PFSweb Inc (PFSW) 2008 Q1 法說會逐字稿

Good afternoon. My name is Rose and I will be your conference operator today. At this time I would like to welcome everyone to PFSweb first quarter 2008 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).

It is now my pleasure to turn the call over to your host, Mr. Todd Fromer. Sir, you may begin your conference.

Thank you and thank you all for joining today's call. Before I turn the call over to management I must read the following forward-looking statements.

The matters discussed on this conference call consist of forward-looking information under the Private Securities Litigation Reform Act of 1995 and are subject to and involves risks and uncertainties which could cause actual results to differ materially from the forward-looking information. In addition I call your attention to the non-GAAP measure reconciliation included in the Company's earnings release.

PFSweb's annual report on Form 10-K for the year ended December 31, 2007 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 clients' projections or transaction volume of product sales; our dependence upon our agreements with IBM and [Newnan Field] print solutions; our dependence upon our agreements with our major clients; our client mix; the 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 or manage growth, increase competition; our ability to generate more revenue and achieve sustainable profitability; effects of changes and 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; potential delisting; the impact of our planned reverse stock split; our dependency on key personnel; the impact of new account standards and changes in existing accounting rules or the interpretation 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 certain of the liabilities and indebtedness of our subsidiaries; our ability to successfully implement the anticipated benefits of the merger; eCOST's potential indemnification and obligations to its former parent; eCOST's ability to maintain existing and building 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.

It is now my pleasure to turn the call over to Mark Layton, Chairman and CEO of PFSweb. Mark, the floor is yours.

Thank you, Todd. Good afternoon, everyone. I would like to welcome you to our 2008 first quarter financial conference call. As always with me here today are Tom Madden, our Chief Financial Officer; and Mike Willoughby, President of our Business Services units.

This afternoon, we will give you an overview of our financial performance for the first quarter, some flavor on the events that are driving our momentum and then, following our prepared remarks, Tom, Mike and I will be available for questions.

As you can see from the results issued this afternoon, we believe we are off to a great start for 2008. For the March quarter we reported consolidated revenue growth of approximately 13.5% year-over-year, and each of our operating segments reported measurable growth individually. We are also pleased to report a consolidated adjusted EBITDA of $2.8 million and net income of $0.4 million for the quarter. This is the fourth consecutive quarter of reporting a consolidated net profit for our business.

These strong results were driven by increased revenues and profit in our service fees businesses, through new client wins and expansion of existing client arrangements. Additionally, we experienced strong top and bottom line improvements in our eCOST.com business year-over-year as well.

Allow me to briefly mention some key points about the overall health of our business, which Mike and Tom will discussed further in our prepared comments and illustrate that we believe we are headed in the right direction to grow our operations' profitability.

First, eCOST.com increased its revenue the first quarter by 29% year-over-year, with gross margins at approximately 8%. Our focus for this business is to continue making strides towards increasing revenue, achieving cash flow breakeven by expanding into new product categories that offer higher gross margins. Secondly this quarter, we experienced exonerating growth within our services business. PFSweb's service fee revenue increased 23% over last year and its growth opportunities remain strong as our pipeline remains very solid at around $35 million of proposed business.

In addition, our end to end offering, that Mike will explain further in his section of the call, that we launched this past February alongside Demandware e-commerce is attracting outstanding market reaction.

Third, our improving overall financial results clearly show a business model with the opportunity to drive greater leverage and scale through our technology and operational infrastructure while also maintaining a keen focus on quality and operational cost control.

One metric that we believe properly communicates the growing scale of our business overall is a nonfinancial metric called Merchandise Sales. In the first quarter of 2008, we reported Merchandise Sales of $777 million. That is a 20% increase compared to the $650 million for the first quarter of 2007. There is a full definition of Merchandise Sales in our press release but generally Merchandise Sales represents the total commerce of product that we move through our infrastructure regardless as to whether we actually own the inventory or not. So we are up about 20% year-on-year in that measurement as well.

So with this information as a broad backdrop on the great results for this quarter I would like now to turn the call over to Mike and let him give you some color on the services business. Mike.

Thank you, Mark, and good afternoon, everyone. Before beginning my comments I want to remind you that when we refer to our Services Business segment, we are including both the Supplies Distributors and the PFS Service Fee Business. Both of these businesses have essentially the same operating model, although they have different financial models.

As Mark indicated, we are pleased and very excited about the first quarter results and the 23% growth that we achieved in the service business in the first quarter. We are also excited about potential for future growth and new agreements that are signed in 2008.

The increase in revenue that we experienced this quarter compared to the first quarter last year is due to several factors including strong project activity, and modifications to existing client agreements, and several new clients that were not operating at full run rate during the first quarter of last year. These agreements include Tractor Supply, Lego, Riverbed Technologies and an undisclosed Fortune 100 big box retailer.

Before commenting on new client activity, I would like to highlight some important recent contract renewals and expansions. While signing new customers is important for our business to grow, renewing and expanding existing agreements is just as important and is an important validation of our capabilities as a service provider as well as an important indicator of operational and financial strength and stability.

Signing a new deal is like a wedding while the working relationship that follows is much like a real world marriage. An updated contract is a very good sign of a healthy marriage with a client. As such, we are pleased to announce in March that we renewed two of our larger client agreements. We estimate the aggregate value for both deals to be approximately $18 million in Service Fees over the terms of the agreement based on current client projections.

The first of these client renewals is with the Fortune 500 consumer products company, which signed a three-year extension of its existing contract. Under the terms of the agreement, we will continue to provide inventory management, fulfillment, reverse logistics and transportation management from one of our distribution facilities in South Haven, Mississippi.

The second renewal is with a large media company which signed a one-year extension of its contract. Under the terms of this extension we will continue to provide inventory management, fulfillment and reverse logistics from one of our South Haven facilities and we will be providing call center support from our Plano, Texas facility.

Both of these clients will utilize existing infrastructure and won't require any additional capital investments.

In 2008 we have experienced a significant change in the contract structure of one of our largest (technical difficulty) services clients relationships. This revised and expanded engagement along with incremental project work generated increased revenue and gross profit in the March quarter.

Also in Q1 2008, we experienced higher-than-expected activity with the undisclosed Fortune 100 big box retailer we signed in September of last year. Through this relationship we support the retailer's direct-to-consumer business from our customer contact center in Plano, Texas. As we stated last quarter, we believe there is potential to further expand this relationship over the course of this year.

Now moving on to new client activities, I am encouraged by the many developments already factored into our Services Business that will drive future growth and enterprise value; and I am pleased to announce that we recently launched our program for discoverystore.com.com and the Discovery Channel store catalog.

Under this agreement we will provide technology, customer care and fulfillment as well as support for front end planning and procurement activities. Also our program for urban brands, Mary Ann and Ashley Stewart, will be officially kicking off this month. Through our partnership with these two brands, we will provide high-touch customer care and order fulfillment solutions with a focus on extending the growing brick and mortar presence to reach online shoppers.

As part of the agreement we will provide custom-tailored fashion in apparel customer care services for these two brands from our contact center in Plano, Texas.

Since our last call, we announced a new agreement with a national retailer of consumer specialty products. With this new agreement with this globally recognized brand name retailer, we will provide an order management, product fulfillment, distribution and customer care solution to support the client's direct-to-consumer initiative. We will be supporting this client at one of our South Haven, Mississippi campuses and with our customer contact center in Plano. The implementation for this custom warehouse and fulfillment solutions is currently scheduled for completion during the first quarter of 2009.

Since we announced our end=to-end e-commerce solution with Demandware in February 2008 as Mark indicated earlier, we've received a very positive response from the industry and from existing client and from potential new clients as well. This new offering supports retailers and branded consumer goods manufacturers with a total outsourcing solution that is customized to their particular e-commerce strategy; and we do this without losing the site or brand control that has been associated with earlier proprietary end-to-end outsourcing solutions.

We believe this new offering makes a significant difference in our ability to compete for and win new clients. And we have already started to experience, in a short period of time since our announcement, this significant difference and this improvement in our pipeline.

In addition to the positive buzz that is created by our end-to-end offering, we continue to benefit from very positive working relationships with the other major e-commerce technology providers such as IBM Websphere, ATG, Market Live and (inaudible). We share existing client relationships with each of these software providers and because of our existing world-class integrations with each technology platform, and also as a result of our excellent reputation as a direct-to-consumer service provider, we are frequently invited to jointly propose on new business with these partners. (technical difficulty)

And three, we have a proven mature, global solution for domestic companies that are looking at markets abroad to fuel their growth as domestic revenues in some cases decline.

As Mark mentioned earlier, our pipeline of pending proposals remains robust, even as we signed a steady stream of wins. Currently our prospective new business pipeline is valued at about $35 million based on client-projected volumes.

Now for some highlights from our growing eCOST.com business I will turn the floor back over to Mark. Mark?

Thank you, Mike. Now turning over to the eCOST.com business, just a few highlights for you from there. We are targeting 2008 to be a solid financial year for eCOST with both strong revenue growth, improved gross margins and a solid control on costs. Q1, as it was for the services business that Mike just described, was also a very solid quarter for eCOST.

Overall, we are pleased to report revenue growth of 29% for the quarter compared to last year and our gross margins were at about 8%. Now, while this is at the lower end of our targeted range we continue to believe that the steps that we are taking will drive improvement in this area going forward. Our mix this quarter was heavier on notebooks than it had been in the past and had some impact on our gross profit percentage this quarter.

We anticipate achieving cash flow breakeven at a run rate of approximately $10 million in revenue per month at approximately 10% gross profit margin. At this time we believe these goals can be achieved in the near-term as we continue to make improvements to the shopping experience for consumers as we offer a wider selection of merchandise with higher margin product -- higher margin potential and the further use of virtual warehouse agreements that allow us to frugally use capital in terms of our inventory investment.

In the past few weeks we launched a very significant site revision. This is the third such major revision in the last 18 months at eCOST. This revision added much improved navigation, search, and categorization capabilities as well as adding PayPal as a checkout payment option. We believe PayPal provides as a safer and more cost-effective payment-processing solution than traditional credit cards have previously. The introduction of PayPal has been met with wide acceptance as almost immediately as PayPal has become one of our top checkout payment choices by consumers on our site right away.

As part of our growth and financial improvement strategy, we recently announced the addition of 60,000 new products in our For The Home and Sports and Leisure stores. We believe the addition of these new products has allowed us to significantly diversified our product mix beyond consumer technology offerings in a relatively short period of time. We continue to follow the same product strategy of sourcing in order to drive customer activity to our site. This strategy uses a myriad of daily deals in these new categories as we do in technology and consumer electronics to drive visitor volumes by way of our daily hot sheet e-mail marketing as well as its ongoing effect on [viral] and our affiliate advertising.

Our long-term strategy is to establish ecost.com as the Web store for deals across a broadening range of product categories. A key factor in achieving our financial goals is being able to acquire new customers in a way that is cost-efficient. This is something that we have worked very hard on over the last 18 to 24 months, during which we have dramatically improved our costs to acquire new customers. We continue to monitor for new and more effective advertising and marketing methods. This is including paying out a much greater emphasis on e-mail and viral marketing activities as I have already described through the advertising of our limited time and limited quantity deals.

Now just a couple of minutes on some operating metrics for eCOST for the quarter ended March 31st, 2008. In that quarter, eCOST had approximately or at the end of the quarter at approximately 1.8 million total customers compared to 1.67 million total customers in the prior year period. New customers for the first quarter of 2008 totaled 22,939 versus 27,735 a year ago. For the three months ended March 31st, 2008, eCOST reported a total of 61,000 orders shipped with an average order value of $450 compared to 66,000 orders shipped in Q1 of '07 when our average order value was $326.

Inventory turns were approximately 15 times and accounts receivable days outstanding remains steady at approximately 10 days. Ad expenses for the first quarter were $190,000. That compared to $300,000 for the first quarter of '07. The estimated cost to acquire a new customer for the first quarter of '08 was $7.10, excluding our catalog costs, compared to $10.50 on the same basis for the first quarter of 2007. This is a great example of our focus on acquiring customers in a more cost-effective manner.

Our estimated cost to acquire a new customer is calculated by taking total ad expenses during the period, dividing it by the total number of new customers during that same period and excluding catalog costs.

We are closely monitoring the macroeconomic issues that may affect consumer buying patterns. We read all the same reports you do; however our first quarter results continue to show strong year-on-year growth in both our business to business and business to consumer segments. April's business to consumer year-on-year results was somewhat softer however. We will continue to monitor revenue activity and we will make appropriate adjustments in our advertising spend and other variable costs as the situation may warrant.

Now for some more details on the overall financial picture I will turn the phone over to Tom Madden. Tom.

Thank you, Mark. Let me first start by providing a brief overview of our consolidated operating results for the quarter ended March 31, 2008. Then I will provide some select operating highlights for certain 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 March 31, 2008 were $118.5 million. a 13.5% increase compared to $104.4 million for the first quarter of 2007.

Gross profit for the quarter for the first quarter of 2008 was $13.3 million or 11.9% of net revenues excluding pass-through revenues as compared to $10 million or 10.2% of net revenues excluding past-through revenues again in the first quarter of 2007.

The increased consolidated gross profit is primarily attributable to improved performance in our Services Business.

As we have discussed previously, we utilized adjusted EBITDA as a key metric in evaluating our operational performance. In the first quarter of 2008, our consolidated adjusted EBITDA was $2.8 million versus $0.8 million in the prior year period. For the first quarter, net income was $0.4 million or $0.01 per basic and diluted share as compared to a net loss of $2.4 million or $0.05 per basic and diluted share for the same period last year.

Another key metric we use in evaluating our operational performance is what we defined in today's press release as non GAAP net income. To calculate this, we exclude from net income calculated in accordance with generally expected accounting principles, the impact of stock-based compensation and amortization of identifiable intangible assets. For the first quarter of 2008, non-GAAP net income was $0.8 million or $0.02 per basic and diluted share. A significant improvement as compared to a non-GAAP net loss of $1.9 million or $0.04 per basic and diluted share of the same period last year.

Obviously we are quite pleased with our results for this quarter, especially with it being our fourth consecutive quarter of consolidated net income performance. We believe this clearly illustrates the progress that we are making throughout our businesses.

Turning now to the performance of select business segments for the quarter ended March 31, 2008, first, service fee revenue increased 23% to $20.8 million from $17.0 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 Tractor Supply, Labor Brand Retail, Riverbed and others within the past 18 months. We also benefited from growth with existing clients which included project activity and modified contract arrangements with one of our largest service fee clients. These components of our topline growth also contributed to improved gross profit margin in the Service Fee Business in the March 2008 quarter.

SG&A increased in the March quarter for this business versus the prior year primarily due to increased personnel cost in the current year.

For our Supplies Distributors business segment, revenue was $62.3 million in the March 2008 quarter compared to $58.8 million for the prior year period. While gross margins for this business remained relatively in line year-over-year at approximately 6.5%, gross profit dollars increased due to the revenue growth which, along with the reduction and interest expense, resulted in an improved net income result for Supplies Distributors.

As for eCOST.com, in the first quarter of 2008, eCOST.com's revenue was $28 million compared to $21.6 million in the prior year, a 29% increase. This is also down just slightly on a sequential basis versus the seasonally high December 2007 quarter. The net results of the increased revenue, along with the continued focus on cost, was a significant improvement in eCOST.com's bottom-line performance. eCOST.com's adjusted EBITDA reflects a loss of $0.5 million for the March 2008 quarter, a dramatic improvement over the prior year loss of $0.9 million.

On the financing front, our banking relationships remain strong. During the quarter, we renewed our asset-based financing facilities for our Service Fees and Supplies Distributors Business segment. These new agreements have terms that are either at or somewhat improved from the prior levels resulting in increased working capital financing availability. The facilities that we have in place are primarily asset-based facilities which are secured and collateralized by the underlying assets of the business, primarily accounts receivable and inventory.

While there are macroeconomic issues facing the banking industry today, we believe our asset-based facility structure is advantageous for us within this environment.

Our debt balances declined this quarter from the December 2007 results primarily due to principal payments made under our term debt arrangement as well as a reduction in borrowing under our Service Fee Business asset-based lending facility.

The [flatter] reduction was due to a temporary cash flow benefit from the modified contract structure with our large client previously discussed. This allowed us to maintain a relatively consistent level of cash in the business while reducing our debt. We do not expect for the same level of cash benefit of (inaudible) relationship to continue as we look ahead to future quarters.

As far as other working capital components, our accounts receivable DSO performance, inventory turnover and accounts payable days to pay remain healthy throughout our businesses. Now I'd like to turn the call back over to Mark for closing comments. Mark.

Thanks, Tom. As an update, I'm extremely satisfied, happy -- as I know Tom and Mike are -- with our results for the March quarter and in particular the improvement in our bottom-line performance. Our results for the quarter reflect continued execution and our Service Fee Business to develop and implement best-in-class solutions and a solid base to expand upon the eCOST.com business. In the face of a difficult retail environment in '08, 2008, we believe our performance will be driven by existing strong client and customer base, as well as new clients that we have signed and fully implemented over the last 12 months.

Moving forward, as we look out for the rest of 2008, we are proud today to tell you that we are maintaining the consolidated guidance that we stated last quarter. For 2008, we are currently targeting consolidated revenues excluding past due revenue to be in the range of $445 million to $475 million.

As Tom stated earlier, we believe that adjusted EBITDA is a key major to gauge the profitability of our business so we provide guidance on an adjusted EBITDA basis. For 2008, we are targeting consolidated adjusted EBITDA in the range of $10 million to $12 million. This adjusted EBITDA guidance reflects the impact of the restructuring of one client contract that Tom has discussed. We expect this restructuring will result in our service fee revenue under contract and reduce capital asset charges on related equipment.

We estimate non-GAAP net income for 2008 to be approximately $1 million to $3 million. Achieving these targets will depend upon, among other things, achieving and maintaining the significant improvement in operations that we have been able to show at eCOST.com and also continued strong performance from our Service Fee and Supplies Distributors Business segments on a year-over-year basis.

Okay, before I complete the prepared remarks, let me just take a moment to discuss the current market valuation and our announcement today on the reverse stock split that we plan to move forward with. As I've stated on a last couple of conference calls, we remain quite disappointed with the current valuation of our stock particularly in light of our improved financial performance over the past 12 months.

Our primary focus over the past year has been on improving the financial fundamentals of each of our business segments and it was our belief that the price of our shares would simply take care of themselves as our performance improved. We believed that by delivering on our stated goals including significant improvements to the eCOST.com business as well as signing new clients to our Services Business, all of which have been done. that we would see the stock react positively.

Obviously this hasn't occurred and, in fact, we have seen a slight decline in our share price during this period. This has left our Board and management to believe that there are other underlying reasons that's depressing our stock. Over the past year and recently, we spent long hours gaining the advice of our trusted advisers on this matter. We consulted with our IR firm, [KCSA] Strategic Communication and others and have offered several possible -- plausible scenarios -- been offered several plausible scenarios.

These include, one, obviously the market is very rough right now for micro and small cap stocks. Secondly that we don't have enough awareness within the investment community. And, third, that the pending delisting notice that has been delivered to us by NASDAQ and trading as a penny stock deters or prevents many new institutional investors from taking a position in our Company.

We considered each of these scenarios very carefully as we developed our IR plan for 2007 and then again in 2008. The most obvious one to attack first after the financial fundamental improvement was the lack of awareness of our Company and its story to Wall Street. As such we have gone on numerous roadshows over the past year and participated in multiple one-on-one conference calls with institutional investors and with sellside analysts as scheduled by KCSA.

A returning message that we received was that our stock price and pending delisting was a deterrent that had to be considered. Further, we've learned that the ways and means of Wall Street are oftentimes not well understood by the general public. The notice of delisting, while having no correlation to the strength and profitability of our business, has the effect with some individuals of painting us into a picture of firms with pending or potential operational struggles or financial difficulties. These characteristics could be no farther from the truth for PFSweb as we believe we remain financially, operationally and competitively strong.

Unfortunately, though, this situation can create a cloud of uncertainty and misunderstanding, particularly as we compete for new clients. While we have assured them that the delisting has no correlation to the strength of our business, it is just simply not a conversation that we want to continually have with clients when everything else is going so well.

We have had shareholder approval for giving our Board discretion to execute the reverse split for almost two years. We have been holding off on doing a reverse stock split with the felling that perhaps we can start seeing results from the increased awareness we were creating through the ratio and IR activity that we did in 2007 and also from the improved financial performance the Company has turned in over the last year. As I stated earlier, clearly this hasn't happened.

Given the continued underperformance of our shares and the steady improvement of our financial results and more and more client inquiries about the delisting, our Board decided last week that a reverse split was the best option available to in effect lift the cloud of uncertainty surrounding the delisting notice. So at our last meeting, the Board authorized a [1 for 4.7] reverse stock split.

Now believe me when I say that this decision came only after careful deliberation and careful consideration of the potential risks and rewards of this course of action. We do understand that there are pros and cons. But after a careful evaluation, we believe that the pros outweigh the cons in this scenario. We expect that this action once implemented will overcome the challenges associated with trading below the dollar share price and that we will be able to move ahead once again with our strategy to raise awareness.

This includes scheduling meetings with investors in Boston, New York and San Francisco in the coming weeks, as well as speaking at the upcoming [J&P] Securities conference and participating in an investor tour in Memphis, sponsored by Cleveland Research all of which will happen in the next few weeks.

That concludes our prepared comments for today. Operator I would now like to open the line for questions.

(OPERATOR INSTRUCTIONS) Jon Hickman of MDB Capital.

Can you explain -- I mean I appreciate the analysis of -- or the thought process behind the reverse split, but why the 4.7? Why that number?

We took a look at our share count outstanding and it is about 46.5 million shares and so conversion that 1 for 4.7 gives us about 10 million shares outstanding. In addition, when we took a look at the share price as it was trading last week, it was trading at about $0.85. You convert that in a 4.7 amount and you get about $4.00 this year which we felt was appropriate price to utilize.

So you're not worried about -- well, okay. You are not worried about illiquidity in the stock with only 10 million shares outstanding?

We've taken a look at it and we believe that if we can properly communicate the story, continue to drive the financial performance that we have and that we've got targeted that we will be able to address that.

Okay and then could you just do me one more favor? Could you go through this one client that is restructuring? I understand that because the assets are fully depreciated you're not going to be able to pass through those costs so that is not going to hit your revenue line. Is that the story?

Yes, there's the client arrangement that we talked about last conference call where the structure was being modified this year, where because of some of the capital asset charges that we had previously in the business there would be (inaudible) amortized over the initial term of the contract, those are no longer repeating on a go-forward basis in the conjunction with re-signing the contract or renewing the contract this year.

One last question. This might be for Mike. Can you kind of review that big box retailer and what you are doing for them? And I missed some of those comments, I think.

I can. So the services we are providing for the big box retailer has to do with supporting their online business and our call center. So we are taking calls around ease-of-use and transactional questions from the online store. Where's my order, what is the order status, questions around orders having to do with the online store. And this is a business as we've indicated the past couple of quarters that has grown pretty significantly; and we're also pretty excited about the opportunities to expand that business as we continue to perform really well for this client and have the levels of customer satisfaction that we do with the client. (technical difficulty) So it is a great opportunity for us and hopefully an expanding opportunity over the coming year.

Any chance of us finding out who that big box retailer is in the future?

There's always a chance. You know it's one of those things with clients, particularly large ones, we have to work with them and their internal legal function and PR firms to have permission to disclose the name and while we haven't been precluded from that, there's just a sensitivity and a legal process to work through with them to have that ability. So it has nothing to do with our performance. It just has to do with sort of the red tape and bureaucracy of working with one of these real large companies. But it's possible that, in the future, we will be able to announce their name. We haven't been precluded from that.

Okay and I guess I have a few more really short questions. One is in the $35 million in the pipeline of new business, are there recognizable names in there? I mean --.

There are. (multiple speakers)

Probably would recognize as either being big brand retailers or big general merchandise retailers and we still have a decent percentage of the pipeline that's attributable to the high-tech B2B side of the business as well. So the diverse pipeline as well as one that's I think very valuable.

Then, this last question is on the eCOST. $10 million or 10%. You want to venture a guess as when you might get there?

I hope it's this year. Obviously as I mentioned a little bit in there I'm a little bit cautious right now in terms of just the macroeconomic undertow there seems to be on the consumer side. We didn't see it in the first quarter but just reading other retailers' results. it appears that there are some consumer spending patterns that seem to be changing.

So we are kind of a little bit holding our breath here in terms of where that is at. So with that has an underlying factor it's tough for me to just say what the prediction is. We are running in roughly $9 million a month area right now at about -- let's say on an adjusted basis about 9%. We were 8 for the first quarter but there were some specific mix issues in there that I think we will overcome.

So I think that we are close, we just need some headway and we need some expansion in our margin percentage. The introduction of these new products that we just came out with really in the first part of April are products that can net us two or three times the gross margin percentage that we are making in our technology consumer electronics side. So --

I will jump back in the queue. I have some more questions but I will let someone else ask.

[John Fitzgerald] of [Bishop Rosine & Co.]

Couple of things. I want to follow through on this reverse split thing. You obviously had a very, very solid quarter and I'm going to say the reverse split thing is extremely disappointing. Okay. You still [left] this stock in any stock category under five dollars. Okay. That is No. 1. 2, the reality of Wall Street is you have now taken it up to the $4.00 level which puts the bulls eye on it for the shorts? Okay? What safeguards are you going to put in place here? There is no buyback in place. There's been no insider buy, they don't go to work on an $0.89 stock but they can certainly go to work on a $4.00 stock which they historically have done with this company back when.

I don't know who advised you on the 4.7, but he left you under -- he left you in the penny stock territory. So these institutions that are saying they have an interest, 1, you've taken the liquidity out as the other gentleman on the call just alluded to before that, down to 10 million shares. That excludes any number of institutions, okay, that would have an interest and, secondly, if they can't buy a penny stock, they are not going to be able to buy this at $4.00.

So why don't you elaborate a little bit further on who advise you and you did answer the 4.7 part to leave it at 10 million shares, but if you are going to do a reverse split it is more important to get it above the penny stock category than it is how many shares you have outstanding.

So could you elaborate a little bit what kind of safeguards you are going to put in to defend yourself here against the bear rates that are going to come in here? Would be very surprised if they didn't. And the same institutions that you had chatted with that they had expressed the fact that they couldn't do anything under the present circumstances, have they now under this circumstance indicated that they are going to be buyers of the stock here.

So I'm more concerned about the safeguards here and how you came to 4.7 and not realize that it's still left it technically in penny stock territory, Mark?

Okay. I think I got the pieces of your question in here. I guess the first question of safeguard is we have got to continue doing what we're doing which is delivering financial performance.

Mark, you've done well on that but it hasn't helped you till now. You've done very well on that. You've shown progress -- I don't mean to interrupt you, but the progress has been there and the share price decline continues. What we're worried about now is you diluted this thing and put it squarely in the bulls eye category of the shorts whether your advisors might want to believe that or not.

But I've been doing this 40 years and I can tell you that is the history of splits that do something like this and that is extremely disconcerting to see you do that off such a very solid good quarter. It basically says to shareholders that we can't get this stock above $1.00 off this kind of quarter. It makes no sense. And the guys that are telling you make might have an interest if you do a reverse split, I've got to question their sincerity.

So now we are exposed again here a little bit up at the $4.00 level on a 10 million share outstanding on the float side of it, very disconcerting. Is there any -- this is a done deal do we assume correctly that you are going to do the one for 4.7?

Yes it's a done deal. We had an approval for a maximum of 1 to 6 so we couldn't make it a $10 stock regardless of where we were at.

No but you could have made it over $5.00, that's what --.

John, let me finish here, okay? There are other callers waiting here.

Yes, no, I know that but I've been with you for three and a half years on this and shareholders have been very patient and loyal here and to see this occur at this stage is very disconcerting to them. I've got to tell you. Go ahead, I will let you finish now. Go ahead and tell me the rest of what you are trying to do.

So as I mention in my prepared comments the competitive situation for us particularly with the general public who don't understand the mechanics of share prices and splits and the fact that many of them paint us into a category of a company with financial difficulties because of the delisting notice, having that hangover there has created an atmosphere for us that makes the competitive environment more difficult.

That was the number one factor for us in terms of the decision process that we went through in evaluating the pros and cons of the deal. (multiple speakers)

In spite of your balance sheet and everything (multiple speakers)--?

We delivered the financial performance the last year now and the market hasn't responded.

Why do you think that is?

I'm not the professional on the Wall Street side. That's why I rely on the financial advisers that we've got. We talk to a number of our large shareholders and, clearly, as I acknowledge we understand there are pros and cons. The outweighing factor here is the competitive environment that we see from a customer standpoint and our need to kind of get this cloud out of the way, even if the share price were to fall temporarily (inaudible) -- ultimately the market value would fall, ultimately, it eliminates in the general public the question about the delisting notice. So that was the overriding factor of where we are.

Operator, we will move onto the next caller now. John, thanks for your questions.

George Walsh of Guilford Securities.

Mark, could you speak to with eCOST in the mix, what are you doing in order to drive the higher level margin business as part of the product mix that is sold in any particular quarter? Is there special marketing things you're doing and that -- or is it just a matter of getting more products on the -- you know available on the site?

Two specific things. 1, we've added a -- at least we've only been at it for three weeks now, so we added a weekly hot sheet that's just housewares and leisure store products only. That sheet has had good response rates to it. Frankly, has had as good a response rates as our technology and consumer electronics hot sheets have. Again, those are targeted to our existing customer base. But we still get about 20% of our responses from our daily e-mail marketing, and getting new customers. That is the viral impact of the marketing that goes on.

So it's too early for us to have measurable results. We are now going to -- all of our houseware for the Home and Leisure Store advertising has just been done on Sunday, (technical difficulty) weeks. We are going to try our first week a hot sheet on that this week and measured the responses on it in contrast to a consumer electronics and technology hot sheet. So to our existing customer base, is number 1.

The second part of it is is that because of the higher margin characteristics of these products, the hypothesis that we have and again I don't have enough data yet to prove this out, but my initial data and indication shows me that I can pay about three or four times the price to acquire a new customer via shopping comparisons and engines for example leading with a houseware product than I can leading with a technology product. And that has to do with the gross margin dollars involved in the sale and the gross margin dollars of the subsequent sale of the kind of buyer that you actually obtain or acquire through this.

So with these higher margin characteristics, it opens up a number of the web marketing avenues that we have curtailed significantly over the last few years because we found we were acquiring unprofitable customers with technology products. So those are the two areas that we are leading with right now.

The third one which we will expand in the coming months will be in our affiliate marketing activity. There are a number of affiliate sites that focus on these types of products that were previously not interested in being an affiliate of eCOST, because we were a technology and consumer electronics site. So we will circle back with our affiliate networks and begin to add affiliate relationships as well.

But we should expect that price to acquire a customer to start ticking up from here?

If we are successful with this, yes, you'll see -- you may see the price to acquire go up, but we should also see gross margin mix [grow] up as well. So (multiple speakers) hand in hand. Right now it is small and it's not measurable on either piece.

So those won't necessarily be concurrent to start out?

They should be concurrent, yes, because they are acquiring the product right away. So what we paid to date to acquire a customer that buys a product today so you should see margin mix. But, again, understand this is a greenfield in the category in here and it's still small today.

If we can get $3 million to $5 million of incremental sales in this category during 2008 at 20+ point margins it'll have a nice impact for us in terms of our overall financial plans.

Okay. Also the other initiative in the proxy was the change of auditors. If you could just 1, presuming the vote went through for that and just how that will proceed and 2, the reasons for that?

It is relatively simple. It's a price issue more than anything else. We had a required partner role happening because of time requirements on our lead partner in the deal which just simply opened up the process in terms of evaluating people in that, because the team was going to change anyway because of the required rules. So we opened it up and talked to three firms. KPMG also rebid on the deal as well and price became a factor in the proposal process so it was relatively simple.

We were going to deal with the people change anyway. So cost kind of became a factor in the decision process.

Mark, I just would like to add, I'm very pleased actually fundamentally with how you guys have done. This is what a turnaround takes. You make the kind of progress, you control your costs, sometimes you're faced with a difficult economy. But I do [say] I'm a bit concerned with the reverse split. I think it takes away a bit from the message. I understand on the fundamental side it is starting to impact your business so you do have to pay attention to that.

But I would just add that the more you get your message out, it is important that the other factor will be here now is I think the liquidity in the stock. You want to keep that is healthy as you can and that's a very strong communication effort that will -- you'll have to follow through on what you started last year in a more vigorous matter. But that will be very important to make sure the liquidity is still vital as you change the number of shares outstanding. So just wanted to let you know. Thanks.

(OPERATOR INSTRUCTIONS). [Alex Silverman] from [Special Situations].

I would like to applaud you and your team for a phenomenal (technical difficulty) and I guess we stand in the minority as your largest shareholder. We think the reverse split is the right idea when your pending delisting. So I'd like to leave it at that.

Thank you Alex.

Jon Hickman of MDB Capital.

Just a quick follow-up. On eCOST are you seeing any new competition out there as far as the technology side goes? Or is it pretty stated (inaudible)?

I've not seen anybody new specifically in the last year. I would say that's relatively stable at this point. It's a tough category to get into. It is very, very price competitive and if you are going to spend the money to climb into this business, unless you had a history in the products it would be a real difficult category to get into. It's very competitive and not a lot of margin potential.

And so how come notebooks were so strong?

It's just the mix issue in the quarter. We have some good deals on it that help drive volume out there and I think that one of the things that was down a little bit that were doing was our LCD TV category was good but not as strong as it had been in the previous couple of quarters. And we make better margins on that product. So I think that some of the acquisition of everybody upgrading to HD television has kind of begun to slow out there a little bit.

So we are shifting our focus now into some of these new categories that I described out there. Portable GPS continues to be a very strong category for us as price points as those products come down as well. So -- but just mix and I don't see it as a mix item that should continue on term.

Okay. Thank you.

George Walsh of Guilford Securities.

A little bit of an updates on Demandware and how that relationship is developing in terms of real business in the pipeline?

Sure, I think we indicated in the prepared comments and maybe hinted at it in the release that we were on track with that rollout. We are very pleased with the results, especially the traction that we have in our pipeline. Even though it's just been a relatively short period of time since we announced that relationship really sort of formally took it to the marketplace, the responses that we've gotten from research analysts and from prospects, and our pipeline from existing clients and probably most importantly from new prospects that have come into the pipeline since we made that announcement has been overwhelmingly positive.

So I think if you look at the value proposition that we were intending to generate from that relationship by having a best-of-breed technology partner that came to market with a model that really gives us a lot of scalability and leverage, that value proposition is being perceived and being responded to. And I expect that we will see the results of that as we are able to announce wins over the next six months, but even more than that, I think we will see the fruit born from this relationship coming in into 2009 just because the nature of the sell cycle. It is four to six months of sell cycle typically on an end-to-end deal. So good results I think coming from the relationship in '08, even better if you look to the future. Very positive.

And are their joint development costs? I mean are you guys developing product together or is it really kind of customer by customer?

There is an integration that we are leveraging, part of which has or do you been done as part of the relationship we have with them before we made the announcement but we obviously have to create an integration between if it's leverageable with multiple clients. So the intention is to do a lot of the work once and then repeat many times by leveraging that core work over and over again.

So there's some investment that we are making in rolling this out which we had planned and we are very much on budget with that planned capital expenditure; and then you will be somewhere in the neighborhood of maybe 20% with each new client that we are doing because of customer requirements or unique requirements each client has, but very leverageable once you have the first client up and running. You might remember that the first client, the first official end-to-end client that we are doing for Demandware is our existing roots relationship which we've had for almost six or seven years now. And that is going well at this point and then there are several in the pipeline to follow as well.

And how did the marketing efforts develop? Is that something where they go out and bring it to you or you bring it to them or is there a joint effort where you both go calling on a new customer or try to develop one?

Actually is one of the great things about the relationship is that there's benefits that flow from both sides. So we cooperate with joint marketing efforts. You would particularly see that at events such as a [shockdotorg] event or e-tail or luxury or activities, different tradeshow type events where we may be cooperating with the [booth] presence in that sort of thing and joint messaging, but we also -- they have a salesforce and a marketing activity that is independent of ours.

Obviously we do as well. And so as we take the message, both of us take this message to marketplace we are generating opportunities that sort of crossfeed, so there's a lot of synergy between the two. And we are seeing the benefit that is driven from both organizations marketing its sales efforts.

Is it domestic versus international in terms of the potential customers?

No, it's both. One of the great things about the partnership is we have a very mature global offering with our presence in Europe that's almost a decade old. They have a very mature presence in Europe, partially because of their origins coming from the -- a primarily European sales model and so they've got a package that is fully localized international and both of us have great international capabilities. So it's an opportunity for both.

And there's a lot of infrastructure on a side that you can leverage in terms of support?

Absolutely.

Yes. Well, it's a very exciting initiative and I congratulate you on it. I think it holds great promise.

Thank you. Obviously we are excited about it to and we are excited to talk about it in the quarters come by.

[Chris Sernaglia] of Stifel Nicolaus.

I missed part of the call. Do you have any profit projections going forward for '08? I know we got earnings projections, any profit projections?

Again it's the targeted adjusted EBITDA guidance for this year is $10 million to $12 million and non-GAAP net income of $1 million to $3 million. Which is consistent with where we were at on our last call.

And these new customer wins, are they going to be cost neutral going forward? Or are they going to be beneficial to the Company going forward?

Going forward they will obviously the -- they will contribute to us profitably, but each of these, I mean the one that was announced today doesn't have an '09 implementation period on it so we won't recognize any revenue during that period of time. I think costs are already here, so I don't expect any changes in our guidance as a result of the implementation costs that will incur over the next seven or eight months with that particular client. But we won't see any revenue or profit impact from that one until early next year.

Some of the others that we have have earlier contribution periods. Some which we've taken into account in our numbers already, Discovery, for example, was a client that we had already accounted for in our projections for this year. And that client implemented last week or week before last at thediscoverystore.com and we have a couple of other deals in the pipeline at this point, but most of the deals that we announced at this time of the year are not going to have impact for us in terms of gross profit contribution until '09.

At this time, I'd like to turn the call back over to Mr. Mark Layton for any closing remarks.

Appreciate everyone's time today and input; and we will talk to you again next quarter. Have a great week.

This concludes today's PFSweb conference call. You may now disconnect.