PFSweb Inc (PFSW) 2010 Q4 法說會逐字稿

Good morning, my name is Melissa and I will be your conference operator today. At this time I would like to welcome everyone to the PFSweb fourth-quarter year and 2010 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 like to turn the conference over to Garth Russell of KCSA Strategic Communications. Please go ahead.

Thank you, Melissa. 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, confidence, target, project, and other similar expressions typically are used to identify forward-looking statements. These forward-looking statements are not guarantees of future performances and may involve and are subject to risks, uncertainties and other factors that may affect PFSweb's business, financial conditions and other results -- 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 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, the financial tables issued today which is located on our website at www.PFSweb.com, you'll find the 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 investors and should not be considered in addition to and not instead of GAAP measures.

At this time, it's now my pleasure to turn the floor over to Mark Layton, Chairman and Chief Executive Officer of PFSweb. Mark, the floor is yours.

Thanks, Garth, good morning everyone. Welcome to our 2010 fourth-quarter and year-end conference call. As we have in the past, with me today is Tom Madden, our Chief Financial Officer, and Mike Willoughby our President. This morning, we will give you an overview of our financial results and some color related to the quarter ending December 31, 2010, and also for the year ended on that same day. After our prepared remarks, Tom and I will be available for questions.

2010 was an incredibly inspiring year for our Company and was marked by many achievements, and I would like to start this morning by just giving you a few highlights that you'll hear themes of throughout the prepared comments this morning. First, as you look at the results that we released this morning, you'll see that our Service Fee revenue for the year grew over 21%, and in the fourth quarter of 2010 grew 35%. The increases in revenue were attributable not only to the growth of our existing clients, but also to new clients, and the fact that it's coming from both parts of the growth engine is very important for us in terms of we -- as we look to the future for sustained growth.

The second key highlight we see for the year and the quarter was the fact that we launched 10 new Service Fee clients during 2010. In total, as I've mentioned, about 10 new clients both in US and Europe, some of the key names included companies like Carter's, Volcom, Havaianas, several new Liz Claiborne brand names, including Juicy Couture, Kensie and Monet, and several clients under our master agreement with asset with an as yet undisclosed beauty and fragrance company, as well as many others. Many of these contracts include our complete End2End services offering that has been a cornerstone to our growth over the past few years.

Third key highlight, adjusted EBITDA when you look at our results grew by 55%. The factors, primarily growth that I just described, helped drive those results for our 2010 financial year. Adjusted EBITDA for the year ended at about $5.5 million.

Fourth, as we've talked in the past, a key financial aspect or model has to do with economies of scale and what you're seeing is the scale benefits beginning to materialize as our Service Fee revenue grows. Strong growth this past year combined with a keen eye toward efficient and cost-effective technology development and operational management we believe allows for a financial model of continued improvement and adjusted EBITDA performance as we look to the future. While we do expect to make some significant investments in staff, facilities and technology in the first half of 2011 to address even greater growth that we see, we believe this will prepare us well to capitalize on the continuing wave of new business opportunities that are out there. As such, we are currently targeting Service Fee revenue to increase approximately 20% in 2011 and adjusted EBITDA to increase between $6 million and $7 million for 2011.

Fifth, you'll see -- as you'll see our comments this morning that our new business pipeline has now grown to more than $50 million in size. This is indicative of the continued momentum that we are seeing as it relates to manufacturers expanding their direct-to-consumer initiatives. Our new business pipeline, which as I mentioned now sits at more than $50 million, is the largest it has been in our history. We believe this speaks for itself in terms of both the rapidly growing number of End2End opportunities we are pursuing and in the growing reputation that PFSweb has earned for successfully implementing high-quality and customizable solutions for our clients.

And sixth, I think the other key highlight from 2010 and recently is that we have completed the -- a divestiture of selected assets of our eCOST.com business as of February 2011. We believe this action will allow us to take what we've learned at the front line, the Web commerce retail world, and focus that knowledge more resourcefully on our rapidly-growing services business.

So with those six highlights as a backdrop, I hope you can see why I'm very encouraged and excited about building momentum we have going into 2011. And I'm even more excited about the strong pipeline of potential new clients and the fact that they're coming from several key and expanding markets that, frankly, are very new to the Internet commerce wave. These include the fashion and cosmetics industry as well as the consumer packaged goods market.

And with that as a high-level backdrop for today's call, I want to turn it over to Mike Willoughby, our President, for a few minutes and let him add a little bit more detail and flavor. Mike?

Thanks, Mark, and good morning everyone. As Mark said, it's natural that we are very excited about the opportunities we see. This morning I'd like to begin by giving you some information about what is driving that excitement and driving the growth in our business.

Just over three years ago, we announced the availability of our End2End eCommerce solution which features the world-class Demandware eCommerce platform. We followed that announcement by the launch of the Canada and US Roots site on Demandware in the summer of 2008. We offer this End2End solution directly as a comprehensive best-of-breed program that provides our clients with a single accountable partner for their entire eCommerce program. We brought all the world-class components of an enterprise-caliber eCommerce program from both our proven components and also from our best-of-breed technology partners together in a single package.

We believe this innovative approach delivers the best of both worlds to our clients -- a single accountable partner without compromising quality or capability in any area of the eCommerce program. Our End2End solution allows our clients to focus on core competencies and drive better customer experience and leverage agility and marketing and merchandising efforts, and it frees them up to be successful.

I'm pleased to say that we now have more than 15 End2End programs operating since that first End2End solution was launched in 2008. Several of our clients have made a point of publicly stating their satisfaction with our End2End solution, indicating that the program has exceeded their expectations, including Roots, our first client to utilize the new End2End solution, and also Carters, Inc. which launched End2End solutions for its Carters and its Oshkosh brands just last year.

We've also helped companies re-platform their brands from internal or competing eCommerce solutions in order to take advantage of our solutions' market-leading technologies. Brands that have made such a re-platforming move or are in the process of making such a move include Lucky Brand Jeans, Juicy Couture, kate spade, and several of those clients under the master agreement with a beauty and fragrance company.

I think our track record along with our reputation as a leading solution provider in our industry is helping us gain entry to potential new clients and helping us to compete effectively for their business. Our collection of great brand names and the vast range of services is a clear testament to the value of our service offering and the flexibility of our commerce solution has played a major role in this success and allowed us to sign numerous agreements with clients who are looking for a solution that fit their specific brand strategies.

Now, I think it's this flexibility that separates us from our competitors and has made us a preferred partner to work with. As Mark mentioned, we're excited and encouraged by the increase in Service Fee revenue this quarter of more than 35% year over year, and our new business pipeline is stronger than ever, now exceeding $50 million in size. The estimated value of this new business pipeline is based on potential client projections, and we believe it's building in momentum.

In addition, we continue to effectively respond to growing trends in various markets and we are working aggressively to expand relationships that we have with current clients. Now, with regard to the vertical markets that we're currently addressing, we continue to see very strong interest among the consumer packaged goods companies that are seeking to launch branded direct-to-consumer eCommerce sites. Last year following the announcement of our enterprise agreement with P&G, we experienced a significant growth in our new business pipeline from CPG companies. And, although the sales cycle with these large companies is typically lengthy, we are seeing several of these opportunities progress nicely.

Last quarter, we began implementing an End2End solution for a well-known company in the prepackaged food and beverage category, and we expect to launch and announce this exciting new site this summer. We have also experienced continued growth in the fashion, apparel and accessories market and the health and beauty market. In fact, over the past few years, we have been launching custom End2End eCommerce programs for a number of well-known luxury or fashion apparel brands under what we previously announced as a master agreement with a luxury goods company. And, due to the ongoing transition of these brands from another service provider to our End2End solution, we were not in a position to disclose the name of the brands or the name of the luxury goods company itself. However, now that a majority of these brands are utilizing our services, we have been permitted to disclose this information.

So, first, the master agreement is with Liz Claiborne, under which multiple brands now have customized End2End programs. And the individual brands include Lucky Brand Jeans, kate spade new york, Juicy Couture, Kensie, and Monet. One additional brand size is in development is in development and will launch before summer, and under the master agreement there is potential for Liz Claiborne to add other brands in the future.

This Liz Claiborne master agreement leverages our warehouse, order fulfillment and logistics services to support each of these brands uniquely, and launching these programs demonstrates our ability to rapidly launch successive brand on a common platform and infrastructure while at the same time we still deliver a completely customized experience at every single customer touch point.

Another master agreement which we initially mentioned last quarter is an expanded agreement with a fragrance and beauty company. Under this agreement, we have now launched four customized End2End eCommerce programs for individual health and beauty brands over the last couple of quarters. We expect to launch at least two more brand sites under this agreement this year. We hope and expect to announce the identity of the client and the name of the individual brands.

The continual rollout of the separate customized programs under this new master agreement in addition to our Liz Claiborne master agreement and our Procter & Gamble agreement I believe validates our approach target luxury, prestige and CPG brand holding companies or brand portfolio companies where a single contract relationship may lead to multiple, valuable, brand engagements. We believe our End2End solution is uniquely positioned in the industry to meet the needs of those brand holding companies where we can provide a single solid infrastructure and provide tremendous leverage to our clients and give them economies of scale. In this position, we're still providing a custom branded experience for each brand meeting their unique expectations, and I think this is critical to the luxury and prestige brand that we are targeting today.

Also, the overall market opportunity for eCommerce in Europe continues to expand as additional brands are becoming more aware of the benefits of going direct to consumer. We are extremely excited about the amount of opportunity proposed by this trend and we believe that we are well prepared to capitalize on this growing market in Europe and potentially expand our services to a much wider customer base. I think it goes without saying that, to ensure we are able to handle these growth opportunities appropriately, careful expansion planning will be necessary, and during 2011 we plan to make some significant incremental investments in our business in staffing and facility, technology, and other infrastructure capabilities.

To provide some color on that, those plans and discuss a little bit further, I'm going to turn the call back over to Mark to get into some detail there.

Great, thanks, Mike. So, as Mike just mentioned and as I alluded to earlier on the call, we do plan to make some anticipated expansion in our business activities over the next -- particularly over the first half of the year to support the new growth that we see, not only from new clients but our existing clients as well. Just let me give you a few highlights on those.

The expansion includes, first, the addition of some new team members in our US, Europe and Philippines operation. These permanent positions are being added now and will be in addition to several hundred temporary positions that will be added to support our Q4 peak. Secondly, we are in the process of adding a new food grade distribution facility in the Memphis area to support specific facility requirements that we need to meet to support growth from the new clients that Mike just mentioned in our consumer packaged goods industry area.

Third, were looking at the addition of or expansion of our Dallas area call center facility, which we believe will add several hundred additional call center stations and provide us better flexibility to expand and contract call center seats as client demands and seasons vary.

Fourth, as Mike mentioned, we're seeing an accelerated opportunity in our European market, and as a result we have a planned expansion of our distribution operations in Belgium to support the numerous opportunities that we are now seeing emerging throughout the European region. Now these are just some highlights, but we believe this expansion shows just how excited we are about the growth we're seeing and how dedicated we are towards securing the necessary resources and planning ahead in order to ensure that we are successful in our ability to operate for our clients.

Now, before I turn the call over to Tom to talk about the financials a little bit, let me just spend a short time on closing the book on our eCOST.com subsidiary. As I mentioned in the past, overall, eCOST was a great but no doubt expensive learning experience. We believe the time and effort we put into the eCOST.com business allowed us to markedly improve and expand the interactive marketing services that we now provide many of our service clients in PFS. Further, many of our experiences with eCOST.com have become fully encompassed in this PFSweb End2End eCommerce solution package that Mike described.

As a result of these advancements, we've significantly expanded our client base over the past few years and we are now better suited to support companies in multiple growing industries.

In late February 2011, we finalized an asset sale agreement with PC Mall to divest a specific inventory and other selected assets, primarily intangibles, of the eCOST.com business for a consideration of about $2.2 million. While our team had worked feverishly over the past few years to transform the eCOST.com business model into one that could generate consistently positive financial returns, ultimately, we continue to face challenge that lengthen the time line to achieve that goal beyond our appetite. In the end, we decided divesting the business was the best option for PFSweb as a whole.

By taking this option, we believe we now have a greater ability to focus all of our attention on maintaining the growth of our services business which is accelerating significantly as Mike talked about, and where we believe our expertise in eCommerce services and existing infrastructure can maximize revenue and profit opportunities for us.

As Tom will comment further in just a couple of minutes here, we do still have valuable continuing client relationships, including Procter & Gamble and some remaining infrastructure to support those relationships that resided in the eCOST.com subsidiary. We also hold for future benefit significant tax loss carry-forwards in this sub.

As part of the sale agreement, we agreed to change the name of the remaining business subsidiary. As such, we've chosen to rename the former eCOST.com subsidiary PFSweb Retail Connect Inc. And given its highly similar buy/sell product design, in the future you will see the PFSweb Retail Connect Inc. results reported segment-wise, along with our Supplies Distributors, Inc. subsidiary in a new segment that we will call PFSweb Business and Retail Connect.

So with that information, let me and the call over to Tom, and he will take you through the financials. Tom?

Thank you, Mark. Well, as Mark and Mike have both alluded to, I'm also pleased with the progress that PFS made this quarter and for the year in our business and financial results. Before we get into the financial results, I'd like to briefly discuss a couple of items that will help everyone interpret these results better.

As we have discussed in March -- or, in February 2011, we made the strategic decision to sell select assets of our eCOST.com business to PC Mall for a total purchase price of approximately $2.3 million. The assets sold include inventory on hand, as well as certain intangible assets, including the eCOST.com trade name and website. This sale also resulted in a non-cash goodwill impairment charge of $2.8 million, which is reflected in the December 2010 results.

As a result of this sale, we have modified our financial reporting results to reflect the majority of the eCOST.com business activity, including this goodwill impairment charge as a single line item in our statement of operations labeled as income or loss from discontinued operations for each of the periods presented. In completing this discontinued operations analysis, in accordance with GAAP, we are required to exclude from our discontinued operation results certain ongoing revenue and costs that were previously allocated to the eCOST.com business and financial results. These primarily included such items as revenue, gross margin and costs, a put book to the P&G store which we continue to operate and certain facility and overhead-related costs in California, Manila and Memphis that were historically allocated to eCOST results that will continue to be maintained going forward to support our future Service Fee and Retail Connect business activities.

We have reclassified these ongoing revenue and costs as part of our PFSweb or Retail Connect results in our consolidating financial presentation in this morning's press release, both in the December quarter as well as for all periods presented. To provide you with additional insight into this modified financial result presentation, we have provided a revised consolidating presentation for each of the quarterly periods of calendar year 2010 and certain periods in 2009.

One thing to note is that, in addition to the discontinued operations presentation in both calendar year 2010 and 2009, because the eCOST business was not sold until February 2011, we will continue to reflect the discontinued operation results in 2011 as well, especially in this first quarter.

Based on this new financial presentation, total consolidated revenue for PFSweb in the quarter ended December 31, 2010 was $76.3 million compared to $72.8 million reported in the fourth quarter of 2009. This included an increase of more than 35% in Service Fee revenues to $21.7 million compared with $16 million for the 2009 fourth quarter. This increase is attributable to increased service fees generated from certain existing client relationships as well as new clients. And this service fee growth is even more impressive considering that a prior contract with a technology manufacturing client that was not renewed effective August of this year represented nearly 13% of our prior-year service fees.

For our Business and Retail Connect business segment, which as Mark mentioned includes our Supplies Distributors operations and results from our P&G operations, revenue was $46 million in 2010 as compared to $47.3 million for the 2009 fourth quarter, a slight decrease on a year-over-year basis, but in line with prior quarter trends.

Gross profit for the fourth quarter of 2010 increased $8.9 million, or 13.1% of net revenue excluding pass-thru revenue as compared to $7.8 million or 12.3% of net revenue excluding pass-thru revenue in the fourth quarter of 2009. This increase is primarily due to an increased percentage of our revenue being generated from the higher margin Service Fee activity as compared to prior year. Our gross margin for the services business remained relatively stable, near 28% which is within our targeted 25% to 30% range.

Our newly combined Business and Retail Connect segment experienced a decrease in margin in the December 2010 quarter as compared to the prior year primarily due to the Supplies Distributor subsidiary. We believe based on existing conditions that our future growth gross margin for the Supplies Distributors business business-to-business activity will trend closer to this lower actual performance from the December quarter, but we are targeting to add new direct-to-consumer clients into our inventory ownership model under Retail Connect, which are expected to operate at higher gross margins in the future.

Our SG&A for the quarter was down approximately $0.8 million to $8.0 million as compared to $8.8 million for the same period a year ago. And with the combination of all these results, in the fourth quarter our consolidated adjusted EBITDA was $2.6 million versus $0.6 million in the prior-year period, or a $2 million growth in adjusted EBITDA in the fourth quarter. This significant improvement on a year-over-year basis is primarily a reflection of the strong top-line growth in our services business combined with an ongoing focus on costs.

For the fourth quarter, net loss was $2.7 million or $0.22 per basic and diluted share compared to a net loss of approximately $0.9 million or $0.10 per basic and diluted share for the same period last year. However, as we've discussed, our net loss for the fourth quarter 2010 included a $3.2 million loss from discontinued operations related to eCOST.com, including a $2.8 million goodwill impairment charge.

Now turning to the results for the full year, our consulted revenue for calendar year 2010 was $274.5 million compared to $267.9 million in 2009. This included a service fee revenue increase of 21% to $70.6 million compared with $58.6 million for 2009. Here again, this Service Fee growth is somewhat masked by the fact that prior-year fee amounts included fees from our prior contract under a US Government contract that was not renewed effective April 2009 and a full year of our technology manufacturer client arrangement.

As a result, actual growth from continuing existing clients and new clients was much higher than this 21% overall result.

For our Business and Retail Connect business segment revenue was $174.6 million in 2010 as compared to $183 million in 2009 primarily due to softness in our Supplies Distributors business-to-business subsidiary. While we currently expect that revenue from this Supplies Distributors business will stay relatively flat or decrease slightly in 2011, this continues to be an important part of our overall business operations and we are hopeful that new client activity in our Retail Connect direct-to-consumer business will also contribute stronger results to the combined Business and Retail Connect segment in the future.

From a balance sheet standpoint, we continue to maintain solid working capital turnover results in our various business segments. In addition, we continue to maintain a solid overall financial position with total cash and restricted cash as of December 31, 2010 of approximately $20.3 million, which is relatively consistent with the September 2010 quarter. From a financing standpoint, we do have several of our debt facilities maturing at the end of this month. We have been working through the renewal process with these lenders and currently expect such renewals will be completed soon.

Now I would like to turn the call back over to Mark for some closing comments.

Thanks, Tom. So, to recap, we currently believe PFSweb continues to have a lot of exciting things in the pipeline that have us well-positioned for growth throughout the rest of 2011 and beyond. In order to foster this growth and growth from our existing client programs, we are actively investing in our business and will be expanding our operations in both the US and in Europe. As I mentioned in the opening, based on current client projections, deals we are implementing and new business prospects, we're currently targeting service fee revenue growth of approximately 20% in 2011. Combining this revenue growth with the targeted investments that we're planning to support for our long-term initiatives, we are currently targeting to report and adjusted EBITDA between $6 million and $7 million for 2011.

I look forward to updating you as we continue to ramp up client agreements and launch our services solutions. This concludes our prepared comments for today, and operator, we'll now be available for questions.

(Operator Instructions) Mark Argento, Craig-Hallum Capital.

Good morning, guys, and congrats on a nice Q4.

Thanks, Mark.

Thanks, Mark.

When you look at the -- just to delve into the services business a little bit more, very solid growth year over year, up over, what, 35%? I know you quantified, Tom, that you had some customer attrition, roughly a 13% customer [less]. Could you just give me the math? Do you have the math, the simple math on like a same-store number excluding any customers that such weren't there by year-end? So what's got the organic growth rate?

So, For the quarter ended December, we had about $16 million of fees in 2009, and included in that was approximately $2 million of fees applicable to the terminated client relationship. The remaining number would be about $14 million, and that would compare to our over $21 million number for 2010. So, 50% growth.

Got you, okay. And if you look at the growth, some was, of course, you had new customers come in -- new customer that you added during the period. And I think you said it was 10 new customers that you had come online. How much was kind of the base of business? You guys are starting to grow that base of business with customers that have been in the system for over a year versus kind of new customers that you added. I'm just trying to get a little bit better feel of what's really driving the growth.

Okay so, again, in the quarter, in the December quarter, we -- out of our $21.6 million-$21.7 million of revenue, we would've had about $5.5 million to $6 million of new client activity there, and about $16 million of existing client activity. So that number that we talked about earlier was $14 million being the base from last year excluding the terminated relationship. That $14 million grew to about $16 million, and then on top of that we had about $5.5 million of new client activity.

Helpful. And then, Mark, when you guys were talking to the pipeline number, the $50 million number, just refresh my memory -- that's up from -- kind of what were you seeing last year, roughly?

Last quarter, we were around $35 million, is what we reported last quarter. I don't have what we were in January last year off-hand.

I think it was kind of trending at that $50 million level, so we've seen -- or, excuse me, at $35 million.

Yes, $35 million to $40 million is where we have been at, historically, so this --

So that's popped up pretty markedly here over the last quarter in particular. So any -- I mean, is it just that you guys are getting more traction and getting more looks with the RFPs, or what's kind of the dynamic driving the pipeline there?

Well, you've got two components. There's more names in the pipeline than what we've had in the past. I think we're taking a relatively conservative look as well the names that are in there, and we have some nice deal size in there. Some of these newer industries, particularly as you look at the size of the companies in the CPG industry, for example, some of these deal sizes are very attractive in terms of scope.

Right, right. When you guys are out, when you think about business from a customer perspective, or size of business, do you kind of have a minimum, like you need to see kind of gross merchandise volume of $20 million, $50 million? What -- when you kind of sit back and look at where your sweet spot is, how big does that -- how big does a business need to be, chunks of business, for it to be profitable or make sense for you guys to be involved?

Hey Mark, this is Mike Willoughby. So, we do have qualification standards, and to an extent they vary somewhat across the type of deal that we're looking at. So, our traditional End2End direct-to-consumer deal with a brand, you know, our qualification floor is in the $1.5 million to $2 million fee revenue size when they are fully up and running. And we expect from that point to see a good organic growth rate coming off of those. So that would equate to somewhere between $10 million to $25 million in online revenue for the brand as kind of a starting point. That gives you maybe an idea of the size deal that's in the sweet spot there.

The CPG deals tend to be quite a bit larger, and as Mark said, the scope of services broader. The sales cycle is also more lengthy, and sometimes the buy/sell model, or this Retail Connect, or Business Connect function, is involved, and that would show up partially as product revenue and partially as fee revenue. But the size of that deal tends to be larger.

And then the final factor I would mention is that, every year we're looking for one to two or maybe three at most opportunities where we see a brand that is emerging that may be a start-up or it may be a brand that's only a year or two old that's gotten traction in retail and doesn't have direct-to-consumer initiative, or it's very small. And in those scenarios, even though the online sales may be $5 million or less, we would sort of place a bet on that brand and deploy our End2End infrastructure in a sort of out-of-the-box fashion with the reference app largely intact and really look to try to hitch our wagon to one of these brands rapidly growing. We'll look for, maybe, like I said, one to three of those every year, and we've got couple of those, and I would put Carters and Oshkosh in that category where, coming out, no direct-to-consumer initiative launched last March. And as they publicly stated, the results are way beyond their expectations, and it's one of the situations where they did place a bet that turned out to be a very good bet.

A lot of these companies, Mark, have collected great customer assets over the years in terms of customer relationship information, but have never directly sold to them in the past. So, particularly when you look at a company like Carters that had done an outstanding job not only in their social apps that they had, but in collecting customer information even though they were previously not selling direct, you know, that was a very valuable asset that allowed that business to take off very quickly going forward.

So when we are looking for these one to three that Mike is talking about when we find large companies that already have a great CRM database out there to work with, those are the ones that are really attractive, and many of these CPG clients have that as well. So, even though they're not selling direct, you've got a good trampoline to start with.

Sure, that's very helpful. And then lastly and I'll hop back in the queue, but you talked about or alluded to potentially a new prepackaged food and beverage company, which is a new area, I know, for you guys. Do you see that as a bigger opportunity? And anything you could kind of flesh out there would be helpful.

So Mark, we really view that as a subcategory in the CPG area. The characteristics of those kinds of companies largely mirror what we see in the nonfood side of CPG, some of the same requirements, expectations. So it certainly does drive some variation in our solution. Mark already mentioned the addition of a food-grade facility that's built with the requirements already in mind for having food products in place. But you know, other than that, other than a few minor variations in the solution, the requirements are largely similar to other CPG opportunities. So we see it as a good opportunity. The price point and the margins have to be right. We have to be selective, but it certainly is part of our excitement around the CPG category.

Is it like shelf-stable product, or is it refrigerated product, a little of each?

Yes, currently everything we're looking at in the pipeline is all shelf-stable product. It does not require refrigeration, other than standard climate control.

Got you.

It is a climate-controlled facility. It has different standards related to it than some of our -- than what a clothing facility would have, for example, to it. And there are some additional technology and operational requirements with it, I would say primarily in lot control that we obviously don't see in fashion or in technology. Technology might see serial control that's different, but we already had systems in place to be able to do deal with the lot control features, so that was just pretty natural for us as this particular part of the industry begins to now embrace. This is a late adopter to eCommerce activity in terms of industry segments that are out there, but as we've talked in the past, it's a gigantic industry that probably will never see the type of adoption percentages, penetration percentages that you see in technology or travel or music where those industries are maybe more than 50% of the penetration rate today. But the industry side is so large, it is practical to think of the next decade that these industry segments could approach 15% or 20% penetration rate which would make them larger industries overall than any of the ones I previously mentioned.

Great, congrats on a good quarter guys. Thank you.

Thanks, Mark.

Marco Rodriguez, Stonegate Securities.

Good morning guys, thanks for taking my question.

Hi, Marco.

I was wondering if you can first talk about the investments you're going to be making in the first half. You did a nice job of providing the highlights, as far as where the money is going to be spent. I was wondering if you could perhaps quantify those dollar amounts.

A lot of this is going to be tracked in good cost of goods, so you won't see it from an SG&A standpoint to speak of, Marco, but let me let Tom give you a little more highlight there.

Okay, it would be a combination of -- as it talks about, there's facility costs, people costs, that are going to be involved with this, and especially in the first part of the year as we start ramping up some of the new clients and put in place some of this infrastructure to support the long-term initiatives, both for this year as well as for years going forward. The total amount of those investments is probably in the $2 million to $3 million range in total across all the different geographies. In addition, we do have certain costs that were previously incurred by our eCOST business operation that are getting reallocated to our PFSweb operation on a going-forward basis for certain things like allocations of the Manila operations or our Memphis facilities and that type of stuff. So you'll see on a year-over-year basis a slight -- or, an increase in some of our cost comparisons to reflect these changes in the business.

Okay, so it kind of sounds like it's going to be mostly in the cost of sales line item. Are you going to see --

Actually, it will be a combination, both in cost of goods sold -- some of this stuff and -- some of it will end up in start-up activity where some of the initial contract periods may be a little bit lower gross margin than what we would expect on a long-term basis after we get the contract up and running properly. But it would also be reflected in the SG&A area as well.

Okay, so from a gross margin perspective for the first couple of quarters of 2011, it kind of sounds like we should be expecting a slight downtick. Is that fair?

Yes.

Okay, and then on the SG&A side, obviously you did a great job of helping us see the quarterly trend through 2010 by splitting out the eCOST. We should obviously as well expect a slight uptick as well from these investments that you are making?

That's correct.

Okay, and then with the eCOST now divested, can you help us think a little bit about your working capital accounts? Is there going to be any sort of an impact?

You know, the -- eCOST didn't have a significant amount of impact on the balance sheet. By the end of the year, we had a couple million dollars of inventory and some receivables and payables. It actually -- it did operate with a positive working capital component to it because of the fact that we -- our historical inventory turns and receivable turns were generally less than our total payable time period. So we did have some positive cash flow from the business just because of the way the working capital dynamics of that worked. However, it's not a significant, real meaningful piece of our total cash position. I think we had a couple million dollars of cash or so on the books of eCOST at the end of the year.

So cash may go down a little bit as we go forward, but that's also offset partially by the cash infusion that we got from the sale of the intangibles.

Okay, and then in regard to your pipeline on new business, I was wondering if you might be able to provide little maybe a little bit more color in regard to your expectations as far as signing some of these clients. Any kind of timing that you might be able to provide would be helpful.

So, generally speaking, our time to on-board new clients is four to six months for an [end] program. It tends to be on the long end of that range, the six months when we have a creative agency involved helping the client to redesign the website. So, you know, a couple of months of that time frame we're kind of working with an agency to design and plan the re-platform. If the client's already had that work done or largely they're just moving a site over with the look and feel intact, then it could be on the shorter end of that range, the four-month kind of time frame.

So if we're talking about in a given quarter that we have a new agreement with a client that we have done in the previous quarter, you should typically expect that the next quarter or the quarter after that we would say that we've launched the site based on that typical range.

Okay, and in terms of the amount of clients that are in your 50 million-plus pipeline currently, can you provide a quantification there?

Well, I suppose what I could do is discuss how the categories of the vertical markets they tend to fall in. Our number one vertical market has been over the past three or four years the fashion apparel and accessories, and the majority of the clients in our pipeline are still in that category. So, that's definitely our most active and most lucrative vertical market.

Right now, I would categorize that the second category is probably a pretty virtual tie between these CPG companies, both the nonfood and the food packaged goods categories, and health and beauty vertical market. So, between those three, you probably have 90% or so of the prospects in our pipeline, and the remainder would be B-to-B opportunities or product categories outside of those three verticals, like toys or consumer electronics.

Helpful. And then, lastly, can you just kind of talk a little bit more about your sales and marketing? Are you seeing more people come to you asking for that End2End solution, kind of the soup to nuts, if you will, or are people just coming, or are people just kind of coming, we're not sure exactly what to do with our eCommerce solution, you help us out?

What we're seeing typically now is that companies want to understand all of the alternatives that they have. So we're seeing less of a preconceived notion or assumptions coming in that they would like to add the contract relationship one way or the other. And so, we're in a position now because of the flexibility of our solution to talk to them about the single provider or the one throat to choke benefit that comes from that End2End solution. but we're also able to say, if you want to contract directly with Demandware, for instance, or you want to use your in-house fulfillment capabilities how easy it is for us to offer our solution in an a-la-carte fashion and create the same kind of End2End synergies by integrating with another third-party or internal capability. So just being able to speak to that flexibility without sort of railroading the prospect down a certain avenue I think gives us a lot of power in our sales cycle.

Great thanks a lot guys.

Marco, one thing I want to clarify real quick in here and I'll let Tom just give you a bit more detail on that, back to your first question in there. In terms of the magnitude of the investments we're making, we have got roughly $18 million --

Yes, we have got about -- as Mark indicated, our targeted growth is about 20% on our Service Fee business. So, if you took that 20% on our $70 million of Service Fee revenue base this year, that is about a $14 million increase in Service Fee revenues, would be what we would be targeting. Of that about $14 million, we would be expecting to earn a gross margin of 25% to 30%. So we're going to have the incremental cost of goods sold to put that new business activity.

What my point was earlier was, on top of that normal cost of goods sold component, we expect to have an additional several million dollars of cost that we are making from an investment standpoint in the business to support not only our initiatives this year as well as our long-term growth.

Right, so you take the 10 or so cost of goods in that number, plus a couple of million more, the magnitude answer I think you were after in terms of the investments that we're making in people and infrastructure and so on and so forth is well in excess of $10 million for the year.

So the revenue increase is going to offset the increase in cost, basically?

That's correct.

Got it, great, thanks a lot, guys.

Alex Silverman, Special Situations Fund.

Lots of my questions have been answered; I have a few technicals. For 2011, what do you project your CapEx needs are?

We do expect our capital expenditure needs to be higher than where they have been over the last couple of years. We generally have been operating at about a $4 million level in the last -- I think both 2009 and 2010. We expect that number to go up this year to probably between $7 million to $9 million. Some of that is expected to be financed with leases and that type of stuff. So our cash CapEx number in total is expected to be probably closer to the $4 million to $5 million that we've had previously.

And is that equipment, or is that bricks and mortar, or a combination?

A combination, as well as some of that relates to startup activity to put in new client implementations.

Okay. How much in leases and unused property is left from eCOST? I understand that you're going to be moving Philippine operations over to the core business and such, but do you have property in California that was old eCOST property that is no longer being used?

Well, we've got a small 5000-square-foot office facility out there that we are in the process of considering repurposing for call center there. I'm trying to get this Dallas-area one sorted out first. We do need to try to make some additions to our redundancy capabilities. The weather patterns this year kind have kind of (technical difficulty) understand. There's probably some improvements we can make in that a little bit. So we may use that office for those purposes, which is the reason it didn't go into discontinued operations, so we haven't made a final decision about that. That's really only the physical plant that's left from that piece.

Okay, so there's nothing that needs to be subleased out?

No. The other space that eCOST was using in Memphis, it was a relatively small footprint and that will be reallocated to other new clients. And then in Philippines, as we talked about earlier, while there was an allocation in the past of that total facility, both between PFS and eCOST, that full facility now will be allocated to PFS and utilized by PFS for some of its new activity.

Unrelated over the last year, we've really transformed that Manila operation. It was primarily eCOST 18 months ago. It became primarily PFS by, I don't know, the third quarter or so last year as we rapped up our technology development there.

Okay. On a continuing operations basis, can you give us a sense for 2011, what you expect depreciation, amortization and stock comp to be?

Yes, give me one second here. So, our G&A estimate will be somewhere in line with this year's number. I have got maybe a little bit of an increase, somewhere between $6.5 million to $7 million. Stock comp expense is also expected to increase somewhat. It was about $800,000 in 2010, expected to increase to about $1.2 million or so in 2011.

Okay, looking at your pipeline, how much of your pipeline are folks that have something up and running with one of your competitors and are looking over to you, and how much of it is sort of greenfield?

Well, I would say that the majority of the prospects in our pipeline currently have an online initiative. It's difficult to say what percentages with a competitor or with a third party versus in-house. I'd have to go back and look at that. My gut feel on that is that over 50% of what we see in the pipeline is with another third party today. So it they would be re-platforming from either a group of separate providers, like a 3PL plus a call center provider with a software platform thrown in so it's not end to end, or with one of our competitors that offers a total solution.

Okay, and my last question -- on the last call, I think you confirmed with Argento that your pipeline was syndicated at $35 million. It's grown by $15 million on a net basis. Obviously some you won, some you didn't, plus you added stuff on top. Can you give us a sense of how much you have taken out of the pipeline over -- either in the fourth quarter, or even better in the first quarter and the fourth quarter, without naming names?

Yes, this is going to be sort of a rough number. We probably -- if you look at the net to get to the $50 million, we probably took I would say $15 million to $20 million out. There was one fairly large deal in there that was a fulfillment only, kind of a 3PL deal that was a pretty big deal in that pipeline. So that made a dent as that went out. We did not win that piece of business. It went to a sort of commodity 3PL provider. So, it ended up being a lower margin than we have an appetite for. But it was a pretty big number in the pipeline, so say $15 million to $20 million that went out.

So, $30 million gross added?

About right.

Okay, and of the $15 million to $20 million that went out, what would you say -- two-thirds were lost and one-third won, if you include that big deal that you passed on?

If you include that big deal we passed on, that's probably close to a right number. Somewhere between two-thirds and three-quarters, or something like that.

Okay, very helpful. Thank you for this help, appreciate it.

George Walsh, Gilford Securities.

Good morning gentlemen, congratulations on the quarter. Just a couple of balance sheet items, a little bit with the lines of credit. It was touched on earlier, but I just wanted to go into that a bit more. With the divestiture of eCOST, is there an ability to consolidate those lines, or is that something you're looking to do or are you more or less happy with the structure you have?

We're looking to consolidating in the future. You know, there still is a need in our ongoing Retail Connect business to have an asset-based lending facility to support some of the working capital needs of that business. So we do expect -- that facility for that subsidiary actually renews in May, so it's a little bit later in the process. We do expect to try to renew that component probably at a smaller dollar amount because it's not necessary to have such a big amount right now. But the other facilities we expect to maintain a relatively similar renewal amount with. And at this point in time, we feel like we've got the right facilities at the right subsidiaries. We will continue to take a look at whether or not presenting a consolidated, especially a US facility, makes sense for us going forward.

Okay. Also, I noticed that the Mississippi Finance Corp. bonds of $1.6 million that matures in April of 2011. Is that something that you just pay off, or is that something that can be renewed, or what do you think (multiple speakers)?

That facility, we have had annual payments on that of about $800,000 per year effective early January of each year. So that $1.6 million at the end of December has already been reduced down to $800,000. And that is supported by a letter of credit that has already been renewed and expanded or extended until 2012.

So you don't have to pay off that balance?

Not the remaining amount. Again, we did pay off $800,000 of it in January, as we have historically.

Okay. And with Q4, for the services business, did seasonality play a big effect in helping, or was it just the new customers ramping up and just hitting that quarter?

I'll take that. The nature of our a lot of our new clients is a heavier fourth-quarter component than we'd had in the past. So, there's clearly a seasonal component in that, and that is going to continue.

Okay. And is that the fashion apparel? Because I was thinking that maybe some of that would (multiple speakers) maybe have some of the opposite effect, than with the CPG in particular.

It's pretty much, all of them have a fourth-quarter peak. We have got some clients that have a little bit of a midsummer peak as well, but nothing related to -- in contrast to the fourth quarter. So you will continue to see a fourth-quarter bubble.

Okay, so the seasonality would be pretty much -- I guess the fourth quarter will be the best? This first quarter will probably be the weakest, and then it kind of ramps up through the year?

That's correct.

Okay, very good. And, what else was there? In the services, what is the breakdown in terms of the percentage relative to revenues of the business-to-consumer and business-to-business?

For 2010, rough numbers, business-to-business represented about 30% of our activity, and business-to-consumer was the remainder. Those are rough numbers, so about one-third and two-thirds in 2010.

I don't think that's what he's asking. Were you asking about our -- basically that new segment I talked about, George?

No, no, that was it, just in the services division, how that broke down.

All right, okay.

The other is also, in that -- could you clarify once again, just to be clear, the -- what's the name of that, the new --

Retail Connect?

Yes.

Yes, Retail Connect. Now that is going to be Supplies Distributors plus clients like P&G?

That's correct, yes. So, basically, we're using a buy/sell model or a product ownership model. Combine that together in that piece of the segment going forward. To the extent that -- right now, the retail component of it or the consumer piece of it is relatively small in contrast to the size of the business-to-business piece. As that retail component grows, we may break it out again and just report business-to-business and retail separately. But, right now, it doesn't make any sense to do that. So you will see basically two key segments going forward -- the PFSweb Web Services segment, which we'll target 25 to 30 points gross margin on, and then the, what we'll call the Business and Retail Connect segment, which is the buy/sell or product ownership model. So you'll see product revenue in that segment, and you'll see margins in low-single digits for now, so --.

Okay, but it's the same business? Right?

Yes it is. We're just repackaging the thing. And what's left of the eCOST subsidiary that we renamed, PFS Retail Connect, is not that large at this point. So, it just makes sense given the similarity of the buy/sell model to segment report those together.

And, George, just to add a little bit to that, remember that with these relationships, such as the P&G relationship, certain activities that we do for them are billable under our normal fee basis, so just delivering platform and marketing services. So if you were trying to sort of size the P&G deal, you'd have to put the two things together. And that, we believe, would be consistent with these CPG engagements where certain activities, including possibly some of the product sales, would be on a consignment basis and be under the traditional Service Fee revenue column and certain activities in that buy/sell. So don't try to back into the P&G deal just by looking at that one aspect.

Okay, that's good. So there are service elements and the inventory buy/sell elements markup?

Yes. If you want us to confuse you more, the other thing that will happen in these things as well is a lot of these CPG clients like the concept of launching using the buy/sell model but, over time, may transition into the services model and change, so the product revenue would go away. We're pretty agnostic in terms of how that happens. We should be able to earn a similar gross margin or a certain similar operating income -- operating income, regardless of which model that they use out of that. So, I think you'll see life cycles of clients change and move between those things as they go forward. Sometimes, clients that are all services come with a project that the easiest way for us to implement is, is on a buy/sell model. So, you know, it's just the flexibility of what we're doing and it will be reported in both places. So product revenue can be a bit misleading in terms of looking at that component of it. I would focus on service fee revenue growth, and then on operating income or EBITDA, adjusted EBITDA performance.

Okay. And last quarter, I think you mentioned a little bit there might be some acquisitions you could be looking at in terms of adding to your capabilities on the services side. Is there anything on that front to report or your thinking there?

Nothing in the hopper at this point. I think I've talked a little bit about the interactive marketing services area or a piece of business that we've begun to call Digital Connect now, but it's our digital agency piece. I think if we find found the right opportunity in that, that's an area where we would like to try to expand some of the services that we offer. But at this point, the model that we are using where we are aligning ourselves with best-of-breed providers in that area and entering into kind of wholesale relationships with them where we earn a markup on their fees, is working well for us.

Okay, is there anything with mobile capabilities that you guys have to add to what you're doing, or is this anything -- an initiative that you guys could be working on there?

If you notice, George, from the press release we just put out yesterday, we launched the kate spade site simultaneously with a traditional browser-based website plus a mobile site. The mobile capabilities we deployed are out-of-the-box with Demandware, so it makes us very easy for us to simultaneously launch the site both ways. The other thing we are seeing just to hitchhike on that a little bit, is an increased interest in multi-channel operations where you have got a synchronization across your brick-and-mortar channel plus your eCommerce channel. So some of the features around pickup at store, return to store, even ship to store, those sort of things, we're starting to see more and more. And we are deploying capabilities to really answer those needs for our clients as well.

Okay, very good, all right, thanks a lot.

At this time there no further questions. I'll turn it back to management for closing remarks.

Okay, we appreciate everybody's time this morning, and we'll talk to you next quarter. Thank you.

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