PFSweb, Inc. Q2 2008 Earnings Call Transcript

| About: PFSweb, Inc. (PFSW)


Q2 2008 Earnings Call Transcript

August 14, 2008 10:00 am ET


Todd Fromer – Managing Partner, KCSA

Mark Layton – Chairman, Senior Partner and CEO

Mike Willoughby – Senior Partner, President, PFSweb Services Division

Tom Madden – Senior Partner, CFO and Chief Accounting Officer


George Walsh – Gilford Securities

Jim Curran – New Salem Investment

Alex Silverman – Special Situations Fund

Steven Becker – Greenway Capital


Good morning. My name is Pamela and I will be your conference operator today. At this time I would like to welcome everyone to the PFSweb Second Quarter Earnings Conference Call. All lines have been placed in mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer period. (Operator instructions)

It is now my pleasure to turn the floor over to your host, Mr. Todd Fromer, Managing Partner of KCSA. Sir, you may begin your conference.

Todd Fromer

Thank you, Pam. Before I turn the call over to management I'd 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 word “anticipate,” “believe,” “estimate,” “expect,” “intend,” “will,” “guidance,” “target,” “confident,” 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 and uncertainties and other factors that may affect PGSweb's business, financial condition and operating results, which include, but are not limited to, the risk factors and other qualifications contained in the PFSweb's 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 today's call, will also present certain non-GAAP financial measures, EBITDA, adjusted EBITDA, non-GAAP net income, merchandize sales, and certain ratios that use these measures in our press release with financial tables issued this morning which is located on our Web site at

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 on the call 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 Layton

Thank you, Todd. Good morning, everyone. I would like to welcome you to our Second Quarter 2008 Conference Call. With me today as usual Tom Madden, our Chief Financial Officer; and Mike Willoughby, President of our Services Business.

This morning, we will provide you with an overview of our financial performance and some color on the events to highlight our momentum as we just take you to the first half of 2008. Once we are done with our prepared comments, Tom, Mike and I will be available for answer a few questions for you.

For the June quarter, we reported our fifth consecutive quarter of consolidated net income which was driven by measurable growth in our combined services business segments. We are also pleased to report adjusted EBITDA of $2.5 million and a non-GAAP net income of $0.4 million in the second quarter.

We are particularly pleased with these results just to come at a difficult time for the economy and consumer spending. As Mike will address in a few minutes, our services business withstood these economic forces nicely so far this year.

In addition to the progress sustained in our services business I'm going to briefly mention some of the other key points in our business that we'll highlight throughout the call. On the front, the top line results this quarter were impacted by a slowdown in sales in our business-to-business segment as well as continued focus on various margin enhancement programs that were designed to improve to build our financial performance and health of the eCOST business.

Further, our broadening of product line and expansion into the For The Home and Sports and Leisure products and they are early part of the second quarter also provided higher margin product mix that aided margin growth this past quarter. Also, in the second quarter, 2008, we reported merchandize sales of $631 million. That compares to about $649 million in the second quarter of 2007.

We utilized merchandize sales as defined as a metric that we believe properly communicate the scale of our business. Our financial results reflect the continued success of our business model to drive greater leverage and scale through our technology and operational infrastructure while maintaining our sharp focus on quality and operational cost control.

With the stability in our business so far this year, we believe the company is on track to achieve the financial targets that we set out for 2008 at the beginning of the year. This includes total consolidated revenues, excluding pass-through revenues of approximately $445 million to $475 million and a consolidated adjusted EBITDA of $10 to $12 million for the year.

We are targeting a non-GAAP net income which excludes the impact of stock-based compensation and the amortization of identifiable intangible assets to be approximately $1 to $3 million for 2008. However, any further weakening in the U.S. economy may cause us to fall towards the lower end of the targeted range.

With this information and the quick backdrop I'd like now to turn the call over to Mike who will offer you some details on our Services Business and their results for the June quarter. Mike?

Mike Willoughby

Thanks, Mark, and good morning. Before beginning my prepared comments I like to remind you that when I refer to our Services Business segment, I'm including both our Supplies Distributors and PFS Service Fee Business since both of these businesses have essentially the same operating business model with different financial models.

As Mark indicated, we are pleased with our results for the quarter for our Services Business which included a 20% increase in revenue for the service fee segment. Our top line growth is mainly due to the implementation of new client agreements, temporary increase activity from one of our largest service fee client and increased project activity. During the quarter, revenue included several new clients that were not fully active this time last year including Tractor Supply and an undisclosed Fortune 100 big box retailer.

During this quarter, we were awarded four new deals with leading well-known brands in the consumer goods space. And we finalized contracts for two of these four deals. First, we signed a new agreement with Daisytek [ph] Group which is a global leader in the design, manufacturing and distribution of premium fashion and luxury highware.

To create and support a new e-commerce solution for Sun Glaza [ph], Sun Glaza is a recognized leader in specialty (inaudible) retailing offering consumers the latest branded products along with outstanding customer service.

Our solution for Sun Glaza includes custom order management and order fulfillment solutions that will be supported for methods and the high-touch customer care solution that will be supported from our Plano, Texas headquarters. We expect this solution to be implemented by the end of 2008.

Second, we signed an agreement with Sephora. Sephora is a division of Moet Hennessy Louis Vuitton, the world's leading luxury products group providing customer contact solutions that will be supported from our Plano facility. Sephora features over 250 classic and emerging brand across a broad range of product categories. These product categories include skincare, fragrance, makeup and hair care. In addition to these 250 brands, they also have their own private label merchandize.

Sephora operates about 515 stores in 14 countries worldwide with an expanding base of over 126 stores across North America. We believe that similar to other client agreements that we have this agreement has potential for expansion through offering additional services in the future.

In addition to the new client contracts, let me discuss the implementation of contracts that we had previously announced. During the quarter we launched our program for and the Discovery Channel Store Catalog. Under this agreement, we provide technology, customer care and fulfillment as well as support for front-end product planning and procurement. And this program is now in full operations.

Furthermore, in August, we launched a new end-to-end platform for that utilizes the front-end store technology of Demandware. As previously announced, has moved to the Demandware platform to increase e-commerce functionality, and improve customer retention.

This new site combines the world-class services of PFSweb, the contact center management, warehouse logistics and fulfillment, with the Demandware technology to provide a single, flexible, best abridged solution, expands the e-commerce store front, delivery of goods, and ongoing customer care.

We believe this site will prove to be a testimonial to the success of our end-to-end product offering as we evolve that in the marketplace.

The launch of the new site represent a significant milestone for our company as it represents our first end-to-end e-commerce client leveraging our partnership with Demandware. The new site features integration with several interactive marketing partners including site brand and core metrics.

The Canadian and U.S. online store front also feature user experience designed by our partner FLUID, an award winning interactive agency team that we partnered with.

And sooner we will offer host of social commerce capabilities from the Star Wars [ph] including product ratings and reviews. We have carefully architected our end-to-end e-commerce solution to address the specific needs of our client and their customers and we are very excited to see such synergy and close collaboration between our various partners as we create the site. All these partners are market leaders which comprised and bolster our solution and create in my opinion investor brief offerings.

Moving forward, we believe there are several factors are built into our business that can drive future growth, start end-to-end e-commerce solution. As positional retailers struggle and declining in economic environment, we are seeing a greater number of new business opportunities from companies that want to build an online presence and have been to new markets.

Forrester Research expects internet sales to surpass $200 billion this year which is up from $175 billion in 2007. And the New York Times wrote an article few weeks ago that suggest retailers are investing in online operations and experimenting with new market technique.

These are retailers that are scaling back their visibles to our presence and stated that they are looking to expand or enhance their online operation. Our end-to-end e-commerce solution has already received a very positive response within the industry, the existing client and from potential new clients as well.

Our new offering support retailers and branded consumer goods manufacturers with the total outsourcing solutions that's customized their particular e-commerce strategy. And we are able to do this without losing the size of brand control has been associated with earlier proprietary end-to-end outsourcing solutions. We believe this new offering makes significant difference in our ability to compete for and win new clients.

In addition to the favorable industry trend and positive buzz we have around our end-to-end offerings this time we continue to benefit from very positive working relationships with the other major e-commerce technology providers such as IBM Websphere, ATG, Market Live as well as, of course, Demandware. We share existing client relationship with each of these software providers.

And because of our existing world-class integration with each technology platform and also as a result of our (inaudible) reputation as a direct-to-consumer service provider, we are frequently invited to jointly propose our new business with each of these partners. Our pipeline of pending proposals remained in line with our expectations with this time of year.

And currently, our perspective new business pipeline is valued in excess of $35 million based on client projected volumes. This total includes the two new deals we have been awarded and for which we are actively finalizing contract terms. We are targeting our lead activity to strengthen in the early fall. And our total sales pipeline size to increase.

As we leverage the good news coming from our watch as well as a strong presence that we anticipate at several industry events this fall including the Las Vegas (inaudible) event.

As discussed in previous calls, our global solution can meet many international companies desire to reach new customers and new countries via the internet. They can do this without losing control of their brands and minimizing the risk of entering these new markets, leveraging our platform.

While we serve the international markets for many years we recently started experiencing even greater demand from companies in North America and Europe looking to reach outside their current geographical market and into markets that historically had less demand.

By utilizing e-commerce, these companies can tap into the smaller market economically. And by leveraging the online channel, domestic companies and potentially look to improve some of these economic times by investing in the online channel both here domestically as well as globally.

And now for some highlights from our eCOST business I will turn the floor back over to Mark.

Mark Layton

Good morning, again. Thanks, Mike. Turning now to the business, we continue to remain confident that 2008 despite the impact of slowing economy will show revenue growth for the year as well as improved gross margins and control costs as a result of our improving operating structure in this business.

During the second quarter, we saw improved year-over-year gross profit percentage that included which was driven by the shift of our overall product mix since the introduction of new higher margin product categories and the impact of a number of new vendor sources that drove very attractive deal opportunities this past quarter. Through the first half of 2008, we are making good progress on the continued and ongoing redevelopment of the Web site.

Revenue for the quarter was down year-on-year due to couple of factors. First, the business was impacted by macro consumer spending patterns, run by the overall economic conditions that we are experiencing here in the U.S. This particularly resulted in our small – or impacted is in our small and medium what we call our B2B sales area which was down quite a bit from last year.

Our B2C area similar result to specific individual consumer came in relatively flat year-on-year. And we believe sales were also impacted by our heightened focus on various margin expansion programs that ultimately are designed to improve the overall financial health of the business.

Notwithstanding the softness in revenue this quarter we do anticipate growth in the direct-to-consumer side of business as we move forward this year. Citing some industry sources specifically, comScore Media Matrix, the number of shoppers visiting Web sites that offer discounts increased 21% from June 2007 to June 2008. And we think this type of information and data relates specifically to deal size like

While revenue was down year-on-year, we see that our financial results actually came in generally flat as we compare the second quarter of '08 to the second quarter of '07. This was a result as I mentioned on our various margin programs that we have in place, that have been real successful this quarter.

As we prepare for the holiday season of eCOST, we are working peevishly to expand our product offering and bring on another 20,000 to 40,000 new products to the site. We believe these additional new products will also help with our margin expansion programs as we bring in a mix of higher margin types of products.

And also in the broadening of our categories to allow us to reach into other demographic areas as we work to become a more general product site. We have four new BW [ph] relationships that are currently in various integration of testing phases that will provide the pipeline for these new 20,000 products to 40,000 products.

We are also hopeful to unveil a significant set of enhancement to our Bargain Countdown wheel section of the store sometime in the next couple of months. We believe these enhancements will provide us a greater ability to showcase our great pipeline of daily deals in a manner that better highlights the limited quantity and limited time major of these offerings.

Product deals are of course known to our growth and to the effectiveness of our viral and e-mail marketing programs and we believe these new enhancement to Bargain Countdown will help to accelerate our success with these marketing programs.

Let me provide you just a few specifics on the operating metrics for eCOST this quarter. We have ended in June 30th about 1.8 million total customers on our file at this point, that compares to about 1.7 million as we compare to the same quarter in the prior year period.

New customers for the second quarter of 2008 totaled 29,400 that was versus 25,400 new customers a year ago. For the three months ended June 30th, 2008, eCOST reported a total of 61,900 orders shipped with an average order value of about $365, this compared to about 64,000 orders shipped in the second quarter of '07 with an average order value of about $420.

Ad expenses for the second quarter were about $170,000. This compared to about $303,000 for the second quarter of 2007. The decrease in ad spend is consistent with our continued focus on more efficient viral marketing efforts and our focus on controlling customer acquisition costs.

This quarter, our estimated costs to acquire a new customer was $5.69, this excludes our catalog costs which is directed to existing customers. And that compares to $9.76 for the second quarter of 2007.

So pretty dramatic decline in our costs to acquire new customers yet we were up pretty significantly in the number of new customers that we acquire. We believe this is directly attributable to the viral and e-mail marketing programs that we believe are gaining some good traction for us. Keeping this customer acquisition costs low is critical to the overall profitability of this business as we move into the future.

Just some notes there. The estimated cost to acquire a new customer is calculated by taking our total ad expense during the quarter and dividing it by the total number of new customers during that same period.

Moving forward, we still believe eCOST can achieve cash flow breakeven at a run rate of about $10 million in revenue, at approximately 10 points gross margin. Again, we are operating a bit low those levels at this point, but we still believe that this is achievable goal for us as we look to the future.

We are continuing to make improvements in the shopping experience for our customers as I described, also we are continuing to look to broaden our selection of merchandize in order to attract a broader range of demographics and a higher mix of products through the use of a number of virtual warehouse agreements.

That's an overview of the eCOST business for the quarter and so far this year. Let me now turn the floor over to Tom, who will take you through some details on the consolidated financial picture. Tom?

Tom Madden

Thank you, Mark. Let me first start by providing a brief overview of our consolidated operating results for the quarter ended June 30th 2008 and then I will provide some select operating highlights for certain business segments as well as an overview of key balance sheet items.

As reported in our press release, our consolidated revenues for PFSweb for the quarter ended June 30, 2008 were $110.7 million compared to $108.4 million reported for the second quarter of 2007.

Gross profit for the second quarter of 2008 was $12.8 million or 12% of net revenues excluding pass-through revenues as compared to $11.9 million or 11% of net revenues excluding pass-through revenues in the second quarter of 2007.

The increased consolidated gross profit is primarily attributable to improved performance in our Services Business segment.

As we have discussed previously, we utilized adjusted EBITDA as a key metric in evaluating our operational performance. In the second quarter, our consolidated adjusted EBITDA was $2.5 million versus $3.4 million in the prior year period.

For the second quarter, net income was $62,000 or $0.01 per basic and diluted share as compared to net income of $154,000 or $0.02 per basic and diluted share for the same period last year.

Another key metric we use in evaluating our operational performance is what we refer to as non GAAP net income. To calculate this, we exclude from net income the impact of stock-based compensation and amortization of identifiable intangible assets.

For the second quarter, non-GAAP net income was $0.4 million or $0.04 per basic and diluted share as compared to non-GAAP net income of $0.5 million or $0.06 per basic share and $0.05 per diluted share of the same period last year.

We are pleased with our results for this June quarter, especially with it being our fifth consecutive quarter of consolidated net income performance.

Now turning to the performance of select business segments for the quarter ended June 30, 2008. First, service fee revenue increased 20% to $21.3 million from $17.6 million in the prior year quarter. This increase is primarily due to incremental revenue attributable to the ramp up of custom solutions for new clients such as Discovery, Riverbed and others within the past 18 months.

We also benefited from increased project activity and a modified contract arrangement with one of our largest service fee clients. These components of our top line growth also contributed to improved gross margin performance in the service fee business in the June 2008 quarter.

SG&A increased somewhat in the June quarter versus a prior year primarily due to increased personnel cost in the prior year results benefiting from a favorable impact on a continuing rate on a certain of the company accounts.

For our Supplies Distributors business segment, revenue was $60 million in the June 2008 quarter compared to $57.6 million for the prior year period. Gross margins for the Supplies Distributors business were relatively flat at approximately 8%, as compared to the second quarter of 2007.

Gross margins for the quarter ended June 30, 2008 and 2007 was slightly above our normal range due to the impact of certain incremental inventory cost reduction that occurred.

As for, in the second quarter of 2008, revenue was $23.0 million compared to $27.1 million last year. As Mark indicated earlier,'s adjusted EBITDA was relatively flat on a quarter-over-quarter basis with a $0.6 million loss.

On a consolidated basis, from a balance sheet perspective, our debt balances declined this quarter from the March 2008 results primarily due – as well as from the December 31st results primarily due to principal payments made under our term debt arrangement as well as reduction in borrowing under our Service Fee business asset-based lending facility. The latter reduction was partially due to a temporary cash flow benefit from a modified contract structure.

As far as other working capital components, our accounts receivable DSO performance, inventory turnover and accounts payable days to pay remain healthy throughout our businesses.

Before I turn the call back over to Mark let me just remind everybody of the completion of our 1 for 4.7 reverse stock split of the company's outstanding common stock which we announced on last quarter's call.

As of June 2nd 2008, the total number of shares outstanding was reduced to approximately 9.9 million shares from approximately 46.7 million shares of common stock outstanding at the end of the previous day. As a result of this split, and the reduction in the shares outstanding, the share – and per share amount of this year's result as well as last year's result have been adjusted.

Now I'd like to turn the call back over to Mark for closing remarks.

Mark Layton

Thanks, Tom. Just adding on to the reverse split there obviously, one of the primary objectives in this was related to dispensing our sales from issues with the NASDAQ we have also gained full recompliance with the NASDAQ, listing performance this quarter, so I think the split objective at least work force from that standpoint.

I appreciate the prepared comments this morning. Just to recap things I'm pleased with our overall performance and results across each of the businesses for the quarter, particularly considering economic climate as a bit soft out there.

Results for the quarter reflect continued solid execution in our service fee business as we continue to work to develop world-class or best-in-class solutions and a solid base that we have put our eCOST business on as we look for the future to continue to grow that business and to drive profitability from it.

In the face of a difficult retail environment in 2008, we believe our performance will be driven by existing strong client insider our customer base, as well as the new clients that we have signed and fully implemented over the last 12 months.

With that backdrop of an information there, that concludes our prepared comments for today. Operator, we'll be available now for a few questions if you could queue those for us please?

Question-and-Answer Session


(Operator instructions) Your first question is coming from George Walsh with Gilford Securities. Please go ahead.

George Walsh – Gilford Securities

Good morning, gentlemen.

Mark Layton

Hi, George.

George Walsh – Gilford Securities

Just a few questions regarding the PFSweb services on the margin side, it looks like sequentially just quarter-to-quarter that there was a – on the gross margin, there was – it was bit lighter there. Can you just walk through what was going there, is anything were there plan through for new contracts or anything?

Tom Madden

It's tough to look at just a quarter by quarter basis, because of the timing of project activity that occurs on quarterly basis with the different clients. I think that last year we would have had some new client activity that has negatively impacted our gross margins, but also some higher level of project activities. So, we kind of take a look at it on an overall basis for the year, our overall desire is to try to maintain a gross margin performance for the service fee business in the 25% to 30% range.

George Walsh – Gilford Securities

And I was just looking as much as you can see with the new clients that you signed up for the balance of the year in terms of the revenues and the margins?

Tom Madden

I think, George, as we look to onboard new clients there staying pretty consistently in the range that we are targeting. We haven't seen to this point any sort of devaluation [ph] in the deals that we are looking at. So, I expect to continue to see the kind of results we have seen and as Mark indicated in his comments earlier we do continue to gain leverage from our platform and the investments that we have already made. So, as we onboard new clients we continue to see the positive impact in the bottom line.

George Walsh – Gilford Securities

And you just further commented that you could make on the pipeline in reference to the numbers up there, but the kind of activity you're seeing and anything maybe a little bit more detail on initiatives with Demandware?

Tom Madden

I can't say I think it's indicated earlier that we are seeing a very positive impact in our pipeline from the end-to-end announcement. A good percentage of the prospects there in the pipeline as well as the once that are earlier – in earlier stages that are reflected in that pipeline value. What I would call image and luxury brands, that are looking to have an e-commerce initiative either North America or globally, and I think primarily that increase that is due to the announcement of the relationship with Demandware as well as putting together the rest of the components of the end-to-end solution including some of these interactive marketing partnerships now. One of the interesting things as we look at our target marketing (inaudible) there is some research out there that indicates for a image and luxury brand only about 30% of those brands actually have in direct-to-consumer online initiative today. So there is a huge untapped potential out there in the marketplace for over 70% of these high quality luxury brand will be – I believe over the next year to 18 months having to seriously consider putting online initiatives up and an outsourcing alternative is the quickest least risky path to doing that. So I think we are really well-positioned with our end-to-end offering to take advantage of those trends.

George Walsh – Gilford Securities

And on the marketing side with that or any special initiatives you are doing in addition?

Tom Madden

We continue to target the specific verticals with our marketing. I mentioned image and luxury brands sort of the suite spot we are targeting right now on the retail side. We also continue to address the high tech marketing vertical that we support. We have a great piece of business in that vertical. It sort of has little less a blip sea maybe a little less jazz [ph] associated with it, but we continue to perform very well in that sector as well. So, we are doing our marketing there as well.

George Walsh – Gilford Securities

Very good. And I will get back in queue.

Mark Layton

Thanks, George.

George Walsh – Gilford Securities



Our next question is coming from Jim Curran with New Salem Investment. Please go ahead.

Jim Curran – New Salem Investment

Hi. Is a fairly long-term older – I guess I am continually to be frustrated with the progress of the eCOST business. As I recall you paid 1 for 1 stock for the eCOST business, got five – work to get five or so, million of EBITDA cost sales out of it, was still to get to where are you equal to the rest of the business. Right now you have to increase the EBITDA of the eCOST business probably by about $15 million. By the time you ever do that, you probably get equal to me probably – rest of the business probably by at least $5 million more. So you have probably to increase business by about $20 million EBITDA just the kind of get back to 1 to 1 ratio. So I mean is that kind of a prospect – is there any kind of prospects anywhere than in immediate future or anything near that type of the quality of what the business was when you won 1 for 1 relationship?

Mark Layton

I think I'm not sure I follow the science and your math, I mean I understand it, but there was a lot of evaluation securities [ph] particularly in the services side of our business. We continue to believe that business was dramatically undervalued and do as we look in our results today so I don't know that, that looking at 1 to 1 comparison is the way to look at, specific for the eCOST business.

Jim Curran – New Salem Investment

Dramatically undervalued, that would mean that your – you should have been able – and then do you guys – someone to agree with it, you should be able to go lower value on, you know, your shares would have been worth lower ratio. My main point is what is the – five years from now, is there anywhere ability to get any real EBITDA out of this business what in the neighborhood of $10 million to $15 million?

Mark Layton

Again, I am not going to talk about future targets on that basis from there. I will talk about one factor. The information that we provided is it relates to where the breakeven point of the business is that's the guidance that we have had so far with that. We need to continue to grow the business. We had a great growth in the first quarter of this year. Lot of margin focus this quarter, so we had good movement in our business to consumer side in terms of gross margin improvement, like see the B2B piece that we can improve from little bit, I think improve more, but I think we are working in a well-positioned for the fourth quarter and our breakeven points at about 10 million or 10%. So that's the guidance that we have out there today. There is clearly been some disappointing thing that I already covered in the last eight conference calls related to some things that we had with the eCOST we didn't expect when we bought it, but I have to cut a view that is water under the bridge at this point move forward from there –

Jim Curran – New Salem Investment

Can you – I'm confused about what the B2B part of the eCOST business. Can you describe that what the differences between the two lines of business, that part of business?

Mark Layton

Sure. We have two segments in the eCOST business. One is the business, the consumer segment; we basically take customers that are individual consumers. You, I, Fred, Joe, individual consumers, are we to C [ph] piece, it represents today a little less than half of the revenue and about 60% of the gross margin in the eCOST business. The other part of it is a B2B segment. This is an area where we have direct sales people, selling to less than $100 million small and medium – what we would call small and medium size businesses, S&B, who are below the radar screen of the CDW [ph] or a PC mall or an M size and our focus is on more smaller contractors, insurance companies, small public school systems and things in those areas in there. That was the piece of the business that was down this quarter.


(Operator instructions) Our next question is coming from Alex Silverman with Special Situations Fund. Please go ahead.

Alex Silverman – Special Situations Fund

Good morning.

Mark Layton

Hi, Alex.

Alex Silverman – Special Situations Fund

In this suite consumer environment, are you finding that – are you finding it that service – potential service customers that whose work you are bidding for is are taking longer to make decisions or the inverse in that folks are looking to cut costs quickly and therefore looking for an outsource partner?

Tom Madden

I think right now I look at the decision making cycle, in the sales cycle for these deals. I would view the people probably getting to that final decision a little bit rather more quickly. As far as the reasons for that I think it probably has more to do with competitive pressure – I mentioned that statistically we see in retail where large percentage of these brands don't have an online presence. And now, especially with growth in domestic retail sales being primarily weighted towards the online, I think you just see a lot of pressure on – management team inside these brands move forward with online initiatives. So there – they are moving through some of the stages more quickly. So I guess the answer, short answer to the question is we do see faster pass-through to decision making for most of the deals at this point. I think it's really just to question people want to jump on this opportunity right now in 2008, get online as quickly they can.

Alex Silverman – Special Situations Fund

Any sense what the competitive environment is like for you guys in terms of bidding on this business?

Tom Madden

Sure. I think we have a very good handle on that at this point. There is some interesting dynamics in our marketplace right now with a number of consolidations. We have seen some of our competitors doing merger and acquisitions with other providers whether that's vertically integrated companies, you saw that was GSI purchasing e-Dialog which is in the marketing company, sort of – and for another piece of puzzle that in their solution. We haven't yet seen anybody put a true end-to-end solutions together from different pieces especially on a global scale. So when I look at our competitive landscape even though we certainly compete against GSI Commerce and some of the other players particularly in an alliance type of situation where you're, multiple parties come together, not under a single contract, over the each individual contracting, none of those competitors have a global solution that can take them, bring them online into the domestic market as well as taking them to Europe or Asia-Pacific. We have the ability to meet those requirements with a single systems platform and a single technology. So feeling pretty good about where we're at from competitive perspective. We will be interested to continue offset consolidation as it happens in the marketplace.

Mark Layton

Just to add to that little bit, Alex, two pieces that are interesting to me in this – I think streak of the parts of your question. There is a lot of focus industry wise, analysts wise, and the company wise on this phase right now. The freight carriers, some of the major kind of traditional logistics guys, some of the people in Europe that are large logistics players, many of the major banks now have a specific view on this. We would have spent 30 minutes two years ago, three years ago, to try to describe our space to people, most people today see the space and understand it so that's I think an important metric as we look at the space I guess we need to use the word “legitimizing,” but there is a lot of focus on it out there and I think we will invite additional competition and dynamics in the industry we look to the future. So, there is you know, that's a two extraordinary, good things and bad things about that in terms of, we have got great infrastructure and we believe lot of barriers, (inaudible) people that are there, but as major names getting involved in this space really allows people to find us more easily and that's important for a marketing efforts as well.

Alex Silverman – Special Situations Fund

Great. Thank you, guys.

Mark Layton

Thanks, Alex.


Your next question is coming from Steven Becker with Greenway Capital. Please go ahead.

Steven Becker – Greenway Capital

Hi, guys. How are you? I just had a few questions on the balance sheet. I don't know if this is seasonal or did you help me understand, receivables in the last six months of down about 8 million, inventories have bumped up about 6 a change, and payables are up pretty dramatically, is that the seasonal fluctuation or kind of how do I look at that?

Tom Madden

Yes, part of it is a seasonal fluctuations, we just the – at the end of December we were coming off of our higher seasonal activity for our services business that create some incremental receivables out there as well as supplies distributors business is generally a little bit higher at the end of – in the December quarter and it will be throughout the year. So, you see some reduction there. From an inventory standpoint, we – our inventory levels start building a little bit at this time here, that we look towards increasing the sales out later on this year. So, that's the other piece of it.

Steven Becker – Greenway Capital

And then the payables?

Tom Madden

Again, somewhat associated with the receivables and inventories which changes that occurred there. And we have some impact from the contract modification where we are – we ended up getting some benefit from the cash standpoint there.

Steven Becker – Greenway Capital

So if I look at this last year the ratios would be pretty similar?

Tom Madden

The inventor is moving around a little bit. Our largest relationship is with IBM from the supplies distributor side. And just the timing of receipt that product that manufactured overseas, essentially. So they are going to be fluctuations from an inventory standpoint at a quarter by quarter basis. Again, it starts ramping up a little bit as we move towards the latter half of the year and we expect to see some volume increases there.

Steven Becker – Greenway Capital

Terrific. Appreciate it. Good quarter, guys. Thanks.

Mark Layton

Thank you.


Our next question is coming from George Walsh with Gilford Securities. Please go ahead.

George Walsh – Gilford Securities

Could you speak a bit to I guess fuel costs that have risen obviously over the last several quarters and year, regards to I guess, two sides of the business with logistics and then also on the eCOST side, in terms of any shipping costs, pricing? And then I guess second part of that is just in terms of general cost for you, the kind of any inflationary – other inflationary pressures you might be seeing?

Mark Layton

The fuel costs are concerning, we have definitely seen pretty dramatic increases particularly in our aero transportation costs over the last three months in the fuel surcharges that exists. We are yet to see our first reduction although I would expect with drop in oil prices we will see a reduction in the next couple of weeks on the fuel surcharge piece, but it's been pretty significant as I said particularly in air, where our business .is designed both with eCOST and with our customers with that those costs are basically pass along. In the eCOST scenario they pass along in the freight that we charge at the shopping card and with our customers it’s passed to them as a pass-through costs in most cases and they will make individual decisions about how they adjust freight rates periodically. So while impact in terms of an intangible nature hence we have to do they don't directly impact our financial statements at this point. In terms of other costs, I would say probably only specific thing is our own internal travel costs have certainly increased with the price of airfare and things, and businesses is pretty mobile and necessary to be mobile in terms of servicing our clients in the way we market for deal. So, we've certainly seen some increase in our travel costs that are falling through our SG&A, but from a materiality standpoint it's not huge from things from there. Other than that, I don't see any other inflationary pressures on the business at this time.

George Walsh – Gilford Securities

And how do the fuel costs look in the eCOST side? Freight cost impact the – your wanting for is, is the deal side, so but then you got the fuel costs to add, so how do you balance that out with pricing and deal that you are looking for to price on the side, your overall attractiveness of your pricing versus just regular retail at this point?

Mark Layton

I think that – the answer to your question is we are trying to maintain margins so, we're actually improved margins, so the reality is that our freight costs offering to customers have gone up. Particularly in air, less so in ground, but particularly in air. And so the first thing is you see happen is the mix air to ground declines, air declines we see heavier movement towards ground. So, that’s the one way consumers react. We do keep a very close competitive tab in terms of our freight costs to the key competitors in eCOST business and at this point we believe we are still in the line of lower than that has to do with strict to the PFSweb's freight relationships we are able to offer which ones benefits the faster the eCOST upfront. Clearly, there is a lot of jammer in the press out here about well, fuel costs fill up, people buy online, because the costs of getting to the store and so on and so forth there I don't know the certain – exactly how that happens in there, but certainly, there is an ability to consumers to recognize the need to absorb some of that as the debt around costs in terms of traditional retail as well. So, that's kind of the way it is, but this much again, you get a lot of factors into it, that's the way we are dealing with.

George Walsh – Gilford Securities

Yes. I was just curious as to how your customers, the dynamics that you're seeing in customers reckon that try to decision. Alright. I will get back in queue. I will come back.

Tom Madden



At this time I would now like to turn the floor back to management for any closing comments.

Mark Layton

George, and we do have one more question, take that now, you want to pop back in?

George Walsh – Gilford Securities

Can you hear me? Just the other side with the how are things with the banks in general? I know you increased your lines but just with the general atmosphere out there, there relationship with you and their own health and how the lines are with them?

Tom Madden

We went through renewal processes with most of our banks in the March quarter. And although banking relationships are good, we are – financing needs are within the credits that's available under those facilities or in clients with all our terms, of those agreements. So we feel good. It's scenario that we continue to watch closely, we understand there is continued tightening in the credit market top tier right now. And we will continue to make sure that we continue to work closely with our banks ahead, and great long standing relationships that we had in place.

George Walsh – Gilford Securities

Very good. Thanks a lot.

Mark Layton

Thanks. We appreciate everybody's time this morning and we will talk to you again next quarter. Have a great day.

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