PFSweb Inc (PFSW) 2006 Q4 法說會逐字稿

Good afternoon, everyone. My name is Mary, and I'll be your conference operator today. At this time, I would like to welcome everyone to the PFSweb's fourth quarter year-end earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer period. [OPERATOR INSTRUCTIONS] Thank you. It is now my pleasure to turn the floor over to your host, Todd Fromer of K -- KCSA. Sir, you may begin your conference.

Thank you, Mary. Good afternoon, everyone, and welcome to the PFSweb 2006 fourth quarter and year-end earnings conference call. Before we begin, I would like to note that matters discussed on this conference call consist of forward-looking information under the Private Securities Litigation Reform Act of 1995, and is subject to and involves risks and uncertainties which could cause actual results to differ materially from the forward-looking information. PFSweb's annual report on form 10K for the year-ended December 31, 2006, identifies certain factors that could cause actual results to differ materially from those projected in any forward-looking statements made, and investors are advised to review the annual report and the risk factors described therein.

These factors include: our ability to retain and expand relationships with existing clients and attract and implement new clients; our reliance on the fees generated by the transaction volume of product sales of our clients; our reliance on our clients projections or transaction volume or product sales; our dependence upon our agreements with IBM; our dependence upon our agreements with our major clients, our client mix, their business volumes and the seasonality of their business; our ability to finalize pending contracts; the impact of strategic alliances and acquisitions; trends in the market for our services; trends in e-commerce; whether we can continue and manage growth; changes in the trend toward outsourcing; increased competition; our ability to generate more revenue and achieve sustainable profitability; affects of changes in profit margins and customer and supplier concentration of our business; the unknown effects of possible system failures and rapid changes in technology; trends in government regulation both foreign and domestic; foreign currency risk and other risks of operating in foreign countries.

Potential litigation; our dependency on key personnel; the impact of new accounting standards and rules regarding revenue recognition; stock options and other matters; changes in accounting rules or the interpretations of those rules; our ability to raise additional capital or obtain additional financing; our ability and the ability of our subsidiaries to borrow under current financing arrangements and maintain compliance with debt covenants; relationship with and our guarantees of the certain liabilities and indebtedness of our subsidiaries; whether outstanding warrants issued in the product placement will be exercised in the future; the transition cost resulting from our merger with eCOST; our ability to successfully integrate eCOST into our business to achieve the anticipated benefits of the merger; eCOST potential indemnification obligations to its former parents; eCOST's ability to maintain existing and build new relationships with manufacturers and vendors and the success of its advertising markets efforts; and eCOST's ability to increase its sales revenue and sales margin and improve operating efficiencies.

PFSweb undertakes no obligation to update publicly any forward-looking statement for any reason, even if new information becomes available or other events occur in the future. There may be additional risks that we do not currently view as material or that are not presently known. It is now my pleasure to turn your call over to Mr. Mark Layton, Chairman and Chief Executive Officer of PFSweb. Mark, the floor is yours.

Thank you, Todd. Catch your breath there, and I'd like to add my welcome to everybody to the -- to our Q4 call and year-end conference today. Speaking on the call today will be: Mike Willoughby, President of our Services Division, and Tom Madden, our Chief Financial Officer. At the end of the call we'll be available for questions. During the call, we'll give you an overview of the Q4 results, as well as our full year 2006, and provide you some detailed information on each of the operating segments, and some financial guidance regarding our outlook for 2007.

Let me begin with recapping our results for the three months and year-ended December 31, 2006, which we released just a few minutes ago. In analyzing these results, I'd like to first point out to you that there are a couple of key points that I think are important considerations for you to evaluate in looking at our results for '06. First, as many of you are aware, back in February of 2006, we acquired the business eCOST.com via a merger transaction. At the time of the transaction, eCOST was a business experiencing certain financial constraints and other operating difficulties that were affecting its overall performance. Strategically, we believe then and we still strongly believe that PFSweb has the operational and technology infrastructure and the know-how that will allow eCOST.com to return to solid growth and improved operational performance, while also driving a better overall financial performance.

However, we spent most of 2006 completing significant integration activities. Our 2006 financial results reflect significant expense -- significant expenses related to that merger and the integration activities, and the large operating losses, which eCOST.com experienced during that transition, and from certain credit card fraudulent-related events that we've discussed on previous calls. We believe that the eCOST.com business is now stable, and that through our actions the operating losses of eCOST have been significantly reduced, but it's important as you look at our '06 results that you keep that transition period in mind.

Secondly, as you look at our results for '06, we undertook various actions to reduce the operating losses of the eCOST.com business, through a reduction of costs and a focus on higher gross margin revenue streams, which in many cases meant that we turned away revenue that we deemed unpalatable. We've been successful in dramatically reducing the breakeven point of the eCOST business. It's now our belief that eCOST can operate at breakeven with revenue levels of around $8.5 million per month and an adjusted gross margin of about 9%.

At this time, the run rate level of eCOST is at about $80 million annually, slightly below the breakeven level, and our gross margin is also slightly below the targeted range as well. While the eCOST.com business declined this past year in terms of top line results, we believe that the overall health and outlook of eCOST is much improved, as compared to the premerger period. However, we are required annually to complete an appraisal and evaluation of the intangible assets of each of our businesses, including eCOST. After that review, it was determined that the goodwill value of eCOST should be reduced by approximately $3.5 million to adjust it to its fair market value. This one-time, nonoperating, noncash charge was recorded in our Q4 results. So as you evaluate 2006, please keep these two points: one, the transition expenses and integration activities, and, secondly, this large noncash charge, as kind of reference point in looking at the '06 results.

So with that as a background, let me just give you a little bit of overview of the '06 financial results and Tom will give more detail going forward. First, on the eCOST side we've begun to show some stabilization in that business. The financial results for the fourth quarter really don't still fairly represent the tremendous changes and progresses -- progress that we've made during '06. We believe that the results in '07 for eCOST will be a much better guide as to the success of our turnaround program. This program includes: significant improvements to more accurately monitor inventory, conduct better service activities, has reduced the occurrence of fraudulent charges -- fraudulent credit card activity in the business, shipping fees have been -- transportation costs have been reduced, and, as I mentioned earlier, overhead costs are down as well. I'll get into a little bit more detail on some of the eCOST.com business segments later on the call, but we think '07 will be a much better year in terms of operating results for eCOST.

As you look at '06, financial results on the service fee segment side, and Mike will give you more details on this in a minute there's really nothing short of an exceptional year on our service fee business during 2006. Not only did we expand on a number of existing agreements with clients, we also signed a number of new clients in 2006. Our scale within the services segment continues to grow. During '06, we moved about $2.7 billion of merchandise over our infrastructure and technology platform. Our services segments, PFS and supplies distributors combined, also had what we believe to be outstanding financial performance during 2006 in the fourth quarter, doing EBITDA of about $2.2 million on an adjusted basis, and for the year, at about $12.2 million of EBITDA. Our quality of performance overall remains high, our financial foundation remains solid, and our outlook for the future continues to be exciting. Clearly, I'm very pleased with the overall progress and momentum within each of the business segments, and I look forward to seeing improvements in our financial results through 2007.

I want to take a moment to thank our entire team worldwide for their outstanding committment and efforts during an important and strategic, but also a challenging transition year for us at PFS. Let me now turn the call over to Mike for a couple of minutes, let him give you a few details on the service fee and supplies distributors segments of our businesses, or the services segments, and then I'll be back to give you a little bit more detail on the eCOST business. Michael.

Thank you, Mark. As I have done on previous calls, I'm going to refer to the supplies distributors and the service fee business collectively as our service fee business segment, as Mark alluded to just a moment ago. I do this because they are essentially the same operational business models, although they have a different financial model behind them. This quarter, we continued to experience a solid year for new business growth within our services business segment. PFSweb's service business segment is a recognized leader in the business process outsourcing market, and our customers choose us because of our reputation as a specialized global services provider, and we have a broad capacity to handle their needs. Our solutions aim to improve the quality, productivity, and the reliability of the global supply chain, inventory management and distribution for each of our key partners. A key reason for our success is not just our know-how, but also the scale of the business we operate.

As Mark mentioned earlier, our platform handled over $2.7 billion in merchandise sales in 2006. By operating at this high level, we're able to offer our clients a wide range of resources that would be totally cost prohibited for them to obtain and maintain on their own.

I'd like to now touch on several exciting new agreements that we announced since our last conference call. This year, we closed approximately 15 new contracts that are estimated to be valued at approximately $12 million in annual service fee revenue. This estimate is based on full implementation and current client projections. While we did recognize the benefit of certain of these contracts during calendar year 2006, other contracts are expected to become operational during the first several months of this year.

We're pleased with this level of new business that we've achieved, and as our list of clients grows with widely recognized reputable leading brands and companies, including the following. First Katun Corporation. Under our agreement with Katun, who is the world's leading alternative supplier to office equipment industry, we'll support their Canadian operations through a customized logistics and customer care solution out of our Toronto facilities. Specifically, these efforts include: inventory management, order fulfillment, traffic management and returns processing services. Katun was the second major announcement for our Canadian operations this year.

The first was our agreement to provide a comprehensive e-commerce solution throughout all of Canada for Roots. Roots is Canada's leading athletic lifestyle brand. As we announced in September, our expanded program for Roots has been a success and further strengthened our -- our partnership with Roots throughout North America. Considering the announcement of both of these agreements and the potential for additional new contracts in the near term, we needed to expand our Canadian headquarters and we moved to a new 22,000 square-foot facility. This new facility allows us to maintain a strategic location in the outskirts of Toronto. This new location features additional warehousing capacity and an additional 20 call center stations. These provide multilingual customer support to both the U.S. and the Canadian markets. By expanding this Toronto location and these new client agreements, we believe we will achieve greater scale of operation and improve our ability to offer world class services in Canada.

Now, moving on to some new agreements we have in the United States. We previously announced a five-year agreement with LEGO brand retail. Under the agreement we will serve as LEGO's fulfillment partner for all direct-to-consumer orders in North America. This includes orders through its website, shoplego.com, which according to Nielsen net ratings experienced an increase in online traffic of 120% during the fourth quarter of 2006, and the LEGO catalog which is sent to between between 750,000 and 1 million homes eight times a year. As part of this agreement, we'll be maintaining and tracking the inventory to support these outlets as one -- in one of our Memphis warehouses. As a global brand, LEGO is an exciting new partnership and we look forward to supporting their North American online and catalog sales, which are continually growing.

We also announced an agreement with Fathead, LLC, an official licenser of popular sports team memorabilia, including NASCAR, NFL, MBA and MLB. As part of this program, we're providing a complete order fulfillment solution that supports Fathead's online sales at fathead.com, including: order fulfillment, inventory management, distribution, returns processing and customer care services. Most recently, we announced an agreement with Riverbed Technology. They are a market leading provider of wide-area data services and they have continually drawn a lot of attention since their IPO in September of 2006. Since announcing this agreement, we started the implementation of a customs solution to support their global operations, and meet all of their supply chain and order fulfillment requirements from our Memphis location.

Due to our consistent flow of new business in the U.S, we recently finished expanding our customer care and distribution facilities in Plano, Texas, and Memphis, Tennessee. In addition to the expansion of our Canadian facility, this included expanding our customer service centers by 170 call seats, bringing the total number of customer care professionals to 480. We have 400 in Plano, and about 80 at our Memphis facility. We expect this steady flow of new business to continue into 2007, and currently, our pipeline of potential new business, including pending proposals, totals about $25 million in annual service fees. Now, after this summary of our service fee business opportunities and status, I'm going to turn the floor back over to Mark. Mark.

Thank you, Michael. Okay, let me go now and just provide you a little bit of update on the eCOST business. I gave you some results, but just to give you a few highlights on the progress that we've made with eCOST so far this year. As I've stated earlier, and we talked about on the last call, we achieved a major milestone this year with the completion of eCOST's integration into PFSweb in time for the 2006 holiday season. Overall we are pleased with the results with the fourth quarter. Growth still is an area we would like to invigorate more, but for the first holiday season, together with eCOST, I'm real happy with what the combined teams have been able to -- to put on the scoreboard for us.

In December, we launched a revamped website that has received very positive feedback from customers so far. This is really step one in a series of changes that will continue to happen to the site going forward, and there's just a lot of almost ongoing activity out there now in terms of improvements that we're making to the site. Some of the improvements that you've seen so far include: easier navigation and enhanced searchability of available products. Most notably, customers will notice easier access to about 36 exclusive offers and the daily bargain countdown link.

While we are pleased with the steps we've taken so far, as I mentioned we have plans to continue to make significant adjustments to the website throughout 2007, in order to enhance the overall shopping experience for our customers, and to allow us to begin to expand into other product categories, which was our original plan strategically with the business when we merged back in February of '06. These improvement plans include: increased rich content and product review integration, further improvements and enhancements to the navigation and search tools, a complete rework of the my account and shopping cart areas, and continued introduction of new payment processing options, all of which we're hopeful to get done in the first half of '07. As part of an ongoing effort, we recently signed a partnership with [Etilize], which is a company that specializes in rich product content on technology projects with e-commerce websites. As a result of this partnership and the development by our team of a new product that we call [on top partner connect], eCOST is in the process of dramatically increasing the number of SKUs that we list and then properly merchandise on -- on our site.

We're not more than 100,000 different SKU's that are appropriately merchandised on the site. When I say merchandised, we're talking about products that are automatically priced correctly to the margin goals that we have, that there are appropriate product descriptions, add-on product information, photos of the product out there on the site. This is one of the major challenges in terms of expanding the scale of products that we offer is to be certain that we can do it in a manner that's automated, so that we have the appropriate merchandising information that's necessary to give consumer buyers the data that they need to make an educated buying decision. Now, we expect the number of SKUs to continue to increase monthly as we introduce new products and new product categories and other nonmerchandise features to the site. These enhancements to the product listing features on the site will also increase the accuracy of new product search modules and improve the search capabilities for specific products. This new platform installed with the assistance of [inaudible] includes automated checks which tracks, monitors and records product data errors in depth and constantly helps us improve the available data on the site.

Additional during the past several months, and this is one of the things that was a key strategic element for us in terms of when we acquired the business, expanding eCOST, is that we successfully implemented several new virtual warehouse partnerships, which are a critical component to our ability to provide customers, not only the best shopping experience in competitive pricing, but also helping us limit our inventory exposure. And once again, using the on top partner connect technology that I just described, this is a critical enabling tool that allows us to scale the implementation of virtual warehouse partners and their corresponding product lines, particularly as we expand outside technology products. Expanded product offering -- offerings with minimized inventory exposure is a critical component to both our revenue growth and our gross profit -- gross profit improvement plans that we targeted for 2007.

During last quarter's conference call, I mentioned that we began the construction of a 6,200 square-foot multilingual customer call center in Manilla in the Philippines. This new facility was officially opened this morning, as the first PFSweb entity using this location, eCOST will now have a dedicated staff of highly-trained customer service representatives who will supplement our existing call center operations here in the U.S. Also, at this location, we plan on housing certain functional areas support personnel, as well with an eye towards reducing future operating costs. In addition, we've employed an expanded staff of web development professionals that will double the overall size of this part of our IT team, and this should allow us to move more quickly and cost effectively to address the numerous development plans that we have for, not only the eCOST site, but under the web commerce areas in the months to come.

Let me give you just a minute on some of the key operating metrics for eCOST this past quarter. As of the fourth quarter ended December 31, '06, eCOST had about 1.6 million total customers. That compares to about 1.4 million total customers in 2005. Active customers for the quarter ending December 31, '06, were about 287,000. That compared to about 468,000 for the same period last year. New customers for the fourth quarter of '06 totaled 29,915. That was compared to 71,000 for a year ago, and for the three months ended December 31, '06, eCOST reported a total of 74,000 orders shipped, with an average order value of about $272. That compares to about 115,000 orders that were shipped in 2005, with an average order value of about $374. Add expenses for the fourth quarter were $438,000, that compared to $1.4 million for the fourth quarter of 2005.

The cost to acquire a new customer for the fourth quarter of '06 was about $14.63. That compared to $19.39 in the same period a year ago. The cost to acquire a new customer is calculated by taking the total add expenses during a period and dividing it by the total number of new customers during that same period. As I've stated previously, we decreased significantly our spending on marketing advertising for eCOST during our restructuring efforts. We're now in the process of reevaluating and ramping up those efforts as we look into '07, now that we're operating on a very solid base of operations.

Now, let me turn the call over to Tom, who will give you some information on our financials for the fourth quarter and the full year of '06, and then I'll come back to give you a little bit of information about what we see for guidance for '07, and then to address questions. Tommy.

Thank you, Mark. First of all, before starting, I'd like to just note that PFSweb's 2006 results, unless otherwise stated, only include eCOST.com's operations from the point when the merger closed on February 1, 2006, through our December 31 year-end. Also, PFSweb's 2005 consolidated results do not include eCOST.com operations. Let me first start by providing a brief overview of our consolidated operating results for the quarter and year-ended December 31, 2006, and then provide some operating highlights for certain business segments, and then I'll follow that with some key balance sheet items as well. As reported in our press release issued this afternoon, our consolidated revenues for PFSweb for the quarter ended December 31, 2006, were $109 million, as compared to $83.4 million for the fourth quarter of 2005. Gross profit for the fourth quarter of 2006 was $9.8 million or 9% of net revenues, compared to $8.4 million or 10% of net revenues in the fourth quarter of 2005. Adjusted EBITDA, which is a key metric in evaluating our operational performance and potential, was $0.9 million for the December 2006 quarter, versus $2.7 million in the prior year. Excluding eCOST operations, adjusted EBITDA was $2.5 million for the fourth quarter of 2006, which was relatively consistent with the prior year period.

Net loss for the fourth quarter of 2006 was $6.5 million, or $0.14 per basic and diluted, share as compared to net income of $0.5 million, or $0.02 per basic and diluted share for the same period last year. Once again, excluding eCOST.com's operations for the current quarter, net loss was approximately $0.7 million, which was down approximately $1.1 million from the fourth quarter last year. The current year bottom line results for the December quarter include $200,000 of stock compensation-related expenses, which were zero in the prior year, as well as the $3.5 million one-time noncash goodwill charge for eCOST.com, which Mark discussed earlier, as well as increased D&A interest and tax costs from the prior year.

Now, turning to the results for the full year, our consolidated revenue for calendar year 2006 was $423.3 million, compared to $331.7 million in 2005. For comparability purposes, excluding eCOST.com, revenues for 2006 were $334.9 million, which was a slight increase over the prior year. Gross profit for the full year ended December 31, 2006, was $39.7 million or 9.4% of net revenues, compared to $3 -- $32.5 million or 9.8% of net revenues in 2005. Gross profit for the year in our service fee unit was 26.5% of service fee revenue, a slight improvement as compared to the gross margin of 25% of service fee revenue in 2005. Adjusted EBITDA for calendar year 2006 was $2.5 million, as compared to $9.5 million in the prior year. Excluding eCOST operations, adjusted EBITDA was $12.2 million for 2006, which actually for our services and supplies distributors businesses represented a $2.8 million increase over the prior year. So very strong improvement in those business units year-over-year.

Net loss for the year was $14.5 million or $0.34 per basic and diluted share, compared to a loss of $0.7 million or $0.03 per share for the prior year. Excluding eCOST.com's operations for 2006, net income was $1.6 million, again an increase of $2.3 million over the prior year for our services and supplies distributors business units, even after considering $0.9 million of stock compensation expense in the current year, which was zero in the prior year. As these results indicate, our combined service fee and supplies distributors businesses performed well in comparison to last year. The results in these businesses over achieved our internal goal -- goals during this period.

Let's now talk a little bit more about the eCOST.com business. We feel the best way to judge the effectiveness of the incremental improvements to eCOST.com's operations since our merger date is by looking at the sequential quarter-to-quarter results. These improvements are most notable when comparing sales, gross margin percentage, as well as cost levels. As Mark discussed, our key focus for eCOST.com is to drive revenue growth through an expanded marketing and advertising program effort, while maintaining our ongoing cost control measures. As you evaluate the financial results for eCOST for the December quarter, you will actually see an improved sales performance, partially due to the holiday season, as compared to the previous quarter.

Secondly, eCOST.com's gross margin is improving. Excluding the negative impact this quarter of selling a higher level of certain aged inventory below cost to reduce our inventory levels, the gross margin for the quarter would have been approximately 8%, an improvement from recent periods and closer to the near term gross profit goals we have established, which as Mark indicated earlier is approximately 9%.

Now, I'll talk a little bit about our consolidated balance sheets and some of the highlights there. From a cash perspective, our consolidated cash positions remain solid with cash, cash equivalents and restricted cash balances exceeding $17.7 million as of December 31, 2006. Our accounts receivable and inventory levels continued to reflect solid turnover results during this period as well. From a financing perspective, over the past month, we have been successful in either amending or renewing all of our asset-based financing facilities for our service fee, supplies distributors and eCOST.com businesses. All of these new agreements have terms that are either at or somewhat improved from the prior levels.

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

Okay. Thank you, Tom. So, to summarize before I open for questions, obviously, 2006 was an important strategic year for us. It was a important -- there was a lot of transition activity that went on, and as I began the call I think there was a lot of information that needs to be taken into account as you evaluate the '06 results. Again, the services business had a great year in '06. It was stable throughout the year. We had good growth ahead of our original targets. $12 -- a little over $12 million of EBITDA performance in those two services segments combined. That stable platform and good results from there allowed us to attack the integration activities with eCOST vigorously and to get those under our belt.

'07's really now the time for us to turn to the future, and we believe that with the multiple markets that we're now operating in that this whole strategic undertaking they are going after will allow us to produce more consistent revenue growth than we were able to previously target, and, hopefully, bottom -- better bottom line performance as we look forward to 2007. Briefly, just let me give you some targets that we have in place now for '07. We are targeting consolidated revenue, excluding pass through revenue, for 2007 in the range of $420 million to $435 million. As Tom spoke in the past, we believe that adjusted EBITDA is the most appropriate measure to gauge the profitability of our business, so we will provide our guidance on an EBITDA basis.

For 2007, we are targeting a consolidated adjusted EBITDA range of between $8 million to $10 million. Obviously, this will mark a significant improvement in our operations from an overall basis that primarily comes from significant improvement in our eCOST business and, obviously, continued strong performance from our service fee and supplies distributors business segments. We expect our capital expenditures for 2007 to be in the $3 million to $5 million range. This would exclude any unknown capital expenditure for new client additions, that at this point we have no information on.

That concludes our prepared remarks for today. We hope this information will give you a good back drop, not only about the strategic activities that we undertook in '06, but also our plans for '07. We're hopeful to get out in the next few months and begin to meet with investors from a Wall Street standpoint and begin to explain information, as we think '07 will be a good year for us in terms of kind of reinvigorating interest and activity in the PFSweb shares. So with that information, operator, we'll now be available for questions.

Certainly. [OPERATOR INSTRUCTIONS] We'll pause for just a moment to compile the Q&A roster. Our first question comes from Frank Hayden from Hayden Investments. Please go ahead.

Frank?

Frank. Mr. Hayden, your line is live. Please go ahead. Our next question comes from [Greg Fortuna] from Carlin Equities. Please go ahead.

Hello, gentlemen.

Good afternoon.

Hi, how are you? I'm a new shareholder, and from where I'm sitting I just want to let you know maybe how it sounds. You have a great service fee business, and that business is clearly significantly under valued compared to your competitors in that business. I'm sure you all are aware of that. And you have a business in eCOST that just to name a few highlights, you had a credit card fraud, it sounds like it's taking up a lot of your time, you're writing down goodwill.

If you look through your release, everything says well, ex-eCOST, this will be better. Ex-eCOST this will be better. Ex-eCOST this will be better. You've already stated, Mark, that you're running below your revenue end margin guidelines. If you announce on this call that you are getting rid of eCOST, the stock would be up $1. I think that -- I guess my question is and I'll have a follow up is what will it take for you to realize that you're only doing a disservice to shareholders by keeping eCOST and -- and not closing it down?

Okay. We've made a lot of information about the eCOST business. The challenges that we have in the services business has to do with the consistency of the revenue growth model due to the long lead times in that business. Shareholders were quite vocal about the fact that we needed strategically to find ways to smooth out the growth of that business. We looked at our strengths in technology and in our infrastructure capability and the products segment, us selling products direct was a way for us to be able to address those concerns. We went through a very significant transition period with a business that was in trouble last year. Going forward, we think it will be able to be a business that will contribute significantly. So that's the strategic plan that we're on with the business and where we plan to go from there.

Okay, but that being said, at this point, there's probably not too many shareholders who would be unhappy. I mean, you're -- right now, you're at four times EBITDA, which is not even -- most deals are getting done at double that rate in your space -- in your service space. You are killing your business. Every -- this is costing money. Every quarter -- I can't imagine how much time you're spending on this. I could hear it in all of your voices when you talk about your service business is very exciting. Even, Mark, when you talk about eCOST, it sounds like you just can't wait to get off the call. It sounds to me, and you know this environment, your stock is cheap and a lot of shares outstanding, it doesn't take much for a few shareholders or one shareholder to get together and force a hand. So I still -- you never answered my question. What is it going to take for you to get -- close this up, write it off, try to sell it, get rid of it. At what point will you make a decision?

Thank you. Next caller, please.

Our next question comes from George Walsh from Gilford Securities. Please go ahead.

Mark, I'll take it from a different angle. Just, as you go into eCOST here, it seems the driver is you've got to get the revenues up and you got to get the traffic up. And let's take it from that element of what to take really going to do that. I -- if we go with your expertise that you've improved the infrastructure, but it's about the marketing initiatives to really drive the traffic, and what is that going to cost, and how soon do you think that can be ramped up where it's meaningful, where you don't have the gap between the run rate and the breakeven point that you have now?

Well, the big challenge that we've had in the business has to do with the fact that the click charges on the shopping box, which was a primary driver of activity in the eCOST website had gone up significantly in the last 14 months. When we acquired the business last year, we were probably looking at an average of $0.50 or $0.60 per click over the holidays that got up to $1.10 per click, and the -- and so we have backed way off in terms of that and that has an impact in terms of driving traffic to the site and ultimately on growth. But, as I mentioned, our focus has been on reducing the breakeven point of the business and in '06, and not really on revenue growth. So the short answer to your question is it's probably not by just increasing ad spend on online advertising. The activity that we're undertaking right now has to do with the fact of expanding our e-mail marketing.

We have done a number of things to try to not only better target e-mails, and much of this is not yet gotten us results, because we just are beginning to do this now as we begin to focus on growth. Really only in the last six weeks or so, have we gotten our head back on how are we going to grow the business going forward. But targeted e-mail marketing is important for us in terms of -- because we see high response rates in our e-mail marketing list now. Secondly, is the growth in off-line advertising activity. We have made some investments in radio advertising. We're going to be doing more in the catalog front, and that will go out in the next few weeks where we have seen in the test markets that we've done with this over the last couple of months, good response rates from those types of things. And, at this point, with the on-line cost being as high as they are, those are more cost effective customer acquisition tools for us from there.

Again, we just have not done a lot investment in new customer acquisition in the last six months, as we went through this transition period. So just in the last few weeks as we begin to focus attention on what we're going to do, and I'm hopeful that the growth results will come as we go throughout 2007.

Okay, do you expect to do any -- any hires in terms of marketing personnel, or do you feel you have the -- the people in place that know what to do and to implement the plan and drive it?

Well, we're using -- we're using -- rather than hiring ourselves, we're using outside, I don't know if it's contractors are the right word, but outside agencies that have specialties in certain areas, and so that's -- that's where our focus is at right now. We've had a number of people involved with the business and -- and through that have developed the plans that we have put in place. Some of these guys are PhD's that understand the whole direct marketing area. Some of these are guys that have been involved in various successful on-line stories in the past that have come and done consulting work for us, and we're also talking to other companies who specialize in customer acquisition and traffic generation for websites. And through that we've garnered a variety of different things to help drive our strategy for eCOST growth.

Okay. Alright. Thank you, Mark.

Thanks.

[OPERATOR INSTRUCTIONS] Our next question comes from John Fitzgerald from Bishop, Rosen & Company. Please go ahead.

Yes. Mark, throughout the course of '07, do you plan to need capital by going to the markets, I guess, is the better question?

At this point in time, as we take a look at our available capital to support the business and expanded financing facilities that we have in place, it is not currently expected to go back to the market. We'll continue to evaluate that.

When will it be evaluated again?

We continually evaluate that.

Okay. On an ongoing basis then?

Yes.

Okay, thank you.

[OPERATOR INSTRUCTIONS] Our next question comes from Brett Combs from Combs Produce Company. Please go ahead.

Hi, guys. What was the net income for PFSweb in 2006, excluding the eCOST acquisition?

Net income, excluding eCOST for 2006 was $1.6 million.

Thank you.

We have a follow-up question from George Walsh from Gilford Securities. Please go ahead.

[Inaudible] Can you break down a little bit what that $3 million to $5 million for Capex, what that would entail?

Okay. Most -- there are certain known clients, like some of the clients we mentioned earlier, that will require some capital expenditure needs, as we support them either in call center and/or fulfillment operations. In addition, we usually have a base of just kind of $2 million to $3 million a year would be an estimate of ongoing upgrades to our existing infrastructure, either from an IT standpoint or warehouse capacity, in order to ensure that we've got the right tools in place to do the job effectively and efficiently.

Okay, do you get reimbursed for some of that? I thought on a previous call it was mentioned there was a certain [inaudible] worked into your rates or there's a reimbursement?

Right. There's -- it depends on the contract scenario, but any time that a large capital expenditure requirement is being required as a result of a new contract, we work with our client to ensure that they're aware of that financial committment on the front end, and that we contract with them to the extent that they leave early from the contract, that they have a committment, if you will, to reimburse us for any unamortized costs applicable with those assets.

And then we'll take the cost of the Capex and spread it over the term of the contract. In other cases, clients buy the cap themselves, so just -- every deal is a little bit different.

Okay. Can you kind of give a reimbursement guidance versus that $3 million to $5 million?

Well, all of it -- I mean, we'll collect all of it with cost of money. But there's none of that we're making an investment on our own. It's just a question of whether we'll get it up front, which is a relatively small percentage of it, or whether we'll get it over the life of the contract.

Okay.

Just a clarification there, so I'm at a $2 million to $3 million base. There's -- most of that is our internal activity, just to again keep our functionality current, another $2 million to $3 million of that $5 million would be items applicable to known new client activity, where that activity would be supported by our contracts.

Okay, and those numbers don't include eCOST Capex, is that correct, or is that's in the base?

There's some eCOST, but eCOST right now, we've got the infrastructure in place primarily. The one primary component that we're doing is take it a look from an IT standpoint as we further upgrade the -- the website functionality to support the business.

But we don't have any significant eCOST Capex plans for the year in there, and also included in that number I think is the work that we're doing in the Philippines, over in the Philippines' office.

Yes.

Okay. Alright. Thank you.

Gentlemen, there appear to be no more questions at this time.

Okay. Thank you, operator. I appreciate it, Mary. Thank you for your time today, ladies and gentlemen. Bye-bye.

Thank you, gentlemen. Thank you, everyone. This concludes today's conference call. You may disconnect your lines at this time, and please have a wonderful day.