PFSweb Inc (PFSW) 2005 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Quarter 2005 eCOST.com Incorporated Earnings Conference Call. My name is Christine, and I'll be your call coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of today's conference.

[Operator Instructions]

I would now like to turn the conference over to your host for today's conference, Liz Murray, Executive Vice President and Chief Financial Officer. Please proceed.

Thank you. Good afternoon, and welcome to the eCOST first quarter 2005 earnings call. With me on the call today is Adam Shaffer, chairman and CEO.

Before I turn the call over to Adam for his opening remarks, 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 Securities 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 the factors that could cause such differences can be found in our first quarter earnings release dated today, as well as the risk factors and MD&A sections in our recent SEC filings. Adam?

Thanks, Liz. Thank you all for joining us today for our first quarter 2005 earnings call.

Before we start the first quarter review, I'm pleased to report that as of April 11th, eCOST has completed the spin-off from our former parent PC Mall, and we now are operating as an independent, stand-alone company.

We've also completed the build out of our new distribution center in Memphis, Tennessee near the FedEx shipping hub, and are operational and have been shipping products to our customers since the spin-off.

This was a transition quarter for us, and results were somewhat mixed as we prepare for the separation from our former parent PC Mall. Much energies were spent in transitioning, hiring and developing staff to undertake many of the functions previously performed by PC Mall.

The most significant task was completing the build-out of the Memphis warehouse facility, receiving inventory and product to customers from our new distribution site.

Along with that was the transition of our technology systems in support of these tasks. These critical initiatives consumed much of our time and attention.

As with many transitions, the spin-off process was challenging, and the business growth and gross margins suffered as a consequence of these distractions.

However, it was critical that the significant focus and attentions were applied to this important milestone. We've made a lot of progress, but April was an equally challenging month, as we continue to work through the separation.

We are now in May, and are now beginning to see some favorable indicators, and are looking forward to improvements in these areas for the following months.

As part of the transition to become a stand-alone, or in becoming a stand-alone company, we need to hire and develop in areas that were formerly serviced by our former parent, including purchasing, warehousing, fulfillment, accounting, and other administrative functions.

As of April 11th, we have hired staff for these key areas with personnel, either originally from PC Mall, or with outside people with relevant industry experience. We also intend to hire additional experienced merchandisers as we move into new categories, and also additional administrative and support personnel.

Our year-over-year growth, although still strong, slowed during this period. The separation of systems from the parent required the addition of new servers, conversion, and testing. This was a substantial undertaking, which caused some achieving problems, which at times disrupted site availability and efficiency.

This resulted in consumer sales loss and some ad-spend inefficiencies. On the other hand, sales through our business group remained strong, and therefore became a larger percentage of our sales for the period.

We are now refocused on addressing the specific operating areas.

Now, for the first quarter results: we continue to enjoy rapid growth of our business with the net sales for the quarter increasing 44% to $55.1 million from $38.2 million in the first quarter of 2004.

We are pleased with the growth in our customer base. New customer additions for the quarter were 144,000, and our overall customer base now stands at over 1.2 million customers served, which is up 53% compared to our overall customer base a year ago during the same period.

This provides with us a strong foundation for growth, and we believe our targeted approach to advertising along with the growing acceptance of the eCOST brand, attributed to the rapid growth of our customer base.

We continue to achieve a positive spread between our average gross margin dollars per order, and our cost to acquire a new customer. Our cost to acquire new customer -- calculated as total advertising dollars spent in the period, divided by new customers added in the period -- was $16.23.

Down from $17.89 compared to the same quarter a year ago and up from $14.93 from the fourth quarter 2004.

Although we didn't introduce any new product categories this quarter, we did spend much of our product focus this quarter expanding and enhancing our current product categories as we continue to add new brands and products regularly.

We have been pleased with our new cellular store as we have re-merchandised this area, add a new products and services and are experiencing strong growth in the category.

Affordable and popular Bluetooth technology accessories help lead the growth along with our new cellular phone and service offering whereby customers have the ability to shop for a cellular phone and service plan for most of the major service providers and activate online.

We also continue to see growth in the electronics category as Flat Panel TV prices continue to become more affordable to a wider audience with prices with certain 30-inch Flat Panel LCD's during the quarter selling below $995.

We also continue to benefit from the introduction of new technology including products like the Apple iPod, the ZenMicro MP3 Player, XM and Sirius Satellite Radio Tuners and Accessories.

We are pleased with the vendor transition and maintain relationships with most of the important suppliers including authorizations from Apple and Hewlett Packard.

We are also excited about the changes we have made and continue to make to our apparel and accessories category, as we have added seasoned merchant to our staff who have relevant experience in the newer categories we are developing.

We've also began re-merchandising these areas and have been adding and plan to add more branded products including popular name brand jeans, tops, and sunglasses.

Although consumer sales were lower than we had forecasted during the quarter, we continue to see year-over-year growth in all product categories with year-over-year triple digit growth in apparel, accessory, cellular, home electronics, housewares, and video games.

With the rapid growth of the new categories, our product sales mix continues to shift.

Computer hardware and software this quarter represents approximately 68% of our total product sales, which is down from approximately 76% compared to the same period a year ago, and up from the fourth quarter of approximately 60%, due mainly the growth in our business sales.

Although there is rapid growth in the other categories, the computer hardware and software category, because of its large average selling price compared to the other categories continues to be the largest category.

The average order value was $302 for the quarter, flat sequentially and down from $333 compared to the same period a year ago.

Computers, along with electronics and digital imaging, continue to be an efficient product category to acquire new customers, which we then leverage across our other categories. We feel that technology buyers tend to be Internet-savvy, higher-income individuals who spend more time online and purchased more products online in many categories.

Our ability to acquire technology customers and leverage them across our other product offerings is an efficient formula as we launch new categories. We feel this aspect further differentiates us from our competitors.

As I have said previously, an area of continued focus going forward is expanding our product depth and breadth as we continue to leverage our growing customer base, encouraging repeat purchases, additional traffic, customers and sales.

In addition to the continued development of our current categories, we plan to continue our strategy of launching new categories and services throughout the year.

As we have mentioned last earnings call, some of the new categories under consideration this year include health and fitness, gifts and gadgets, VoIP telephony, music, books, and pet supplies.

The new categories we have added and plan to add carry higher gross margins than our original category of computer hardware and software, which we feel should be accretive to overall gross margins.

In addition to adding more products and product categories, we continue to develop additional service offerings to provide us more ways to enhance our relationship with our customers and giving them more reasons to buy from us more often. These offerings should also result in higher gross margins.

During the quarter, we launched the eCOST private label credit card, whereby customers can easily sign up on our site for this card during the purchase process, and based on their credit history get instant approval and place their orders on our site at that same moment, and while placing their orders received favorable payment terms. For instance, no payments for six months interest free.

This program also have the potential to reduce our credit card processing costs as more customers adopt this payment method.

We continue to leverage a proprietary shopping platform Bargain Countdown throughout the site. Bargain Countdown has become a popular, cool, and exciting way to shop by offering limited quality and hard define products and deals for a limited time within a graphical and easy-to-use environment.

In addition to our traditional Bargain Countdown shopping site, we have now introduced other vertical Bargain Countdowns, including apparel and accessories countdown, watches and jewelry countdown, and clearance countdown.

At the end of December, we launched our fee-based membership club based on this proprietary platform called the Bargain Countdown Platinum Club.

The Bargain Countdown Platinum Club is a private members-only countdown, which offers special products and deals not available on our public site. We've been pleased with the performance to date of our membership club, now with almost 3,000 members.

We will focus on this area because we believe in the strategic importance. We have had positive feedback from our customers, and we continue to add more features and benefits to the club throughout the year.

In the quarter, we also launched a new service targeted to Spanish-speaking customers called eCOST Espanol, whereby customers are offered a unique phone number to call if they choose to speak to and inquire about products with a fluent Spanish-speaking customer service representative, who are available to support this effort.

We are pleased to offer this service and feel that this is an important and growing demographic to address.

We are also leveraging our brand, customers and site traffic by offering visitors special after-the-sale offers to eCOST.com private label sites posted by third-party affiliates, which are attractive from a margin standpoint.

As we continue to expand the customer base and develop our brand by being an all-inclusive destination shopping site, our ability to leverage these assets beyond products creates the opportunity for margin expansion going forward.

Our growth strategy remains consistent with our initial plan. Leverage our existing customer base across all our product and service categories.

Continue to add new product categories and service, which carry higher gross margins and our original category of computer hardware and software.

Attract new customers by adding new categories and advertising and developing the brand.

Focus on profitability with sales growth being important.

This is as -- the business is an exciting phase. As we enter into this new quarter as a stand-alone independent company, we have made substantial progress in developing our infrastructure, including the opening our own distribution center in Memphis, Tennessee to the hiring and developing additional personnel in the purchasing, merchandising, accounting, and administrative areas.

The first quarter as well as April has been transition months. The spin-off and operational separation including a systems transition, warehouse build-out, and administrative hand-over, which deserved and required keen attention and focus, which affected the day-to-day metrics and operational business including sales growth, expenses, and gross margin.

As we are moving through the transition, and are starting to experience positive indicators, we remain optimistic about our business outlook for 2005 and beyond. We are coming through a transition that affects two quarters.

Moving forward, we plan to further develop our product and service offerings and will invest in building our customer base and the eCOST.com brand.

We expect these initiatives to drive topline growth and margin expansion. The growth and convenience of on-line shopping trends positively for continued sales expansion for eCOST and gaining market share.

We're focused and committed to the business fundamentals including execution, increasing our customer base, developing brand awareness, and gross margin expansion. And, I believe we have the building blocks to achieve success.

Having said that, I would like to turn the call over to Liz, who will provide the financial results for the first quarter. Liz?

Thanks, Adam. Sales for the 2005 were 55.1 million compared to 38.2 million in the prior year comparable quarter representing an increase of 44%.

Sales decreased sequentially by approximately 5% partially due to seasonality, but more particularly to the transition initiative that received the focus of our attention.

Looking tat mix, consumer sales for the first quarter in 2005 were 63% compared to 69% of our total net sales in the fourth quarter, 2004.

The business sales in the first quarter, which make up the balance of 37% grew approximately 11% sequentially. Net loss for the quarter was 1.7 million, equivalent to a loss of $0.10 per share.

The net loss in the fourth quarter 2004 was 301,000 equal to a loss per share of a penny. For the first quarter last year approximated break even.

Gross profit for the first quarter 2005 was 3.7 million, compared to 3.5 million in the comparable prior year quarter and 5 million in the fourth quarter prior year.

Gross profit margin as percent of sales was 6.8% in the first quarter compared to 9% in the same quarter prior year and 8.6% in the fourth quarter.

The Company's gross profit percentage will likely vary from quarter-to-quarter, depending on the product mix, pricing strategies, key vendor support program, and other factors.

The margins' loss this quarter can be attributable to the lower consumer sales as a percent of total sales, business sales carrying a lower gross margin percent and consumer and this, in turn, affected the product mix and the related vendor marketing support program.

Additionally, the freight costs were higher due to a shift in shipping carriers used in the quarter, which affected the margins by less than 0.5%.

SG&A expenses for the first quarter 2005, were 6.6 million equivalent to 12% of the percentage of sales. Expenses grew 1 million sequentially, in line with the expectations and compared to 9.6% in the fourth quarter.

SG&A expenses in the first quarter prior year were $3.5 million, equal to 9% of sales.

The growth in the year is predominantly within the areas of advertising and personnel costs. The additional expenses reflect the extra cost of operating through our transition to becoming a stand-alone company and public company cost.

Advertising expenses remained within the range of 3.4% to 3.6% for all three comparable quarters.

At the end of the first quarter, the company had cash and cash equivalence in short-term investments of approximately 11 million. Including the balance of 3.5 million due from affiliate, the total balance is 14.5 million.

On the same basis, this compares to 16.6 million at the end of the fourth quarter, down by approximately 2.1 million.

During the quarter, certain of our receivable funds, including some credit card moneys were paid to PC Mall on our behalf.

We added approximately 1.4 million in capital expenditures in the first quarter, largely associated with the system separation and the warehouse build-out.

We have no debts and have a borrowing facility in place of up to 15 million. The amount of funds available under this line is based on inventory levels and receivables balances.

Looking forward to the second quarter in 2005, we're now beginning to experience operational improvements as we work through the transition. It will continue to challenge us for the spin-off on April 11th. And so we're looking at second quarter as another transition quarter.

We believe that sale will be lower than the first quarter based upon a growth rate, which is less than the overall year range estimate.

We're expecting losses in the second quarter equal or slightly lower than the first quarter. Given our first quarter results and their expectations from the second quarter, we're now estimating sales to grow approximately 40% to 45% for the year and their estimating losses for the year overall.

We continue to believe we'll achieve profitability in the latter half of 2005 based upon operating efficiencies and gross margin expansion, which Adam outlined.

That concludes management's prepared remarks, and I'll now turn the call back to the operator for Q&A.

[Operator Instructions]

Your first question comes from Richard Fetyko of Merriman Curhan Ford. Please proceed.

Thanks. Thanks for taking my questions. On the gross margin side, guys, it seems like a pretty big debt quarter-over-quarter and year-over-year, even. Could you give us a little more color as to what extent it was as a mixture between consumer and business sales and any other trans in terms of promotional being promotional on the pricing side?

Means you get to the new category, we would expect that gross margin to improve and you have been getting to new categories yet to gross margins were sort of disappointing.

And then any expenses related to transition -- I know there is, obviously, expenses related to the transition to your own warehouse, but were there any one-time expenses as well?

I'll try and knock the gross margin question out for you. You know, you get a few moving parts in that gross margin. When you look at the shift in the mix, that's going to create a bit of a drop in gross margin.

I mean, if you remember, notebooks last quarter in the fourth quarter were about 60% of our total. And because the business sales grew faster than the consumer sales, it kind of changed the product mix where they were more focused on notebook computers.

So, it picked up that area a bit and got a compressed gross margin percents in that area. So, I think we suffered from that a little bit.

On the one-time costs, so I would yes, we did experience some one-time costs in the quarter. Some of those related to recruitment costs and always largely fall into the bucket of any inefficiency as we train staff develop the warehouse.

And I would put that in the order of half a million, Richard.

Yes. On the growth margin -- one more thing, how did the percentage change between consumers versus business again? I think it's 63% consumer this year in the first quarter, 69% a year ago?

Yes.

And so that -- how's that kind of impact on -- on dramatic impact on gross margins?

Rick, yes two, things, the business sales have higher average order values and but they have low gross margin percents. Consumer sales have higher gross margin percentages associated with it. And so the business sales actually came on, you know, right at plan.

So, that's been --, we're pleased about that. But we have that shortfall in consumer sales.

Okay. And what should we expect in terms of gross margins for the rest of the year?

I mean our plan is to increase gross margins. I mean, I think this was a bit of an anomaly as far as I'm concerned. Lizzie could chime in on that.

But, we're taking the steps that we needed to take in all of the areas of gross margin, will gross margins. What the percentage would be, I'm not exactly sure, it would hate to pin myself do it. But the plan is first to get better for the quarter.

Okay. Thanks.

And once again ladies and gentlemen, press "star" followed to any audio question and your next question comes from Tony Tristani at Halpern Capital Management. Please proceed.

Hi. Thank you. Maybe longer term, we've had declining gross margins now for two quarters in a row and your operating margins minus 5%.

Obviously, the transition had an impact, but maybe there's a good time to remind us longer term what your business model is and where you think you can take operating margins, because, you know, just looking at your numbers, it looks like there's not a business model that's sustainable here.

So, maybe you can just kind of remind us where you think you can take this. I mean overstock has gross margins of 15 going to 17. Amazon, I think, is close to 20, in the 20's or so. And then we're sitting in here at, 8% last quarter, 7% this quarter -- can you take us out, give us a feel where you plan on taking this? Thank you.

I think, so, if you look longer term that, again, I'm not going to address the next quarter. I don't want to be precise as that.

But, longer term, I mean, we've always believed and we feel that this is a strong operating model. We do -- we are able to acquire customers at an affordable rate and the gross margin expansion is there with all of the things that we're doing.

I think we just took a little bit of a step backwards with regard to that gross margin percent in this quarter because of the multiple moving parts and with the business side is hitting exactly where we wanted it to hit but the consumer is kind of falling short. I think, that was somewhat self-inflicted there and by all of the things that were happening. And long term, our gross margin should be -- if you're looking at years out, overstock or better as far as, I see it. There's no reason.

You've got comparables out there that are doing that and again we're able to acquire those customers, bring them in, and leverage those other categories and we're spending a lot of time on this category that carry higher gross margins to get us there.

Another question is now that you've had some experience with your new warehouse and doing your own fulfillment, are you confident that you can do better on the cost side than the deal you were getting with PC Mall?

Our goal is to do better than we were doing with PC Mall. At the beginning, you have your startup, so you have a bunch of new people in there and maybe new people we transferred over to PC Mall.

And, you kind of working through all of the new intricacies of that, but ultimately our plan focused on that strategy has got to be lower. We got to drive that cost down. That's our -- that's the main focus of ours.

So your fulfillment costs moving forward, will fall on the SG&A, if I have that correct? And before they were in your gross profit line?

Yes. Let's talk about that geography. I'll pass it to Liz but you have some thoughts on that I'm telling.

Yes. We have in our private filings outlined, we would disclose those fulfillment charges as part of our SG&A. And during the last call, I had mentioned that that would be the approach that we would take having looked at some of the costs, some of them have them in SG&A and some of the costs have them in the gross profits -- different in the gross profit.

So, either way, I think, the basis of the geography aside, we're going be focused on improving our gross margin. And as Adam said, we're going to step back off to where we were before and then expand upon that base to a number of initiatives and so all together, we think the cost line is going to be last.

On the fulfillment side, it's 1% to 2% improvement on that alone.

Can you repeat that. Just because the costs are moved from one line to the other, it will improve 1% to 2%, or are you saying overall, long-term, you can reduce your actual fulfillment cost 1% to 2% over what you're doing with PC Mall?

Some on the just to say not the fulfillment is 1% to 2%.

So, if we take that out of the cost of goods sold that would fall into SG&A. And that's a geography issue. But more over, our endeavors are to improve that fulfillment cost by that amount also. Throughout the -.

Okay.

Through the margin, whether it falls in gross margin or operating margin.

Okay. Thank you.

And your next comes from RJ Hottovy (ph) of William Blair and Company. Please proceed.

Hi, Adam. Hi, Liz.

Hi, RJ.

A couple of questions for you, first one I was wondering, if you can comment on the customer acquisition trends that you're seeing, namely the repeat customers there.

Secondly, I wanted to see some comment on your ability to find an attractive vendor posed from the eCOST or PC Mall. And finally, I was wondering you could update us on the CapEx plan for this year?

Well, let's me take this first -- I want to make sure I got that vendor's question right. So, I got the acquisition repeat customers question. Tell me about that vendor question?

just kind of looking for any kind of update not as you do it separate from PC Mall, how you've been able to acquire or bring in new vendors prior to the previous relationships that you had established

That's great, RJ, that's a great question. So, we've been proud of what we've been able to accomplish and that was really where a lot of the focus was, when you look at what some of the things we were really focused on. We had, I don't know, 1100 to 1200 vendors in transition.

And we did a great job in transitioning most of the relevant relationships over. And -- we had marketing type relationships with them but the ability to buy direct from them was not there.

So, that's what we put in place during this time period and we've been very successful at that - to the point where we've also have authorizations from Hewlett-Packard and Apple, which we're very proud off to have those medallions. So, that part of it, I'm incredibly pleased and bullish.

On the customer acquisition repeat customers, when -- I'm going to do I think a better job next time. I have a lot of people asking me those types of question, including you. And I have some numbers that I've been putting together. I think it'll be a bit more detailed with our next time around.

But, what I can see from the trends is that the repeat buys where people who had placed orders, being it their second order or more from us has trended upwards.

So, without giving a specifics with the one I spend little more time on refining that detail it seems that the trend fourth quarter to first quarter has gotten better and gotten into the right direction with regard to repeat purchases.

Was there any impact from the new business customers you're bringing in that number?

The number would be a combined. So, I mean I would look at it both ways and then put a combined number together. But business customers do purchase more often. There's no doubt.

But, again, I haven't given you enough details to give you that. I am working on that for the next call.

Okay. And then Liz finally, do you have an update on the CapEx numbers for the year?

Yes. I'm holding with the estimate of $2.5 million for the year. We've spent about $1.5 million building out the warehouse and some of the equipment that goes with the systems separation.

There's some more to complete that task. And, then there is additional infrastructure, etcetera.

So, I think I believe $2.5 million is a pretty safe estimate for the year.

Okay. Thank you.

Thank you.

[Operator Instructions]. There is no audio question at this time.

Any other calls? Okay. So, we really appreciate everybody's participation in today's call. And we look forward to continue our execution and growing our business.

And, again, as we said, we remain optimistic on what we're doing and getting this past transition behind us. So any other words other than that? Thank you for your participation today.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.