PFSweb Inc (PFSW) 2004 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2004 eCOST.com, Incorporated earnings conference call. My name is Bill and I will be your conference coordinator for today. At this time, all participants are in a listen-only mode. However, we be facilitating a question-and-answer session towards the end of today's conference. If at any time during our conference today you require assistance, please key star, followed by 0, and an operator will be happy to assist you. As a reminder, today's conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today's presentation, Ms. Elizabeth Murray, Executive Vice President and Chief Financial Officer. Please proceed, ma'am.

Thank you. Good afternoon, and welcome to the eCOST earnings call. With me on the call today is Adam Shaffer, our Chairman and CEO.

Before I turn the call over to Adam, let me begin by reading the Safe Harbor Provision. To help you interpret our growth opportunities and financial outlook during the conference call today, we'll be making forward-looking statements within the meaning of the Private Litigation Reform Act of 1995. As you know, our financial results are subject to numerous risks and uncertainties, and it is possible that actual results may vary from the predictions we make today. Additional information regarding these factors that could cause such differences can be found in the risk factors and MDNA sections in our recent SEC filings. Adam?

Thanks, Liz. Before we start on the business, I wanted to welcome Liz Murray, eCOST's new Executive Vice President and Chief Financial Officer to the eCOST team and our first quarter end earnings call with the Company. Welcome, Liz.

Thank you.

With our second quarter as a public company, I am delighted to report some very strong results for the fourth quarter 2004. We have now enjoyed 8 quarters of sequential sales growth and are gaining considerable traction in brand awareness amongst an ever-increasing customer base. During this quarter, we reached a major milestone of serving over 1 million customers and added over 138,500 new customers, a record number, and a 74 percent increase compared to the same quarter a year ago. These dynamics helped fuel the sales growth in the quarter, which was up 60 percent against prior year and up 34 percent sequentially. We continued to develop new merchandise areas during the quarter. And during the quarter introduced 3 new category stores, bringing the total number to 12 at the end of the year. The new groupings included apparel and accessories, bed and bath, and cellular.

The new categories we added carried higher gross margins than our original product category of computer hardware and software, and, although early in the offering, have already gained considerable customer interest. As I have said previously, an area of continued focus is expanding our product depth and breadth as we continue to leverage our growing customer base, encouraging repeat purchases, additional traffic, customers, and sales. With the new products and category additions, our sales mix has shifted pretty markedly from computer hardware and software, which made up approximately 70 percent of our sales in the fourth quarter last year, to about 60 percent this year in the same quarter. We are constantly adding new brands and products in our current categories, while evaluating and developing new product lines. Some new categories under consideration this year include -- health and fitness, gifts and gadgets, Voice-over Internet Protocol telephony, music, books, and pet supplies. During the quarter we continued to see growth in all our product categories, with triple-digit growth in home electronics, housewares, watches and jewelry, DVD movies, and video games.

In addition to adding more products and products categories, we continued to develop additional service offerings to enhance our relationship with our customers and give them more reasons to buy from us more often. These offerings should ultimately result in higher gross margins. At the end of December we introduced the Bargain Countdown Platinum Club. For an introductory $29.95 annual fee, customers gain access to a private members-only area of our site, where they are offered special limited time and limited quantity exclusive deals. In only a few weeks since the launch of the club, we have sold over 1,400 memberships. Our new cellular store offers customers the ability to shop for a cellular phone and service plan from most of the major service providers and activate these service plans on-line, while also shopping for the latest technology, including Bluetooth, wireless headsets and hard-to-find accessories. We also plan to offer our customers an eCOST private label credit card this year, whereby we can offer favorable financing terms and have the potential to reduce our processing costs. We are also leveraging our brand, customers, and site traffic by offering visitors special after-the-sales offers through eCOST.com private label sites hosted by third-party affiliates, which are attractive from a margin standpoint. As we continue to expand our customer base and develop our brand by being an all-inclusive destination and shopping site, our ability to leverage these assets beyond products creates the opportunity for margin expansion going forward.

This quarter we spent 53 percent more in advertising compared to the prior year and 50 percent more from the prior quarter. This investment decision was made to grow the customer base, a key asset of our business, and had considerable, immediate benefit. As we have continued our targeted advertising efforts, we have been able to substantially lower the cost of customer acquisition in the fourth quarter to $14.93 per customer, compared to $16.91 a year ago, and $15.58 in the third quarter 2004. Related to this, for the fourth quarter, we increased our positive spread between our gross profit per order and our cost to acquire a new customer. The average order value was $302 for the fourth quarter, slightly higher than the same quarter last year, but lower than the $320 from the third quarter of 2004, which was expected due to product mix and seasonality. While the fourth quarter was another seasonally strong quarter, the growth and convenience of online shopping trends positively for continued sales expansion for eCOST and for gaining market share.

In 2005 we are forecasting strong sales growth of approximately 50 percent for the year, with possible fluctuations for the quarters. In line with the revenue growth for 2005, we expect to be profitable for the year, with emphasis on the second half. Looking forward to the first quarter of 2005, with the continued advertising spend and the additional headcount and personnel costs as we prepare for the separation from our parent, PC Mall, our level of expenditures will increase, which will have a higher bottom-line impact sequentially compared to Q4. The business is an exciting phase of growth and we have made substantial progress in developing our infrastructure. In late January 2005, we signed a lease for the warehouse facility in Memphis, Tennessee near the FedEx hub and are currently in the build-out stage of this facility. We expect to be fully operational at the end of the first quarter, 2005.

We continue to add to the Management team. As I mentioned earlier, in January Liz Murray joined eCOST as our Executive Vice President and Chief Financial Officer. We have also strengthened the purchasing team to further enhance the key vendor relationships on behalf of eCOST as a stand-alone Company. The business is progressing well, and I am very optimistic about the future. We are focused on execution, increasing our customer base, developing brand awareness, and driving market share. And I believe we have the right building blocks in place to achieve success. Now, I'd like to turn the call over to Liz, who will provide the financial results for the quarter.

Thanks, Adam. I'm delighted to be here at eCOST, and I'm very optimistic about the business and the opportunities ahead of us. I believe the market for serving the online shopper is robust and growing. And we have a unique opportunity to provide a strong product and service offering to that market. We're enjoying rapid revenue growth and are fast expanding to a leverageable model, which will deliver profitability in 2005 and growth beyond. Sales for the fourth quarter 2004 were 58.1 million, compared to 36.4 million in the prior year comparable quarter, representing an increase of 60 percent. Sales increased over 34 percent sequentially, given the seasonally strong quarter, and this was the eighth consecutive quarter of sequential growth. Consumer sales for the fourth quarter were 69 percent of our total net sales. And sales to business customers were 31 percent of the mix.

GAAP net loss for the quarter was 300,000, equivalent to a loss of $0.02 per diluted share. On a non-GAAP pro forma basis, excluding non-cash stock-based compensation, the loss was 232,000, equivalent to one penny per fully-diluted share. The GAAP net loss in the fourth quarter compares to a loss of 892,000 in the third quarter 2004, or $0.06 per diluted share. Excluding non-recurring IP-related expenses and non-cash stock-based compensation, the pro forma EPS was break even. In the fourth quarter 2003 GAAP net income was 5.5 million after reflecting a favorable 1-time tax benefit from the release of the full valuation allowance of 6 million, equivalent to $0.42 per diluted share. Excluding this benefit, and on a non-GAAP pro forma basis, losses in the quarter were 229,000 or $0.02 per diluted share, essentially flat compared to the fourth quarter 2004. Gross profit for the fourth quarter 2004 was 5 million, compared to 4.1 million in Q3 2004 and 2.8 million in the fourth quarter prior year. The increase year-over-year was 2.1 million, or 76 percent, and is largely attributable to the increase in sales.

Gross profit margin as a percentage of sales was 8.6 percent in the fourth quarter, compared to 7.8 percent prior year, and 9.5 percent in the third quarter. The margin expansion year-over-year reflects improved product mix, while the delta from Q3 is largely due to seasonality and selective promotional activity to drive customer growth that Adam touched on. The Company's gross profit percentage will likely vary from quarter to quarter, depending on the product mix, pricing strategies, key vendor support programs and other factors. SG&A expenses on a GAAP basis for the fourth quarter 2004 were 5.6 million, equivalent to 9.6 percent as a percentage of sales. Compared to the same quarter prior year, SG&A expenses on the same basis increased 2.4 million from 3.2 million. SG&A was equivalent to 8.9 percent of sales in the last year's comparable quarter. The expense increase compared to prior year comparable quarter was attributable to additional advertising expenses and higher personnel costs associated with the anticipated separation from the parent company, along with the added regulatory requirements of being a public company. Compared to the third quarter, 2004, on a non-GAAP basis, excluding non-cash stock-based compensation, and 1-time IPO-related costs, pro forma SG&A expenses were 4.1 million, or 9.4 percent of sales.

As Adam's already discussed, we increased the advertising spend in the fourth quarter. As a percentage of sales, advertising expenses increased to 3.6 percent, from 3.2 percent in the third quarter. The cost to acquire a customer calculated as total advertising cost divided by new customers, declined by 4 percent in the quarter and 12 percent during the year. These targeted advertising campaigns are proving to be very efficient in attracting customers on a cost-effective basis. At the end of the fourth quarter, the Company had cash and cash equivalents of $16 million, compared to $19.7 million at the end of the third quarter. The primary application of funds was a payment of over 3.3 million to PC Mall, the parent company, and settlement of the intercompany payable at end of the third quarter 2004. We have a strong balance sheet with no DAT. Given our current cash position and the additional barring facility we have in place of up to 15 million, we believe we have adequate funding for our needs over the next 12 months.

Looking forward to 2005, we believe we will achieve profitability for the year, with sales growth of approximately 50 percent. As Adam outlined, due to the planned advertising spend and the additional personnel costs as we prepare for separation from our parent, we anticipate additional losses in the first quarter relative to Q4. Summarizing the 2004 fourth quarter results, with strong revenue growth year-over-year of 60 percent, record quarterly new customer additions of 138,500, a meaningful reduction of our customer acquisition costs, we launched our Platinum Membership program, and continue to add to our product stores. All of these accomplishments, together with the initiatives Adam outlined, provide a strong platform for further expansion in 2005 and beyond. That concludes management's prepared remarks. I'd now like to turn the call back to the Operator for a Q&A session.

Thank you, very much, ma'am. Ladies and gentlemen, if you'd like to ask a question, please key star, 1 now on your touch-tone telephone. If your question has been answered or you wish to withdraw your question at any time, please key star, 2. Questions will be taken in the order they are received. Please key star, 1 now. And our first question comes from Richard Fetico of Merriman and Company. Please proceed, sir.

Thanks. Thanks for taking my question. Congrats on the first public -- public company quarter, guys. First, on the advertising expenses, 3.6 percent of revenues, that's a bit of a pick-up from prior quarter and a year ago. What should we expect going forward, and, you know, are you expecting to -- for that to rise or decline? And, secondly, is this a reflection of the Company being more aggressive or just a general industry trend in terms of advertising costs going up?

Hey, Rich. It's Adam. First of all, hello. Thanks for participating today. I want to make sure I got your question. But by the way, it's our second public company announcement, so. Just what was your original -- your initial question?

My question was on the advertising expenses, as a percentage of revenues is ticked up. Wondering whether -- what should we expect going forward from the 3.6 percent of revenues? Should we expect -- should we expect this to go up or down from these levels?

Yeah, I mean, good question. I think since we've been talking together, you know, we've been saying we've been living in the range of 3 to 4 percent of sales range and I'm, you know, I'm still in that world. You know, I spent a bit more because I realized quickly that the cost to acquire was lower, and we were able to find some veins of advertising that really made sense. So that's really why we did what we did. I think we came off of the third quarter at about 3.17 percent of sales. But, you know, I still think 3.6 is pretty reasonable, compared to what most would spend, but I'm still in my bracket of my, you know, my expectations. And I'm not going to change that. I think we're still in the 3 to 4 percent of sales range, depending on the opportunities.

Okay, thanks. And on the category expansion, could you highlight -- I think you can mentioned some of the categories that performed well. Where are you going to spend most of your focus? Are you launching new categories in '05? Just more a little more color on, I guess, the category expansion and impact on the gross margins.

Yes. Well, first and foremost, and I always say this when we talk, Michael, is it's life is an Erector set. And in the categories we're currently in, we're spending an enormous amount of time to get deeper, better, more brands, more products, more features. You know, I see a lot of opportunity in things like jewelry and watches. I see a lot of opportunity in-housewares. And you can see the growth in some of these areas being triple-digit or better. You know, am I going to spend all our effort there? A good part of my -- our brain power's going to go there, but we still have our core that we're focused on.

Okay, thanks. And then you finally -- you mentioned additional and private label categories. I'm aware of one, which is travel. You're saying that there may be more than that coming?

Yes, yes. It's -- there's more than that, because depending on -- you know, I mentioned a few. You know, we talked about pet supplies, maybe that was a surprise a little bit to some of you, but I really like that category because of the ability to have repetition and retention. That's, to me the supplies business, and it's something that people are fanatical about, and I love any category where people are fanatical about the products. But, you know, will that be an affiliate relationship, will it be a hybrid relationship? When you look at cellular, cellular is a hybrid category for us. Cellular is partially with a third party doing the service provider stuff. And then there's the accessories and add-on's that is us being the principle in transactions. So the combination of the 2 is really good for us from a margin perspective.

What are the, sort of, economic arrangements in this private label deals.

They vary. Some are not -- I'm not able to talk about them. But they're there. There are many available. And I think that as we are developing our customer base, we have more access to these types of deals, because many of these deals are, A, brand and loyalty based, but, secondly, traffic based.

Okay. Thanks.

Yes. And, you know, there's a bunch. And as time goes on, I'll, you know, as I do more of these things and completely release these things, we'll, you know, give you full disclosure on all the things that we're doing and how they work.

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Tony Frestani of Astro Capital Management. Please proceed.

Hi. Good afternoon, great quarter, nice growth.

Thank you.

I guess my question is just kind of longer-term. As you look out 2 to 3 years, where do you think you can take gross margins? I mean, from a combination of 1, I guess, mix -- you're moving it to higher-margin areas. But, 2, as you get to maybe half a billion in revenue what kind of costs can you take out of your logistics kind of cost? What do you think -- you know, 2 or 3 -- 2 to 3 years out, where you think gross margins could be in this model?

Well, let's take away -- you know, there's the cost equation on how we buy, and that could, of course, can influence gross margin. But let's talk about the mix, mix that we're getting into. As I mentioned, most of the new product areas we're going to, carry much higher gross margin percents than the original categories. So that's margin expansion there. But I believe, and I'm seeing, and I'm experiencing right now other opportunities where we're able to work with third parties to monetize our customers and make, you know, really high gross margins. When you look at our Platinum Club, you know, really the Platinum Club, ultimately , should be incremental gross margin. So you know, where does it end? I'm not sure. But to me, in my mind, there's no cap on that gross margin percent. I think that that's something that's going to grow and evolve as we execute. You know, it's just -- it's depressing when you hear some people say it's this percent and no more. Product is one of the many elements we're involved with. But there's so many other ways to build relationships with your customers, get more purchases from new customers, and get more gross margin from them over time.

I mean, for example, I mean, Overstock, is at, like, 15 percent gross margins --

Yes.

And part of that scale, and I guess is, part of that I guess is mix. I'm not sure exactly how you overlap. I mean, it seems you're moving more away from computer to higher-margin products. Do you think when you're in the $500 million to billion dollar kind of range, I mean, that would be 3, 4, 5 years out, that, you know, all things equal -- assuming current kind of pricing environment, et cetera -- I mean, do you think you could, you know, trend towards the mid-teens? Is that unrealistic? Of course --

It's not unrealistic, especially with the areas that we're looking at to get into. I think there's more -- again, you know, I don't want to throw some, you know, grandiose number out there, at all. But, you know, I feel -- you know, I heard that rumor of this 15 percent number. And I thought that was kind of, you know, silly. I don't even think that's what they meant. When you look at products, that's one thing. When you look at some of the product categories we're getting into, there's definitely higher gross margin percentage available. And also, as you build a relationship and you develop clubs, you develop these other third-party ways of doing business with your customers, you have the opportunity to really enhance that gross margin. What that number is, I don't know. But it's not a capped number in my mind at all. And, you know, if you look at Amazon, their gross margins are much higher.

I guess one last question, Adam, is how do you measure, kind of, repeat customers? And I know, you know, cumulative, you're at over a million customers and you had half a million active customers, et cetera. How do you measure the repeat customers? I guess, obviously, that's some -- that's important, going forward.

Yes. And I think there's a bunch of folks that take a look at the numbers, plus we try to put a lot of operating stats that can really help you guys. You know, we put new customers, active customers. You know, we've put enough in there that you'll probably come up with a mathematical equation to come up some kind of a retrition number -- or attrition number. But, you know, I've been looking, and the trend has been very positive on our lifetime value and our repeat purchases. I don't disclose that. There's, like, 3 or 4 different ways people like to look at. We just put the numbers very simply out there for you guys to look at and do the math.

Sure.

And I'm bullish on that. I think the trend for the year has been darn good.

And I guess I could just subtract active -- I mean, new customers from active customers, and that would be repeat customers. Would that be a correct assumption?

That's a way you can -- it's a way you can look at it. I look at it about 4 different ways. And as long as I'm consistent in the way I look at it, and I continue to do that, my math says that the trend is in good shape.

Okay. Thank you, Adam.

Thank you, very much, sir. Ladies and gentlemen, again, if you wish to ask a question, please key star, 1 on your touch-tone telephone. Your question comes from Mr. David Ricci of William Blair. Please proceed.

Hello.

David, holy -- where have you been? We miss you. Hope everything's good.

On vacation.

We want -- we want that job. What can we do for you today?

Well, exciting quarter for you guys, so. Let's see. You kind of alluded to attrition rate. And depending on when you pick up the new customers, the set of that number can move around a fair amount. But that seemed to have been, have trended up, where it had been trending down. Is that accurate? Do you have any thoughts on that?

Yes. I mean, I think, what -- I think, you know, you and I have looked at that based on the numbers I put out there. And the trend was trending down. But when you look -- you know, there are some aberrations from time to time. You have to look at, not just the quarter, but you have to look at the year. And if you look at the year, the trend is darn good. You're also anniversarying some big customer blocks that we brought in a year ago. So, you know, really, I look at the health of that attrition. And it's really, really good compared to what I see out there from a comparable point of view. You know, that -- I think 1 quarter, if you looked at the same math that you've been looking at, you say maybe it went up a little bit, but we added a bunch of customers a year ago. And I think that you just anniversary some of that. But you have to look at not just that 1 quarter, but you have to look at 3 quarters, 4 quarters, a month, and a year. And I think if you looked, you'd put kind of a line through it and say man, that's [expletive deleted] good.

All right. So we really shouldn't think of that as the X-factor or anything?

No, no. I wouldn't -- I wouldn't at all. And I -- And, you know, there's some numbers -- because I look at things a little different than, maybe, other people want to look at it. And I don't want to confuse people. But when I look at it, our repeat purchases are better than ever. And so I look at that trend, and I'm like, that is very, very encouraging, as far as I'm concerned. That's very interesting and very important.

All right, absolutely.

That's something that, David, we're looking at every day.

Right. A lot of people in the industry are talking about the cost of online advertising, paid search going up.

Are you talking inflation?

Yes. Something like that. Are you seeing that? Or are you finding ways to get around that? Any kind of color there?

Yes. You know, it's there somewhere. It's not radical. It's in pockets of this inflation. In fact, I think there's been a little relief since the fourth quarter ended. And we're back down to a bit more reasonable. But with all that and having said all that, we still have figured out how to drive the cost down. So if these advertising partners -- if that's what you want to call them -- are trying to get more out of us, I'll tell you, David, if it doesn't make sense, we don't do it. So inflation's one thing, but that's a good way for them to lose customers. And so, it has not affected us. It's there. I see it. We negotiate it. We moan about it once in a while. It's not major. But again, look at those numbers. I'm really pleased at 14.92. You know, if you look at some of our better competitors out there right now -- when I say better, bigger -- and I really like Overstock a lot, don't get me wrong, but, you know, they increased their cost to acquire -- I think their cost to acquire is now well over 18 bucks. And so, you know, we didn't need to do that. And we've been able to grow at a controlled, fair, I think, robust rate without having to deal with any of this inflation in advertising. Just being smarter at what we do.

Right. That's since you've come on board, so.

And the trend's been, you know, pretty consistent.

And I'll ask Liz a question. Hello, Liz.

Hi, David.

If we looked at Q&A -- no, excuse me, SG&A, excluding the advertising, how much of that -- or maybe all of it -- is reflective of the added cost of being public and, I suppose, the cost to hire you, and whatever?

Thank you. I know, I feel I'm taking responsibility for the step-up in expenses already. Are you asking what would be attributable to the personnel and the public aspect of running the Company?

Well, just in terms of how much of the increase, as a percentage of sales year-over-year would be attributable to those costs then?

It's really in the 2 buckets. It, quite frankly, is in those costs end, and as Adam, you know been eloquently described the advertising. And so the difference is we're looking up at the expenses on a kind of a year-on-year basis. There's a pretty marked step-up in the cost of personnel, and therefore, as a percent of sales. And I think it was Richard, and David touched on it also a little earlier, about the margin expansion and the ability to lever, and you know, where do those gross margins stop? We're, you know, extremely optimistic in that regard because we think we have a model that will turn in margin and will continue to expand, you know, beyond kind of the levels that have been visible today. And basically, you know, once you've got your infrastructure and your establishment in place, I think the growth of the top line will allow us to deliver and add to the bottom line.

Hold on a second. Hello?

Hi.

Yes. Okay, so, as we look at the back half of next year, we should see moderation in those trends because -- ?

Yes, exactly. And that's driven a function of the top line, and also some of the initiatives and the cost on the expense line.

Right, right. Are you still planning to change your definition of gross margin some time this year or not?

Definition with regard to fulfillment?

What were you thinking?

Yes, yes.

The fulfillment aspect? Yes, we'll be complying with, you know, normal standards in terms of gross margin. And just by, you know definition of the relationship, the monies that we've paying to PC Mall will go into, will actually eliminate and we'll be developing our own warehouse. And that will show in our SG&A expenses and will not roll through the gross margin. And so that's a pick up. It's kind of a geography issue. But there are besides that aspect, I think, you know with our vendor relationships and some of the other initiatives we've got in place, we're expecting the margin, the gross margin to step up during the year.

Right. So I guess we'll see some of that move in the first quarter and then fully by the end of the first quarter?

We haven't anticipated that aspect to move significantly in the first quarter because we're looking toward the rest for that -- for that change in the geography.

Okay. There's some discussion, obviously, in the industry about expensing stock options starting back half of the year. What's your view there? How much might we want to put into our model, et cetera?

Yes. The forecast that Adam had talked about had not contemplated the affect of expensing stock options. And I'm sure pretty familiar with. There's, you know, couple, 3 different alternatives to pursue in terms of, you know, contemplating or determining what that charge might be. Candidly, we haven't concluded on which approach we might take. And, therefore, I apologize. I can't give you guidance as today what that might effect might be as we expense them. And, so don't have that baked into our numbers.

Okay. That's fine. On the gross margin line, you had indicated you had increased some selective promotions. Could you tell us a little bit more about that?

Yes. I just want to make sure I got it, Rich. Sorry to be -- if you could just say it one more time.

Somewhere in here, it sounds like there was some incremental promotional expense with respect to -- how it fell out on the gross margin line as opposed to the advertising line. I'm wondering what within a gross profit line was added or from a promotional standpoint during the quarter.

So I -- again, so I'm going to restate it just so I make sure I nail this thing here. You're talking about the combination of the gross margin and the promotion at the same time?

I'm talking about the gross profit of 8.6 percent --

Right.

-- would have included in the cost of goods sold some promotional expenses.

I believe that -- that there's multiple elements to promotion. There's the promotion that we do we spend direct dollars on for advertising promotion. And then there's the, let's call it promotional pricing that we do. And the promotional pricing that we do is part of that. If you do look at that, the promotional pricing that we did in this Q4 is definitely less than what we did a year ago in Q4. So we've been able to also be more efficient in that area. Our gross margin as a percent of sales was higher year-over-year in that same period. So I think the combination of the 2 is very important. I think, offers, offers, offers are great, especially when you're backing advertising dollars behind it.

I guess I was referring to quarter-to-quarter you had indicated and definitely was down. And I'm wondering what -- what was different versus last quarter specifically that you did.

I'm sorry. So you're talking about third quarter?

Yes.

Yes. I mean, so we had -- we had less, again, promotional activities. We had less rebates or coupons with regard to the products. We do that at that fourth quarter period because it's an efficient time to acquire customers at an affordable rate. So it was the combination of the 2, which is really promotion.

So it's all kind of rebate related?

Yes. That's -- most of that in that gross margin is rebate related. Rebate or what we would call coupons.

Okay. So there's nothing with respect to, like, shipping or anything?

No. The shipping promotion's been pretty much staying the same.

Right.

It hasn't changed. And I -- and, you know, you brought that up. You know, I played around a little bit with that and realized it wasn't a worthy use of, let's call it advertising dollars. So I left freight alone for the most part.

Got it. And then, as you look back on your new categories that you've added, not only in the past quarter, but let's say in just the past year, any, you know, surprises one way or the other in terms of customer response?

Rich, I'm trying to not be a pain in the neck, but I'm not actually hearing what you're saying, so.

The new category that you've added the past year.

Right.

Right. And there's been a number of them.

Right.

Have there -- I'm sure there've been, you know, some surprises versus what you might have expected and wondering what some of those surprises may have been, and you know, whether it's been above or below. I mean, what have you learned?

Well, it's a fun question, then. The fun part of that question is that we've been very pleased with all the categories we've gotten into. Remember, we're starting from a very large base with the original -- the computer hardware, software category. But consumer electronics has really, really grown rapidly. We're thrilled about that. We're thrilled about that because the average order value is high. The gross margin dollars per order is high. And, you know, that's an area of focus. All the other categories that we talked about -- watches and jewelry, apparel, have higher gross margins and are growing at a rapid rate, albeit, they're small as a percentage of sales, they're definitely adding to the mix and they're adding to the change in the mix from getting away from the dependence on just computers. And, really, now that we're down to about 60 percent as a total of our computer sales and that continues to decline, I think we're in good shape. I think we're in good shape to be able to enhance our gross margin percents. The categories we're in seem to be doing fine.

Last question, I promise. These new categories, and your plans going forward, will this shift at all the percent of merchandise that you're selling that is brand new versus, I don't know, end of life, or how -- whatever else you want to call it?

Yes. No, I mean, it could. So we've been -- I think we've maybe hinted along the way with you guys what our mix of new to closeout/refurb is. And it's been living now at about the 70 percent new, 30 percent closeout/refurb. And that fluctuates depending on the deals we have. I don't think that any of this is going to change radically. I thought -- I think they all have their own elements of closeouts and refurbs. And I think that mix should be in that vicinity, probably somewhere between 60 to 70 percent being the new products and the rest being the closeouts and refurbs. We like that. We like that the refurbs and closeouts bring in the masses because of the prices, they get great deals. It makes them come to a site more often. But when we sell the new, latest, greatest stuff, that's how we get them to come back time and time again. We're a regular supplier of all their products.

Okay. Thanks, very much. Sorry for all the question.

No, they're good questions. I don't know if I'm answering all your stuff. And if I'm not, let's get back together, but, you know, it is what it is. I'm trying to be as clear with you as I can.

No, I appreciate it. It's very helpful. Okay.

Thank you.

Thank you, very much, sir. Ladies and gentlemen, your next question comes from a follow up from Richard Fetico of Merriman and Company. Please proceed.

Hi, guys. I was just wondering, any update on the share distribution from your parent company mall, PC Mall?

Yes. Let's actually talk about that for a second. I knew that would probably come up today. And I'm sure it's something you guys have all been thinking about. But, if you were talking about the timing of the spin, if that's what you're alluding to?

Yes. I was hoping the timing and anything else that you need to -- that we need to know about that.

Well, I'll tell you what I can tell you here. The timing of the spin is really in the control of PC Mall. They control this area and this issue. And more appropriately, it should be addressed to and by PC Mall. Their earnings call is scheduled for tomorrow at about 5 p.m. Eastern Standard time. And we would really feel more comfortable and appreciate that if you have question and you want it answered, it might be best to be served by calling them and participating in their call. Their more than welcome to talk to you about that then. But it's really -- it probably inappropriate for us to talk about it.

In the meantime, we've been adding, as we've been talking through today's script, and also in our press release, adding more people. We added a CFO, we added purchasing people. We talked about last call ahead of logistics that's helping us kind of full-time run us through that transition period. We just leased a place in Memphis, Tennessee, a warehouse that's being built out. So, you know, for the eCOST team, nothing's changed. You know, we're going full hog to separate and build our team out and do what needs to be done. We regard to the intricacies of that, I think, it'd be best for you to talk to PC Mall, without shloughing (ph) that question off too much, I think it'd just be fair to our parents.

Okay. That's fair enough. And then, now that you're sort of entering the transitional period where you're trying to sort of peel off PC Mall in terms of the warehouse and back-end systems, how do you see that coming along? You mentioned that you might be up and running in the new warehouse by end of the first quarter. And I understand that PC Mall, right now, charges you for the -- the, I guess, shipping and handling, processing of the orders, rather, currently. And at the point that you peel off and you start using your own distribution center, will those charges stop, and how will that, you know, difference?

Yes. That's a good question. And we might have also talked about this before. But, you know, right now they charge us a fee. They do -- these guys do a great job for us in managing that process for us and shipping our products. We work very closely in that area, but, the minute that that service goes away and we do it on a self-sufficient basis that fee they're charging is gone and now it comes down to us being able to manage that at the same, if not better, rate. And so, that's what we're working on and that's what we're focused on. Does that answer your question?

Yes, it did. And then, finally, I think you mentioned at that point, or in the past, you mentioned at that point, you will also start breaking out the fulfillment costs out of the cost of goods sold and, you know, putting them into operating expenses. Is that still the intention?

Yes. If the geography, you know, where to look at it. Maybe Liz can address that in more detail, but that's definitely -- once we take it over completely, it doesn't live up in that -- in gross margins. Liz any other things to add?

I think that's well said.

Okay. Thanks, guys.

Thank you, very much, sir. Again, ladies and gentlemen, if you have a question, please key star, 1 now. Your next question comes as another follow up from the line of Tony Frestani of Astro Capital Management. Please proceed, sir.

Hi. Thank you. Adam, I just have 2 additional question. The first one is about, I guess, the eCOST brand. You know, your larger, kind of competitor and in the same category, has been very aggressive, you know, national advertising, et cetera. You know, you not obviously to that scale. But what are your thoughts and how do you measure the eCOST brand? And, you know, how important do you think that is going forward?

Well, when you talk about a competitor, are you talking Overstock?

I'm talking about Overstock, I guess, you know what I'm saying, the big O and all the advertising they're doing. And, you know, they're growing at a pretty -- growth, I guess, has maybe accelerated.

Yes. No, you know I go back to that. Let's talk about that. You know, I really like those guys a lot and I like what they've done except that I look at our metrics and I look at their metrics. And, you know, they're spending more money on advertising as a percent of sales. They're actually spending more money to acquire customers than they have in the past. So with the TV advertising, I imagine it's helping them build their brand, but it's also costing them. And it comes back to can they earn that money back over time from those customers? We have been fortunate enough to really focus outside of this television or mass media programs to be more direct, drive our cost of acquisition down, and try and create a world were, if we can have a gross margin per order spread that's higher than our cost to acquire, we start at a much better point in exploiting that customer.

The, kind of, the monkey's off our back if we make money on the initial -- from a variable basis on that initial order. So, you know, is TV a good thing to do? Is that in the plans? Is that something we want to do? Oh, sure, it's there. But first things first. I'm no where near ready to do that until I've extinguished and gone through all the wonderful elements that are available for us at a much more targeted rate, much more targeted way to get to customers. And, you know, I do think if I were to do TV tomorrow, although it would probably have much more of a direct marketing flair to it, and hopefully with more help from our vendor partners, the cost to acquire would probably go up from doing that. So, I'm just ready for that yet. The time will tell, and there'll be maybe a moment in time where that happens but it's not today.

Okay. And second question is -- I know you gave 2005 guidance of 50 percent growth in revenue, et cetera. How's the tone of business, though for January, and now half way into February as you're starting out the new year?

Yes. So, let's go back to that. You know, we don't -- and, again, not to be short or anything. We don't -- we don't normally give interim period information. And, in fact, the directional information we gave you, which was, again, our toe in the water at taking a crack at this. We -- we're trying to give you a feel for where we are for the year. I don't know if we're ready to be precise yet exactly what our quarter's going to be, both from a top and bottom line, so I think we've given you enough information to say, look, we're going to grow the business at 50 percent for the year. We're going to probably lose some money in the first half with making money in the second half. And when you look at the full year, we plan to make money for the full year. You know we're coming off a fourth quarter that was a very good fourth quarter. And most companies don't -- don't increase sequentially after the fourth quarter. We've been fortunate enough to do that in the past.

Okay. Thanks.

That could happen, but, you know, it's not necessarily, you know, super likely that that can happen. So -- so, so, you know, that's kind of my answer. You have an understanding from us from our direction that first quarter's not going to be the profitable quarter for us. That's going to really come a little later.

Okay. Thank you, very much.

But it's truly -- it's truly an investment in what we're doing to get to the promised land.

Sure. I mean, the reason I asked is there's been some reports that, you know, Overstock had an acceleration, you know, in web traffic, et cetera, in the -- in the, you know early part of this quarter. And I was just wondering if you're kind of, you know, seeing good growth early on, or maybe, that's a competitive threat to you. I was just trying to kind of flush that out a little bit. But 50 percent-plus growth for the year is still very good. And it's worth waiting for. Thank you, Adam.

Thank you, very much, sir. Ladies and gentlemen, that concludes our Q&A session for today. I'd like to turn it back over to our speakers for any closing remarks.

Back to us, no more questions? That was too much fun. But anyway -- first of all, thanks, again, for joining us on our -- on our, you know, second public conference call. I've been -- I've been very excited about the year. We talked about our results. And we appreciate everybody's support. And, you know, we're in to grow this business. We talked about our growth from a top line. We talked about our ability to want to make money. And I think we've given more, probably, directional advice than we normally have, which I'm hoping is pleasing the investor community a little bit because you get to see where our head's at and where Management believes we can be. So, having said that, once again, I say thank you. And thanks for the support. Anything else? Then that's it for the call for today. Thanks, again, folks.

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