PFSweb Inc (PFSW) 2007 Q3 法說會逐字稿

Good afternoon. At this time, I would like to welcome everyone to the PFSweb third quarter 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, Mr. Todd Fromer, Managing Partner, KCSA. Sir, you may begin.

Thank you. Good afternoon and thank you for joining us for PFSweb's 2007 third quarter conference call. Before we begin, I must state that the 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 10-K 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 or product sales of our clients; our reliance on our client's projections or transaction volume or product sales; our dependence upon our agreements with IBM; our dependence upon our agreements with all 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 e-commerce, outsourcing, government regulation, both foreign and domestic, and the market for our services; whether we can continue our managed growth; increased competition; our ability to generate more revenue and achieve sustainable profitability; effects of changes in profit margin; the customer and supplier concentration of our business; the unknown effects of possible system failures and rapid changes in technology; foreign currency risks and other risks of operating in foreign countries; potential litigation and potential delistings; our dependency on key personnel; the impact of new accounting standards and changes in existing 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; relationships with and our guarantees of certain of the liabilities and indebtedness of our subsidiaries; whether outstanding warrants issued in a prior private placement will be exercised in the future; our ability to successfully -- the anticipated benefits of the merger; eCOST's potential indemnification obligations to its former parent; eCOST's ability to maintain existing and build new relationships with manufacturers and vendors and the success of its advertising and marketing efforts; eCOST's ability to increase its sales revenue and sales margin and improve operating efficiencies; and eCOST's ability to generate a profit and cash flow sufficient to cover the values of its intangible assets.

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.

With nothing further, I would like to now turn the call over to Mr. Mark Layton, Chairman and Chief Executive Officer of PFSweb. Mark, the floor is yours.

Thanks, Todd. And I'd like to add my welcome to everyone. As Todd mentioned, we will discuss our third quarter and a little bit information about nine months results for 2007. With me here today are Tom Madden, our Chief Financial Officer, and Mr. Mike Willoughby, who runs our -- is President of our Priority Fulfillment Services Group, our Services divisions.

Again, I appreciate your time today. I hope you've had a chance to review the release that we put out a few minutes ago and will share with me my excitement about the fact that 2007 is shaping up to be a great year for us here at PFS.

Just in reflection, back in 2005, we set out on a defined strategic direction that we hoped and believed would allow us to better capitalize on the true core value of our Company, that being the collection of world-class call center technology and distribution infrastructure. We've spent over 15 years and tens of millions of dollars developing these capabilities, and we realized then that we needed more leverage and more scale to drive faster and more consistent growth, and ultimately to drive improved bottom-line performance and improved overall value for all of our stakeholders.

As I reflect on our year-to-date 2007 financial results, I believe we are now beginning to see the fruits of that effort. These key points, which Mike and Tom will discuss further in their prepared comments, I believe are critical indicators that we're headed in the right direction. First, we clearly have got some Mojo going. Our top line showed some fantastic momentum this quarter, highlighted by approximately 19% year-over-year revenue growth. In our eCOST division, revenue was up over 60% versus the same quarter last year. In our Services group, we were up 18% over last year.

Secondly, it's pretty clear that the adjustments that we made back in 2005 to our sales and marketing approach and our Services segment have resulted in a larger, more robust and higher quality new business pipeline -- maybe than we've ever seen -- and a number of new recent business wins that Mike will discuss in a few minutes.

Third, I believe it's clear that our plan to drive greater leverage and scale through our technology and operational infrastructure, combined with sharp quality and operational cost control, have resulted in improved financial performance. Adjusted EBITDA, as Tom will discuss, is up significantly compared to last year. And we now believe that our 2007 adjusted EBITDA will come in toward the high end of our targeted $8 million to $10 million range for the year.

And last, as I reflect on this quarter's results, with the continued improvement in financial performance and top line growth, I believe it is also clear that our efforts to stabilize eCOST integrated into the PFS infrastructure, and provide it the tools and resources necessary for success are working marvelously. We continue to have an optimistic outlook for our targeted fourth quarter results for this business unit, as well.

Needless to say -- and I hope my tone says it -- I'm excited about our progress and our outlook for the future. And with this information as a backdrop, I'd like to turn the call over to Mike, who will give you some additional color on the Services business. Mike?

Thanks, Mark, and good afternoon, everyone. Before beginning my comments, I would like to remind everyone that when we refer to our Services business segment, we are including both the supply distributors and the PFS service fees business, since both of these businesses are effectively the same operating business model, although they have different financial models.

As Mark has already indicated, we are very pleased with the results for the Service business in September quarter and we are excited about what the future holds for this segment of the business as well as eCOST. Our 2007 third quarter results reflect an improvement over the prior year, and service fee revenue increased 18% to $18.4 million compared to the same period last year. The increase in revenue is primarily due to several new contracts that were implemented during the fourth quarter of 2006 and the first quarter of this year -- including our LEGO deal, which we announced earlier in the year, and Riverbed Technology -- and an increased amount of project work during the period. In addition, the service fee revenue for the third quarter benefited from a shift in the timing of transaction volumes from one of our larger clients into this quarter, as opposed to earlier in the year.

On last quarter's call, we announced a new agreement with a major U.S. retailer. We've continued to receive inquiries about the name of this new client and today I'm able to let you know that this retailer is Tractor Supply Company. Tractor Supply is the largest operator of retail farm and ranch stores in the United States, with over 717 stores in 37 states. This successful and growing company is focused on supplying the lifestyle needs of recreational farmers, ranchers, and those who enjoy the rural lifestyle. Under the agreement, we will provide a comprehensive solution that includes customer contact services, warehouse management and order fulfillment services, and support of their Web commerce initiative.

In his opening comments, Mark mentioned the continued positive trend in the size and quality of the new business pipeline and pointed to this trend, as well as some exciting recent new business wins, as evidence that the changes that we made in our strategic direction are starting to bear visible fruit. I share Mark's assessment and his optimism, and I'd like to share some details around several additional agreements we have signed since the last quarterly conference call.

In the U.S., we signed an agreement with a large specialty retailer. Through this agreement, we are providing this client a seamless customer service solution in support of its direct to consumer business unit. This agreement was signed in September and the program was rolled out starting in mid to late October at our Plano, Texas facility. The program is expected to ramp up significantly over the next year, including adding customer service agents to our call center facility in Memphis, Tennessee during the first quarter of '08.

Our European business also signed several new service agreements providing end-to-end Web commerce solutions to each new client. These services include Web design and hosting, order management, warehousing, and fulfillment and distribution.

As previously announced, we signed a two-year agreement with Microlife AG Europe, a subsidiary of Microlife Corporation, one of the world's leaders in the development and manufacturing of medical diagnostic equipment. This is to support its e-commerce partnership with the Blood Pressure Association of the United Kingdom. Under the terms of our end-to-end Web commerce agreement, we are providing financial management services in addition to the services I mentioned before. This program was rolled out in September and it is being supported by our facility in Leige, Belgium.

In October, we signed another end-to-end Web commerce agreement with L'Oreal, the world's largest beauty company. L'Oreal has selected us to service L'Oreal's international customer base in support of its Diesel brand perfume -- Fuel For Life. Our services include providing a full service solution for L'Oreal online Diesel store, including end-to-end services mentioned before, plus product kitting and assembly, returns, and multilingual call center support from our European facility in Belgium.

Also in November 2007, we were engaged by Proximus, the largest mobile telecommunications operator in Belgium. This is also an end-to-end Web commerce agreement in which we will provide a complete service solution for the Proximus Online store, including the end-to-end services plus returns and multilingual call center support.

These additions to our growing portfolio of premiere direct-to-consumer clients strengthen our presence in the online retail space, which is our primary growth focus in the services business today. We believe our global infrastructure and our experience positions us to effectively compete for and win business in this hot direct-to-consumer vertical market.

Our perspective new business pipeline is currently valued at about $40 million based on client projected volumes. This total includes about $12 million of proposals we added in the third quarter. As I indicated in the last conference call, several of our current prospects are U.S. retailers and brand name companies looking to us to provide end-to-end global Web commerce solutions to support their expanding online initiatives. This positive trend in the size and quality of the new business pipeline, along with the ongoing presence in our pipeline of qualified end-to-end global Web commerce opportunities, in my opinion, helps confirm our objective to continue to focus on providing end-to-end global solutions for online retailers and brands.

Now for some highlights from our growing eCOST business, I'm going to turn the floor back over to Mark. Mark?

Thanks, Mike. And I'll just add on the services side of the business in there that successes in Europe are quite encouraging. While those particular deals that Mike discussed in themselves right now are not huge in size, they are an indication that we're finally beginning to see some movement in the Web commerce channel in the European marketplace. So, congratulations to our European unit. Our central location in Belgium is really critical to our success in continental Europe. And we look forward to future results there going forward.

Just shifting over to the eCOST side. Obviously, as I'd stated in the opening comments in there, we're very happy with the continued improved performance so far this year for eCOST. Revenue for the third quarter was up over 60% compared to last year. Gross margins improved to 8.8%; that compares to 1.9% last year. Honestly, we had a number of integration and fraud-related problems in the third quarter of last year, so there's not a lot of great direct comparison. But clearly, the trend when you look sequentially shows solid improvements and we're very optimistic about where we're headed here.

So let me recap some of the specific highlights regarding some of the customer service and site improvements that we continue to make at eCOST.

Recently, within the last, I think, three weeks, we went live with an enhanced catalog search feature through a collaboration and partnership agreement with Visual Sciences. They are a leading provider of real-time analytics and search tools. The enhanced search function not only will provide eCOST customers with a powerful tool to find great deals on brand name consumer electronic, home and outdoor merchandise, but also allows us to begin to direct certain search result pages, allowing us to better highlight products or manufacturers.

As an example, if you would go to the eCOST.com site and key in the search word Zoom, for example, into the eCOST search box, on the top of that resulting page you'll see some featured links that we've added to help direct customers to specific Zoom products and players that we are choosing to feature. Search is our second most common entry point for consumer shopping at eCOST.

Previously, our search results with the organic search engine that we had were often inconsistent and irrelevant. We believe the improvements that we've made in this area over time will result in improving visitor to order conversion rates. This improvement is the latest among many being made on a regular basis at eCOST.

Also, this past quarter, we completed the addition of two new virtual warehouse partners. That brings our total SKU offering now to over 110,000 products. You'll recall the summer we launched into the home and housewares category. As I've mentioned in the past, virtual warehousing agreements offer several benefits for us. First, they do not require a large sum of capital for inventory, because as the name proposes, we use our partner's warehouse as our stocks.

As of today now we have about 14 virtual warehouse agreements fully functional. Our IT and product management professionals are currently feverishly working to bring online a significant implementation group of approximately 10 virtual warehouse partners before Cyber Monday. When implemented, this group of VW Partners will bring us a host of new products and categories, many of which have attractive gross margin characteristics compared to the technology and electronic products that we currently offer.

The implementation will significantly expand our offering of home, outdoor, and houseware products, and will also be the initiation of our entry into the casual apparel and sporting goods categories. This will provide us access to leading manufacturers such as Rawlings, Mizuno, and Wilson in the sporting goods category, and Hunter Lighting and Klaussner Furniture in the housewares category.

Overall, we're targeting to add about 30,000 additional and unique products with full merchandising information and imagery in this group.

I don't expect significant revenues from these categories this holiday season. We've got a lot of work on the merchandising side in order to be able to present these products, and obviously to begin to make our customer base aware of them. But we see the peak season as a key opportunity to introduce these new categories to our growing base of daily site visitors with an eye towards attracting greater return visitors in the coming months, as we appeal to a broader base of customers.

On the marketing front, over the last year, we've made tremendous changes. We've put much greater emphasis on our email and viral marketing activities through the advertising of limited time and limited quantity deals. eCOST has become known for deals and it is what is driving activity to our site. This focus on finding great deals has become the cornerstone of what we believe the eCOST shopper seeks and why they return, and even better, they tell their friends about us.

With the new site enhancements in place, we are capitalizing on selling incremental products with the original order as well. I described a number of those in our last conference call that relate to the assortment of accessory products that now are shown in our jump page as we go through the shopping cart.

We also have got a much better picture now of the life value of our customers, our customer acquisition costs, and how to acquire customers profitably than we did at any time in the past. We believe our customer acquisition marketing, while very challenging, is now armed with better information, is making great strides in driving increased visitor and site traffic, and is allowing us to improve customer retention. We believe that collectively these actions will result in a customer acquisition and retention model that makes long-term financial sense for us.

With the holiday season just around the corner, we are impatiently waiting for Cyber Monday. Predictions for a strong shopping season for Web commerce merchants like eCOST abound. You may have noticed just today in today's Wall Street journal, Forrester Research was quoted as saying U.S. consumers are forecasted to spend about $33 billion on Internet purchases between Thanksgiving and Christmas. That's up 21% from last year. I think the overall retail projections for the year are growth of about 4% overall. So, clearly, traditional retail is predicted to have a soft holiday season but Web commerce in general is continuing to flourish, as more consumers flock to gain the benefits of convenient shopping, larger selections, and easier access to in-stock products, and with a growing confidence in the security and capability of Web merchants like eCOST.

I encourage you to be sure to go and check out the great deals that we've got on LCD TVs, GPS devices, Zoom music players, HP re-certified laptop and desktop systems, and 10,000 -- tons of thousands of other great products at deal prices that will blow your socks off. Our merchants over the last two or three months have absolutely beat the bushes out there to find great deals to offer and we believe these things are really the cornerstone of what's happening -- an optimistic outlook for the fourth quarter.

We believe we're well prepared for the holiday season. As I mentioned, inventory levels have increased to meet the expected demand. We have added more trained staff in our Manila call center to ensure speedy response and competent service. And we have completed our operational planning that we believe will allow us to take orders through Saturday, November 22 for express delivery on your doorstep before Christmas.

So come on over and experience eCOST's improved shopping and service experience along with huge product selections and great prices firsthand.

Finally, just a quick overview on some of the key operating metrics for eCOST for the quarter ended September 30 of '07. We had approximately 1.7 million total customers on our house list at the end of the quarter. That compared to about 1.6 million total customers in the prior year. New customers for the third quarter totaled about 21,400. That was compared to 34,100 a year ago. A lot of the change in that relates to the types of customers that we are seeking and the retention characteristics of those customers that we're after.

For the three months ended September 30, we reported a total of 64,900 orders shipped, and average order value of $405. That compared to 52,000 orders shipped last year and an average order value of about $361. Average order size is up about 10%.

Ad expenses for the third quarter were about $220,000; that compared to about $436,000 for the third quarter of 2006. The estimated cost to acquire a new customer this past quarter was about $7.08. That's down significantly from last year, again, as we continue to target the types of customers that we want from a long-term value standpoint.

For your notes, the estimated cost to acquire a new customer is calculated by taking our total ad expenses during the period and dividing it by the total number of new customers during that same period.

That will give you the recap on eCOST. I'll now turn the call over to Tom shortly here and allow him to give you some update on the financials. Tom?

Thank you, Mark. Let me first start by providing a brief overview of our consolidated operating results for the quarter ended September 30, 2007. Then I will provide some operating highlights for each of our business segments as well as an overview of key balance sheet items.

As reported in our press release, our consolidated revenues for PFSweb for the quarter ended September 30 were $112 million; a 19% increase as compared to $94.3 million reported for the third quarter of 2006. Gross profit for the third quarter of 2007 was $11.9 million or 10.6% of net revenues, excluding past due revenue, as compared to $9.5 million or 10.1% of net revenues in the third quarter of 2006. The increased consolidated gross profit is primarily attributable to the improved performance at eCOST.

As we have previously discussed, we utilized adjusted EBITDA as a key metric in evaluating our operational performance. In the third quarter, our consolidated adjusted EBITDA was $3.2 million versus just $5,000 in the prior-year period.

For the third quarter, net income was $162,000. As Mark indicated earlier, it's our second consecutive quarter of earnings positive net income. This equates to breakeven from a per share and diluted share calculation, but it compares to a net loss of $3.3 million or $0.07 loss per basic and diluted share for the same period last year. We are quite pleased with our results for this quarter. And we believe this clearly illustrates the progress that we are making throughout our business units.

Turning now to the performance of the selected business segments for the quarter ended September 30, first, service fee revenue increased 18% to $18.4 million from $15.6 million in the prior-year quarter. This increase is primarily due to incremental revenue attributable to the implementation of custom solutions for new clients, such as LEGO brand retail, Riverbed, and others within the past year, and also relates to the shift in business for one of our major service fee clients into the third quarter, which Mike discussed earlier, as well as increased project revenue activity from certain clients.

Gross margin, excluding past due activity, was nearly 30% for the quarter; at the high end of our targeted gross margin range of 25% to 30%, primarily due again to the positive impact of higher margin project activity, the shift of the transaction volumes for one of our largest clients, as well as continued focus on controlling our operating costs.

SG&A for the service fee segment was consistent with the same period of the prior year. The current year amount includes the favorable impact of foreign currency fluctuations and certain of our intercompany balances, and the adjusted EBITDA for the service fee business was $2 million for this quarter as compared to approximately $100,000 in the prior-year period.

As you can see, we're quite pleased with the financial performance of our service fee business segment this past quarter.

For our Supplies Distributors business segment, revenue was $58.3 million, which was an increase of $2.4 million as compared to the prior year. This increase was primarily due to the impact of foreign currency fluctuations applicable to our European business. Gross margin for the Supplies Distributors business decreased year-over-year to approximately 6.9% as compared to about 9.5% in the prior-year third quarter. This decrease in gross margin year-over-year is primarily due to the impact of certain incremental inventory cost reductions that occurred in the prior-year quarter.

Let's turn now to eCOST. In the third quarter of 2007, eCOST revenue was $27 million compared to $16.7 million last year or a 62% increase. The prior-year revenue for eCOST, as Mark indicated earlier, was negatively impacted by, I guess, service and product merchandising issues in conjunction with our 2006 integration activities. But on a sequential bases, eCOST's quarterly revenue remained steady as compared to the $27.1 million in the second quarter of 2007, and improved significantly compared to the $21.6 million in the first quarter of 2007.

The gross margin for the third quarter was approximately 8.8% compared to 1.9% last year. While we are pleased with eCOST's increased gross margins for the period, we still see room for improvement in the future. We continue to work toward achieving the gross margin goal we had established of approximately 9% to 10%.

We continue to be focused on controlling SG&A costs within the eCOST business, as well. We maintained a consistent cost level this quarter as compared to the June 2007 quarter. In addition, as noted previously, our costs are down significantly from the levels experienced in the prior year.

The net results of the increased revenue, along with the gross margin and cost focus, is a significant improvement in eCOST bottom-line performance. ECOST's adjusted EBITDA reflects a loss of $0.4 million for the September 2007 quarter, a continued improvement over the last two sequential quarters, and a dramatic improvement over the prior-year loss of $3.2 million.

Now let's discuss some balance sheet highlights. Our consolidated cash position remains solid with cash, cash equivalents and restricted cash balances exceeding $16.8 million as of September 30, 2007, relatively consistent with where we're at, at the end of June. Our accounts receivable and inventory levels continued to reflect solid turnover results during this period, as well.

In addition, our banking relationships remain strong. As indicated in last quarter's conference call, in March and April of this year, we renewed, extended, or amended all of our asset-based financing facilities for our Service Fee, Supplies Distributors, and eCOST business segments. All of these new agreements have terms that are either at or somewhat improved from the prior levels, resulting in increased working capital financing availability.

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

Thanks, Tom. Just one clarification. My people here in the room have noted that I made a mistake in what I was saying earlier in here but -- we plan to take orders on the eCOST site through Saturday, December -- December 22 -- I think I said November earlier -- for express delivery at your doorstep before Christmas. So that's Saturday, December 22.

In closing, my long-term partner and mentor taught me over and over that profit is a reward for risk. That was his motto and his saying. Also, Mark Twain commented a number of times that 20 years from now, you'll be more disappointed by the things that you didn't do than by the ones you did do. So, throw off the bow lines, sail away from the safe harbor, catch the trade winds in your sails, explore, dream, and discover. It gives me great pleasure to report to you that the risks we have taken have led us to discovering improving growth and increasing profit. And that is our plan -- to continue to risk, to explore, to dream and to discover.

That concludes our prepared remarks for this morning -- or this afternoon, and we're happy now to address your questions. Operator?

(OPERATOR INSTRUCTIONS). George Walsh, Gilford Securities.

Mark, I'd just like to congratulate you and the whole team for another good quarter and the sequential sustainability is very encouraging. So I just wanted to congratulate you on that.

I wonder if you could go into a bit with the eCOST on the same theme a bit. It seems like you're at a pretty good run rate here with revenue sustainability at this level. Speak to a bit about the mix. There was a little bit an issue last quarter where you were -- the margin mix and the type of products there and how you also see the breakeven point for eCOST at this point?

Okay, on the mix side, I think last quarter and the second quarter of the year we had a higher mix of B2B sales during the summer period -- that's B2C sales and typically our margin on the B2B side is a little lower than it is on the B2C side.

In Q3, actually we saw probably the reverse trend. Our B2B business was a little bit sluggish, I think, in the -- not necessarily down, but just kind of flattish in the third quarter. Our B2C revenue was also relatively steady, which we seasonally expect, but we're seeing improvements on the margin side of that business. And there it was generating higher gross margin activity for us on that side of our business as well. And as we begin to look into the fourth quarter, we see those trends kind of continuing from there. So, I think the mix is going to trend more towards the B2C side. It's the area where we see greater opportunities and frankly, where we are putting more of our resources and investment in terms of IT development is on that side of the business.

The addition to the product categories that I talked about earlier, I think if you go back to our stated objectives when we announced the merger back in 2000 and [some] of the key aspects of that was to add new product categories with our technology and distribution capabilities and higher margin product categories and really take advantage of the enterprise value of eCOST.com [website]. We're now just beginning to get an ample selection of products and some new categories. And as we get those merchandised and can market them from there, all of those will lead to the optimism that you heard from Tom about our goals towards improving those margin percentage going forward.

The second part of your question I think was related to the breakeven point. I'd say revenue-wise on a monthly basis we're still in that $9 million to $10 million range and around 9.5%. We've got to get roughly an adjusted gross profit number per month of about $950,000 is where we're at in order to generate a breakeven performance from an EBITDA standpoint. So we are very close to that right now. I'm hopeful that the fourth quarter is a breakthrough quarter for us. And as I have cautioned in the past, we've got to watch and see what Q1 does in terms of the seasonal change from there.

We are in a bit of uncharted territory here right now given that our historical comparisons for 2006 are not particularly relevant, given the challenges that we had last year. So, we're clearly growing through and recapturing some of our customers who may have been disappointed with our performance in the past right now. Some of that will be a one-off gain and then we'll be back to really trying to focus on the customer acquisition model that I described in the call from there. So anyways, we're close on the breakeven standpoint from that and continue to make progress.

Okay. Just in line with that, the active customers was down sequentially. Is that something that -- is that number a reflection of the focusing effort you've done over the last year? And is there a point where that becomes a little bit more of a concern to you? But, you know, it seems like the new customer adds are -- that's a good counterbalance to that. It seems like they're quality customers and better customers.

Yes. And what you've got is we are focused on quality customers. You will notice in the trend that you just stated, the ad spend is down significantly as well too. I think we're now almost half from where we were in the second quarter last year. We are really targeting our ad spend towards being certain that we are acquiring customers that fit in an acquisition model that when we pay to acquire them ultimately return to us a minimum gold net income percentage over the next 12 to 18 months of life value that we expect from them.

One of the things I think that had happened historically here is that there was a lot of -- at least what we saw -- was a lot of spin that was going on related to generating growth and new customer activity with customers that ultimately weren't going to drive profit for you. The business had -- and I need to be fair to everybody involved in this before -- it was a different time and place and growth was really the key focus of the business at the time. It had a much longer term outlook for its profit until they ran into some of the challenges that they had operationally that affected their financial performance. And that forced them to really change courses.

So, it was a different time and a different place. But we had to really kind of unravel the business from the mindset of just growing and focusing on growing with customers that can have a more near-term financial positive impact on us. So, that's the change that you see in the new customer side. I mean, we are down, but the ad spend is down, but the cost to acquire those customers are down significantly as well.

Okay. And are you getting any data in terms of the repeat customers, the people that are getting customer loyalty improvement?

Yes, we've got very good data. We haven't disclosed all that data. But I would say to you right now we have got since August of 2006 now, I've got very good data on all of the new customers that were added since August of 2006. So we continue to monitor those trends and we've got good return rates. We are able to now sub-class those into different sources and demographics of customers so that we can see which programs and activities that are there. We are much more active now in our catalog mailing than we had been in all of 2006 and for the most part of '05. And the catalog is a key part of reactivation of customers that we already have on our house list.

And so we are doing much more on that front from there and trying to focus on what is really a lot lower cost acquisition model in terms of marketing to customers that have already done business with us in the past. So we've got good data, good activity and now it is just the age old direct marketing game of testing and experimenting and finding the nuggets.

Okay, great. I'll get back in queue and then come back. Thanks.

(OPERATOR INSTRUCTIONS). Jon Hickman, MDB Capital Group.

Just a couple of questions. It seems like you changed your reporting so you're now putting stock-based compensation up in the expense line again any more?

You know, we're -- well, it will still be included in the C&L our (multiple speakers) with our auditors it's now part of the SG&A line. It's supposed to be and broken out separately. And I think we put the disclosure in there as far as the dollar amounts (multiple speakers) in the reconciliation. And in our 10-Q you'll actually see it line item out or described, I guess, as a component of the SG&A.

Yes, I just wanted to make sure I didn't miss something. And then during your prepared remarks, you mentioned Tractor Supply as the major retailer that you had announced earlier and were waiting for the okay to actually give the name?

And then it seemed like you mentioned that you had already signed another major retailer. Did I get that mixed up? Are there two or is it just Tractor Supply?

You are correct. We announced, as we had previously announced the business with the retailer, we announced the name today of that retailer as Tractor Supply. And then separately we announced the signing of a call center deal with a large specialty retailer and is still unnamed. And we're very excited about that contract as well. But it is a separate new contract from the Tractor Supply deal.

Okay. And then I have one other question. For the fourth quarter with eCOST and with your service business is typically the best quarter of the year, right? As far as revenues go?

That would be our expectation on the eCOST side, yes.

Not necessarily on the PFS side. Our largest client relationship has seasonality that's generally been stronger historically primarily in the June quarter; this year both June and September quarters are their stronger quarters.

Okay. So there could be a little -- okay. But last year, well, last year you had an increase in your service business third and fourth quarter.

Yes, we did.

So I just want to make sure I understand this right. So for you to hit the top end of your guidance or EBITDA, you only have to do $2.7 million in EBITDA this quarter. Am I correct?

That's correct.

Okay, thank you. That's it for me.

[Jim Currin, New Sale Investment].

Wondered if you would comment if you are doing anything extra to promote business to the eCOST site for Christmas?

Are we doing anything extra to promote the site?

Yes, more than you normally would have done.

This comes back to that conversation I had just, I think, two callers ago regarding the careful use of advertising spend. We are trying to be accountable for just about every dollar that we put out in terms of our ability to be able to measure its impact and what its actual cost -- what the actual cost is to acquire a new customer.

We are testing a lot of areas out there but I would not expect our total ad spend for the quarter to be significantly different than it was in Q3 at this point. And we are relying more on our deals and the viral aspects of that as well as our email marketing and catalog marketing to be able to drive activity to the site.

How often are you sending out catalogs?

We're on about an every six weeks cycle right now. And we have got a kind of a defined algorithm of who we choose to mail to in each six week cycle.

And you mentioned -- you talked a little bit about your seasonality of your PFS business. You're taking on a lot of new customers and Tractor Supply and some others. I'm just wondering to what degree is that changing with your new contracts?

Well, I think that there certainly is a focus in the business on targeting the online retailers and the brands which tend to have a big fourth quarter. So I think that over a long term you might expect for us to see stronger and stronger fourth quarters. But we do benefit from a very nice spread across the year in client volumes. And so we continue to expect that (inaudible) and not see an inordinate amount of business falling into the fourth quarter like some of our competitors struggle with.

And so I think we're right now pretty comfortable with adding the online retailers and brands to our infrastructure and being able to handle the scale of responding to that fourth quarter. And quite frankly over time, seeing the fourth quarter kind of rise up to the level of some of the other quarters have been traditionally for us. So we're looking pretty good right there.

George Walsh, Gilford Securities.

The pipeline stayed nicely up there, in fact, even increasing it seems a little bit for the services side. Is there any seasonality to that where once you get past the Christmas season maybe that will kind of drop off a bit? Or is this just kind of general business activity that you're seeing?

I do not believe that we are going to see a variation in our new business pipeline based on seasonality. I think that we have seen fluctuation in that pipeline over -- quarter-to-quarter over the past couple of years. And right now we have seen pretty consistent growth quarter-on-quarter for the past two or three. And if I look at the activities that are coming in to our pipeline through RPs and different sources, we're not seeing maybe what we have seen in the past couple of years in sort of a drop-off in Q4. The interest remains strong and we continue to see new deals coming into the front end of the pipeline.

So with luck, we will see this trend kind of continue on through Q4 and into '08. I mean, we just believe that it is an indicator of the strength of the online retail sector with a lot of companies re-platforming and a lot of companies, especially brand, really testing the waters with online Web commerce where they haven't before. So we're hoping to ride that wave and see the benefit from the real solid new business pipeline that we have right now.

I'd like to add to that, June and July are typically sluggish months in the services side in terms of new RFP activity. So if there is any seasonality, those would be the months that we would see things slower. But I will underline that comment with the fact that some of these deals sizes can range from $1 million to $15 million on an annual fee size. So the pipeline can change rapidly on that. And the one large deal can make a pretty significant difference one way or the other with that. So you just kind of have to peel back the layers a little bit there to understand what it really means.

Okay. Well, currently have you got -- is there that kind of mix in there where there's like one really big order? Or is it just kind of several?

There's no individual items within there that are over $10 million. So, there's a couple of larger items but a good mix.

And is there such demand that the margins on these are -- or is your pricing for you guys better or is it pretty competitive out there?

Pricing is pretty good for us at this point. Our key competitor in this industry typically prices higher than we do using a different model. So we're -- while we're not necessarily the largest competitor -- the largest provider in the direct-to-consumer space at this point, we do enjoy that [cap work seat] on the B2B side. But on the B2C space, our bigger competitor there is more expensive than we are. So we've got some flexibility in there in terms of our ability to be able to be aggressive in the marketing of that business.

Okay. All right. I'll get back in queue and come back. Thanks.

[Liza Millent], Trent Advisors.

Question -- your pipeline revenue, is that all service fee revenue?

Yes, when we quoted the pipeline side, that's all service fee opportunities.

Okay. And the $12 million in proposals added is just -- that doesn't include the new contract, that's RFPs that are out there that you got new in the third quarter -- is that correct?

That's correct.

Okay. And then the -- can you remind me what your service fee target margin is and how leverageable that is on the new business wins?

The target margin on the service fee size is 25% to 35% gross margin and -- 25% to 30%. And I would say that that's highly leverageable.

But larger -- as the deal sizes get larger, the margins do trim up. And also as you deal with typically deals that are broader spectrum deals, what we would call end-to-end type activities, have greater margin opportunities to them than deals that are silo deals, if you will, where there's only one business function involved. So there is some variability again in that in terms of what kind of deal it is and how competitive it is.

Okay. In your separate press release talked about three of the deals but not -- didn't include the other European deal, the Microlife deal. And it talked about $6 million to $8 million in service fees over the various terms of the agreement. Do you have an average time of those agreements? I know you said one was two years?

The reason that the Microlife deal was not included in today's press release was because we had announced that in October already. So we didn't want to duplicate an announcement of a new contract win. So we just added the three new ones that have been done since that point in time. The average life for these is approximately two years. So you can take that number in half and estimate the annual service fee revenue aspect of it.

Okay, thank you. And then the other thing is your CapEx I know, it looks like it increased from your guidance for the year from last quarter. Is that because of the higher service fee wins?

Yes. What we had disclosed previously was that it was $3 million to $5 million, excluding some of the new client activities. With some of the additional client activities we've got through the year, both earlier this year as well as through the year, the total number that we have now quoted of $6 million to $7 million now includes that additional new client's activity.

[Jim Currin, New Sale Investment].

You mentioned competitors. Can I ask who you consider your main competitors today?

It depends on the segment of the business. In the B2B side, competitors are typically what have been traditionally called 3PL providers. That would be companies like Eagle, Excel, Logistics, Penske, Ryder, Logistics, [Menlo] are probably the primary players we see on the B2B side. And that's typically in the technology industry area -- technology manufacturers.

On the B2C side, our biggest and most common competitor is GSI Commerce. We also see InnoTrack and had historically seen Accretive, which was recently acquired by GSI for 15 times EBITDA.

Okay. I'm curious to what degree people -- your potential customers look at the size of your business, possibly your market cap, your -- what factors are you looking for, for stability in your business to make a positive decision?

Well, there's always questions. Trading at the share price that we're at and stuff, I would say that's always a check point on any of our customer's list is the play on -- these are marriages in the services side of our business. You've got a lot of eggs in one basket in the deal so you have to have confidence in your partner. And likewise us and our partner as well. On many of these divisions and clients that we deal with, we've got to be real careful with them from there.

But typically a phone call from CFO to CFO is all that's necessary to calm those aspects of things out there and then just explain the strength that we've got in our balance sheet, our banking relationships. And then we really let our client references speak for themselves from there. Even past clients today are more than willing to speak to potential clients for us in terms of the referenceability of the work that we've done and our willingness to make investments on their behalf and so on. So there's work that has to get done there but it clearly is something we have been successful doing.

Okay. Now, you mentioned like your current contracts, your new contracts are for two years. It raises the question of to what degree you're having turnover in contracts or renewals and are you able to renew for longer terms and things like that?

Well, we don't focus too much on term. I would say that some of the competitors in our industry like to focus on term. We like to focus on just doing quality work and having clients want to stay as opposed to dealing with terms of contracts. The longer the term, the more legal work typically that has to get done with everybody with that. And most of our contracts frankly are terminable at will -- or terminable with notice -- a relatively short period of time from there. And now there are -- every contract is a little bit different, but there are cover charges to leave in many client situations out there that the term's not really an area that we spent a lot of time with.

We've got a high degree of renewal activity with that. We have shed some clients this year. One of the factors in the improvement of our gross profit percentage on the services side has to do with some of the clients that we've chosen not to continue with. And if we can't make our targeted margin and we can't make adjustments to the client relationship either in the way we are processing the goods and the scope of the deal that we're doing or in changes in the pricing structure, then we are going to make proactive changes on our side to be able to move forward with it.

We've got a gold gross margin and a defined group of resources that we have to deploy. And if we want to capitalize on the opportunity that is out there, then we want to be certain that we're pointing to market areas that we can achieve the kind of gross margin that we are after. So there is client turnover that does occur. But as you can see from our growth results here that we are growing in spite of the planned turnover that we put in place this year.

So most of the turnover has been at your choice?

I think the conversations that go on -- that become difficult conversations. Typically there are issues on both sides of the table that are trying to be addressed, and in some cases you're able to address them and both parties are happy. And in other cases you make the decision to shake hands and to separate in a professional manner. So it is a two-way street.

I'll just add further that -- Tom just gave me a note here but -- we have clients that have business changes. Some clients choose to launch on our infrastructure, test both a business to consumer segment and a business to business segment, for example. And then decide that the B2B side and through a traditional retail channel is where they're going to go with the product. We've got one client that has done that three different times, I think, with us and two of the products have stayed with us and one of the products decided it was going to be a pure retail product and they moved it back in-house, because they already had traditional distribution capabilities in-house.

So there are lots of reasons -- acquisitions. Nextel was a good client of ours at one point in time; acquired by Sprint, Sprint consolidated themselves. There are other reasons than what I just described that relate to our customer activity. Good questions. I appreciate it.

George Walsh, Gilford Securities.

Could you -- just a little more detail on Tractor Supply, just in terms of understanding. Do you have any revenue stream numbers in terms of -- not what you expect to do. I'm just trying to get a sense of the size of the company.

Sure. Well, let me tell you that -- I think as we previously indicated, this is a startup for them, this online retail initiative. And I think the best way for me to direct you to information regarding the size of the company and the nature of the initiative is just to point you to tractorsupply.com. They're a public company and there are press releases and information on their website that talk about the company specifically and also this initiative in detail.

Okay, they are public. I went to the site. I didn't quite catch that. Okay.

The other thing I will add on that, that all of the brands that we are working with, that Mike spoke of earlier, are all looking at a lot of the Internet 100 information shop.org information that's out there that begins to speak to what percentage of their total business is coming from their Web commerce initiatives. And the guys that got out of the gate early are now, many of them, in the average of 9% to 11% of their total sales are being done through their Web commerce storefronts.

So when you begin to look at large companies and large retailers out there who are just beginning their initiative, there is a pretty big frontier for them to be able to capitalize on out there in terms of their market share aspects. So, it's interesting times.

Okay, great. The other was, Mark, you -- I just want to get a better handle on -- you mentioned the adding -- if I thought I heard it right, 10 new virtual warehouses and about 30,000 new products for eCOST. That seems quite significant. And also, it would seem to be the biggest move in that direction you've probably made since the acquisition, is that correct?

Yes, it is. We are working with a partner that is [in effect] a wholesaler of virtual warehouse relationships. We were able to strike an arrangement with him where we could create one technology interface that provided us access to about 10 VW partners across these categories that I spoke of earlier. So it made for a relatively efficient way for us to be able to get to a big group of guys very quickly. Again, we're still testing here. We are in, I would say, the final stages of our system test.

We kind of get to a point here where we don't want to launch for the holiday season, so really my hedge that you heard in the comments and it was really related to whether we're going to make it across the finish line in time for Cyber Monday or not. And then, if we don't make that a conscious decision about whether we want to really try to plow it into this quarter or hold off until after the holiday season just in terms of safety. So we are kind of evaluating that.

But I wanted to just provide everyone a feel for the fact that we think there's hopeful in the next week or so to roll out about 30,000 in those categories that I described. The same partner -- and there's another maybe 30,000 or 40,000 products that are available from this group of companies that are going to require more work from us on the merchandising side than we're going to be able to get done in the next ten days. So those won't be available before the holidays. But I think you're dead on. It's the biggest lump we've brought in, if you will, since the merger.

Yes. And I just think it's significant conceptually in that you had to do a lot of streamlining of eCOST over the last couple of years as you brought it in. And it seems you're comfortable with that now. You've got a good organization and you're ready to really build upon it.

Right. And as we look to the future, one other thing that was left out of the merger plans that we have not yet addressed relates to geographic expansion. I think that will be a 2008 topic for us in terms of what we may want to do in Canada and Europe on top of the infrastructure that we already have in place in those countries. It's certainly a logical discussion for us to have. I can't conclusively say, yes, that that's where we're going to go but it's certainly an area that's on our list for further evaluation for next year.

Do you mean in terms of eCOST or --?

ECOST, yes.

I guess I'm a little confused in that -- when you have a virtual site, what does that mean by geographic expansion?

No, I'm just saying another strategy for us in terms of expansion is to begin to really expand our activities in the Canadian and European market.

International.

International sales for eCOST. Okay.

Yes.

Okay. Got you.

Thank you. The Q&A portion is now concluded. I'll now turn the call over to your host for any closing remarks.

Okay, well, I appreciate everyone's time this morning. Again, we continue to work hard here in terms of improving the financial performance of the business and our growth aspects. I would once again call your attention to the fact that we think our shares continue to remain significantly undervalued in light of some of the equity deals that have been done in the market recently and on a comparable comparison. So, tell your friends about it. And we'll keep our nose to the grindstone here and continue to improve the financial performance. Appreciate your time today. Take care.

Thank you. This concludes today's conference. You may now disconnect.