PFSweb Inc (PFSW) 2009 Q1 法說會逐字稿

Good morning, my name is Latrisha and I will be your conference operator today. At this time, I would like to welcome everyone to the PFSweb fourth 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 session. (Operator Instructions). Thank you.

I would now turn the conference over to Mr. Garth Russell of KCSA Strategic Communications. Please go ahead.

Thank you, Latrisha. Before turning the call over to management I would like to make the following remarks concerning forward-looking statements. All statements in this conference call other than historical facts are forward-looking statements. The words anticipate, believe, estimate, expect, intend, will, guidance, confident and other similar expressions typically are used to identify forward-looking statements.

These forward-looking statements are not guarantees of future performance and involve and are subject to risks, uncertainties and other factors that may affect PFSweb's business, financial condition and operating results which include, but are not limited to, the risk factors and other qualifications contained in PFSweb's annual report on Form 10-K, quarterly reports on Form 10-Q and other reports filed by PFSweb with the SEC to which your attention is directed. Therefore, actual outcomes and results may differ materially from what is expressed or implied by these forward-looking statements. PFSweb expressly disclaims any intent or obligation to update these forward-looking statements.

During this call, we'll also present certain non-GAAP financial measures. EBITDA, adjusted EBITDA, non-GAAP net income, free cash flow, merchandise sales and certain ratios that use these measures. In our press release with financial tables issued earlier this week which is located on our website at PFSweb.com you'll find our definitions of these non-GAAP financial measures, a reconciliation of these non-GAAP financial measures with the closest GAAP measures and a discussion about why we think these non-GAAP measures are relevant. These financial measures are included for the benefit of the investor and should be considered in addition to and not instead of GAAP measures.

I'd like to just correct what I said. The press release was actually issued this morning. At this time, it is now my pleasure to turn the floor over to Mr. Mark Layton, Chairman and CEO of PFSweb. Mark, the floor is yours.

Thank you, Todd. Good morning everyone. I would like to welcome you to our 2009 first quarter conference call. After we have a few moments of prepared comments we'll be available for questions at the end of the call. This morning we will provide you with an overview of our financial results for the first quarter and add some color on the events that shaped the quarter ended March 31st, 2009.

As I look at the financial results for the first quarter, I would categorize our status as steady as you go. On lower revenue and cost levels, our consolidated adjusted EBITDA performance of $2.7 million for Q1 was virtually flat with our same quarter last year. Given the economic challenges that we have all been facing and the loss of our large US Government client that became effective during the March quarter, I'm actually quite pleased with our overall performance when you compare it to last year.

As I described previously, we have built our business model and operating culture with the goal of ensuring the utmost in flexibility, variability and responsiveness. While those all sound like great words that any Company can repeat as part of their culture, as they say, the proof is in the pudding. Over the past several months, recognizing the economic downturn and changes in our client revenue levels, we have quickly reacted to make adjustments to our operations accordingly.

We have shed costs, adjusted our operational approach to help address the evolving landscape, while also seeking to preserve our ability to effectively compete for new opportunities that arise. It is from this nimbleness and flexibility that we believe we continue to perform well operationally. We see these abilities as important factors for us and our clients as we believe it gives our clients confidence in PFSweb as a partner because we believe we have the ability to adapt, change, and react quickly to a rapidly changing business environment.

As you listen to the remainder of today's call, you will hear more about the solid progress we continue to make in each of our business segments.

Our services new business pipeline remains at near record levels. We have signed or in final contracting stages with number of new client deals already this year include ago five year agreement with the Army and Air Force Exchange Service and a new signed relationship with a Fortune 100 Company.

You'll also hear this morning details regarding the continuing improvement in bottom line results and top line growth in the consumer portion of our eCOST.com subsidiary. Even in this challenging retail environment, eCOST.com is showing solid top line growth activity in the B2C segment. And I'll give you a little more flavor on that in just a minute.

So with this information as a backdrop, I'd like to turn the call over to Mike Willoughby who will provide you some additional details about our services business segments specifically. Mike?

Thank you, Mark and good morning everyone. It's good to be here. Before beginning my comments I'd like to remind you that when I refer to our services business segment, I'm including both our supply distributors and our PFS Service Fee business. Since both of these businesses have essentially the same operating model although they have different financial models.

As Mark just mentioned, our services business is quickly adjusting to the impact of the economic downturn as well as the non-renewal of a large US Government contract. Our strategy to respond to the challenges of the weak global economy and the non-renewal of this large US Government contract is to continue to aggressively manage costs within the business, as we continue to seek to grow the services business through new client contracts.

Our goal in effectively executing on this strategy, we believe, will result in our being able to emerge from the recession with greater diversity in our revenue base, as well as a robust list of name brand clients which would lead to decreased customer concentration risk.

As of March 31st, 2009, our services business had over 40 clients and brands. This includes a number of client programs launched within the past year. Some of which were not fully ramped up as of the end of the first quarter.

These client programs include Luxottica Group's Sunglass Hut which was implemented in the December 2008 quarter. Sephora, which is a division of Moet Hennessy, Louis Vuitton or LVMH, which was also launched in the December 2008 quarter. And an iconic brand name client signed early in 2008 which just went live during the March 2009 quarter.

We were also very pleased to be able to announce on April 7th, 2009 that we signed this five year, $15 million service contract with Army and Air Force Exchange Service. Under this agreement, we'll support the printed exchange AFIS catalog as well as the exchange online store.

Our customized solution includes warehousing and order fulfillment services and technology services required to create multiple technology interfaces with AFIS systems. We're implementing this solution into one of our Memphis, Tennessee facilities in order to support this new relationship.

During the March 2009 quarter, we also launched an end-to-end eCommerce program for a brand that we are still unable to disclose. This brand is part of the previously announced master agreement with a luxury goods retailer. And is the first custom eCommerce solution that we will provide under this master agreement for separate but widely recognized luxury or fashion apparel brands. This master agreement leverages our warehouse, order fulfillment, and logistics services to support each of these brands uniquely.

Since then, we have also launched a second brand on this end-to-end program earlier this week. We believe this second program launch testifies to the maturity of our end-to-end product offering and visibly demonstrates our ability to rapidly launch successive brands on a common platform and infrastructure while we still deliver a completely customized customer experience at every customer touch point. We're also excited that the master agreement has the potential to expand through the addition of other brands that are owned by this company.

The continued roll-out of the separate customized programs throughout 2009 under this one agreement validates our approach to target luxury and prestige brand holding companies or portfolio companies where a single contract relationship may lead to multiple valuable brand engagements. We believe our end-to-end solution is uniquely positioned in the industry to meet the needs of these brand holding companies. Where we can provide a single solid infrastructure and provide tremendous leverage to our clients and economies of scale while we still provide a custom branded experience for each of the brands.

And I believe this is very critical to the luxury and prestige brands that we're targeting. We have now launched multiple end-to-end programs including roots.com for the US and Canadian markets, as well as the two sites for the luxury goods retailer.

In addition to the branded sites yet to be launched under the master agreement, a significant number of the opportunities in our new business sales pipeline are for end-to-end programs. We believe our end-to-end eCommerce solution launched in early 2008 is a significant competitive differentiator that we believe will continue to help us compete for new business contracts going forward.

Concerning new client agreements for 2009, we've entered into one new client relationship with a Fortune 100 Company and we're in the final contracting stage with several other companies. We will formally announce specific new agreements as we're permitted by our clients. However, clients are often hesitant to disclose their decision to outsource major portions of their operation. And we're sensitive to their wishes as we are the brand behind the brand for the world's leading brands.

We're pleased with these new client relationships and the continued confidence displayed by major brands in the strength of our solution and our Company. We believe this confidence is further signaled by the significant increase in the quality and value of our new business sales pipeline.

This new business sales pipeline has increased from prior levels to reach approximately $45 million in estimated annual contract value. And these contract values are based on client projections. This figure includes the deals mentioned previously that are in the final contracting stage.

As Mark indicated earlier in his comments, we believe this to be one of the most exciting new business pipelines we've had in years. And I join Mark in congratulating our entire team for their hard work during a difficult time to create significant new opportunities to grow our already impressive client portfolio. For us, winning new business is a big team effort and I'm very proud of our winning PFS team.

To summarize, we believe the recent new clients that we have signed as well as our pipeline of pending proposals demonstrates the strong demand for our global solution in the US and European markets. Our solution meets the needs of large international corporations, looking to directly reach customers via the Internet without losing control of their brands and allowing them to minimize the risk of entering new markets.

By utilizing our global eCommerce solution, market dominating brands are now empowered to quickly and aggressively tap into new growth opportunities while they maximize their existing online channel much more effectively and efficiently than was previously possible with in house or competing outsource solutions.

Having commented on the services business, I'm going to pass it back over to Mark for some comments on the eCOST.com business. Mark?

Okay. Thanks, Mike. Obviously a lot of exciting stuff going on in the service segment. Likewise, in the eCOST.com subsidiary as well. You may recall that we operate eCOST basically in two operating segment. We have a consumer segment, what we call business to consumer and then a small and medium sized business segment that we call business to business.

Over the past 16 months we have placed increasing focus and emphasis on the growth and expansion of the business to consumer segment, given we believe it has greater potential for growth and has more attractive financial dynamics. As we look over the past few quarters, we are seeing what we believe is outstanding progress in the B2C segment and its contribution to the improving financial picture of eCOST overall.

During the first quarter of 2009, we continued to see this momentum as the B2C invoiced activity grew approximately 14% year-over-year. Now retail numbers that came out this morning from the commerce department showed retail sales down 0.4% in April, and down 1.3% in March of this year. So you can see that in a very challenging retail environment out there that we're continuing to have success with the programs that we're implementing.

Because the business to consumer segment business generally offers higher gross margins than the business to business segment, the B2C growth has contributed to improving gross margins in the business overall. In the first quarter, gross margins reached 9.8% on a consolidated basis for eCOST, which is about 180 basis point improvement from the 8% reported in the same period last year. This is we believe directly attributable to the growth in our business to consumer segment.

The growth in the B2C business is due to a couple of different factors. The most important of which being our continued focus on increasing the number of product categories and products we offer. This drives a higher margin mix in our revenue base. We are currently offering more than 250,000 SKUs now on the eCOST site. That compares to about 170,000 SKUs on the same period a year ago. Further, new and improved marketing strategies have helped to drive solid growth in our daily unique visitor levels, that's shopper count in retail terms. That has also resulted in higher overall order volumes.

Additionally, eCOST.com continues to drive almost weekly site improvements in our features and functionality. And we also continue to drive outside the box marketing approaches and features that are designed to improve shopper conversion rates.

Most importantly, though, is our merchants. They're continuing to work with our manufacturer and distribution partners and importantly are continuing to provide our business with an ever constant flow of attractive and aggressively priced products that we can offer to eCOST.com customers by way of our bargain countdown deal section and through the twice weekly Outrageous Offer program that we started in the latter part of 2008.

Let me provide you just a few key highlights from the detail standpoint that I believe are important indicators for the improvements of the eCOST business. First, let's talk about unique visitor traffic. This is a statistic similar to shopper count in traditional retail. Unique visitor traffic was up 16% during the first quarter of 2009, compared to last year. Clearly, getting more shoppers to our site and then converting them into buyers is one of the most critical factors to driving higher revenue volumes.

Secondly, because of the attractiveness of our product deals, many of which we make available only to our Platinum Club members, Club member ships have grown tremendously over the past year. This quarter, Club memberships were up over 350% versus Q1 2008. What's important about this data is that our historical information shows us that Club members buy two to three times more frequently than a non-club member. As such, we're excited about the customer life value, that's the repeat purchasing patterns and potential of this large group of new Club members. And the more Club members we have, the higher return purchase volumes we can expect.

Third, new customer growth was also strong again in the first quarter of 2009. We added a little more than 32,000 new customers in the first quarter of 2009 and that compared to about 23,000 new customers during the same period a year ago. That's an increase of about 40% year on year.

Maybe what's most exciting financially is that with these outstanding characteristics that I've just covered, we continue to find ways to optimize our marketing spend. Ad spend over the past year has continued to decline, yet new customer levels are growing. We attribute this trend to improved measuring and evaluation techniques that have allowed us to quickly identify the most effective programs and sources that drive new customers to our site.

As a result, we've been able to eliminate the less effective programs quickly, and invest heavier into the more effective programs. This is resulting in less total ad spend and higher new customer activity, kind of a magic paradigm there. The estimated cost to acquire a new customer for the first quarter of 2009 was $5.84. That excludes any catalog cost. That compares to $7.10, excluding catalog cost for the first quarter of 2008.

We believe that we are perfecting a suite of buyer marketing methods that bring customers to our site by word of mouth or personal recommendation. The buzz created by our Outrageous Offers we believe draws new customers and does so in a manner that's very cost effective when compared to other marketing programs like affiliate advertising or shopping comparison engines or search engine marketing.

As I mentioned a minute ago, we made the decision in early 2008 to heighten our focus on the B2C segment, really for all the reasons that I just described. And clearly we believe this strategy is showing solid success. This is supported by the data which I've already discussed.

Our B2C segment represents now approximately 55% of eCOST.com's total revenue. That was during the first quarter of 2009. As a comparison, the business to consumer segment represented less than 40% of the overall revenue mix in 2006. Generally, the B2C segment provides adjusted gross margin contribution that is more than 500 basis points higher than the business to business segment.

We've certainly not abandoned the business to business segment but with our strong focus on continuing to improve the financial characteristics of the eCOST.com business, it behooves us to continue to focus most of our resources on the B2C segment given its substantially stronger financial characteristics.

B2B revenue during the quarter was down more than $7 million versus last year as we reduced focus, sales resources, and adapted our margin objectives to help ensure that the B2B business that we do have meets the overall financial objectives of our Company. However, it's important to note that during Q1 2009 we did begin to experience some firming up of the B2B revenue from a sequential quarter standpoint. And as a result I would expect the year on year comparisons to begin to improve for the B2B segment in the coming quarters.

As we've discussed on previous calls it's important to note the additional intangible value that our eCOST.com segment has for our services business in terms of its pioneering and innovation. eCOST in addition to being its own business, serves as sort of a development laboratory for new capabilities, be it checkout methods or customer acquisition models, or marketing approaches, customer life cycle analysis, virtual warehouse partnerships, and many, many other things that are out there in the web commerce frontier.

As we find successful tools and they become fully developed at eCOST, we can then offer them as additional products and capabilities on our services business segment. From our experiences at eCOST we believe we are developing significant web commerce retailing expertise that is becoming increasingly valuable to our services division and its clients.

In summary, eCOST continues to evolve in what I believe to be a positive direction. When you peel back the layers of our Q1 results as I've laid out for you here, it does show significant and positive development and progress in many areas.

I'd like to now turn the call over to Tom Madden, our Chief Financial Officer and he'll cover the financial details for the quarter. Tom?

Thank you, Mark. Let me first start by providing a brief overview of our consolidated operating results for the quarter ended March 31, 2009. Then I will provide some select operating highlights for individual business segments as well as an update on our recent credit renewals.

As reported in our press release, our consolidated revenue for PFSweb in the quarter ended March 31, 2009, was $88.9 million, compared to $118.5 million reported in the first quarter of 2008. Gross profit for the first quarter of 2009 was $11.2 million, or 12.6% of net revenue excluding past due revenue, as compared to $13.3 million or 12% of net revenue excluding past due revenue in the first quarter of 2008. The increase in consolidated gross margin percentage is primarily attributable to a decrease in product revenue, our lower gross margin business.

As we have discussed previously, we utilize adjusted EBITDA as a key metric in evaluating our operational performance. In the first quarter, our consolidated adjusted EBITDA was $2.7 million, relatively consistent with the $2.8 million reported in the prior year period.

For the first quarter, net loss was $248,000, or $0.02 per basic and diluted shares. Compared to net income of approximately $414,000 or $0.04 per basic and diluted share for the same period in the prior year.

Another key metric we use in evaluating our financial performance is non-GAAP net income. To calculate this we exclude from net income calculated in accordance with GAAP the impact of stock-based compensation, goodwill and intangible asset impairments, and amortization of identifiable intangible assets. For the quarter -- for the first quarter, non-GAAP net income was a loss of approximately $119,000 or $0.01 per basic and diluted shares as compared to non-GAAP net income of about $817,000 or $0.08 per basic and diluted share for the prior year.

So as Mark indicated earlier, our March quarter results were about break even from a bottom line standpoint.

Let's turn now to the performance of select business segments for the year -- for the quarter ended March 31st. First, Service Fee revenues decreased approximately 18% to $17.1 million from $20.8 million in the prior year. This decrease is attributable to the economy and the non-renewal impact of a large US Government contract which was effective during the March quarter, although we did continue to perform some project work under this US Government contract throughout this quarter.

This decrease was partially offset by revenues from new clients related to the newly implemented client programs Mike referred to earlier. SG&A decreased in 2009 versus the prior year, primarily due to certain cost reduction activities implemented throughout the fourth quarter of 2008 as well as the first quarter of 2009.

For our supplies distributors business segment revenue declined to $45.3 million in the first quarter of 2009 as compared to $62.3 million for the prior year first quarter as Supplies Distributors saw a decrease in demand during the quarter, which is primarily attributable to overall global economic pressures as well as inventory rationalization by our customer base.

Gross margins as well as net profit in this business were generally in line with prior year results and our expectations.

As for eCOST.com, revenue in the first quarter of 2009 was $20.9 million, compared to $28 million for the same period last year. As Mark indicated earlier, our enhanced focus and success in the business to consumer segment was more than offset by the revenue decline in the business to business segment. However, our bottom line results for eCOST.com improved as a result of the higher margins in the B2C business segment as well as our continued cost focus.

From a balance sheet perspective, our current assets and current liabilities declined from the December quarter levels primarily due to the December amounts reflecting the seasonal uptick in working capital requirements for many of our business segments. We are pleased to report that our cash balance including restricted cash of $17.6 million at the end of March was relatively consistent with the $18.1 million reported at the end of December. This occurred while at the same time our debt balance decreased to $21.5 million from $27.2 million at the end of December. So cash remained relatively constant, debt balance ended up decreasing by about $6 million.

As discussed on the last conference call in late March, on a collective basis we have renewed virtually all of our financing facilities since the beginning of this year. This includes facilities that we have in place with IBM Global Finance, Comerica, Wachovia, and Fortis and we believe we have the financing in place to support our current business needs.

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

Appreciate it. Thank you, Tom. So, to recap before we go for questions here. But despite the tough economy we obviously believe our results for the first quarter were solid. We believe we've made necessary adjustments to our business to weather the economic challenges that we currently see out there in front of us.

As Tom mentioned just a minute ago, we have support from our banking partnerships going forward. And more importantly, we believe we have some great growth prospects as Mike's described in both our new business pipeline and the services business, as well as the exciting activity we have going on with the eCOST consumer channel.

All of these things taken together are a testament to our ability to overcome adversity. And we believe it will put us in a stronger position to deliver value and higher share price when the marketplace begins to recover. We believe the Company is in good position to continue executing its business strategies and to build shareholder equity.

As I stated during our last conference call, we do expect that growth in 2009 on a year on year basis may be challenging due to the economic situation and because of the client changes we've experienced. But even with this adversity, we believe our financial foundation remains strong and we continue to target a breakeven to positive free cash flow performance in calendar year 2009.

That's our prepared comments for today. Operator, we'll now be available for questions.

Thank you. (Operator Instructions). We'll pause for a moment to compile the Q&A roster. Your first question comes from the line of Alex Silverman with Special Situations.

Good morning.

Good morning, Alex.

Nice quarter.

Thank you.

Thank you.

A few questions, I apologize, I know you covered some of this but I missed it. You were quick. To start off on the service side, can you give us some sense of what same customer numbers look like were they down single digit? Double-digit?

Well, Alex, it's interesting comparing, trying to compare year on year results and sequential type results. Our feeling is that our clients by and large feel like their business is somewhat soft. Certain clients we're seeing what we believe would be a trend that would indicate softness and we factor that into our forecast and expectations.

However, we have some clients who are actually above their forecasts. One of our clients, Lego.com is experiencing significant growth and great results. And so we continue to work with our clients to try to understand their near term forecasts and to understand the trends. But I'm not sure that I would be in a position right now to say that there's a clear trend where clients are experiencing softness in any material sense. But we continue to monitor it and look into especially in the third and fourth quarter where we would typically our seasonal peaks and make sure we're on top of client expectation.

Alex, I think just to add to that on a broad basis, I'd say our technology clients are -- which that area is more business to business activity, have experienced greater softness than our consumer clients have seen at this point. So the web commerce activity continues to be reasonably solid.

I mean, everybody's results are a little bit different. We don't have any clients that have seen eCOST results where they're up that significantly. But we, as Mike mentioned, Lego and some of the others have continued to see growth and activity.

I'd say in general the trend you seen is the direct to consumer web commerce segments seem to be performing and holding up pretty well and the business to business side of it is softer.

Okay. That's helpful. On the eCOST side, did you say there was 14% growth on B2C?

Yes.

And did you say that B2B was down $7 million year-over-year?

That's correct.

If you just take 28 less 7 it gets you to sort of your 21. I don't -- the math doesn't make sense.

Well, the B2C activity would have represented less than half of the business activity last year in the first quarter. And obviously I think we pointed out it represents about 55 or a little more than 55% of the activity this quarter. And so if you take a look at the revenue growth there, it's $1 million to $2 million of revenue growth on the B2C side which equates to that increase that Mark referred to.

Okay. I got you. Let's see. Can you give us -- I know that you can't say who your Fortune 100 customer is. Can you say whether it's B2B, B2C, whether it's Christmas, seasonal, all that kind of stuff? Any help there?

Sure, I can tell you that our agreement with them is a master agreement which gives us the opportunity to engage with them on other opportunities besides this one initial one, which is a very positive thing for us.

The initial opportunity with this Fortune 100 manufacturer is a B2B opportunity as they service sales directly to small and medium enterprises. So even though they're a consumer goods manufacturer, this particular deal is selling those consumer goods into small and medium sized business.

Okay.

That means the install base or the service base of this business is over 100,000 establishments, enterprises.

So you're basically service -- you're basically fulfilling inventory to smaller retailers on behalf of this manufacturer?

We are facilitating the sales of that product to those retail sites or to those individual enterprise customers.

Okay.

This particular contract is for eCommerce services, marketing services and call center which isn't a detail that we disclosed but that doesn't have fulfillment.

But it does not have fulfillment. Got it. Okay. And the last thing is if you take your 2009 guidance, which is free cash flow breakeven to positive, I can't get there with 2.7 of EBITDA. I come to a much higher number. Is there -- was the first quarter unusually strong and it's going to be weaker as the year goes on or am I missing something?

No, it's a good question, Alex. The second and third quarters are obviously our seasonally slower period. We did have as Tom mentioned some project activity in the first quarter as well that at this point we can't project will continue in quarters two and three, and hasn't so far in quarter two.

So you're going to see, as you look at the trend, you're going to see a down swing in our seasonally slower second and third quarters and then an upswing in the fourth quarter from things. So that speaks to how things will go from kind of trending standpoint the rest of the year.

Okay. And the project work is specifically related to the US Government contract or other customers as well?

There were a couple of other customers as well.

Okay. Great. I'll get back in the queue. Thank you very much.

Alex, hang on one second. I want to circle back to one point on the eCOST revenue question that's in there.

Yes.

Just to make a little more clarity on that. The numbers I'm quoting the growth basis in there are invoiced activity in there. At the end of the quarter there are accounting adjustments related to timing of deliveries and then our warranty and Club membership things have to be taken out over a period of time. So the actual reported revenue number ends up being adjusted. So that's part of the difference in what you're seeing when you look at -- just on a macro basis, when you look at the revenue comparison.

Does that take into consideration returns as well?

Yes, yes. Returns were quoted on both sides and I'm reporting on a net invoice basis in there.

I got you.

Returns were in there. There's revenue recognition rules that the accountants do and I'm relying on our daily kind of statistical stuff that we have our there to report what I was giving you on the business trends.

Got it. Super. Thank you.

Thank you.

(Operator Instructions). Your next question comes from the line of George Walsh with Gilford Securities.

Thank you. I wonder if you can go in a little more detail on the Supplies Distributors business and the trends you're seeing currently in revenues and more or less the outlook you're seeing there?

George, this is Mark. As I'm sure you'll understand, I think we've described in the past that our Supplies Distributors business is majority of made up of one client activity in there which is our relationship with Infill Print Solutions which is the joint venture between Ricoh and IBM.

Generally, when the economy slows down, so does printing. And so the use of consumables kind of tends to track the economic environment out there a little bit. So just a general slowdown in the economic environment led to less purchases of consumable products which makes up the majority of this business.

As well as Tom mentioned, everybody -- the customers that we support for Infill Print Solutions had a pretty belt -- a pretty strong focus on their own balance sheet. And so you saw a lot of just reduced purchasing activities as people reduced inventory levels. Trying to react to what they think the next six months might look like out there in terms of what's required for their own inventory and customer demands out there. So those two things led to a decline of about $16 million year on year in terms of revenue levels that are there.

So there's no -- I don't see anything in the business other than just the economic impact of it. There's nothing out there to suggest that the levels won't return to the higher activity that we saw before, once traction begins to happen.

Okay. Any firming, near term that you're seeing?

I think the one difficult thing this quarter, we actually ended up having a more significant decrease because first quarter performance last year at $62 million was still pretty strong. The $45 million or $46 million number from this March 2009 quarter is not as down -- is not down as much as you take a look at Q3 and Q4 last year. It is down somewhat again because of the reasons that we've talked about.

So as I look to the June quarter and September quarter and what we're hearing from our clients is that we do expect that the business will hopefully pick up from the levels that we've seen previously.

Okay. But so more or less this level though is something of a run rate?

Hopefully not. But we're hoping that it's better than this.

Okay.

I don't think 62 is the right level either. I think things will firm back up again.

Okay. Understood. Also, it looked like the tax rate for Supplies Distributors in the breakdown was a little higher than usual. Was there anything special there or -- ?

It was just -- primarily relates to some of the intercompany activity that we have and our -- our European operations. So nothing unusual there.

Okay. Just that it came out about 46%. Is that the regular rate? I just really hadn't looked closely.

Usually it's at a 36%, 37% rate, so it's a little bit higher. On an overall basis I would expect that it would be closer to that level.

Okay. So that should normalize during the year?

Yes.

Okay. I wonder if also you could just go into a bit of the -- one of the things -- obviously gross margins improved for the quarter. And you certainly made dollar cuts in the SG&A spending which you could see. But particularly for the PFSweb, the services and the Supplies Distributors, they still couldn't quite stay ahead of the revenue reductions. Could you just speak to that a bit with the SG&A?

And is that a function of some of the capacity that you have that you just want to keep online relative to the changes in business? And also particularly with the services side that you are -- looks like you're aggressively trying to seek new clients so does it have to do with the capacity you want to keep in place? And will some of that be filled up as you add some of these new clients over the next few quarters?

George, you described it perfectly. That's exactly the case.

Okay.

There are certain variable costs that can be easily shed. Then there's a group of fixed related costs that are more difficult to get rid of and some of those in effect have been absorbed into our SG&A level in there. And then there's some strategic assets that we have to look at and make the decision about how important they are for our future. And we made the decision to carry some of those types of things in order to ensure that we balance our ability to continue to grow and provide the high quality solutions that our clients have. But the way you described it is really exactly the situation.

Okay. Do you expect as you ramp up here that those SG&A percentages will improve?

Yes, hopefully the intent would be that the SG&A levels will, as a percent of revenue, will decline as we're able to utilize some of the infrastructure that's currently there against the new revenue activity.

Okay. So that should more or less -- kind of going back to Alex's question about the outlook for cash flow. The next couple of quarters, is that -- is there any reason that those balances can get you through some of the weakness you kind of seem to be anticipating over the next couple quarters?

Well, again there, as Mark talked about, we do have slower periods coming up in the June and September quarters. And the expectation that our project work will be off from where it was in the first quarter. So those will have a negative impact on us as we look out over the next couple of quarters. And as we continue to implement some of these new contract opportunities that have -- that we have, we're looking to see not only the benefit of those but also the normal seasonal spike as we get into that December quarter.

I think another way to describe it, because of the seasonality and also because of the loss of those -- of the big government clients you're probably going to see June and September kind of be at the bottom. And the December quarter and beyond we'll begin to see the benefits of the new business pipeline that Mike's described out there. So I think that's the trend we're in right now.

Okay. And the ramp-up for the new business, it's still a matter of utilizing existing capacity and you don't anticipate any special capital expenditure costs?

Every new deal has some CapEx involved in it. The ones that we have right now are not overly significant and we plan, as Mike described in there, to deploy most of the deals that we have into existing facilities that are in place from there. So -- and that will speak to your point of moving SG&A back into cost of goods and reduce the SG&A level in there so that -- for now.

Now, there are some deals in the pipeline that could require additional facilities and things going forward. But I think we've discussed in the past our contract nature is that as we are required to implement capital assets for clients, we -- our clients are tied to financially in some method there's various approaches that we take, but are tied to those assets so that it's not our exposure.

Okay. And I wonder if you could go into the -- with the pipeline and the sales cycle between -- maybe the difference between what are the trends in terms of signing up new clients? And then maybe the difference between like with these master agreements, signing up additional brands with existing clients?

I think the, this is Mark, the difference is that once you have a master contract in place, it's a lot more -- it's a lot less lead time to then negotiate an individual instance with the brand that's there. So one of these that Mike's talking about has about 20 very iconic lifestyle brands in the apparel industry that will -- should move along like clock work. And so we'll absorb a couple of those at a time in terms of the implementation and as long as things continue to go well, we would expect to be servicing a large majority of those brands over the next year or two in that area.

So as Mike said, the advantage of getting to these brand families, if you will, is that you in effect negotiate one major contract and then it's really an individual statement of work that speaks more to the uniqueness of that additional brand's requirements that are out there, that is there. And so the lead time on those are much shorter than a regular deal where we've got to go through the marketing of it and so on and so forth from there. And so there's clearly an advantage to these because they in some degree create an annuity, and new business opportunities with shorter lead times.

Yes. It certainly expands the pipeline and hopefully it can give you -- I hate to use the word visibility but a sense of a visibility in terms of prospects in the pipeline there that you can go after and hopefully get some momentum on. Okay. Thanks a lot.

Thanks, George.

Thanks, George.

(Operator Instructions). At this time, there are no further questions. Are there any closing remarks?

That will be it. Thank you, operator. We appreciate everybody's time. Have a great week.

Thank you for participating in today's conference call. You may now disconnect.