Q2 2020 PFSweb Inc Earnings Call
Ladies and gentlemen, this is the operator, thank you for spending by your call is scheduled to begin momentarily until that time your lines will again be placed on music cold. Thank you for your patience.
[music].
Good morning, everyone and thank you for participating in today's conference call to discuss P.S.S. web financial.
Results for second quarter ended June Thirtyth 2020, joining us today, our P. S. S web CEO, Mike Willoughby, the company's CFO Tom Madden.
General manager of P.S.S. Zack Selman.
General manager of live area, Jim Butler, and the companies outside Investor Relations adviser, Sean men story with Gateway Investor Relations.
Following their remarks, well open the call for your questions I would now like to turn the call over to Mr. men story for some introductory comments.
Thank you Glendora people. We go further I would like to make the following remarks concerning forward looking statements.
Any statements in this conference call other than historical facts are forward looking statements, including those related to the company's expected future performance and results of operations.
Award anticipates believes estimates expects intend will guide and confidence target project and other similar expressions typically are used to identify forward looking statements.
Full disclaimer relating to forward looking statements as well at certain non-GAAP metrics used in our filings and this presentation can be found in the financial reporting section of the PFS why web site under Safe Harbor statement.
I'd like to remind everyone that this call will be available for replay through August 21st starting at 11 30 am Eastern this morning.
I've got to replay will also be available via the link provided in today's press release as well as available on the company's website at <unk>, that's what dot com.
Any redistribution retransmission or rebroadcast of this call in any way without the expressed written consent on PFS web is strictly prohibited now I'll turn the call over the Chief Executive Officer P., if that's what.
Mike.
Thank you Sean good morning, everyone. Thank you for joining here said this a early time I hope everyone is safe and healthy.
During the second quarter, we continued to benefit from the strong ecommerce momentum we have seen since the onset of the koby at 19 pandemic.
That's consumer reliance on digital shopping remains robust.
We generated Q2 records in fulfillment volumes service fee equivalent revenue and adjusted EBITDA.
Although conditions surrounding dependent any color on certain heightened consumer demand within E. Commerce has been a durable durable tailwind where I business.
And our Liberia and PFS teams have worked diligently to ensure our clients can meet this increased demand.
[noise] buoyed by these tailwinds in the strong momentum as we entered the year. We continue to expect both business units to grow compared to 29 team.
And we are raising our guidance for total company SFP revenue growth to be in the range of 9% to 12% compared to 29 team.
Now taking a closer look at the record Q2.
We experienced rope and elevated activity levels across our client portfolio and what verticals.
Particularly in health and beauty jewelry.
Active wear and consumer packaged goods.
Consumer demand hit peak levels in April and stay at home mandates due to covert 19 drove shoppers online amid brick and mortar retail closures.
Though various economies began reopening in may and June demand within E. Commerce remained high as online shopping continued to be a keep fixture of consumer buying habits.
In our PFS business.
Clients experienced online order volumes near holiday levels in Q2.
To ensure we had the appropriate level of staff to effectively service. This demand we added to our remote contact center teams and expanded the ground teams in our distribution centers.
Going into may be elevated levels of ecommerce traffic generated our highest mother's day related fulfillment volumes in company history.
We are using this demand environment as a benchmark to prepare for the Q4 holiday season, which many analysts predict will be the strongest digital holiday of all time.
That will be on later in the call to provide more color on our PFS momentum and expectations going forward.
In Liberia, as we communicated on our last corporate update.
We experienced some project delays and initial softness in bookings at the start of Q2.
As most prospects were still contending with cobot 19 related uncertainties.
However, as we progressed through the quarter, we developed what we believed to be our strongest Liberia sales pipeline to date.
We still have work to do to close these engagements of course, but we're very optimistic the process I mentioned in Liberia.
Jim will have more to discuss about Liberia later in the call as well.
Before I pass it over to Tom I want to take a moment to thank our employees across the globe for their incredibly hard work.
As they continue to support our clients during this pivotal time.
I am, especially grateful to our frontline employees and management working in our fulfillment center dealing with record volumes and the significant operational complications from working to maintain a safe working environment.
I am most grateful.
And that we're very fortunate that up to this point.
We continue to have a very small number of Kobin 19 cases, among our employees.
With that I'll turn the call over to Tom to provide more details on our Q2 financial results and our 2020 outlook.
Uh huh.
Thank you Mike good morning, everyone.
Following the structure of last quarter's call I'll keep our second quarter financial comments free.
Unless otherwise noted all financial comparisons are to the second quarter of 2090.
For Q2 arc consolidated service fee equivalent or SFP revenue increased 23% just 62.3 million.
Primarily driven by the benefits of higher fulfillment activity.
On line order volumes in our PFS segment.
As well as double digit growth.
Due to new and expanded client relationships from our project engagement bookings in late 2019 in early 2020.
Service be gross margin in the second quarter of 2020 was 34.2 per cent compared to 34.8%.
With the slight decrease primarily due to revenue mix.
Note that the gross margins for both segments continued to be within the guidance range of 25% to 30% PFS.
40% to 50% provide Mary.
And we expect these ranges to remain consistent through the second half of 2020.
With the increase PFS activity, we have added resources in both our call center and fulfillment operation.
Our PFS operations team did a good job primarily hiring full time employees.
As opposed to contractor.
As we went through this ramp up period, which helped us in controlling our costs.
However, with the ongoing overnight activity.
Putting certain government supported programs.
We have begun seeing some pressure on labor rates within certain of our de sees so we will continue to monitor the impact there.
Yes, DNA costs were 21.5 million in the second quarter 2020, compared to 18.1 billion last year.
With the increase primarily driven by higher stock based.
Compensation expense of 4.5 million.
Increased variable compensation expense.
The impact of increased sales and marketing personnel.
Partially offset by a modification to our vacation policy.
Yeah, well did a favorable adjustment of approximately 1.7 million during the quarter and 1.1 billion year to date.
Additionally, as we mentioned last quarter, our higher fulfillment volumes amid covert 19 require enhanced sanitation and social distancing measures across our DC.
We expect that to continue for at least the next few quarters as well.
We will continue to manage these and other costs prudently.
Adjusted EBITDA in the second quarter more than doubled to 7.2 million compared to 3.4 million in the year ago quarter.
With the improvement primarily due to strong growth.
Revenue.
Coupled with operating leverage as well as the impact of the modified vacation policy.
Turning to the balance sheet at June 30, 2020.
Cash and cash equivalents totaled 9.7 million.
Total debt.
Excluding operating leases was 40.6 million.
This results in a net debt position of approximately $31 million.
As highlighted on our last corporate update.
Net debt increased this quarter was primarily due to a change in the credit card collection program for one of our clients who is transitioning away from it from utilizing this component of our service offering.
Overall, we remain confident with our liquidity position and client receivables as we navigate the current market conditions surrounding a pandemic.
Our capital expenditures in the second quarter were approximately 1.9 billion.
Resulting in a year to date level of 3.2 million.
Which 1.5 million was funded through debt and lease financing.
We continue to expect our 2020 capex to be between 7 million to $9 million.
The majority of which is expected to be related to new client activity and expanding our DC footprint to support new and existing client growth.
We also continue to cautious we maintain all our other 2020 expectations outlined on our path to calls.
Including expectations for product revenue.
DNA expense interest expense and tax expense.
These of course are subject to change given the uncertainty and bid cobot 19.
In addition disease, we do expect to report a higher than originally anticipated increase in stock based compensation expense for 2020 as a result of our increased share price.
Across both segments of our business, we continue to work closely with our clients as they married manage the varying impacts of covert 19 on their operations.
And we currently feel comfortable overall with the vast majority of our client financial positions.
While our overall client base has limited Derrick.
Direct brick and mortar retail exposure, which helped mitigate our potential credit risk.
Several of our clients have requested flexibility in payment timing in terms regarding contract receivables.
We view our clients as our partners and in the spirit of good partnership we're committed to helping them, where we can you really unprecedented times with short term adjustments to payment and contract terms.
Now, let's move onto our 2020 outlook.
We continue to believe that we are poised for growth in both business segments for 2020.
As a continued consumer tailwinds only strengthen our positioning.
In light of heightened demand in our PFS segment, and a robust library of backlog and pipeline.
We are now raising our expectations for consolidated fee revenue growth to be in the range of 9% to 12% compared to the prior year.
Oh from our previously expected range of mid high single digit growth.
Coupled with an ongoing focus on cost.
We also expect to continue driving improvements in our adjusted EBITDA margin.
I don't know at corporate update I discussed some of the quarterly trends, we were expecting to see for the rest of 2020.
At that point in time.
Given evolving market dynamics.
Of course, very challenging to predict how the rest of the year would play out even the broader economic uncertainties surrounding unemployment.
Consumer confidence.
GDP growth and a host of other economic indicators.
He's uncertainty still remain.
But it is our best estimate today that we expect Q3 to be down from Q2, as we don't expect to see the peak level of fulfillment related volumes experience in April nor do we have the benefit of another holiday like mother's day.
Additionally, we expect to incur incremental cost I'll put put a various investments in people and infrastructure in both business segments.
Coding, our recently announced new fulfillment center.
In order to support our business and client growth as we prepare for the upcoming holiday season and 2021.
This gets us to our full year outlook highlighted a moment ago.
This concludes my prepared remarks, I'll turn the call. It does act to walk through operational highlights in PFS back.
Thanks, Tom.
And our last earnings call, we're able to share share specifics on our global team, we're managing the rapidly changing environment due to kind of in 19.
Which focused on health and safety measures to protect our employees.
And scaling our clients backend ecommerce operations quickly as buying behavior shifted to digital purchasing.
I'm exceptionally proud of the work or team has done since the beginning of covered 19 pandemic.
And for our unwavering commitment to clients their customers and our employees.
Mike mentioned earlier in the call.
We reached a record level of fulfillment volumes for the second quarter.
Fueled by brick and mortar retail shutdowns and stay at home and.
This unexpected dramatic and rapid shift the digital channel push online ordering to a much higher rate and we would typically be the case, but this time of year and allowed many of our client programs to experience volumes in the quarter that exceeded their Q4 outlets and 29.
Kim.
Thanks to PFS demonstrated experience and scaling back and ecommerce programs during the busy holiday shopping period.
And the hard work or the PFS grounds games, we were able to quickly ramp up operations across our global facilities to respond to the elevated volumes.
During the quarter, we increased our fulfillment center SAPIEN levels across all existing facilities and continued to ramp our work from home customer care program.
The move to a virtual contact center model has allowed us to increase the geography is in which we recruit and provide a fully at home model for our customer care team members.
We expect to build on the benefits. We are currently experiencing with the virtual contact center model, especially when we were able to move to a post Tobin hybrid model with a mix of onsite and work from home agents.
Most importantly, our teams continue to work in a safe environment as we haven't shared that nightly fogging access to PPD.
Strict sanitation and social distancing standards remain integral to our distribution center operations.
Moving to Q2 sales, we booked for new engagements, where the combined estimated $3.7 million an annual contract value for ACB compared to six new engagements with an estimated $16.3 million of ace TV in the year ago quarter.
As highlighted on our last corporate update we anticipated softer bookings in Q2 as prospects were reluctant to make any changes to their warehouse technology for fulfillment operations as they work through co good related uncertainties.
However, since the end of June you added to our pipeline in Q3 and continue to see a renewed interest from prospective clients to focus on the direct to consumer channels.
We anticipate a nice pickup in bookings this quarter as prospects become more acclimated with a new normal and focus on 2021 initiatives.
Regarding our DC footprint, we recently signed a lease on a new 58000 square foot distribution center, and the Dallas, Texas area, which will increase our total north American fulfillment center footprint to six facilities and improve our daily output capacity ahead of the holiday season.
Additionally, we expect to add more capacity soon for our European operations as the heightened E commerce demand is not isolated to the U.S.
Although we expect a degree of uncertainty with respect to our future outlook, we remain on solid operational footing as we entered the second half of 2020.
We believe that E commerce has become a permanent fixture of our consumers shopping experience as there are many industry reports, citing an acceleration of E commerce adoption across the globe.
We believe our investments to scale our operations over the past couple of years and those we are undertaking now will provide the foundation for us to effectively navigate shifting consumer demand for the road ahead.
I'll now pass the call over to Jim for an overview of Liberia's operations Jim.
Great. Thanks, and good morning, everyone.
Well not be to announce that we generated yet another solid quarter of double digit growth in Liberia, largely driven by the increase in Q2 backlog.
Resulted from our record sales bookings in Q3 Q4 of 2019.
And with the most recent Q1 2020 <unk> record sales bookings, we shared on our last call.
As discussed on our May conference call. We did experience. Some initial project delays and softness in sales bookings did a covert 19 related uncertainties. However, our momentum picked up throughout June and into July as prospects began to ramp their digital capabilities in response to online shopping trends.
[noise], let's pick up largely offset the project delays and client concessions, we experienced in Q2, allowing us to finished the quarter strong and on track for library has returned to growth and 2020.
In terms of our broader market opportunity library developed to study that was conducted by the independent research firm in May that sound, increasing numbers of business managers are prioritizing investments in their long term digital commerce and infrastructure strategies as a result of covert 19.
And our also looking to Outsourcer I T and marketing activities.
These trends further support we are seeing in the market I present, a strong opportunity for library and our comprehensive offering a digital services over the next couple of years.
We are extremely fortunate to be growing during these unprecedented times and as such had been proactively investing in senior talent that will extend our thinking and our capabilities and we believe will ultimately assist us with capturing larger portions of the overall commerce stand with our clients in 2021.
Despite the distractions of Kogan 19, our strategy for 2020 remains intact.
Well I don't see successes, we've seen continued growth from our partner channel.
Successfully extended our work to include new commerce marketplace enormous technology platforms.
Extended our multi cloud capabilities and elevated our interactions with clients by delivering strategic consultation and products through a newly redefined strategy practice.
In addition, we made significant progress in our brand awareness, which is critical for consideration in the larger commerce transformation projects.
Our global marketing efforts to promote library is work with Crocs and various for example has led to several awards and the development of our own content with White papers thought leadership pieces and webcast has led to increased website traffic and media opportunities.
Well, there's much work can be done we are thrilled to see the progress against our 2020 strategy that is fueling continued momentum in our business.
Moving onto our sales results as a refresher our sales results are divided between project based efforts that are typically less than one year in duration and engagements, which are typically managed services agreements, where digital marketing retainers, that's bad one to three years and duration.
For Q2, we book 33 projects in Liberia worth a combined estimated 11.1 million and project value.
Compares to 38 projects and a year ago quarter, where they combine for then estimated 7.6 million in project value.
We also booked 13 engagements and library or what the combined estimated 3.1 billion in annual contract value or ACB.
This compares to 16 engagements, where it's a combined than estimated 4.5 billion and ACB in the year ago quarter.
So in total our sales bookings for Liberia, and Q2, despite the pandemic or 14.2 million compared to a combined then estimated 12.1 million in a year ago corner.
[noise]. Please keep in mind that both types of bookings are helpful, leading indicators of future revenue streams for our business.
And we are well positioned to continue driving growth in Liberia at the back half of the year.
As Mike mentioned coming out of June and July our pipeline is at an all time high we're optimistic about our momentum as we enter Q3.
We remain both operationally and strategically well positioned to navigate this new environment I demand and deliver on our 2020 expectations.
I'll now turn it back over to Mike for his closing remarks, Mike.
Thank you Jim.
And before we wrap up todays call I wanted to briefly touch on two organization wide initiatives that we have taken this quarter to improve how we serve our retail partners and support our internal teams.
First as we work to strengthen our client partnerships and meet their specific operational needs. This quarter. We also focused on understanding the broader shifts in online consumer demand patterns more deeply.
We partner with Arlington Research and independent research firm to conduct several studies regarding online consumer behavior amid the pandemic. They reveal key differences in buying patterns across generations retail categories, and even geographies, we compare U.S. and UK shoppers.
But the other insights we found that consumers have become more willing to explore new brands and new products during the pandemic.
Especially millennial engines the shoppers.
And that customers of all ages across the U.S. and UK have raised to their expectations of environmental responsibility for the online brands. They purchased during this period.
Leveraging this information will help us improve our understanding of the values of todays online consumers, which we can share with our clients to further optimize in both business segments.
With this formal research mine, we have been proactively working with all of our clients to help them respond to the rapidly evolving consumer behavior that we have all witness as consumers ourselves.
Our research showed the emergence of a new online conscious consumer who expects the digital channel to operate with a view toward environmental sustainability goals.
And we are equipped to help our clients respond with solutions that provide safety and efficiency as well as enhanced sustainability and to reduce impact on our environment.
Also we probably all experienced the rapid adoption of curbside delivery and local delivery options as an extension of buy online pick up in store with varying degrees of effectiveness.
Brands and retailers have also experienced varying degrees of operational disruption and profitability impact from meeting this new consumer expectation.
This rapid shift in consumer behavior is expected to drive demand for practical cost effective omnichannel solutions to response to this consumer expectation.
Which will very likely extend into the post Kobe period as a permanent consumer behavior.
This trend intersects strategically with our PFS product strategy for retail connect and cloud pick.
In Liberia has responded with a strategy services and products nice offerings, including an exciting innovative scan and go prototype we have developed in collaboration with one of our clients.
The combination of reach up in that and scanning go can enable our clients to provide fast efficient safe and cost effective shopping experiences whether in store curbside or local delivery.
Second.
In the wake of recent protests and the social movements across the country.
We have engaged a global consulting firm the future work Institute for FW I.
To help us develop a phased approach for further advancing diversity and inclusion across our organization.
That's why is assisting us through the three phased approach consisting of admission.
Listening and action that will allow us to enact permanent change within our organization and advocate for permit change within our communities.
I have further supported these initiatives by signing the CEO action for diversity and inclusion pledge as I am personally overseeing these efforts to foster greater social awareness and inclusivity among our team members at this pivotal time in our company and Nations history.
Looking ahead, we remain optimistic about the benefits from this market environment in both the near and long term and our diversity and inclusion initiative will ensure we had a comprehensive understanding of consumer behavior.
Yeah, and inclusive and diverse workforce to meet our clients' needs and the needs of their customers.
As always Tom and I are happy to engage with our investors to answer questions and communicate our exciting story.
We are happy to make ourselves available by phone and video chat.
We will also be presenting and holding virtual meetings. During the three part advisers conference on August 26, and the Gateway Conference on September nine intent.
We hope to speak with some of you then.
Andrew will now open the call up for questions.
[noise] to ask a question you want me to press Star one on your telephone.
To withdraw your question press the pound King.
Please standby, while we compile the Q1 day last there.
And our first question will come from the line of George Sutton from Craig Hallum.
Please proceed with your question.
Thank you guys, it's very encouraging alert or the resurgence of the pipeline opportunities on both sides of the business. So nice to hear Mike you laid out a broader set of verticals than you normally do.
And your early comments, we talk of course, all the time about health and beauty can you talk about Oh that breadth are you seeing a and expanded breadth of interest from customers.
Well, we certainly are George across the organization. So when we list the total product categories or verticals.
And we include Liberia, we.
We have a broader set of vertical markets that we can't address.
On the Liberia side than we traditionally have on the PFS side.
I would say with PFS, we continue to see the same strength.
Within health and beauty within jewelry collectibles.
We sort of split out activewear from fashion in general. This particular time, just because I think there's there's a difference in bring this cobot 19.
Period.
Between the sales of different types of fashion, where.
Luxury apparel and ready to wear and fast fashion have probably overall not fared nearly as well as active wear as you might imagine people, who are working out at home or just using active whereas leisure aware.
I have continue or even accelerate those purchases and interest rate interestingly enough. Some of the activewear around hunting activities things like that has also done really well during this period. So we wanted to kind of split that out a little bit.
But we also wanted to make sure that we're talking about some of the product categories that liberia's, specifically addressing and frankly, we would expect that that would continue to expand as Liberia moves into more.
Services oriented around experience.
With the new hire that we had just recently George that you had last week.
Well it will most likely be looking at some additional product categories vertical markets and maybe even some non hardgoods oriented categories as we expand.
Now as we looked at a combination of the hirings that you are doing right now for the remainder of the year plus the increase in the DC footprint.
It's the fulfill footprint, it's pretty clear that while your pipeline is all time highs.
It does suggest you're pretty confident in your ability to win a fair amount of that pipeline is that reasonable way to look at it.
Yes, yes, I think thats reasonable on both sides.
I would characterize the resurgence in our pipeline is most dramatic on the Liberia side, where that occurred during Q2 and we started to after the initial softness regained traction as people realize that they were gonna have to play catch up to this.
Month, 45 day period, where things kind of slowed down and even as we started to exit Q2, we recognize that the value of the overall pipeline was starting to build.
And now our mission is to convert that pipeline that all time high pipeline as quickly as we can into closed deals.
So that we can recognize that revenue partially in the back half of this year and have a very strong backlog leaning into 2021. So.
Thats the effort, Steve coin isn't tire sales team and the early Q3 results as far as a closing deals in bookings are encouraging that we'll see.
You know kind of back to normal as far as far as conversion rates and just flow through the pipeline.
It took a little longer for the PFS pipeline to rebound, we started to see that a little bit of towards the end of Q2, but it's been more within Q3 that similar wake up has occurred where clients are realizing that they really need to make key decisions in anticipation of 2021.
And where they've had failures or disappointments or scale issues.
We're starting to hear about that and so we're also sitting a resurgence there I do expect will have a higher close rate and the better information around bookings for Q3, as we get to the announcing those results later on but as you might expect George the impact from those there's going to show up more in 2021 at this point then.
To have an impact on 2020, so our expectations for the remainder of 2020 on the PFS side are largely based on continued overperformance with our clients and the expectation we have that they're going to have a big holiday.
[noise] one other thing if I could this would really be targeted to Jim the I'm a big Commerce IPO occurred. This week. Many investors on this call probably are disappointed with their allocations in that IPO, but can you talk about how you work with big Commerce in the market.
Sure.
We've been partnering with them for quite some time now we see a lot of momentum with them in EMEA.
And definitely seeing them appear in a lot more bake off here in the U.S.
They have a unique offering.
That.
His allows us to do headless commerce implementations and essentially what that means is the commerce platform.
Could be the head to that platform or what put the client where the consumer sees.
Could really be anything right. So from an experience standpoint, you can take your commerce experience to the next level.
And really differentiate their and still have the ends the strong engine behind that so we're really excited about the partnership that we have with them.
Last year, we were the partner of the year with them. So it tells you how how much they like working with us.
And the partnership I would expect will continue to blossom, especially as they move into this IPO arena, but I'm very excited and happy for them I think could have agreed offering and and we're excited to continue to our work strongly with them.
Great. Thanks, guys.
Thanks, George Thanks, George.
And your next question comes from a line of Kara Anderson from B. Riley.
Please proceed.
Hi, good morning, guys.
Good morning Kara.
[noise] I'll say the installed at peak fulfillment levels in April, but hoping we can get a little bit mark.
Good color around the year over year growth trends within the quarter on kind of April to June or or what it really looks like host mother's day.
Sure I'll make a general comment and then I'll, let Jack chime in with maybe a little bit more color, especially as we think about different geographies.
When we were having our last conference call in early May.
We certainly new the mother's day was going to be a big holiday that times I think was the weak right before.
Other stay occurred and I think some of the hesitancy that we had in projecting continued increased volumes past mother's day.
Was really not knowing if that would drop off at that time or if kobin related trends would continue.
And so what we saw it was in fact during may.
[music].
Continued really strong volumes, even after mother's day that were I think largely result to close stores hesitancy for consumers to get back out even with stores where reopening.
And our clients continued to promote there.
And so that continued through may.
And then even into June although we started to see with additional store openings.
A little bit of or the decline.
And into what we might consider at the end of June a little bit more of a normative pattern.
And as we headed into July so zeki have any other color you want to add.
Only in that as we look into Q2 and into the future, obviously Q2 and benefited as Mike mentioned by a lot of the brick and mortar closures, but even as we go forward and I think we called this out in the script was we expect to see even with three openings in increase demand in the commerce channel.
'cause adoptions up and there's obviously.
Some ease to it and the current environment and that's really what's fueling our guidance that we've given on the call. So.
We look at Q2, it was because obviously record volumes for us, but primarily in the early onset of it was our belief that the closures and driving a lot of that but now as we look forward. We see a lot more of just shifting consumer behavior at least in the mature.
Yes.
Quite a while I'm not quite.
I mean, you're talking about pretty good business trends here.
You've already highlighted bookings and Michael strong pipeline.
Three but if I kind of look in the balance of the where again those comments to me it seems like there might be some conservatism and in your guidance.
I guess, if thats true why would you say about concentrated.
So yeah, Karen it's interesting because.
As you might imagine as we were looking at the remainder of the year in trying to make plans for.
What we expected to happen.
There's a wide range to what what.
Especially the holiday could look like and so if you think about a bell curve, we're looking at sort of high probability right in the middle and then with the tail on either end, where you could have disappointing holiday of consumer spending is very depressed and we just don't see people pulling money out of the walnuts, whereas the other.
And we could see it up holiday that is just completely blows away everybody's expectations.
Because maybe stores are closed down again, but were concentrated on sort of the middle ground.
We also I think have to be prudent as we look at the back half of the year I would use that word instead of conservative just to account for the back there's still a lot of uncertainty, especially around factors such as unemployment rates and government programs around how to deal with that and so you throw that in the pot and I think.
Prudence would demand that we strike that sort of the middle ground I would say that as a pattern.
We expect that revenues fulfillment activities and therefore revenues.
Would be more than we would've expected in a typical Q3.
With probably Q3 coming above Q1, but certainly not at the same level as Q2 with its kobin related Bob.
And then we would expect based on what we're seeing now to have a really strong holiday probably a record holiday as far as just overall sales and fulfillment volumes.
And so we're taking this moment in time during Q3 to make certain investments and preparations for that big holiday.
And so as Tom talks about no the remainder of the year, while we may see revenues kind of up between Q1 in Q2, and we probably will have some impact on our adjusted EBITDA as we make those investments and preparations and expectation for a really big digital holiday. That's a bet we're play.
Thing, but we feel like it's a prudent Ben just based on all the data that we're seeing and when all the analysts are saying and so we'll have our fingers crossed we're hoping for a big holiday were also hoping for an extended holiday where clients start to promote.
Well before Thanksgiving this year.
Unfortunately, we're also seeing that trend, we're big retailers are saying, we're going to back off of the Black Friday cyber Monday type of phenomenon to try to make sure we're not encouraging people to block to stores.
To sit intense outside the doors and be clearly not social distancing, which means everybody is going to meet the spread that holiday out start earlier and.
That would be good for us.
Thanks, that's all very helpful I'll jump back in the Q.
Thanks Kara.
And your next question comes from the line of Mark Argento from Lake Street capital.
Please proceed.
Good morning, everyone. Just a couple of quick ones or one for Zack.
And one thing we when we've been talking to some other companies sounds like supply chains are somewhat stressed or you guys seen any issues with respect to your customers getting product into the warehouse at all for the holidays as things ramp up.
Thanks, Mark for the question I think we saw some of that phenomenon early in Q2, let me talk a little bit about it I think you and at the time largely we saw that impact the apparel segment, a cover 19 really impacted yeah, China and a lot of Asian suppliers first so kind of constrained.
Front side of the here on the supply chain side as we progress through Q2, we've seen that eats up considerably.
So we haven't seen as much a constraint around supply chains for.
Products, because it seems really sure that up and diversified pipeline end part manufacturing ahead of that.
We have seen a little bit of an impact from some of our partners and vendors in terms of procuring assets, but nothing material that would impact are thinking on a go forward.
So pullback.
Just one was for Jim in terms of the yeah.
Traffic more people more dollars are falling three guys.
E Commerce portals and platforms. What are you seeing what types of projects are you seeing near term to help got out for lack of a better word beef up there or infrastructure.
Was there any direct benefit for that or is that.
Does that relatively benign.
Yeah, I would say the thanks for the question I would say the thing that we're seeing.
To be expected and last year.
You mean develop a strategy for 2021 of our big bet area as.
Just to expand into water management systems.
And the eliminates technologies and.
Yeah, that's an area that we had no idea that obviously covert was.
Going to hit US this year, but you've got obviously, a lousy orchestration of.
Sure Brian like a couple of storage things like that's a really allowed our clients to benefit from those technology. So I would say that's the area that we're seeing a bit more momentum in as well as.
We're definitely seeing a lot as I mentioned in my in my opening we're seeing a lot of momentum in our strategy business really helping clients understand what they what they under invested in and where they should be considering investments as they get through the balance of the here in 2021.
That's helpful and just one last one.
Tom as you guys are thinking through kind of the Capex guide and some of the investment here.
Take advantage of the surgeon business.
What does that leave you from free cash flow perspective for the year as is sitting back.
That's one things out.
Right.
No.
As I take a look at it today and obviously lots of uncertainties as we go through the rest of the year, but as we take a look at it today my expectation would be that from a free cash flow standpoint, we're going to be around breakeven.
Within that range as we look at the full year.
But the reason for that is that we would have on a pro forma basis generated.
Yeah, a reasonable amount of free cash flow into business, but we are being impacted by the on client that is transitioning some of that credit card collection activity from us So if I.
We've taken the.
Let's call it flat to slightly positive number for free cash flow and if I pro forma that one client situation out I'd probably be back in the normalized range.
Call it $6 million to $9 million are so for the year.
Right.
Okay. Thanks, everybody.
Thank you thanks Mark.
I can't if he would like to ask a question.
Your next question comes from the line of Ryan Macdonald from Needham. Please.
Please proceed.
Good morning, everyone. Congrats on an excellent quarter, one don't want to I guess jump too far ahead of ourselves here, but as we look out into fourth quarter with Amazon Prime day being shifted into fourth quarter. This year you talk about some of the preparations that you're making now with your customers to be able to address maybe now we see.
In long dated periods of heightened fulfillment volumes.
Sure I'll do a general comment then I'll shift over to Zack talk about.
Print prep and us and things like that.
Corresponding to the announcement of a new distribution center that we made in Zacks indication that there is sort of more news to come on that point.
And then I wouldn't mind, if Jim provide just a little bit of color on.
Thinking about.
You know.
Amazon's.
Constraints on some inbound products during the.
Cobot crisis, and how we're helping to clients to think about the.
Their sites in sort of marketplaces in general.
But I would say that we are expecting an elongated holiday for the reasons I mentioned earlier.
We are preparing for helping our clients to.
Inventory into.
Geography, swear they're closer to their in delivery point and we're also looking at just creating more bandwidth across more facilities.
You want to provide some color on on the operation side of it.
The thing thanks, Mike.
Mike was indicating we are as recently announced the opening of elements that are in the DFW area and we'll be opening our expanding our operations in the European theater to ensure that we can meet.
The expected increase in demand that's really the high level metric around that level below that is really inside of all four walls of each facility. How we plan assets the lay out all the things around that to ensure that we have capacity.
In the quarter as well as part of Q4, we're going to continue to expand.
With our headcount to ensure that we have the folks available to ensure that we can run those facilities that near capacity levels.
We execute green into Q4 expecting that same trend that Mike was this highlighting of an elongated.
Holiday shopping period, that's that's our expectation and really.
Highlighting as it relates to investing and inside of the quarter to ensure that we're set up correctly for Q4.
Then the other side of it frankly is working with our partners to ensure that we have the appropriate carrier capacity in the network I didn't hear delivery of packages house or the PSS fulfillment centers the reach customers homes. So there's a considerable amount of work that goes into planning for the Q4 period and all that work is underway and in full implementation mode right now.
Excellent in for Mike.
And to Mikes point, just real quick on the lighter side, we're definitely seeing another one of our.
Big bet items that we made in 2019 start to materialize, which is really around marketplaces.
So deploying technologies to allow brands to not only have a personalized strand site, but also participated marketplaces. So we expect that trend to continue and and our brands continue to.
Find.
The bandwidth now.
Invest in the services that we provide to ensure that they can really maximize not only the holiday period, but anything beyond that.
Hey, Ryan just to kind of punish Ryan just finish out that question.
We talked a lot about fulfillment.
In Q2, and I are expected Q4.
And rightly so because that is where we saw the most dramatic change in Q2, and certainly where most of our planning is going on but I didn't Wanna mention also that we see a real benefit and be.
Shift of our contact center operations into more of a virtual mode, where we have most of our agents work from home model.
And as we worked with our clients to think about how we respond to their customer care needs.
It really does open up lot of opportunity for us to also scale our contact center.
We're not necessarily having to bring people into physical offices in order to train in prep and take calls and so it's going to be interesting to see this Q4 the mix of contacts you know how many.
Customers are calling in to to ask questions are placed orders via email will be a chat.
And we're certainly looking at how we scale our contact center operation virtually and one of the I think interesting benefits of this whole thing is that where we really learned how to do virtual contact center really really well.
And it opens up you know the whole country.
For recruiting in staffing. So we're also looking to scale that part of our operation in Q4 as well.
Excellent. Thank us as a follow up Mike had mentioned early in your comments about sort of helping clients to move inventory into jails, where they are closer to the and delivery point.
How does this how does the fulfillment as a service initiatives sort of factor into this or you are you seeing a greater demand maybe from existing customers to to take a look at retail connector cloud pick.
As an alternative means to say the traditional fulfillment capacity footprint.
Yeah, Great question, Thanks for asking Ryan.
So I would say that where we are sitting in August that the Kobe 19.
Crisis kind of put a bit of a dent in cloud pick as far as where we thought we would be but halfway through Q2 as clients and prospects started to really think about.
How they deal with closures that were happening and various other operational supply chain issues and getting product to consumers more quickly.
We saw an acceleration in conversations, particularly around retail connect.
And I'd like to focus a little bit on retail connect.
Obviously, we saw brick and mortar stores being closed almost universally here in the U.S.
And in other geographies and lots of inventory that just was stuck in those locations.
And then you had retailers that were as stores were reopening really trying to.
Pivot over to curbside delivery and local delivery is a way to simply survive.
And so as things have started to get a little bit back to normal we're seeing a real increase in conversations around.
All right, where this is a new normal we're gonna have to support curbside delivery, we need to leverage local delivery, we need to be able to use the inventories that we haven't our store locations a much more effectively and if we're going to if we're going to have closures, we need to be prepared to use our stores is mini fulfillment centers and even if we're not going to have closures we.
To expect that consumers are going to behave differently within a store environment and look for touchless experiences.
So, yes retail connect to spawn all kinds of conversations both with current clients and prospects.
I think we're at the right place through my time, we just need to turn conversations into close deals.
Thats the focus right now and then I mentioned the scanning go prototype earlier in the conversation.
My personal hope is that that moves from prototype into product ties operating very quickly.
You are probably familiar scanning go in saying Amazon build environment, maybe some other large retailers using it where you basically can do self checkout without having to go through a traditional line or interact with the Pos system.
We're wanting to bundle retail connected scanning go into a seamless solution, where you could support.
Well I pick up in store curbside delivery local delivery and do it very effectively in cost efficiently. So really excited about the opportunity to help our clients just leverage inventory wherever it is regional facility store centralized facility.
And meet up with that sort of Amazon surface level the promise.
Excellent Thanks again excellent.
Thanks Ryan.
At this time. This concludes our question and answer session I would now like to turn the call back over to Mr. Willoughby for closing remarks.
Thank you calandra I'd like to thank everyone that attended this call. This morning.
And we certainly look forward to speaking with our investors and analysts or when we report our third quarter results in November and as we're able to at various conferences that occur between now and then and as I said before we're always available by phone if you'd like to speak with us.
Thank you very much.
Ladies and gentlemen, this does conclude today's conference call. You may now disconnect. Your lines at this time. Thank you for your participation.
[music].
[noise] Oh.
[music].