Last month I wrote an article (for those unfamiliar with the company and its revenue structure that article may be helpful) about PFSweb (NASDAQ:PFSW) and observed that its expected Asian growth was currently falling short of expectations. Noting that management has pushed that opportunity out to 2015, I wrote:
The statement that the opportunity is now a 2015 event - and no general time frame for when in 2015 - is a disappointment. I also suspect that the gradual realization that this market opportunity will take far more time and effort to monetize than originally thought is one of the major reasons that the shares have fallen more than 17% from their 52 week high.
I also noted that there were opportunities and risks for the rest of PSFweb's business in North America and Europe. One of those key opportunities is its contract with the U.S. Mint. This will be a major client for PFSweb, going live towards the end of this month, and the Mint is already promoting the new ordering and fulfillment website with this YouTube video.
How important is this business? The company had stated the agreement is a:
10-year contract with the United States Mint consists of a 1-year development project that we are currently in the middle of, plus a 5-year initial support period, followed by a series of 4 1-year optional extensions.
The company further stated that it will begin generating service fee revenue from the Mint by early October, and projects $17-20 million of service fee equivalent revenue in 2015, the first full year it provides fulfillment services. On the recent conference call, CEO Mike Willoughby stated:
At this time, we are reiterating our previously announced target for 2014 service fee equivalent revenue to [range] between $127 million to $133 million and adjusted EBITDA to range between $12 million to $14 million.
This one contract should provide somewhere in the neighborhood of 10% of next year's revenue. It will also be business that puts less strain on PFSweb's resources because the revenue is expected to be less seasonal than some of the company's other Business to Consumer (or B2C) clients which experience significant holiday spikes.
These holiday spikes have caused major problems in the past. Flash sales in 2011 and conservative forecasts by many clients left PFSweb unprepared for the 2011 holiday season, resulting in significant client defections. As they transitioned away from PFSweb, the revenues came under pressure throughout the past 10 quarters. These defections are now in the past, and the year over year comparisons should become more favorable. Investors should not be overly concerned about these types of disruptions in the upcoming holiday season, as the company has shown its clients that it has become a more reliable partner. PFSweb CEO Michael Willoughby discussed these preparations:
...based on our experience over the past couple of years,we've sort of been led to expect our clients will give us conservative forecasts because that's what's happened over the past couple of years. And so our program management team takes those forecasts and they look at the trend, and,you know, frequently we will be more optimistic than some of our clients with regard to the business in the fourth quarter as we're trying to, you know, accurately as we can predict what might happen. We certainly operationally prepare for anything to happen.
In the last 2 years, we have seen our clients, in the aggregate of anywhere from 30% to 40% over their forecasts. And we wouldn't be surprised if we don't see something similar this year. So while we don't necessarily take the most conservative view, I would say we're sort of aiming for a middle ground as we project into the fourth quarter. And, then in this exercise that we go through with the clients to really try to fine-tune those forecasts, which is something that happens in the September and October timeframe, is very, very important so that we can try to be on the same page with our clients. It really revolves around their promotional schedule and what they're intending to do around these key events of Thanksgiving and Black Friday and Cyber Monday and Green Monday and all the different promotional events that are being created in this holiday season. And specifically, what kind of things that they're planning on doing to promote their products.
When 2013 finally came to a close, the company had beat its increased guidance and reported:
2013 Service Fee Equivalent Revenue of $118.7 Million Drives Adj. EBITDA of $10.7 Million
More importantly, it did so without alienating its customers as it kept pace with the increased activity. As Willoughby stated:
...due to robust client volumes during the holiday season and our continued focus on cost containment, we were able to generate Service Fee Equivalent Revenue and adjusted EBITDA results for both the fourth quarter and full year that were better than our previously communicated targets.
...we continue to see both challenge and opportunity in the all-important holiday selling season. For eCommerce retailers in general, this last holiday was once again characterized by a further concentration of promotion activities and order volumes during the 5-day time period from Thanksgiving to Cyber Monday. In a few cases, our clients blew away their forecast during that time period by well over 200%. The weather events of December also created additional challenges for all eCommerce retailers and service providers, especially transportation providers.
PFSweb maintained its bullish forecast for 2014:
Service Fee Equivalent Revenue in 2014 Expected to Increase 7%-12% to $127-$133 Million, With Adj. EBITDA Increasing 12%-31% to $12-$14 Million
In the recent Q2 earnings release the company maintained these guidance figures, and on the conference call reiterated its longer term goals for 2015 and beyond:
Based on our current projections of existing and new client activity, we expect to see strong year-over-year improvements as we complete the second half of 2014 and enter 2015. We continue to maintain our long term target to grow service fee equivalent revenue at a rate of 20% or more.
With the leverage we believe we can generate from our existing infrastructure and higher margin services, we are targeting that this incremental revenue will result in an adjusted EBITDA contribution in the mid to high teens range as a percent of incremental service fee revenue. If successful, this would allow us to steadily improve our adjusted EBITDA performance and as a percent of service fee equivalent revenue from a level of approximately 9% in 2013 to a range of 12% to 14% as we look to the future.
The company has a solid pipeline, including expansion from existing clients (like L'Oreal (OTCPK:LRLCY)) which tend to be more profitable than new clients as the activities build off previous development work. That's a good sign for future profitability. There is also, as noted previously, the U.S. Mint.
As the company gets past the previously discussed loss of clients the year over year comparisons will become more favorable. However, it should be remembered that although the company's business-to-business [B2B] client activity is relatively uniform throughout the year, the B2C activity will be subject to spikes during the holiday season that takes place in the fourth quarter and present challenges to all eCommerce businesses.
In addition, despite the slower than expected start to leveraging the relationship with its Asian strategic partner, transcosmos (which owns one fifth of the company), the size of the market opportunity is too significant to ignore. Any investor with long term horizon should consider this potential in their evaluation.
The loss of clients that choose to bring eCommerce activities in-house because they are considered central to the success of the business or because they have reached economies of scale will always be a risk for PFSweb. However, the risk of loss due to poor performance as occurred in 2011 appears to be in the past. PFSweb now appears to be on a clear path to growing the business. That alone would have been enough to justify some of the market's optimism when it sent the shares as high as $10.43 earlier this year.
The market should now begin to look ahead to the additional growth opportunities available to PFSweb from its current pipeline, the incremental business with the U.S. Mint and future potential from Asian clients as well as opportunities from its current clients looking to enter Asian markets. These opportunities not only justify the current price, but also presents investors with an opportunity for an investment with above average returns over the next two years.
Disclosure: The author is long PFSW.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.