PFSweb Inc (PFSW) 2004 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the eCOST.com third quarter 2004 earnings conference call. My name is Bill and I will be your conference coordinator for today.

[OPERATOR INSTRUCTIONS].

As a reminder, today's conference is being recorded for replay purposes. I would like to turn the conference over to your host for today's presentation, Mr. Ted Sanders, Chief Financial Officer of eCOST. Please proceed, sir.

Thank you, Bill. Also with me today is Adam Shaffer, Chairman and CEO of eCOST.com.

Before we start the call I would like to remind everyone that today's call may contain forward-looking statements. These forward-looking statements are not historical facts, and are subject to a number of risks and uncertainties, and that actual results may differ materially from such forward-looking statements. For a description of the factors that may cause actual results to differ from these forward-looking statements please refer to the company's earnings release furnished today to the SEC on Form 8-K, the company's most recent registration statement on Form S-1, and the company's reports filed with the Securities and Exchange Commission.

All forward-looking statements are made as of today and we assume no obligation to update any such statements. Also, throughout this conference, we will be referencing both GAAP and non GAAP financial results. Our recently published earnings release, which was furnished to the SEC on a Form 8-K today, contains the presentation of the most directly comparable GAAP financial measures, and a reconciliation of the differences between each non GAAP financial measured used. And the most directly comparable GAAP financial measure. The earnings release can be found in the investor relations section of our web site at www.eCOST.com.

Now, I'd like to turn the call over to Adam Shaffer.

Thank you, Ted. And thank you all for participating in eCOST.com's first earnings conference call.

Let me start by sharing with you some of the highlights. To continue to experience robust growth in our sales, sales for the third quarter set a net quarterly sales record for our company. We had break even results for the quarter, excluding IPO related expenses, and non cash stock compensation expenses recognized as a result of the IPO.

This compares with diluted earnings per share of $0.02 for the same period last year, which benefited from a new operating loss carry forward of $0.01 per share. Our GAAP earnings for the quarter were a loss of $0.06 per share, reflecting $0.06 per share of IPO related expenses. We continue to lower our next customer acquisition cost, and maintain the positive spread between our average gross profit per order, and costs to acquire a new customer.

Throughout the quarter, our focus continues to be on cost efficient market share expansion. To this end, we increased our advertising of commercially priced products to expand our customer base. We also continue building out our product offering to give our customers more reasons to buy from us. We increased the brands, and the product selection in our existing categories as well as launch two additional stores, license sports apparel and memorabilia and travel. These enhancements have resulted in increased retention of our customer base.

Now I'd like to turn the call over to Ted so he can present these financial results in a bit more detail. Ted.

Thanks, Adam. Today we reported record quarterly sales for the company of $43.4 million, an increase of 70% over the same quarter last year. And the seventh consecutive quarter of sequential sales growth. Earnings per share for the quarter on a pro forma basis after excluding IPO related expenses and non cash stock compensation charges was break even versus $0.02 per share for the same quarter last year.

Last year's earnings per share had no tax provisions due to NOLs worth one cent per share. On a GAAP basis earnings per share was a loss of $0.06, reflecting $0.06 per share of charges related to the IPO. This compares with GAAP earnings per share for the same quarter last year of $0.02. Consumer sales for the quarter were 65% of our mix and sales to business customers assigned an account manager were 35% of our mix.

Consolidated gross profit for Q3 2004 rose from 59% from Q3 2003, or a $1.5 million increase. The increase in gross profit was primarily due to the increase in sales. First profit margin as a percentage of sales declined to 9.5% from 10.1% of sales in Q3 2003 and 9.7% of sales in Q2 2004, reflecting promotional activity to attract new customers. The company's gross profit margin may vary from quarter to quarter, depending on continuation of key vendor support programs, as well as product mix, pricing strategies and other factors. Pro forma selling, general and administrative expenses as a percentage of sales from Q3 2004 adjusted to eliminate IPO related charges was 9.4% of sales compared with 9.1% of sales for Q3 2003.

GAAP SG&A expenses for Q3 2004 as a percentage of sales was 12.7%, reflecting 3.3% of sales for IPO related charges. SG&A expense for the quarter reflect a partial quarter of public company related expenses such as director's fees, and directors, and officers liability insurance. We also added management talent in marketing, customer service, accounting and transition services. Advertising expense as a percentage of sales for Q2 2004 were 3.2% of sales, the same as Q3 2003. However, the cost to acquire a customer calculated as total advertising cost divided by new customers declined by 12% as mentioned earlier by Adam.

Our average order value for Q3 2004 declined to $320 per order from $341 per order for the same quarter last year, reflecting a higher sale of products with non computer categories that have lower average selling prices. Now I'd like to turn call back over to Adam.

Thanks again, Ted. During the quarter, we continued to see growth in all of our categories. In fact, several categories such as digital photography, home electronics, video games and DVD's at triple digit year-over-year growth. Although computer hardware and software continue to be our largest category with strong growth categories other than computers are growing at a faster rate causing computers to decline as a percentage of total product sales. This continued change in sales mix caused our average order value to decline to $3.20. Over time, we expect our AOB to decline, as we add and grow our new product categories. But we expect that this will increase to frequency of customer purchases. Also, we expect our new product categories will have higher gross profit margin.

For example, our two new categories license, sports apparel and memorabilia and travel have higher gross margins than our original categories. We have expanded our home and housewares to include bed, bath and apparel products. We have recently launched a new store on our site eTrend (ph) cellular products and accessories. We're also expanding our proprietary bargain count down section of our site, which will now include a holiday countdown, clearance countdown and accessories countdown.

During the quarter, we continued to round out or management team for growth by adding marketing, customer service and accounting management. In addition, we have added a full time director to manage our transition to a standalone company. With respect to our CFO search, we are nearing this final stage of our search and we expect to reach a final decision shortly. Our average gross profit per order continued to exceed our new customer acquisition cost per order for the quarter. Our total advertising expense divided by new customers acquired declined to $15.58 from $17.75 in the same quarter last year. And $16.80 in Q2 2004.

We realize the cost to acquire a customer calculated this way also includes the cost of advertising to our existing customer base. However, the statistic is a consistent indicator of our cost trend. We now have nearly served one million total customers. Total customers are up 48% from the same period a year ago. A 12 months active customer file continues to have robust growth. Active customers great 84% year-over-year, and we added nearly $90,000 new customers in Q3 2004, a 93% increase from the same quarter last year.

We are proud that we delivered record sales and a strong growth rate in our very first quarter as a publicly traded company. Keep in mind that last year's fourth quarter sales growth was stellar, thus we will be up against a tougher revenue growth, rate comparison in Q4 than in previous quarters. I would like to thank the eCOST.com employees for their dedication and efforts towards achieving record sales and 70% sales growth furthering our goal of becoming your online discount super store.

I would now like to open up this call for any questions you might have. Bill over to you, Operator.

Thank you very much, sir.

[OPERATOR INSTRUCTIONS].

Again, ladies and gentlemen, that's star one for question. And your first question comes from Dick Slattery (ph) of Symmetry Peak Management, please proceed.

Hey, guys, nice quarter. Just a quick question on your guidance, what's your guidance for your top line for next quarter. And then what type of growth should we look for 2005 and maybe 2006?

Yes, this is Adam. I'll take that question. We currently don't give guidance on the quarter, and future quarters at this point.

OK. Adam just in the past, is Q4 still your strongest quarter? And should we expect that next quarter?

Yes, this is Ted Sanders. Historically Q4 is our seasonally strongest quarter, Q1 typically is the next strongest. Q2 is our weakest and Q3 is behind Q1 and Q4.

So do you guys expect for the next few years for Q1 to be up sequentially from Q4?

I missed that. Say it again, please.

Do you expect Q1 to be up from Q4 sequentially, for the next few years?

Last year, sequentially we were up, so ...

Right. Like I said, we're not really giving guidance on that.

OK. And just your eventual kind of customer acquisition costs, what's your goal? What's the goal to drive that down to?

There's no goal. I mean it continues to come down. We continue to be efficient in our advertising. And, you know, we're direct marketing folks. I've kind of said in the past when I met with many of you. So it's to keep on driving it down the best we can. And there is no final penultimate goal as long the metrics continue to make sense.

OK. Thank you.

Thank you very much, sir. Ladies and gentlemen, your next question comes from David Ricci (ph) of William Blair.

It's David.

Hey, David. How are you?

Good. And I realize you don't give any guidance, but you did kind of mention that the gross margin might fluctuate from quarter to quarter, can you give us some idea around how much fluctuation we might anticipate there? Or, you know, generally be on an upward trend?

Well let's talk about the gross margin for a little bit, and where are. We're at 9.5% for Q3. And then, you know, David, you have to understand that also, we have fulfillment up in that gross margin percentage line. And so if you took the fulfillment costs out of that gross margin percentage line, you're probably closer to like a 10.8ish number.

I guess without saying too much, we continue to be promotional. We have the promotional programs in place for the fourth quarter, which we believe this is a great time to acquire new customers efficiently. You know, longer term, our new categories should have gross margins associated with them. In fact, our license, sporting goods, apparel, travel, and a lot of the new bed, bath, and apparel product carry higher gross margin. So I don't know if I'm answering your question definitively but that's, you know, kind of where our heads are at.

Would you anticipate being even more promotional in the fourth quarter? Or are you thinking about sustaining the level of promotion that we saw in the last quarter?

You know, right now, we've been successful with the promotions we have, and we're trying to build that customer base. And it can - it's a wonderful time to increase your customer base efficiently. So I think life continues right now. You know, let's see how competitive life gets out there, but right we are promotional, we have our freight programs still going out there, which is a big part of our promotion.

And long-term do you envision any change to that freight program?

We're always looking at ways to enhance freight from a cost point of view. We're always looking at other methods, and other shippers to use. But right now, that promotion is pretty much a competitive issue out there in the marketplace. And so, you know, for the foreseeable future, until something changes that will be there. But again, we're looking at experimenting with other carriers and things like that to work on the other side of that equation. And looking at ways to push them to other methods of shipping with regard to FedEx, and maybe FedEx two days instead of the free ground shipping and maybe we can offset some of that.

One housekeeping, Ted, what should we be looking for in terms of go forward share count?

Well as you know, right we're at 14 - 17,465,000 shares. It's awful difficult to predict, you know, what that share count is going to change to, because obviously we have the option issues. You know, what's going to be in the money, what won't be in the money in terms of options, who exercises it, et cetera. So I think it's, you know, a difficult number for us to speculate on. So I would really use that as a base just the 17,455,000 for now.

Well might be it more conservative to use a number - a larger number?

Well I mean you can obviously assume that the diluted shares will obviously take in to account the option and their value. Also, you have the PC mall option shareholders as well, that will convert in to eCOST options at the spend.

But it's very difficult to determine how many people are going to exercise before that occurs or after that occurs.

Right. Changing gears, Adam. Given the incredible progress you're making on customer acquisition costs and the fact that you're doing that profitably, where does that take you in terms of how do you think about your advertising levels going forward?

If you look at this past quarter, Q3, we still, with all that we're doing in testing and playing with, we're - you know, we came in at about three - it was like 3.17% of sales on the advertising, which has been pretty consistent, in fact lower in many cases from other quarters. So, you know, I still kind of want to remain in the 3 to 4 range over time. And that hasn't changed. We continue to find pockets of good advertising out there, that helps us remain efficient. And, you know, we'll see. But, you know, we've been pretty consistent with where our advertising spend as a percentage of the total is.

Given the reduction in the cost to acquire, the need to know, instead of different ways to go after more customers, more aggressively than you might have otherwise done?

We continue to do that. That's A, really good direct marketing on our side, good analysis, good testing, but we're always coming up with creative ways of bring traffic at a low cost to our site and trying to convert them. We have a very controlled methodical way of going after these customers. And our goal, David, just to maybe get to you answer, our goal is to try and continue to lower that cost to acquire.

Great. One last question, just on a housekeeping Ted, has the return rate been pretty consistent by quarter? Or has there been any fluctuation?

No, it's been pretty consistent.

OK. Thanks.

Thanks.

Thank you.

Thank you very much, sir. [OPERATOR INSTRUCTIONS].

Your next question, gentlemen, comes from Richard Patico (ph) of MTSN Company, please proceed.

Thanks. Congrats on the quarter, guys.

Hey, Thanks, Richard.

Just to follow up on the gross margin question with the new categories, when do you think you're going to start feeling the impact of, you know, sort of new categories picking up and having a positive impact on gross margin. I mean is that '05 or later than that?

It depends on how quickly we get traction in some of these newer categories, and it depends on, you know, if the computer category continues to grow say at a faster rate that could slow that down a little bit. But I'm hoping 2005 we start to see feel some of that impact of some of the newer categories, especially with these new products, and new product margins that we're seeing, and we're also seeing potential.

OK. And then on the advertising side, I know you were still testing, looking in to search potential, customer acquisition, and advertising tool or channel. Where are you with that would it be a real legitimate opportunity for you?

Yes, it's definitely legitimate. And, you know, it comes down to every day we look at different ways to try and enhance what we're doing and optimize what we're doing. But if you look at the main core search engines that we just really started getting into, we are participating now in Google on a regular, consistent business so that we continue to optimize and play with different ways of enhancing that.

Overture, we're doing. Paid inclusion. The non paid inclusion. And we also continue to optimize our site which helps Overture overall. We tried second and third tier search engines, some of them work and some of them don't and we continue on. And we're also testing other methods of both offline and online advertising. And some of them are better than others, and the ones that are better, we put the pedal to the metal, and the other we discount and get past.

OK. And with - just with the timing of your warehouse build out where you are on that, and the spin off itself?

OK. I mean, Richard, with respect to the spin off as we mentioned before, that it would be approximately six months from the IPO date, we're pretty much still on track with that timing. So we don't foresee anything different than what was in the S-1, and I think the S-1 kind of covers all of that pretty well at a - Adam, if you want to just talk about the warehouse for a second.

Yes, no, I mean at this point, we're pretty pleased. We're moving forward. We have a good team. We brought in, you know, a more robust management team. And we mentioned in the call we have a full time director that's really just not part of our day-to-day team which is our ops getting, you know, working on advertising and sales. This one person is involved in coordinating all of the efforts with regard to transitioning warehouse and administrative and all of that stuff. So, you know, we're making very good progress, and we continue to just work to the date.

Do you think you're going to have the warehouse - you're going to build the warehouse in the first quarter, I'm sorry?

You know, first quarter, maybe beginning of the second quarter. We're still looking at a few different things and ways to go about it. So yes, I mean so you look at the six months from the IPO and we should be close to that date.

OK. All right, thank you.

Thanks, Richard.

Thank you very much, sir. Again, ladies and gentlemen, if you have a question, please key star one now. And at this time we have no further no questions. I'd like to turn the call back over to Mr. Adam Shaffer, for any closing remarks. Please go ahead, sir.

Well first of all, thank you all for participating on this call. Again, we were proud of our results. And we appreciate everybody's participation today. We'd just like to wish you a happy post election day. Thank you and have a great day.

Thank you very much, sir. And thank you, ladies and gentlemen, for your participation in today's conference call. This concludes the presentation, and you may now disconnect. Have a good day.