PFSweb Inc (PFSW) 2011 Q1 法說會逐字稿

Good morning. My name is Wes, and I will be your conference operator today. At this time, I would like to welcome everyone to the PFSweb first-quarter 2011 earnings conference call. All lines have been placed on mute to prevent background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.

I will now turn the conference over to Garth Russell, Managing Director at KCSA Strategic Communications. Please go ahead, sir.

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

During this call, we 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 are used with these measures. In our press release with financial tables issued today, which is located on our website at www.PFSweb.com, you'll find our definitions of these non-GAAP financial measures, a reconciliation of these non-GAAP financial measures with the closest GAAP measures, and a discussion about why we think these non-GAAP measures are relevant. These financial measures are included for the benefit of investors, and should be considered in addition to, and not instead of, GAAP measures.

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

Great. Thank you, Garth. Good morning, everyone. I would like to welcome you to our 2011 first-quarter conference call. With me today are Tom Madden, our Chief Financial Officer, and Mike Willoughby, President of our PFSweb Businesses. This morning, we will give an overview of our financial results and some color of the events that shaped the quarter ended March 31, 2011. And following our prepared remarks, Tom, Mike, and I will be available for questions.

These are exciting times for us at PFSweb. We continue to see outstanding growth opportunities for our business, evidenced by the strong growth results in our service fees over the past 2 quarters. We believe that this trend of solid growth will continue as we look to the future, and is being driven by not only the addition of new clients, but also from solid organic growth from our existing client base. One of the key drivers of our growth is coming from the manufacturer direct-to-consumer web commerce channel where we continue to see outstanding results as well as numerous new client opportunities from a variety of well known fashion, health and beauty, and consumer packaged goods companies. As a result, we are ahead of what we believe is the next big step forward for the web commerce industry overall, putting us on the right path toward long-term revenue growth and profitability.

The first quarter of 2011 was marked with several key achievements, and the continuation of a number of themes that began to take form over the past couple of years for us, and which we will continue to pursue during the remainder of 2011 and beyond. Let me recap a few highlights for you. First, probably the most important achievement has been the ongoing growth of our service-fee revenue, which increased 18% this past quarter compared to the same period last year. The increase in revenue is attributable to successful ramp-up of client programs launched within the last 18 months. This is important because it's a clear indicator that we are succeeding alongside our clients, which is important for our long-term success. Overall, we are extremely pleased with the successful launch of many of our new client programs over the past year, and we remain excited and optimistic about the long-term growth potential in many of these new client programs.

Second is the significant increase in the number of simultaneous new client programs we have begun deploying since the beginning of the year. In total, we are now working on 11 new separate contracted eCommerce client programs that are set to launch over the next 6 months. 8 of those are our full End2End eCommerce solution. In case you are keeping track, we've included 4 of these programs as client wins in our previous discussions and previous conference calls. 5 more of the programs are incremental brands under our master agreement with 1 expanded client relationship. This is a trend we're seeing more and more frequently.

In addition to these 11 programs in development, as we recently discussed in our last call a little more than 1 month ago, one of the new programs we launched, and we launched with a big bang, was kate spade new york, a Liz Claiborne brand. I'll let Mike discuss these recent launches, and disclose some additional client names as we're permitted to do so, here in a couple of minutes.

Next, we are very excited about the string of new client programs in development for launch in 2011. Perhaps even more exciting is the growing pipeline of new business that we've seen develop over the past couple of quarters, and the rate at which we are able to win new business. In fact, of the 11 projects in development, 7 of the projects have been contracted as part of 3 new or expanded client agreements since January 1 of this year. These new deals are with some of the world's most recognizable companies and iconic brands. Mike will also add some flavor to that here in a couple of minutes.

Although we've had success in closing new business agreements, meaning these amounts came out of our new business pipeline, we've also been busy adding to the pipeline of potential new clients as well. And as such, our pipeline, based on client projections, still sits at more than $50 million in size, continuing to be at nearly the largest level 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.

As I spoke on our last call, strong growth in 2010 and the first quarter of 2011 has led us to making some significant investments in staff, facilities, and technology that we need to support the pipeline and new business, and to enable us to expand both domestically and abroad. We believe these investments, along with the divestiture of our eCOST.com segment, which was finalized in February 2011, will prepare us well to capitalize on the continuing wave of new business opportunities we see, and help us reach our targeted adjusted EBITDA goals that we've stated.

So with this information as a backdrop, let me turn the call over to Mike, who will give us a lot more detail. Mike?

Thank you, Mark, and good morning, everyone. As Mark just mentioned, we are really thrilled about the growth we're experiencing in our service business. And to give you a few details, this growth is being driven from a number of factors, including the ramp-up of our new client that launched during the last half of 2010. Also from the impressive organic growth of several of our established clients, and the contribution from the kate spade new york End2End eCommerce solution that we launched on March 9.

In addition to that kate spade launch, as Mark has mentioned, we've begun deploying 11 new client programs since the first of the year. These new client programs are all expected to be launched over the next 6 months. These client agreements span multiple industries, as we continue to benefit of the emergence of several large product categories accelerating growth in the web commerce space. Our excitement has primarily stemmed from 3 specific industry sectors including fashion, health and beauty, and consumer packaged goods, or CPG. I think it's important to note that CPG category is very broad, and it includes companies that are focused on beverages, pet food, home textile products, and many other product categories.

With regard to that kate spade new york launch we discussed in the last conference call, we have been very pleased with the ramp-up of the program, and the positive attention that both we and our client have received as a result of the launch. The kate spade program is included in our master agreement with Liz Claiborne. That agreement also includes Lucky Brand Jeans, Juicy Couture, Kensie, and Monet. One additional brand site under this Liz Claiborne agreement is in development, and will launch later this year. And under this master agreement, there is potential that Liz Claiborne could add other brands in the future.

The LCI agreement is a great example of our ability to simultaneously launch several independent End2End eCommerce solutions, each unique to the different brands' needs, but leveraging a common infrastructure. We've used our work with LCI as a case study with other major brand holding companies that are also seeking an End2End partner to develop and manage an eCommerce solution for their family of brands. And the feedback that we have gotten from these various companies has been very positive, as they see the benefits of having branded eCommerce solutions on a single infrastructure.

Another one of these master client agreements, which we discussed last quarter, is an expanded agreement with a fragrance and beauty company. Under this agreement, we have launched 4 customized programs for individual brands over the last couple of quarters, and we expect to launch at least 2 more brand sites under this agreement this year. We do expect to announce the identity of the client, and the names of the individual brands later this year as we receive permission from our client to make that disclosure.

We also announced on the last conference call that we began implementing an End2End solution for a very well known company in the prepackaged food and beverage category. We're progressing on this launch as planned, and we expect to launch and announce this exciting new site later this summer. I'm very pleased to say we now have 15 End2End programs operating since the first End2End solution was initially launched in 2008. This successful track record, along with our reputation as a leading solution provider in our industry, is quickly helping us gain entry into potential new clients, and helping us successfully compete for new business.

The diversity of our current and potential clients represents a broadening opportunity for us in multiple market spaces. We are expanding our reach to many different audiences looking for a solution that fits their specific brand strategies, both in the US and Canada and across western Europe. In fact, as I mentioned before, the overall market opportunity for eCommerce in Europe and Canada is continually expanding, as additional brands are now becoming more aware of the benefits of online marketing in these geographies. Of the 11 new client programs that we are currently working to deploy, 3 of them are for eCommerce sites serving western Europe and/or Canada.

We've experienced the same positive opportunity with brand holding companies in Europe, and several of our opportunities in our European sales pipeline involve multiple brands owned by a current client or a perspective new client. We're also seeing an increase in the number of clients and perspective clients that are seriously planning geographic expansion of their program using our global End2End eCommerce solution. We are very excited by the amount of opportunity that is created by this trend, and we believe we are well prepared to capitalize on this growing market and potentially expand our services to a much wider customer base because of our global capabilities. Also, as we announced last quarter, we've begun to make some significant incremental investments in our business in the area of staffing and facilities, technology, and other infrastructure capabilities, each of which is specifically designed to help support the new clients that we've signed, as well as maintain the high level of growth that we are experiencing in our service fee business.

Finally, as I indicated at the beginning of my comments, we are also benefiting from impressive organic growth of several of our established clients. Helping our clients grow their businesses with our End2End eCommerce solution, particularly with our digital marketing services, is a core part of our value proposition. Benefiting from our clients' organic growth is also an important part of our financial model. In order to take advantage of these client organic growth benefits, we must continue to offer a leading-edge, comprehensive End2End solution, and we must operate that solution with a very high level of quality.

We believe our success in winning and now expanding new client business validates our model, and provides an inherently positive reference to the high levels of quality that we are providing to our clients and their customers.

For some more detail on the efforts that we are undergoing right now, I'll turn the call back over to Mark for some comment.

Thank you, Mike. So as I mentioned in my opening remarks in there, the strong growth we reported, obviously, over the last 2 quarters and everything that's going on is leading us to make some important investments in staff, facilities, and technology to support the pipeline of new business. And to ensure that we can expand both domestically and abroad, and continue to provide the high quality that our customers expect, and to be certain we can meet their growth demands that in many cases have been very significant over the last couple of quarters. So as Mike mentioned, we've made a number of investments in technology development in our operational areas, support management, and in expanded facilities. These investments resulted, as we had spoken previously, in an increase in SG&A during the first quarter of this year as compared to previous quarters.

Specifically, just a few highlights. We recently added a new food-grade distribution facility in the Memphis area to support specific facility requirements for certain new clients in the CPG industry. During the quarter, we also began a large addition to our fleet of high-tech put-to-like pick carts that we believe will help us substantially improve worker productivity and facility throughput, particularly as our peak fourth-quarter season arrives. We've also recently expanded our distribution operations in Belgium in order to support the current and potential growth we see in western Europe.

And we're also planning to make additions to certain of our call center operations, particularly here in the Dallas market, over the next several quarters, which will provide us with better flexibility and more capacity to be able to meet the growing client demands that we are seeing. We are also currently evaluating options for our Dallas area headquarters space requirements for the next several years, as we are reaching capacity in that area as well.

Also, as previously disclosed, during the first quarter of '11, we finalized an asset sale to dispose of the operations and most of the assets of our former eCOST.com subsidiary. This division's financial results, as Tom will discuss in a minute here, will be reflected as discontinued operations for each of the periods presented. And to get you a little more financial flavor on the quarter, we will now turn it over to our CFO, Mr. Tom Madden. Thomas?

Thank you, Mark. Before we get into the financial results, I'd like to briefly discuss a couple items that will help everyone interpret the results better. Over the past couple of years, we've taken a number of positive steps with the objective of improving our short- and long-term financial results. This has occurred through an ongoing balancing act of reducing and closely monitoring costs, while at the same time making the right investments to support our future growth objectives.

As part of these efforts, we made the strategic decision to sell select assets of our eCOST.com business to PC Mall. This divestiture occurred in February of 2011. And as Mark just mentioned, the financial results for the operation sold to PC Mall have been reported as a discontinued operation component in our financial results released this morning. And they include an approximately $0.6 million loss during the first quarter of 2011. And that loss amount included certain incremental costs associated with exiting the business.

For our continuing operations, total consolidated revenue for PFSweb in the quarter ended March 31, 2011, was $72.4 million compared to $68.2 million reported in the first quarter of 2010. This included an increase of more than 18% in service fee revenues to $18.9 million compared with $16 million for the 2010 first quarter. This increase is attributable to increased service fees generated from new and existing service contract relationships.

For our business and retail connect business segment, which includes our supplies distributor's operations and results from our P&G client activity, revenue was $45.3 million for the first quarter of 2011, which is relatively stable with the $45.6 million for the 2010 first quarter. Gross profit for the first quarter of 2011 increased to $7.9 million or 12.4% of net revenue, excluding pass-through revenue, as compared to $7.8 million or 12.6% of net revenue, excluding pass-through revenue, in the first quarter of 2010. Gross margin percentages for both our service fee business as well as our product ownership businesses were in line with our targeted range this quarter.

SG&A for the quarter was up approximately $0.6 million to $9.2 million as compared to $8.6 million for the same period a year ago. The increase is primarily attributable to increased non-cash stock compensation expense, sales and marketing costs, personnel related expenses, as well as growth- and technology-related costs required to support current and future growth.

As we've discussed previously, we utilized adjusted EBITDA as a key metric in evaluating our operational performance. In the first quarter, our consolidated adjusted EBITDA was $0.5 million versus $0.8 million in the prior-year period. For the first quarter, our net loss was $2.3 million or $0.19 per basic and diluted share compared to a net loss of approximately $1.2 million or $0.12 per basic and diluted share for the same period last year. But do recognize that net loss for the first quarter of 2011, as I discussed previously, included a $0.6 million loss from discontinued operations related to eCOST.com.

We continue to maintain a solid financial position, with total cash and restricted cash as of March 2011 of approximately $19.8 million. In addition, during the March quarter, we were successful in renewing many of our financing facilities primarily with existing banking partners, and on similar terms to what we had previously. These renewals extended our facilities from either periods ranging from 1 to 3 years.

So on an overall basis, we're very pleased with our first-quarter results. We continue to maintain our targets of service fee revenue growth of 20% for the year, and consolidated adjusted EBITDA performance of $6 million to $7 million for calendar year 2011.

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

Great. Thanks, Tom, and Mike as well. I hope you can detect our excitement. We feel like we are really in the vein of great opportunities right now. Lots of exciting things in our new business pipeline, and clearly we feel like we are -- we believe we are well positioned for potential growth throughout the rest of 2011 and beyond. We are making some significant investments in our business to be certain that we can support that growth, both here in the US as well as in Europe. I look forward to continually updating you as we build up our business, ramp up client agreements, and launch our services solutions over the coming quarters.

That concludes our prepared comments for today, and operator, we will now be available for a few questions.

(Operator Instructions)

Our first question comes from Mark Argento with Craig-Hallum Capital.

Hi. Good morning, guys. Nice quarter. Thanks for the additional detail in terms of the customer base and the programs. I was hoping if you could walk me through a little bit -- a little bit better maybe starting from that 15 number, the number of clients that are currently deployed under the End2End solution.

And then juxtapose that versus the -- I think you said you have 11 new programs rolling out. Are the 11 programs, are they equivalent to the 15 that you have in place right now so 6 months from now that number is going to be 26? Or just help me -- I'm trying to get a little bit better feel for some of these new metrics you threw out at us.

So, one thing that I think to understand as indicated in my comments, Mark. Of that 11, five of those are actually brands that are part of an expanded agreement with the current client. So, you probably could characterize that group of 11 as somewhat smaller and kind of a gross margin value flowing to the program than the 15 that we're currently operating. Those brands are somewhat smaller, but as a group -- as a group of 5, they are pretty significant piece of business for us.

If you look at the rest of them, I'd say that there is pretty characteristic of the existing 15. There are a few of them that are fairly startup type opportunities for us that we anticipate having some good growth potential, and there are a couple that are very mature. And I mention, 3 of them are for Western Europe and/or Canada which would start relatively small but then have growth potential according to the -- just what you're seeing in those geographies.

Great. That's very helpful. Also in your prepared remarks you guys talked about not only CPG being the fashion and apparel but also now you guys are -- are putting in the beverage category, pet food category, and I believe you also mentioned textiles or -- not textiles, but there was one other one I can't read my own writing.

But, the opportunity set here looks like it's expanding, I guess, is my point. Are you starting to see more interest for your services clearly from a broader vertical or broader subsegment or segments of the CPG vertical? And how would you characterize the amount of activity and everything going on relative to, maybe, above and beyond the traditional areas that you guys have focused on?

I think you are right -- right at the crux of -- the trend that we see is that not only is the web commerce marketplace continuing to be driven by growth in terms of just consumers' buying patterns, but there are lots of new products that are bubbling into the bottom of the web commerce channel that maybe 5 or 10 years ago we would have never predicted would be purchased over the web.

Our efficiencies that we've created in our freight programs, growing infrastructure capabilities that are out there, and combined with just demand by consumers about being able to buy products when and where and how they want to buy them, are all driving the demand for additional categories.

You are also seeing, particularly with manufacturers, a situation where they are aggressively attacking the direct-to-consumer marketplace because it gives them more control over their relationship with their consumer than they may have been able to attain over the last several decades through the traditional retail channel.

Many of these manufacturers are trying to create greater economies of scale by manufacturing the same products in different packaging or different scents or different sizes that allow them greater economies of scale in their manufacturing lines out there, but also lead to a broader presentation of SKUs and sizes that traditional retail is saying I can't carry these, I don't have shelf space for them. Or in the case of retail wanting to compete with them with private label products.

So, the direct-to-consumer channel for a manufacturer becomes a way for them to be certain that their presentation of the entire range, size, color, style, whatever it is, is appropriately presented and available to consumers in the marketplace. And that's, going back to the first thing there, is really expanding across all kinds of product categories.

And that is the exciting thing we see is that years ago, I think it was, years ag we would have looked at it and said, well, it was technology, maybe some sporting goods, and some digital delivery categories like music and things that were early adopters to the Internet space. But now we're seeing lots and lots of other products.

I think the Forrester numbers, if you will, for 2008 on the CPG category was less than 1% of that industry had gone over the web. As we look out over the next decade we see that giant industry particularly as broadly defined as we define it, being an industry that could well approach 20% of the industry there. So, there's just tons of growth opportunity we think available in these expanding product categories and industry sets.

I agree. I think it's nice to see the expansion of the opportunity to go after that broader set. So, good work there. When you think about the investments you guys are making of the business, can you give us any kind of metrics around maybe the number of people you hired, the amount of capital -- I know you talked about maybe cranking up expenses $2 million to $3 million in terms of adding new people and other types of CapEx activities. Anything you can share with us for the quarter?

Yes. The comments would be pretty consistent with what we talked about last --I guess a month or so ago. The incremental investment this year is anticipated to be in that $2 million to $3 million range. We'll have some additional capital expenditure requirements this year, probably a higher rate than where we were in prior years, to support some of the pick card initiatives that Mark talked about earlier, as well as some of the new facilities that we are expanding into. So, really not much changed from the comments in the last quarterly call that we had in March.

Great. Good quarter. Thanks, guys.

Thank you Mark.

Your next question comes from Alex Silverman of Special Situations Fund.

Good morning.

Good morning. How are you?

I'm well, thank you. You mentioned an unnamed CPG win. Can I assume that's related to the new South Haven facility?

Yes. It's the new food grade facility. Yes, that is one of the -- that is the unnamed client. That is correct. Those are tied together.

And I see from the press release a couple of weeks ago, it's is 50-plus 1000 square-foot facility. How much of that facility is this client taking up?

More than half initially.

More than half of the 52?

Yes.

Great. Can you tell us whether this is a buy/sell client or consignment client?

It's a consignment deal.

It's a consignment deal. Okay. I'm sorry?

It's a services contract deal, yes.

Great. What are you seeing in terms of the pipeline, the bidding pipeline? Are folks looking for buy/self agreements, or are they looking for consignment agreements?

We see both. I will let Mike add flavor to that because these on the front of the sales area. Go ahead, Mike.

Hi, Alex. We still see the majority of the opportunities being a traditional fee revenue consignment model. The requirements for the buy/sell from our perspective are more of a niche type of a requirement. As we have said in the past, I think there's a couple of things that drive somebody to that model. One is channel conflict issues, which I think are becoming less and less a motivator for that model.

The other motivator we are seeing is internal capabilities within the brand manufacturer to handle a retail sale, which primarily comes down to IT capabilities, internal finance and audit restrictions, that sort of thing. Does the client understand, and are they prepared to deal things like PCI compliance and the various Sarbanes–Oxley expectations around retail sales? That's a bigger motivator. And if you looked at the pipeline that we have today, I would say certainly less than 10% of the pipeline we are seeing is considering a buy/sell arrangement.

Okay. That's very helpful. How many integration teams do you guys have at the moment?

So, we mentioned that we are working on 11 simultaneous deployments right now. So, you could accurately assume that we have the capacity to do 11 simultaneously. There are a leveraging of 3 teams across 2 of those. So, we are positioned to do the 12 to 15 new deals per year that we've anticipated being able to do.

We have stepped up, too. That is where the -- that's where a lot of the addition of staff has come is in that area where we have added technology developers, project leaders, functional analysts in those area over there to launch these new client programs. So, that's where the headcount increases have been -- have been most significant recently.

Okay. Given that the business is becoming less complicated without eCOST, is there an opportunity for an umbrella lender? Rather than having all of the different lending agreements you have in place?

Yes, this is Tom. Yes, that is a possibility. We have been actually in the process of beginning some of those discussions with our banking partners to take a look, especially from the US standpoint, to roll out over various US facilities together. So, that will be an item to explore further this year.

So, maybe a US and a Europe?

Yes.

Okay. That would make things a lot -- a lot less complicated. And the question I ask every quarter, how much was taken out of the pipeline in the quarter? And if you could break that down between wins and loss/pass?

So, looking at Q1 of 11, we're reporting a pipeline of more than $50 million. And the churn in that quarter was about half of that. So, half of the $50 million either progressed to an awarded deal or dropped out. So, that gives you the flavor for the churn.

Can you give us a sense of, of the $25 million that came out, how much that was won and how much of that wither was either lost or you passed on?

Let me see. Probably somewhere in the -- yes, I would say somewhere in the $20 million to $25 million range. So, about half of that --

Between 25% - 30% of that --

-- progressed. Yes. So, 20% to 25% of that $25 million.

Was progressed?

Right.

Great. Thanks, guys.

I'll try to have a crisper answer for you next time, Alex.

As you know, I am going to ask you next quarter, too. Thanks, guys. I appreciate it.

Your next question comes from Marco Rodriguez from Stonegate Securities.

Good morning, guys. Thanks for answering my questions. Most of my questions have actually already been answered. Just 1 question. I was wondering if you might be able to characterize the pipeline in terms of what percentages are beauty, fashion, and CPG?

Okay. Mike?

Yes. So, if you look at -- what I have been able to do is characterize what we call the mid to late-stage deals. So, that would be ones where we actually have a proposal outstanding. And right now, about 15% are CPG. And the remaining 85% is split pretty evenly between health and beauty category and the fashion category.

Great. Thanks a lot, guys.

Thanks Marco.

Your next question comes from Glenn Primack of Peak 6.

Good morning Mark and Tom. A long time since the old days at Datatech. How much of service revenue do you think you guys can support with the existing capacity you have in place? You know, whether it's DCs and the call centers?

Well, an important thing in our design is that we have built our architecture worldwide on a common technology platform and as well as our distribution and operational infrastructure to be basically plug and play. Occasionally, obviously, we have to move to additional facilities or relocate a facility based on size from there. But, you know, it's pretty much a slide-in, blade approach in terms of all of the components of our business, be it technology or physical.

We target ourselves to be certain that we have minimal excess capacity as possible. We've obviously had periods of time over the last decade where we had a lot of available capacity. But, where we operate today, I think we are operating in a healthy capacity range, but we are adding facility and technology capabilities we discussed in the prepared comments to deal with the growth that we know we is coming in the new client deals that are in implementation right now.

Okay. And would use activity-based costing to figure out your cost of serving a given client before pricing that -- that deal, is that --

Yes exactly. Very detailed activity-based cost models.

That's great. And the new facility and outside of Memphis? What would be your target of return on something like that?

Well, it's a leased facilities or not looking at the building in terms of to cap rate or anything like that. So, we enter into leases with as flexible of terms as we can negotiate with the landlords. We try to align the terms of those buildings with that of our client. We would then --the space, if you will is a -- we leased it knowing pretty much where all the client use would come from.

Based on the way we've design the -- the terms with the landlord and that particular deal in there, we will have really no excess capacity in that building, we believe, because of the way the step up works in the lease. We will allocate that to a client, and obviously, that space amount gets a margin that is added to it from there. We would earn similar margin rates on distribution space that we do for each of the activity components that we have in a deal.

Okay. I guess as I look out at 2013, 2014, the target model hasn't flushed itself out yet, although you're getting closer. Is that fair to assume, or do you have you have a 3 to 5-year plan in place?

We do have, believe it or not, a 4-year plan in place. And you we have always talked about -- there is -- we begin to reap the benefits of economies of scale and are a model at a service fee revenue of around $90 million to $100 million. That's where we begin to see in our modeling, we believe, financial targets that allow us to see an expanded EBITDA percentage as service fees grow from that point forward. So, we are very close to that --

You're getting there. No wonder you are excited. Okay. Super. And then in terms of -- I take it don't get to participate in terms of the -- the savings you provide your customer, whether it's -- you're turning the working capital or save them on working capital. The -- all of the logistics type stuff that they wouldn't have to spend on putting it your way. Do they measure that in terms of how much they are saving, or do you measure it? Or is it -- they just kind of know it's a better deal for them to outsource it versus do it themselves?

I think most clients, Glenn, take the role up of our activity fees that we charge for them and transaction fees and measure that on an ongoing percentage of revenue that they are paying us in total. And, we would see a site at scale depending on the breadth of the End2End offering that they would be using, and we define scale around $20 million a year of gross merchandise revenue through the site.

Using a standard average order size of around $75 to $100. That particular site we would expect to operate somewhere in the 14% to 17% of revenue range. The -- as the site then scales beyond that point, we would expect our percentage of revenue to decline. So, the client benefits that gained share, if you will, moving forward, by the fact that their variable costs, if you will, in their business decline as we -- we share with them the economies of scale that are there.

In some client arrangements, we actually negotiate gain share splits, depending upon the size and scope of the deal and the things that they are -- they are seeking to achieve in their business model. That's more common in the mature businesses that we see out there is supposed to new ones.

But, at the end of the day, quality is clearly important with our clients, and we have to ensure that the financial model works for them because, obviously, we're not -- we want to be able to show clients a financial justification for staying with us even as their sites move past $100 million in size where 1 might ponder, can I do this cheaper myself?

I think we can clearly show them that at that level, we probably expect our cost to be in the 9% to 12% of revenue range and that as they really, honestly evaluate that, it will be very difficult for them to take the billions of dollars of economies of scale that we have by collecting these clients together and be able to achieve that on a business that is only $100 million in size.

It's expensive; it's complex; it's hard to maintain and keep going; there's a lot to it. And as we talked about in terms of financial model, it all really comes down to the end of the day, you've got to have economies of scale through transactions to be able to make this a -- a viable financial model going forward.

Okay great. And how long does it take to land a decent size client like a Liz? Is that a 12-month type process?

Yes, that is a pretty good rule of thumb. If our first contact with them probably would have been much longer than that. We have a lot of these situations where clients are -- we may have known them, and they may have been in the acquaintance stages of our pipeline for several years before the timing is right, either because now is the time for them to start a site or they have been in an existing relationship with another provider and their contract is coming up.

Whatever it is. There is a kind of a, the marketing process here, you know, is a lot of just building a network of knowledge and allowing our clients to understand our capabilities until the timing is right. And then when the thing begins to get active, I think a year is a pretty good time frame to use.

Okay then do you close them typically, or are you up on the front and?

Mike is our closer.

The reason I ask is I think I remember, were you at Anderson at one point, running the whole logistics and that part of the business?

Yes. I was a knowledge source industry guy in that area, yes. But, I didn't run the whole deal. So, that was part of my career. But, the sales cycle is very, very similar to what you see in that business.

Okay, great. Well, good luck. This should be pretty exciting.

Thank you.

Your next question comes from George Walsh of Gilford Securities.

Morning, gentlemen. Just a quick question regarding the South Haven facility. Is there any issues with the flooding that's going on down there, as far as the facility is concerned or shipment delays or affecting employees.

None for us. Frankly, you will see the City of Memphis is trying to make a pretty significant effort to allow people to understand that the news reports are maybe a bit overblown in terms of the impact. We've seen no real delays in carriers. None of our people are impacted. I checked with our guys this morning about that. None of our facilities are impacted.

There was a period of time last week where I-40 was closed eastbound and westbound about 60 miles or so to the west of Memphis, but that has been since reopened. And the crest is happened, and it's moving on. So, we had no impact with it.

Okay that's good. The news reports seem lately that the levees have held very well, and they have been feeling very confident about that.

That's correct . And most of the areas, the lower-lying areas that are at risk, are either right along the riverfront or well to the north of where the main transportation lines are and where our facilities are located. At this point with where we are in this, I think our risk is very, very

Okay, good. Mark, you mentioned possibly looking at either -- you mentioned your headquarters. I don't know if you mean an expansion or looking for a new location or a new lease. Can you just elaborate on that a little bit?

Yes, we are operating at capacity or maybe above in terms of our office space at this point in time. We want to -- we've been in the current facilities that we are in here for over 20 years at this point. So, we have a bit of a tired infrastructure in terms of the office space in here that needs to be addressed as well.

But, the biggest issue really is to be certain that we can provide the capacity for our people to be able to work. So, we are evaluating all the options. Staying here. We might relocate somewhere close. It will just depend on what kind of offers we see from the various landlords and municipalities that are interested in our presence.

Okay. Well, is the market down there, office space, such that you might be in a good position to make a deal? Just curious of the real estate market?

We would not expect any, other than maybe some one-time expenses related to the moving, we will expect that we will be at or better than our current rental rates in the things that we are doing. The real key for us particularly in the call center area is that we have seen an ability to be able to negotiate in some things that we are working on, more flexibility for us to be able to expand and contract to the extent that we get new client deals or they have immediate needs for space.

Or, as does occasionally happen in there, we lose a client relationship for whatever reason. We don't want to be in a situation we are tied down with a lot of excess capacity or not able to -- or boxed in and not able to grow quickly with that. So, fortunately, here in Dallas, the real estate market is such that, particularly in the downtown sector, where there is a lot of opportunity and a lot of supply for us to be able to work with and landlords that are willing to work with us on the terms that we want.

Okay. Very good. And just in reference to the previous question asking about clients and landing the big clients. In terms of the definition that you are using for pipeline, can you just put the timeline associated to that, when you put something in the pipeline as you define it there?

Yes. So, basically over $50 million is 1 year of our clients projected. Our client gives us their projections for gross merchandise revenue, if you will, and then we lay our fees against that. So, that over $50 million, if we were to win it all, we'd expect in 1 year to book $50 million of service fees on that 1 year. Typically the contracts are in the 3 to 5-year range that we see. So, the actual win value is probably at least 3 times the amount in terms the extent of if we can win all of that business.

And that $50 million to includes outstanding proposals that have actually been provided to a client based on a specific request for them for a solution being offered.

Right. We don't include anything in the pipeline that hasn't been proposed on.

So, it's a proposal. So, it's something that's at that theoretically 1 year point as you were talking about before. It's where it's moved along into proposal. It still -- the max would be a decision made within a year ? Is that

When you're talking about business that's already been proposed, that's well within that 1 year sales cycle. Would look at probably an average of 2 to 3 months remaining from that point of proposal to a decision.

Then our average time to install is 4 to 6 months. So, if you say the average closing time for this -- this set of business would be 3 months, to close, and then an additional 4 to 6 months to implement that's kind of the timeline before you'd start to see revenues flowing into the P&L.

Do you take it out of pipeline with the installation or with the closing?

The contract signing.

Okay, so it's the closing. Okay, so that's fairly tight when you talk about pipeline.

Yes.

Two - 3 months, that's pretty good. Okay. Great. Thanks a lot.

Thank you.

Ladies and gentlemen, we've reached the allotted time for Q & A for today's conference. I will turn the conference back to management for any closing remarks.

Are the more questions out there, operator?

Yes, sir.

Let's go ahead and take 1 -2 more.

Our next question comes from Marco Rodriguez of Stonegate Securities.

Hi, guys. A real quick follow-up question. I was wondering if you could characterize the 18% year-over-year growth for service fees. What was the organic and what's new the clients?

Okay. If you take a look, we had $16 million last year of service fees and $18.9 million in this quarter. Included in that $2.9 million differential, we would have approximately $3 million of new clients that did not generate any revenue in the first quarter of last year. We'd have approximately $2.2 million of new client -- or growth and existing clients. And then approximately $2 million -- a little over $2 million of loss from terminated client relationships.

The bulk of that $2 million of lost activity is primarily related to a relationship that we've discussed previously that had -- with the technology manufacturer that elected effective July of 2010 to move to another provider. And as we -- if you actually take that number out of the comparison year over year, our 18% growth of existing or service fee revenues really would be 35% excluding that 1 technology manufacturer moving away.

Great. Thanks a lot guys.

Your next question comes from Alex Silverman of Special Situations Fund .

Thanks. Can you give us a sense of --let's see, can you give us a sense of -- oh, boy, I lost my train of thought here. Second question, my understanding is the US Mint has decided to shop their -- their contract from taking away from Pitney Bowes. Is that something you can confirm?

We can confirm there is a RFP out for the technology portion of the existing solution, Alex. The RFP stipulates that the provider chosen to replatform from their current technology platform to the new 1, should also be capable of operating the fulfillment in customer care function as well. But the fulfilment in customer care functions are not in scope with the RFP explicitly.

Is it something you guys are bidding on?

Yes.

Okay. And I remember my -- the question I had was, on your pipeline, how much price pressure are you seeing from small competitors, if any?

Not a lot, I mean it's more -- pricing pressures that we would feel are more oriented towards larger deal sizes. Clearly, as deal sizes get larger, I think clients expect, as they should more economy of scale on that as I described earlier with that.

There are -- we certainly have seen the average deal size increase over the last several years. I think I would have described an average deal size of maybe $1 million to $1.5 million a year 3 years ago, and that's probably doubled or maybe a little more in terms of average deal size at this point. So, with that, that is really the trend I think you see in terms of margin pressure is just larger deals. But, certainly, the margin dollars are there, and I would say that right now we still feel confident in our 25% to 30% overall gross margin range that we are targeting for a service fee area. Newer services like or interactive marketing services, our digital agency piece, allow us to earn a higher margin. Now it's a different product because it's people based as opposed to infrastructure based, but we have a higher targeted margin range in that particular segment of our business as well.

Fantastic. Thank you guys. Really appreciate it.

Your next question comes from Chris Cerniglia of Stifel Nicolaus.

Hi, guys. Alex sort of asked my question, but are you seeing any clients that you've lost were turned back to PFSweb in any capacity?

Yes. Alex asked the one about the Mint. That would be a return for a little bit different deal. But to the extent that we were a successful in winning that particular competition, that would certainly be a return.

We have an unannounced cosmetics client family that had previously had been a client of ours that left for operational reasons inside their business. They had some excess capacity that they wanted to fill in their business, so that at the end of the contract previously, they moved that business back in-house, and now, through growth and changes that they've had there, we've actually not only won that particular piece of business back, but the rest of the family is coming with it as well.

And there's a number of significant brands in that group. One of them Mike disclosed previously. We are -- we really strive to be -- we talk about 100% referenceable. We include not just our current clients in that 100% reference, but also past clients. And we would not hesitate in most cases, really in any case that I'm aware of, to allow a potential client to talk to a client that left us and to understand why that happens because we -- we strive to be certain the quality is high and that the financial justification is there. Beyond that, there are other reasons that clients make decisions to make a change. But -- or we may make a decision to make a change for the client occasionally with that. Certainly, the answer to your question is yes.

Great thank you.

And your next question comes from Glenn Primack of Peak 6.

One last 1. Is the Liz arrangement with kate spade and Juicy and I forgot the other 1 -- is that global in scope or that's just in North America where you are doing stuff for them?

Currently, the scope of that agreement is just North America.

Okay. That's it. Thanks.

Ladies and gentlemen, that is the end of our Q & A session for today. I will turn the conference back to management for any closing remarks.

I appreciate everybody's time this morning. Thanks for the questions, and we'll talk to you again next quarter. Have a great day.