in mind for your holiday shopping. Have a
great quarter.
Operator: Thank you. This concludes todays conference. You may now disconnect.
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