PFSweb Inc (PFSW) 2010 Q3 法說會逐字稿

Good morning. My name is Tina, and I will your conference operator today. At this time, I would like to welcome everyone to the PFSweb third quarter 2000(Sic) earnings conference call. All lines have been placed op mute to prevent any background noise. After the speakers remarks, there will be a question-and-answer session. (Operator Instructions). I would like to turn the conference over to Todd Fromer with KCSA Strategic Communications. Mr. Fromer, you may begin your conference.

Thank you, Tina, and thank you all for joining us today for the PFSweb third quarter conference call. Before turning the call over to management, 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, target, project 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 not limited to, the risk factors and other qualifications contained in PSFweb, (inaudible) 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 may also present certain non-GAAP financial measures, such as 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 today, which is located on our website at pfsweb.com, you will find our definitions of these non-GAAP financial measures,a reconciliation of these non-GAAP financial measures, with the closest GAAP measures and a (inaudible) of why we think these non-GAAP measures are relevant. These financial measures are included for the benefit of the investors, and should be considered in addition to, and not instead of, GAAP measures. At this time it's 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, as well, to our third quarter 2010 conference call. Present with me today is Tom Madden, our Chief Financial Officer. Our President, Mike Willoughby, who normally participates in these calls is away today on a client visit. This morning, Tom and I will provide you with an overview of our financial results, and then add some color on the events that shaped the quarter ended September 30th of this year. Following prepared remarks, we will be available for questions.

As color and summary for our overall business activity through September 30th, I'm very encouraged by the outstanding momentum we have at our PFSweb core services segment. While our ecost.com and supplies distributors segments turned in some tempered results for this quarter that I'll describe in a little bit, and that impacted our overall revenue growth. I believe it's most important for us to focus today on the 25% growth in service fee during quarter three, and the strong, new business pipeline that our services segment is currently boasting.

Our services business has always been our core strategic segment, keenly focused on capturing the large opportunity to deliver end-to-end web commerce solutions to the rapidly growing manufacturer direct to consumer web commerce marketplace. Not only did we see strong growth in our services segment this past quarter, but, we've also seen our new business pipeline continue to be large and attractive -- and as of attractive as really any point in our history. Collectively, this provides an outstanding barometer, from my perspective, as we look at the exciting opportunity for growth that we have as we look towards the next year or two.

As I mentioned, both our ecost.com and supplies distributors segments turned in softer results this quarter when compared to last year. On the e-cost side, issues surrounding email deliverability, as we discussed last quarter, impacted this segment negatively. However we did begin to see an improving trend late in the quarter as the actions we undertook to address email deliverability began to have impact.

On our supplies distributor segment, it also experienced a reduction (inaudible) this past quarter. This was partially due to certain inventory supply shortages during the quarter that were related to this segment's largest clients transition to a new ERP systems platform, as well as impact of changes in currency rates. The migration from an ERP perspective with this client is now generally completed, and supplies inflows return generally to normal at the end of the quarter. As such, we currently expect the overall business levels to improve during the fourth quarter..

I would also like to briefly remind everyone that each of these businesses offer our services segment substantial additional benefits. So, speaking of the supplies distributer segment and our ecost segment do provide additional benefits to our services segment. These benefits include bringing a significant amount of scale to our operations, as well as a platform for development of new technologies, which are carried over to our service fee business, and benefit our services clients. In turn, this has helped us sign new service fee clients. So while the results in these segments are mixed, we do gain substantial benefits that are not directly reflected in the segment's financial numbers.

Overall, I'm quite pleased with the direction of the Company. We believe we are on the right path for the future. We are evolving our offering to stay in line with a rapidly expanding and evolving web commerce marketplace, by continuously offering additional services and by staying abreast of the rapid development of technologies and features that this incredible frontier continues to spawn. We have our hands around some exciting growth sectors within the rapidly expanding eCommerce industry, and we're successfully seizing upon those opportunities, particularly as we look at the fashion apparel and accessories, beauty and fragrance and the consumer packaged goods industry, where a lot of our new business focus has been recently.

With a summary information as backdrop, let me now spend a few minutes providing you some additional commentary on each of the three business segments and their results for this quarter. First, on the services segment, we are now servicing approximately 40 total clients in this segment, including great names like Procter & Gamble, Lego, The family of Liz Claiborne brands, including Lucky Brand Jeans, Carters, Roots, the Home Depot, Chanel, Tractor Supply and many more.

The past few months, we have launched several new client relationships, including Volcom, a large board sports brand; Juicy Couture, another brand in the Liz Claiborne family, and a couple of others. With these new launches, we now have 14 client programs operating that are utilizing our entire end-to-end eCommerce offering suite, featuring the demand wear software platform. Many of the remaining clients are utilizing a vast range of the suites services as well, but have elected to contract directly with demand wear for their e-commerce platform, or operate one or two business functions in house or operate with another web commerce platform entirely. This really indicates the flexibility of the solution that we have developed where we can work with the client in many different ways on many different technology platforms. Our collection of great brand names and the vast range of services we are providing to them is a clear testament to the value of our services offering.

The flexibility of our web commerce solution plays as huge role in our success, and it has allowed us to sign numerous other clients that have heard about our end-to-end solution, but realized after discussions with us that they only needed a program featuring a select group of that services that fit their business operating strategy. It's this flexibility that separates us from our competitors and makes us a preferred partner to work with.

As I mentioned earlier this segment, our services segment, grew this last quarter 25% over the previous year. During the past three months, we have also been successful in closing a couple of new client agreements, and are in the contracting stage with a couple of others. Our new business pipeline now exceeds 40 million in size, and is nearly as robust as any time in our past, not only in dollars, but also in the terms of the attractiveness of the brand names and their underlying revenue opportunities that are contained therein.

Moving on to more recent announcements in this segment, as I mentioned earlier, we successfully launched several new client programs during the third quarter of 2010, including a full end-to-end eCommerce program for Volcom, that you can find at www.volcom.com. Volcom is a leading men's and women's board sports brand. Revenues for this program started towards the end of the third quarter, but we believe it will continue to ramp up over the next couple of quarters. It's a very unique site, and features as lot of demand wear functionality on it, and it was an exciting site to develop for Volcom. Take a look when you get a chance.

We also expanded relations with a number of existing partners during the last three months as well, including support of several eCommerce sites under our previously announced master agreement with the Liz Claiborne company, geared mostly towards women. And we launched an end-to-end eCommerce solution for multiple brands under master agreement with leading fragrance and beauty company that we have not yet disclosed the name. Almost all of the custom branded eCommerce sites features the demand wear eCommerce platform, contracted either through us or with demand wear, as well as our logistics and fulfillment capabilities, our high touch customer care, our financial services capabilities and various interactive a marketing services we are providing.

Shifting over to the European segment, we launched earlier this year a site for Hobianus, and that is now running successfully and reporting very positive feedback. One of the things that is exciting for us is that the overall market opportunity for eCommerce growth in Europe has begun to show some significant life for us. We are continuing to expand with a number of additional brands there. We have become aware of the innovative online marketing capabilities that we can provide. We believe we are well prepared to capitalize on the European marketplace and its potential growth as we look over next year given that we have been in the marketplace there now for about 12 years. After years of lower than originally expected web commerce activity, the Europe market is really now showing good signs of growth, and we're excited about the number of new exciting opportunities that have arisen in our business pipeline over the last six months.

So from a summary standpoint of the services segment, our growth is doing very well. The new business pipeline is quite strong. We have got new additional activities in Europe that we haven't seen in the past, and it's pretty difficult not to be very excited about the opportunities in this core segment of our business.

Now, let me shift to some highlights on our ecost.com segment. As I mentioned at the beginning of this call, revenues for the ecost segment were down on a year-over-year basis. This decrease primarily relates to the unforeseen challenges with our sales and marketing strategy around email campaigns that we began to experience last quarter, and as I discussed with you the last time we were together. As I mentioned on that call, the email filtering algorithms that are constantly being evolved by the various leading internet service providers had recently begun to have an adverse impact on the amount of customers that were able to reach via our email marketing strategies. This is also impacted several -- sorry, severely impacted the viral impact of our email programs as well, simply because we are reaching fewer individuals who then can pass along email to fewer and fewer individuals as well.

Because such a large portion of our target customer base is reliant on this method of email communication, we have simply not been able to reach them near as frequently as we were in the past, which in turn reduces overall visitor activity to our site. Obviously, fewer visitors results in lower revenue, less product purchases and so forth. This has been quite a impact for us.

We have undertaken a number of efforts to overcome deliverability challenges and resume sales growth. We spent a lot of time during the third quarter modifying our current email practices and using a broader mix of marketing tools. These initiatives included first, working closely with each of the major ISPs to educate them on our need to frequently communicate with our customers, given that daily deal nature of our business, and educate them that customers that purchase in these segments may only make one or two purchases every year, and that these characteristics may lead automated filtering programs to conclude that the relevance of our email is low, when in fact it's simply the nature of the products being offered.

Secondly, we increased our offline marketing activities with an eye towards reaching customers through this channel, which included the use of postcards, fliers and an additional catalog that we had not done in a couple of years. Third, we ended our paid online advertising activities to help offset the impact the I just described. However, many of these channels do not offer us an attractive cost to acquire ratio for new customers. So, we have to continue to watch this portion of our advertising activity very carefully.

Fourth, we have worked to segment email list to improve deliverability relevance in each of the major ASPs. While these actions have improved our overall email deliverability, we are currently sending less than half of the total emails we were sending previously. Maintaining these reduced emailing quantity levels are necessary in order to keep our orders above acceptable levels at the major ISP's and ensure the email we are sending is getting through.

While I believe personally that the actions of the ISPs are a restriction of trade, and I'm probably not the only CEO out there who feels that way, we do have to recognize that a group of just a few major ISPs control the email playing field. And we have to play by their rules or suffer the consequences that little to none of our email gets delivered. It's a challenging trend, but we will continue to evaluate the landscape and take actions as we see appropriate.

As painful as it is, this email deliverability issue is another example of how we gain intangible benefits from having our own retail web commerce presence in that the significant experience we have now gained over the last few months about email deliverability is allowing us to in turn in (inaudible) interactivity services area in our services segment assist our services clients, with similar email issues that they may well be experiencing as well related to this topic. The good news for the ecost.com segment is that our actions have now begun to show improvement. As we look towards the end of the month of September, we did begin to see an improvement in revenue activity, and we believe we are now well positioned to capture the upcoming holiday spike that is a very important part of the financial performance from an annual standpoint for the eCommerce segment.

While I'm encouraged by the improving trend in the last few weeks, as I mentioned last quarter, and I do want to reiterate again, I do remain disappointed in the overall financial results of the ecost.com division, this year. There is no doubt we learned and continue to learn a lot from the business, and there is a lot of intangible benefits we gain. But as I said last quarter, the cost has to be reasonable, and historically it's been too high. The low gross margin characteristics of the traditional ecost.com product range being technology and consumer electronics products leave little room to absorb challenges like this when they arise. While I was encouraged by the improved financial results during 2009 and into early 2010, at ecost.com, the more recent financial results have led us again, to carefully review each area of the ecost.com business operations and evaluate various strategic options in this particular business segment.

I remain hopeful that with the significant changes we made in the business recently, as I just described, along with the expected up tick we get from the holiday peak in Q4, that we will show a return to an improving financial trend as we finish out the year. But I do want to make it clear, that one way or the other, it is our objective to take actions to ensure we improve the financial impact from the ecost.com segment during 2011.

Speaking of the holiday season, be sure to put ecost.com on your shopping agenda. Once again this season, you can expect to see the best online selection of new, closeout and refurb merchandise anywhere at prices that you just won't find anywhere else. Manufacturers continue to see this platform as a very attractive way to move large quantities of products. This holiday season, ecost will showcase the hottest computer deals in the industry, and will be precepted by our patented bargain countdown showcase technology, and will include thousands of limited quantity, limited time offers that manufacturers are making available to us, many times on an exclusive basis. We expect high-definition televisions, net books, gaming products, like the connect product, HD cameras and camcorders, will lead the way this holiday season in terms of the hot products that consumers are seeking. We're also excited about certain free shipping offers that we put together this year, and they will be showcased in the secret sale campaign, and also the platform that we announced late last year called make an offer has also begun to grow this last few months. Be sure to subscribe to the daily hot sheet from ecost.com, so that you get the latest offers, and are prepared for your holiday shopping.

Let me shift now just a minute to talk about how we are evolving the ecost segment and how we see the ecost model as we look towards the future. As I discussed previously during 2009, we began to see opportunities to deploy the significant web commerce retailing skills and expertise of our ecost. com team. In our interactive marketing services and product merchandising, sorry let me say that again. To deploy the retailing skills and expertise of our ecost.com team, and these skills being in interactive marketing and product merchandising acumen and deploying those in the service fee opportunities as a different model in our PFSweb services segment.

Early in 2010, we launched a new division within ecost called estore retail services to formalize this offering. As we disclosed previously, our relationship with the Procter & Gamble company and the launch of the PNGE store, was the first client to utilize this new business model. Since this time, we have continued to see outstanding opportunities for the use of the business model, where the client, either in an effort to minimize channel conflict or because of limitations in their own business models prefer a buy-sell model as their approach to outsourcing their web commerce activities.

This new business lead pipeline in our services segment that I spoke of earlier contains a number of new opportunities for the e-store retail services model. This model allows our clients to create a fully branded direct-to-consumer presence, control the look and feel of the site and its product offering, while also direct -- while also directing all of the creative aspects of the site as well. But they also then are able to have the site operate within this business like a traditional retailer who buys and then resells the products. The beauty of this model is that it can be quicker and cheaper to implement for our client, because it generally requires less IT and other systems integration work when compared to traditional service fee business warehouse model.

As the retail services division grows, we are targeting to generate increased product revenue and gross profit margin in our ecost.com segment reporting. As we look to the future, the results of this trend may lead us to a diminished focus on electronics and technology products, that's the traditional ecost.com product range and a greater emphasis on utilizing our retail acumen and expertise to assist our clients in growing their branded website through this retail services model. It's important that you understand strategically what we are thinking there. Let me just repeat that; As we look to the future, the results of the trend maybe a diminished focus on electronics and technology products and a greater emphasis on utilizing the retail acumen of the ecost segment and our expertise in that area to assist our clients and growing their branded website through the retail services model. It's simply another way for us to leverage the retail commerce expertise and our investment in our ecost.com business, and to do so in a manner that we believe may help mold the financial model of the ecost.com segment, into a model that has faster growth characteristics, and an improved overall financial complexion.

Again, we want to avoid as much as possible, comments about specific client's business activities, but I will give you just a little update on the PNGE store. The store is continuing to grow and operate well. We saw a number of highly successful marketing campaigns this past quarter, and these successes are driving greater awareness of the opportunities to utilize the online space through various Procter & Gamble brand channels, which we believe will result in even greater momentum as we look to the future.

As I mentioned last quarter, Procter & Gamble is taking a very plotted approach to the estore, and while near-term growth may continue to be modest, the opportunity in this virtually untapped industry segment not only with Procter & Gamble, but with other large consumer package manufacturers that we do have in our business pipeline, we believe is very significant as we look over the next few years. So with that information as a backdrop, let me now me turn the call over to Tom, who will cover the financials for the third quarter and give you a little bit of background on the supplies distributors results. Tom

Thank you, Mark. As Mark previously discussed, our overall financial results for the September 2010 quarter reflect mixed results from our three business segments. Our service-fee business performed quite well with a significant increase in revenue of 25%, and a $1.1 million improvement in adjusted EBITDA, as compared to the prior year. This was offset by tempered results in our supplies distributors and ecost.com businesses. We continued to take a number of positive steps towards improving our short and long-term financial results for the Company. The key here continues to be new client growth in our service fee and retail services segment, as well as strong cost management, and ongoing sharp focus on our balance sheet, including our cash. We believe we are well positioned to do just that.

In addition to Mark's prior comments on the segments operating results, I wanted to share some additional insights into some of the components of our business unit's performance this quarter. As we stated, our service fee business experienced 25% growth this quarter, as compared to the same period in the prior year. This growth was generated primarily from growth of existing business to consumer clients, and revenue from new clients, which have come on board over the past 12 months, both of which were partially offset by the impact of reduced service fees related to the previously disclosed nonrenewal of one of our large service fee segments business to business client relationships, which ended in July of this year.

In our September quarter, our service fee business generated approximately three-fourths of its business from business to consumer clients. And this component of the service fee business was up more than 50%, as compared to the third quarter of 2009. Clearly, we have seen significant growth in our business to consumer client activity, and as we look forward we continue to target strong growth here, especially in consumer packaged goods, fashion and apparel, and beauty and fragrance industries.

In our supplies distributer segment, our adjusted EBITDA performance was $1.0 million for the September 2010 quarter, as compared to $2.2 million in the prior year. In addition to the reduced profitability caused by the revenue decline year-over-year, which Mark discussed earlier, our adjusted EBITDA profitability for this business segment was also lower, as compared to the prior year as a result of the 2009 quarter, benefiting from a higher level of incremental inventory cost-related adjustments than in the current year. Our adjusted EBITDA results for this business in the third quarter of 2010 is much more consistent and in line with the financial performance for this business in each of the quarters earlier this calendar year.

Our ecost.com business was negatively impacted by the continued email delivery issues to our customer base as Mark discussed. This softness in the traditionally higher gross margin direct-to-consumer segment of this business impacted the overall gross margin reported for the quarter. While we continue to make strides and have been successful in further reducing cost in this business, the softness and the revenue in gross profit resulted in a reduced adjusted EBITDA for this business of $0.3 million, as compared to the prior year third quarter.

We continue our focus on our SG&A cost for the entire consolidated business, while at the same time making investments in areas in the business where we see strong growth potential. During this quarter, while our consolidated SG&A costs show a slight increase of $0.2 million, as compared to the prior year, the 2010 third quarter amount reflects a $650,000 charge applicable to a PFSweb's executive disability benefits. This executive was recently diagnosed with an illness resulting in his subsequent retirement. And this charge relates to various salary and benefit costs, including estimated future medical costs, as per the terms of this individual's employment agreement. However, if you exclude the impact of this charge, our SG&A cost would have been decreased on a year-over-year basis as we look at a quarter-over-quarter basis.

Now turning to the balance sheet, just a quick recap here. Our cash, cash equivalence and restricted cash remain quite strong here with an aggregate balance for the period ended September 30, 2010 of $20.4 million, which compares to approximately $17 million as of December 31, 2009. Our cash balance, as you know, will have benefited from our capital raise that we did earlier this year. Now I would like to turn the call back over to Mark for some closing remarks.

To recap, obviously you can hear our excitement as it relates to services segment, both in terms of our growth that we are seeing, as well as our new business pipeline that we have that we believe is important as we continue to look for how the growth will come in the future. As I stated before, very excited by our ability to persevere through challenging times, but I'm equally excited about our ability to evolve and seek out new opportunities as the world of web commerce continues to change rapidly around us. We look forward to prosperous times ahead. That concludes our prepared comments for today. Operator, we will now be available for questions.

(Operator Instructions). Your first question comes from the line of Mark Argento with Craig-Hallum Capital.

Good morning, guys. Can you talk a little bit about --I know you said the B2C business up 50%, on a year-over-year basis. Can you talk a little bit about how many clients the B2C, I think you alluded to it. But, maybe -- how many clients you have that are in the B2C camp right now. And then maybe talk a little bit more about where they are in the lifecycle, meaning I know you have some that are fully deployed that are ramping, some that are still very early stages. So getting a better feel for what that growth rate can continue to look like, and then maybe we can circle back then and talk a little bit more about the pipeline.

Of the approximately 40 total clients we have right now, Mark, in terms of the ones that are active and working, I would say roughly 25 to 30 of those are direct-to-consumer manufacturer sites. Seen a pretty significant kind of evolution of our client base over the last few years, where if you would have asked me that question three years ago, I probably would have said 25 to 30 of the clients were business-to-business related clients. Maybe not quite that many, let's say half were business clients. So we have had some clients leave, and as we replaced them, and certainly the growth has come out of that direct-to-consumer segment as we look forward.

In terms of the portion that's ramping, again this would be a very rough estimate. But I would say eight to ten of those are still recently launched sites that we see a significant ramp on. Obviously the underlying growth of the web commerce industry overall should be driving a significant tailwind for all of our clients in terms of their sites. And organic growth is something that we continue to hope and expect going forward. You will see some clients that because of customer assets that they already possessed have had really significant shots out of the gate. If you turn to the Carters site for example, Carters is a leading provider of baby and youth clothing. And their results have been very successful from a launch in March or April of this year. And a lot of that is predicated on the fact they had a very active email campaign even before the web commerce enabled their site. As a result, they've seen very, very quick and ramping results in there, and they've, in their public comments have stated what their outlook for the next few years is like if terms of growth.

That's one client example of information that talks about what the opportunity is like here, and what can be done with these direct-to-consumer branded sites. Consumers really like the manufactured sites and as long as pricing is within reason, the presentation of range, the fact that consumers typically find better images and better information about products of fuller range of sizes, better in stock positions than they have come to experience at many of the traditional retail sites is really driving growth in manufactured direct-to-consumer sites and visitor activity.

Sure. And then when you think about the new pipeline, I know you touched on it and said it was $40 million plus pipeline value, but when you look at the size and quality of these customers, it sounds like the -- you got a pretty big pipeline of really good clients or large clients that could become really good customers of yours. Maybe you could touch on the competitive environment, how you guys are winning this business. How you mentioned the flexibility of your model. But where are we, are there still a bunch of big RFPs out there? How much longer can we continue to expect the line to be pretty robust?

It's important as you evaluate the new business pipeline and we look at this a couple of ways. The first part of this is that when we make a quote of $40 million, recognize that all we are taking is the first year's annual fees that we expect to earn from the client. On the sites that are ramping, that would be a relatively modest perspective of what the annual value might be three years out for a particular client depending upon the success that they have from a growth perspective. That's the first thing that's exciting is a lot of these are new generation sites. Maybe they are a rework of an existing site, but I would say for the most part, a lot of them are early in their web commerce evolution. But they're all, for the most part major brand names that are very prevalent in the demographic segment that they are focused.

As an example, you talk about Volcom. Volcom is a start-up site. They had a brand page, before but it was not web commerce enabled. Some people don't know the Volcom brand, but they are very present in their demographic age set, which is typically younger, much younger age set. These are an example of the types of brands we are working with. Our pipeline is really full of those kinds of deals.

I would say the average annual size that we have in our pipeline hasn't really changed all that much in terms of what we may have seen a year ago, but the quality of the names that are in there are much better. And then if you were taking that pipeline of saying let me do a mathematical evaluation of what a year two or a year three or a year four value of that pipeline might look like, that's where I see the real excitement is in the potential of what years two through four might look like for these clients, given where they are in the cycle and the attractiveness of the brand itself.

Got you. I think, Tom, you had mentioned in the quarter that you had a customer that came out of the -- tgat did not renew. Could you quantify for us, on annual basis, what kind of run rate they were doing?

This was a client that we previously disclosed in our 10-Q informations earlier this year. It was a business-to-business client relationship with a technology company. It previously represented a little bit over 10% of our service fee revenues. I think last year's number was somewhere in the 12% range of our service fee revenues for that client relationship.

So you are still able to grow service fees 20% plus despite losing a 10% customer?

Yes. We did have the client in place for the one month of the quarter so there was still come activity this quarter that helped us but it was still significant growth.

Got it. And then just quickly, E cost, Mark, it sounds like you guys are focused on making sure that's not a drag. Is that a business you think you need to be in long-term? I know there are some ancillary benefits, but if it's taking too much time and energy and focus, is that something that you would think about doing the divesting or figuring out a way to move away from?

I'd just come back to commitment. We are going to do everything we can, it's our objective to be certain that the drag, as you say, is not there for 2011. That is -- our eyes are open to all the options that are there. What is important in this is that everybody understands the way that we are going to take the acumen and the knowledge that we have in that business and we are evolving it into a product that our services segment can utilize, being this estore retail services piece.

Those components, which are basically the operating knowledge of the business and a number of key people in that business area. And there have become very advantageous to our services offering, and so we will certainly want to maintain and grow those areas of our business because our clients are finding it very attractive. Whether or not we stay in electronics or technology products really is predicated on whether we can find the financial model or an attractive option for that segment of the ecost business if you will, that makes sense for us. Our eyes are wide open there. Suffice it to say, it's our objective to be sure that we don't have the same kind of financial impact during 2011 that we had in 2010.

Sure. Last question, more of high level question. Amazon just acquired Quidsi, which owns Diapers.com, and a handful of other sites. Clearly, Amazon didn't buy them for their revenues. Probably more for their expertise in terms of moving CPG to head products. Any thoughts on what you are seeing going on out there in terms of eCommerce landscape versus competitive environment and maybe any thoughts around that transaction?

Well, the CPG industry in the US is a -- I don't know the exact numbers but I've heard $2 trillion, $3 trillion industry in terms of size. According to Forrster, the adoption rates during 2008 for CPG products was less than 0.5% over the web. You have a giant marketplace that has very small Internet adoption. There is no reasons why with the improvements that we've made in freighting, in packaging and in technology that this segment won't move substantially, and maybe it's not going to reach a 50% benchmark that you might see in technology products or in sporting goods. It's certainly an industry that you can make a very good argument about the fact that over the next ten years it may move from 0.5% to 10% or 20%. But even at 10% or 20% over the web, given the industry size, it is a huge opportunity. Unfortunately we are not exclusive in seeing this opportunity, so obviously, Amazon is seeing that as well, and I think that's probably the crux behind their very large payment they made for the acquisition that you mentioned.

Great. Well, congrats on a good services business quarter. It's unfortunate, the other parts of the business that are working against you, but the services business is what we care and it looked like a really good quarter. So good work there.

Thanks, Mark. We were happy to just have been able to attain our overall objectives for the quarter, even given the drag out of the other two units. We should see an improvement, certainly out of the supplies distributor segment in Q4. The holiday peak is where we expect it then we should see improvement with ecost as well. We've got a good outlook for Q4. Thank you, Mark.

(Operator Instructions). Your next question comes from the line of Marco Rodriguez with Stonegate Securities.

Good morning, guys. Thanks for taking my call here. I was wondering if you could help quantify the supplies distributor business that got impacted from the ERP switch in ForEx.

Of those amounts, rough, but it's approximately $2 million or so was applicable to the inventory supply matter that we talked about. And probably about $1 million that related to the euro conversion issue.

Okay. Then, can you help us understand what are your expectations for that business going forward? Are we expecting revenues to grow, to decline, how should we think about that?

This is Mark. Marco, just to clarify what Tom was saying, the quotes that he just made were revenue impacts to give you a feel for the two things that impact the SV business. In terms of criticalness of the business, this one is a very important piece of business for us. As I mentioned in my comments, we get intangible benefits out of many of our entities. This one obviously brings us scale because of the size of the business that's out there. The business is now fully -- our largest client is now fully owned by Reco. This was previously an IBM printing deal we had since 1995 through a joint venture with IBM, that created Info-print solution which is now a wholly owned subsidiary of Reco through the terms of the agreement that was there. Reco is the manufacturer of many of the printer engines that are used in this business model that's out there, and they own a lot of technology and capability and that. So we understand that they are very committed to the space. There is an ongoing effort to freshen the product offering that's out there and to increase market share for Info-print solution as it looks to future.

We've seen relative flat results over the last few years in terms of the consumables that these printers use. The good news is that because consumables are a trailing edge technology, when printer placements slow down, there is still an existing base that are using these products that are out there. That doesn't go on forever, but it trails along for many years behind that because of the legacy use of equipment that's already placed. Clearly we are hopeful that Reco and our other clients in this segment will continue to grow as we look forward to the future. We've got a pretty modest outlook on ourselves in terms of where we expect things to be with that piece of the business. But because of its scale, and the nature of the way the contract is oriented, it is strategically important and is a strong financial contributor to us as we look to the business going forward.

Now transitioning into that while this one is a business-to-business deal, as I mentioned in my prepared comments, we are seeing a lot of clients in our direct-to-consumer channel interested in a similar buy-sell model. Now the arrangements will probably be somewhat different from a financial perspective in terms of how the buy and the sell happened, if you will. But I would expect that we would see over the next few years a growing product revenue component of our overall financial results with a higher gross margin component to it than what we see in the supplies distributor segment, or frankly even in the ecost technology portion of its business today. We are reacting to what clients are asking us to do, we have a very flexible platform. We have got a flexible attitude towards working with our clients and customizing the way we work with them in order to be certain that we can be the partner that they want us to be.

That's helpful. In regard to the ecost business, that was interesting that you mentioned in your prepared remarks a movement away from technology electronics towards consumer type products. Do you have a timeline when you think that might transpire?

Well, again, the only backdrop I would provide is what I provided in the prepared comments, which is that we want to make this segment financially. The financial impact of it much better for us in 2011 than what it's been in 2010. Our eyes are open to all the options that are available out there, and our team in our way are working very hard to have a successful fourth quarter in this business, and we will continue to look for all strategic options that we have with this. But the timeline is improved financial impact for 2011.

Okay. And then a housekeeping item here, can you discuss the DSO's or your account receivables and your balance sheet .They've been picking up here the last three quarters and also what was the cash flow from operations in CapEx for the quarter?

Hold on for a second for the quarter I got the net -- actually one second. The net free cash flow for the quarter was use of $1.2 million with a -- I think the capital expenditures was about that amount and the cash flow before CapEx was about break even. I will get you the exact numbers here in a minute. The other question on the DSO performance for our business units, our supplies distributors activity has stayed relatively stable. Usually it kind of depends on the timing of the sales activity during the quarter. But the performance there has generally been in the 40 day window from a DSO performance standpoint, which is quite good. We've got a good strong position of power there, with our customers because we are the only source of product for them to go to. That stayed relatively stable.

Our ecost business, the DSO has increased a little bit, but that relates to fact that we've got some additional business to business client relationships there that have term accounts that have increased that somewhat. On our service fee business, that stayed relatively constant over the years, it's generally operating with a DSO of about 45 days or so on build activities. And again from just clarification, just confirm what I mentioned earlier cash flow from operations for Q3 was break even with capital expenditures of $1.2 million, to get to a free cash flow of negative $1.2 million for the quarter.

Okay. Great, thanks a lot, guys.

At this time, there are no further questions. I would now like to turn the conference back over to Mr. Layton for closing remarks.

We appreciate everybody. Keep ecost.com in your mind for all your holiday shopping. Have a great quarter.

This concludes today's conference you may now disconnect.