Q3 2020 PFSweb Inc Earnings Call
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Ladies and gentlemen, this is the operator, Denise gone friendship scheduled to begin momentarily until that time, killing each one is going to be placed on hold thank you for your patience.
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Yes website actual results for third quarter ended September 30, Wayne Wayne.
Joining us today or be a patch webs CEO, Mike Willoughby the company's CFO Tom Madden.
General manager of PFS SEC settlement.
And the general manager at all Siberia came Butler.
Yeah, the Companys outside Investor Relations advisor, Sean, Missouri, with Gateway Investor Relations.
Following their remarks, we'll open the call for questions I would now like the clinical liver eastern Missouri for some introductory comments Troy. Please go ahead.
Thank you Ray before we go further 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 words anticipate believe estimate expect intend will guidance call target project and other similar expressions.
We are used to identify forward looking statements.
Full disclaimer relating to forward looking statements as well as certain non-GAAP metrics to use in our filing and this presentation can be found in the investors section of the PFS one website under Safe Harbor statement.
Like to remind everyone that this call will be available for replay through November twentyth. So.
Kartik at 11, 30 am Eastern this morning, a webcast replay will also be available via the link provided in today's press release.
The goal is available on the company's website at PFS web Dot com.
Any redistribution retransmission or rebroadcast of this call in any way without the expressed written consent of PFS why is strictly prohibited.
Now I'll turn the call over to CEO, Mike Willoughby Mike.
Thank you Shawn and good morning, everyone.
Before beginning my comments I'd remind you that in response to FCC guidance, we are providing additional color and commentary on the business during uncertain times, including current information about our business. We are almost six weeks into Q4, where do.
This in an effort to be as transparent as possible about the state of our business as we respond to the ongoing crisis and in bidding transparent we will do our best to highlight both the important challenges we face and the significant opportunities we are experiencing.
I'll point out that we continue to maintain up to date information about our response to the pandemic on Rps that swept dot com and PFS Commerce Dot Com website, just follow the COVID-19 leagues.
As we support our clients through an evolving online retail environment well ahead of the holiday season, our business continues to experience strong tailwinds from robust E commerce demand, yeah, hi, fulfillment volumes ramp.
Wrapping activity levels, among our current clients drove double digit year over year growth in SMB revenue and adjusted EBITDA during the quarter.
Across PFS and Liberia, our sales teams have done an excellent job of driving new business development opportunities with a record Liberia sales pipeline and a much improved PFS pipeline compared to last quarter.
Most importantly.
Our global workforce, it's still operating safely and at high levels of productivity.
He was there on the front lines in our distribution centers or working remotely for our professional services contact center or corporate teams.
In most segments of our business.
We have remained focused on preparing for what we anticipate will be a record digital holiday season.
Retail experts vary widely in their estimates for holiday online sales growth.
But the consensus outlook supports our expectation.
For example.
CVR he predicts that this year's holiday ecommerce sales will come in at double the record growth regenerate and the 2019 season and continued to trend towards omni channel retailing.
Other predictions for year over year holiday online sales growth from experts at the Lloyds Forrester and Salesforce ranged from 90% to 34% sales.
Sales force believes that up to 30% of total U.S. retail sales will be transacted through digital channels. This holiday.
With additional restrictions in place in several European markets and the potential for continued surge in cobot cases in the U.S.
There's good reason to believe the higher end of these ranges as possible.
We are also encouraged by the early start to the holiday shopping season influenced by Amazon and the big box retailers.
And our clients are largely following that trend flattening the retail curve.
It is especially important since experts also believe transportation barrier capacities will likely be seated between Thanksgiving and Christmas.
Considering all these factors.
I'm very pleased we have prepared during the quarter were record fulfillment volume holiday and.
And I believe we are positioning ourselves well to deliver for our clients in this environment.
In PFS.
We are ramping operations in both current fulfillment centers and the two new fulfillment centers, we announced during the third quarter.
Once in the Dallas area and one in Belgium.
These two additional centers to expand the PFS global DC footprint to nine facilities.
And increase our overall capacity to accommodate key client expansions as the peak holiday season approaches.
The company will be on the call later to provide more details on our expansion progress and.
And the PFS strategy ahead of the holidays.
In Liberia, our team has built a record pipeline and is benefiting from the sales and marketing improvements implemented over the past year.
We have worked closely with our clients to preserve the strength of their brands, while creating innovative E commerce solutions to respond to both pandemic related industry changes and the upcoming holiday season.
[noise], Liberia has made strong progress and its return to growth and Jim Butler will be on to discuss additional development and initiatives to maintain this momentum.
As we enter what will be another seasonal peak for our business.
I would like to once again recognize the hard work of our front line employees and management in our fulfillment centers.
They have demonstrated incredible flexibility as they've accommodated high order volumes and recalibrated everything from sanitation processes to overall workload to maintain optimal safety and efficiency.
The dedication of our entire global team has enabled our growth to this point.
And I am proud of the strong position, we have heading into the holidays.
Now I'd like to turn the call over to Tom to provide more details on our Q3 financial results and our outlook for the rest of 2020.
Tom.
Thank you, Mike and good morning, everyone.
Unless otherwise noted all the financial comparisons that I'm, making my comments are to the third quarter of 2019.
For Q3, our consolidated service fee equivalent or SFP revenue increased 21% to 60.4 million.
The increase was primarily driven by ongoing high volumes of fulfillment activity in our PFS segment.
As well as growth from new and existing clients in libraries.
Service fee gross margin in the third quarter of 2020 was 32.1% compared to 34.9%.
With the decrease primarily due to revenue mix.
Reflecting a higher percentage of revenues generated from from fulfillment services and PFS.
And increased fulfillment labor cost during the quarter.
Note that gross margins for both segments continued to be within our guidance range of 25% to 30% for PFS.
And 40% to 50% provide barrier.
And we currently expect those ranges to hold through the fourth quarter.
F G and H costs were $21.4 million in the third quarter of 2020 compared to 18.9 million last year.
With the increase primarily driven by higher stock based compensation expense of 2.4 million.
Additionally, we had increases in personnel related costs, including variable compensation expense.
And facility related costs.
Including the impact of the two new distribution centers.
And enhanced sanitation procedures as a result of the pandemic.
These were partially partially offset by reduced travel costs.
As well as the prior year amount, including a higher level of severance related costs.
Adjusted EBITDA in the third quarter increased 10% to 3.4 million compared to 3.1 million in the year ago quarter.
With the improvement primarily due to sustained strength in SFP revenue growth.
Partially offset by some gross margin pressure in the PFS segment related to higher fulfillment labor costs.
Turning to the balance sheet at September Thirtyth, 2020, cash and cash equivalents totaled 10.4 million.
And total debt, excluding operating leases was 39.5 million.
This resulted in a net debt position of approximately 29.1 million.
Which was slightly improved from the June 32020, net debt position of 31.0 million.
At this point, we remain confident with our overall liquidity position as we navigate the pandemic.
We currently expect our net debt level to increase modestly as we look ahead to the December year end.
As we support the increased seasonal demand.
And then expect it to come back down in the first quarter of 2021.
Our capital expenditures in the third quarter of 2020 were approximately 4.0 million.
Primarily related to the new DC facilities.
Resulting in a year to date level of 7.2 million.
As we continue to expand our FY two facilities to support current client growth.
And ramp our new facilities and new client activity.
We expect our total 2020 capital expenditure spend to be between 8 million to $10 million.
We are also reiterating all other 2020 expectations outlined on our previous calls this this year, including expectations for product revenue.
DNA expense interest expense and tax expense.
These of course are subject to change given to the uncertainty amid COVID-19.
Moving onto our 2020 outlook.
Echo Mikes earlier comments, we continue to believe that both business segments are well positioned for continued growth.
Especially given the upcoming holiday season Ellen.
Elevated fulfillment volumes and PFS.
And our record pipeline in Liberia.
With these factors in mind, we are raising our expectations for consolidated SFP revenue growth to be in the mid teens compared to the prior year.
Which is up from our previously issued range of 9% to 12%.
Coupled with our sustained focus on prudent expense management throughout our business.
We also continue to target an improvement in adjusted EBITDA margin compared to 2019.
Well it really remains uniquely challenging to predict how the rest of this year will play out.
Our expectations are in line with other market reports predicting this season's E commerce sales growth to outperform last year's growth rate.
The investments, we have made across PFS and wide area, but.
They shouldn't us well for the upcoming peak holiday orders and we are operating from a strong financial foundation as we work to sustain our business and client growth over the long term.
In order to reach these calendar year 2020 objectives.
We are currently projecting SFP revenue growth in our upcoming fourth quarter to be up approximately mid teens as compared to the prior year fourth quarter.
With an estimated adjusted EBITDA margin in a similar range as to what we have experienced on a year to date basis. So far this year, which is me which is in the 8% range.
As we look ahead past 2020.
While we expect to benefit from the projected continued E commerce tailwinds due.
Due to the overall uncertainty of the ongoing impact of the pandemic, we have decided to postpone providing our targeted guidance for 2021 until next year.
This concludes my prepared remarks, I'll turn the call over does act to walk through operational highlights in PFS Zack.
Thanks, Tom.
We have continued to experience high levels of fulfillment activity across our PFS client base with global fulfillment volumes in Q3 that are akin to the previous Q4 peak quarters of 2018 and 2019.
As we look past Q3 with the benefit of the retail expert guidance, Mike mentioned earlier.
Updated quiet forecasts and almost six weeks of Q4 activity behind us we reasonably expect to continue to see significantly elevated direct to consumer fulfillment activity throughout the holiday season.
With that expectation for the holiday and based on our experience over the past two quarters, we rapidly built out incremental capacity during the quarter for our clients increasing fulfillment needs.
We have continued to demonstrate our agility and scale of operations as we have both optimize existing fulfillment centers to increase capacity and secured and launched two additional fulfillment centers.
Our new Dallas area facility opened during the third quarter, expanding our total North American fulfillment center footprint to six facilities. This.
This location allows us to fulfill orders for several existing clients from more than one facility and it creates opportunities to provide additional services to other clients in the future.
The facility is strategically located near the DFW International Airport and its also a short drive from PFS webs Global headquarters, allowing easy access for I T and innovation teams to test new technologies.
Mixing solutions and a new distribution center environment.
We have four client operations now live in this facility, including a second node for Kendra, Scott Augmenting the Memphis operation, we launched for them and 2019, and we're ramping up to take on more volume.
Having this additional capacity has already helped to ensure optimal business continuity, while scaling our operations for key client relationships, including Kendra Scott.
At the end of Q3, we announced that we are opening an additional distribution center and liaise, Belgium that went live in October.
This facility is strategically located near both our existing the age fulfillment center and they can now Albert which allows for faster outbound delivery in the Netherlands and Germany.
And will serve as a valuable location for inbound product flow through ship containers. This facility has ramp quickly over the first part of Q4 to be ready for full scale operations prior to the peak surge in direct to consumer demand.
These infrastructure investments coupled with investments in personnel and wage increases did result in higher operating costs in the third quarter. However, our ability to launch two new fulfillment centers within 45 to 60 days of lease commencement is a strong testament to our agile and cost effective expansion straight.
Thank you.
This has allowed us to efficiently manage our capital expenditures through the period and respond dynamically to shifting client need without maintaining a large underutilized infrastructure.
As for Q3 bookings and PFS, we signed eight new engagements, where the combined estimated 5.2 million in annual contract value or ACB compare.
Compared to four new engagements worth an estimated $7.1 million ACB in the year ago quarter.
Many of our new clients and prospects based kogan related uncertainties and their operations. During the first half of the year and were initially reluctant to make any changes to their warehouse operations as they work to stabilize their business.
Although some of these headwinds persisted into Q3, we have begun to secure additional new wins as companies look to improve their distribution capabilities before the holiday and solidify growth plan in 2021.
As we have stated on prior calls we began the year targeting more high growth smbs to expand our addressable market to get involved earlier on the clients growth cycle. As a result, our bookings mix to date has been comprised at higher number of smaller lower HCV engagements.
This strategy allowed us to recognize revenue from seven new programs in Q3 with an opportunity to grow these high potential brands for a long period of time.
In addition to the initially smaller but high potential opportunities. We also drove an increase in branded direct to consumer programs from large client prospects.
These larger potential deals have increased the value of our PFS sales pipeline and enabled our sales team to focus on higher value engagements in the back half of the year.
But the benefit of these tailwinds and the growth we're seeing in E. Commerce, we expect to generate a higher total ACB from bookings in the second half of 2020 than we did in the first half of the year.
To comment on some unique projects, we have implemented recently.
I've spoken for several years about our cloud Pic based pop up fulfillment capabilities and how existing clients had benefited from these initiatives during previous holiday periods.
This year, we implemented a pop up distribution center within an existing client facility in Germany.
Realizing nurse staffing running on our technology. They are already live in fulfilling customer orders. This pop up solution can seamlessly transition into a longer term fulfillment enablement solution for this client based on the results from this holiday.
Another interesting recent win is a great example of our team's agility to help new clients with flexible solutions.
We recently engaged by a major jewelry brand to help with their order fulfillment capabilities for this year's holiday season meeting.
Eating a very rapid launch we worked with the brand to quickly implement a temporary solution using there I T systems within one of our Memphis distribution centers to fulfill orders.
This flexibility provides us new client with additional fulfillment capacity they need to meet their demands. This year, while we work on a long term engagement beginning in 2021.
To reiterate Mike's earlier comments I'm deeply grateful we're grateful for the hard work of our fulfillment center personnel as they address our elevated order volumes and influx that has only grown as we get closer to the holidays.
Further I'd like to recognize the work of Dawn Brewster PFS webs area, Vice President of contact center operations and shifting our entire contact center operation from an on premise to work from home at the start of the pandemic.
This model has preserved our teens safety and resulted in better business outcomes employee retention and quality scores have risen and we have been able to recruit talented team members from across the country rather than exclusively sourcing local candidates.
Our experience has been featured in several contact center industry focus magazines as an example of it extremely extreme agility during the crisis.
These results give us confidence that we can sustain a more efficient hybrid contact center model going forward.
As of the end of October we have already completed the reductions space in our Dallas contact center, which further promote operational efficiency and should benefit benefit margins longer term.
Throughout PFS, our collective adaptability has enabled us to either a year filled with many obstacles related to the pandemic and will enable us to carry our momentum through the fourth quarter and into 2021.
I'll pass the call over to Jim for an overview of Liberia's operations Jim.
Great. Thanks, Zack and good morning, everyone.
[noise] after implementing significant operational improvements within our sales and marketing teams throughout the past year.
We have continued to build upon record pipeline of opportunities as we enter the fourth quarter and begin our planning for 2021.
Q3, we booked 39 projects worth a combined estimated 8.6 million in project value. This.
This compares to 60 projects in the year ago quarter.
Were they combined for then estimated at 12.5 million project site.
We also booked 23 engagements for library are worth a combined estimated $4.5 million in annual contract value or a CV.
This compares to 15 engagements worth a combined then estimated 3.3 million in HCV in the year ago quarter.
As we've stated in the past all types of bookings quite hopeful leading indicators of future revenue streams.
While our Q3 sales bookings were down our challenge was getting several large key new client contracts through their signature process.
We've experienced delays in getting contract signed due to enhanced scrutiny. Many clients put on new engagements. During this extraordinary time.
In many cases multiple senior executives within these organizations, but now signed off on the large project engagements.
The good news is that we have been awarded the business new situations and in many cases, we have been able to begin work under a letter of agreement, which allows us to provide services collect payment and recognize revenue, while we work through the clients procurement processes.
The substantial logjam of contract signings, we experienced that we ended the quarter should result in a big boost to our Q4 bookings and contribute to the already strong backlog, we have as we head into 2021 in fact, so far.
Six weeks of Q4, we have already signed nearly 8 million total bookings.
As consumer demand for ecommerce continues to grow amid the pandemic and ahead of the holidays.
I'm excited but not surprised that our sales leadership has generated another record pipeline of qualified opportunities.
We're very excited to see momentum in our EMEA business, along with our strong pipeline of large multi cloud projects with major brands you us.
However, we may still experience delays in our official project and recent launches.
Clients work to manage their operations and thus the pandemic once.
One thing is clear.
We are optimistic about our momentum for the remainder of 2020 and into 2021.
Subsequent to the third quarter, we announced several additional developments that will continue to grow librarians global footprint and enhance our suite of service offerings differ.
The first is our expansion into Europe, and the Luxe and dock regions collectively covering Belgium, the Netherlands, Luxembourg, Germany, Austria and Switzerland.
Our presence there will be led by our newly appointed regional sales director.
All through a banker who has over 25 years of experience generating new business and information technology.
We have already serve several key clients within these regions, including while Peri and Pandora.
Formal expansion, we plan to build upon our existing client relationships and technology partnerships to grow our European presence.
Just weeks after we announced the expansion we officially launched our partnership with leading German footwear brand than yours.
We will be modest rise in the brand's ecommerce presence by building and launching a new digital store on the Big Commerce platform, which we expect will rival its award winning in store experience.
Excited about our growth our growing global partnership with Big Carlos who announced that their platform drove total revenue growth of 33% year over year in Q2.
We are seeing increased demand for their headless commerce offerings, especially in EMEA.
Brands didn't have more innovative experiences to support their commerce initiatives.
In addition to think homeless, we're beginning to work with other emerging commerce platforms, including the tax commerce tools and an actor to ensure we remain the leader in the evolving commerce platform ecosystem. These.
These platforms represent a growing shift in the industry towards micro services based foundations that will allow for a richer customer experiences.
The teacher deployment and increased overall agility.
We are continually expanding our skills and expertise to ensure we are meeting our clients to success and adapting and evolving these architectural approaches 2021.
Turning to support and expand our global partnership with sales force, we appointed Sonsini inside.
As sales was probably mostly because of your major EMEA region. We.
We saw it has more than 20 years experience in information technology systems integration digital consulting expertise and B to C and B to B E Commerce technology, Omni channel solutions and digital marketing automation.
Besides the specialists in the sales force multi cloud environment with considerable implementation.
Soapy experience.
Sales Force Commerce Club sales force marketing cloud sales force CRM and sales force cloud craze.
Growing our global footprint is already providing us with expect with expanded opportunity set as we look forward to driving additional growth as we enter 2021.
Yes, we're excited to have appointed Barry sales.
And accomplished experience transformation leader as our new senior Vice President of global experience and innovation.
He has a long track record of delivering new business growth and piloting innovation for leading brands, combining the power technology and design.
His leadership will help us enhance our award winning design services as we elevate our clients' customer experience to keep pace with the changing commerce landscape.
In an environment, where there is increased demand for expertise in product innovation service design performance marketing and.
Overall customer experience, having leaders like Barry on board.
Help us further improve the breadth and quality of our offerings mall.
Walther Sanjeev Barry.
Just the latest additions to our deep roster of industry leaders assembled over the past year in hand.
This top team of industry leaders has accelerated libraries growth platform and its introduced innovative solutions and strategic insights our clients require as they look to transform their businesses.
Their clients and prospects increasingly need solutions beyond commerce design and implementation services, Liberia has a unique value proposition and our abilities globally deliver connected commerce experiences comprising strategy experienced design product and service design technology performance marketing.
And orchestrated services we.
We approach projects with a focus on innovation to help brands realize the full potential of the digital business.
Rapidly exploring future opportunities.
That's the nature of Commerce continues to evolve and accelerate the pace, we're committed to aligning our professional services to best support their needs and elevate the connected commerce offerings with that I'll turn it back over to Mike for his closing remarks, Mike.
Thank you Jim.
I want to emphasize that across both segments of our business.
We have worked diligently not only to meet the needs of our clients, but also address larger scale changes in consumer digital shopping preferences.
To that end I want to conclude our call with a brief update on several of our prototypes offerings that are enhancing the value of our services.
In addition to the cloud Pic based pop up solutions Zack highlighted earlier.
We are implementing retail connect and another clients physical stores this coming holiday.
And this installation also has the opportunity to become a larger deployment that could include international retail locations.
Read something that isn't in store solution compliant comprising lightweight technology integrated scanning.
And staffing hardware that enables the online sales of store inventory and keeps track of the steps associated with billing each order.
Life's cloud pick it can integrate seamlessly with retailers existing software systems.
And to be efficient tracking allows retailers to easily facilitate the buy online pickup in store capability that has been in high demand during the pandemic.
As we mentioned last quarter, we are looking to pair this solution with liberia's scan and go capability, which allows shoppers to use their mobile devices to scan and in store QR code.
Or visit the retailer's website, and then scan pay and go all about visiting the point of sales system.
Given that 87% of shoppers are seeking out touchless, where self checkout options.
We believe these two paired capabilities will help our clients further evolve their customer experiences to adapt to this new normal spurred by the pandemic.
We have been both proactive and innovative and our response to these industry wide changes in both E commerce and the broader retail industry.
Looking ahead to the fourth quarter as well as into 2021, we remain confident in our ability to navigate these changes and continue elevating the customer experiences for our clients that they have come to expect as Tom mentioned, we are raising our expectations for SSD revenue.
New growth to be in the mid teens compared to last year.
And we continue to expect growth within both business units and adjusted EBITDA margin expansion for 2020.
As Tom mentioned, we have decided to postpone providing our targeted guidance for 2021 until next year, we have already experienced the Q twos, which likely has some one off koby fulfillment volumes and we have yet to complete what we believe will be a record fourth quarter also likely with some one off because of the fulfillment volume increase.
Leases, which could create interesting comps next year right.
Recognizing the uncertainties, we still currently reiterate our overall long term objectives of the business business segments that we have previously provided which is for PFS segment to grow SP revenue at an annual rate of 5% to 10% our libraries segment to grow SSD revenue at an annual rate of 10% to 15% as well.
Well as an overall target to improve our consolidated adjusted EBITDA margin.
As always Tom and I are happy to engage with our investors to answer your questions and communicate our exciting business updates and we're happy to make ourselves available by phone and video chat, we will be presenting and Holden virtual meetings during the Craig Hallum Alpha Select conference on November 17th.
And the Stephens Nash 2020 investment conference on November 18.
And we hope to speak with some of you that.
We'll now open the call up for questions.
Thank you Sir.
As a reminder to ask the question you wouldn't need to press star.
On your telephone keypad to enjoy your question profit bounty.
Please standby letter, we compiled making irrational.
And our first question will come from Kara Anderson from B. Riley Securities. Your line is open.
Hi, good morning.
Good morning, Karen.
Hi, I wanted to ask some questions on the gross margin.
I guess, starting with PSS sales gross margin in the quarter I'm. Just if you can provide a little bit more color around that and whether there is any part of that.
So where do you see pressure from that in that and if you could bucket that that'd be great on that one.
So now I'll kind of two things off I'll, let Tom give you sort of technical answer to it.
Within the gross margin I would say we are primarily talking about.
Costs associated with late.
Labor.
Inflation during the quarter on the PFS side of the business.
There are some costs associated with opening new facilities, but I think primarily gross margin you're going to find some wage.
Wage pressures and Zach may comment a little bit on what were doing headed into Q4.
To make sure that we are mitigating that.
But I would say that's probably the one off Tom you agree.
Yes, Mike I do so we do have a again as Mike indicated most of the costs there from a labor standpoint would be impacted the gross margin some of the cost of the new facilities.
While they are getting ready to be a go live during the quarter. Some of those initial cost would end up as a sq. They component. So that's one of the components of our SGN, a fluctuation year over year, but.
But.
Tackle that you discussed.
Discuss a little bit more on the labor cost side.
Certainly so as Mike was pointing out the increase in wage pressure that we saw inside the fulfillment centers did.
Has an impact on the gross margins we have there. In addition to that we intentionally were building out staff across a 24 by seven operation inside of Q3 that did have an impact on our gross margins as very intentional as we wanted to make sure. We have the capacity available for us to respond to what we believe will be a.
An elevated Q4 for PFS.
In addition to that as we have more of a concentration and mix towards fulfillment, you're also going to see the PFS business have a little bit of pressure on the gross margins.
Compared to some of the other service offerings that we have that PFS.
I mean, you're right there's.
There's probably important to that too as we look forward to Q4 I also want to give credit to Zach and his team are they spent a lot of time during Q3 working with clients to adjust.
Adjusted to those rising labor rates in Q4 or.
Through various holiday surcharge programs and other kinds of programs to help cover what we believe will be sort of a continued increase in those rates as we go as we move through Q4 and support our clients during the holiday peak so.
Hopefully, we will see less impact to our gross margins in Q4 from the wage rates.
Got it that's very helpful and then on the line area gross margin.
And I guess, what new things are what little room to happen I know for you to get towards the top end of that targeted range of 50%.
Yep.
You know over the last three to four quarters, we've been generally right in that the mid range there.
Which is I think.
Appropriate.
Expectation for the business. So we've been out the 45% to 46% range. So we continue to monitor.
Look for opportunities to utilize our international resources.
At a high level in certain project opportunities, where they're available to assist so that can you know that benefits us in terms of our profitability component there and just continuing to drive towards making sure. We've got good tight controls in regards to the project planning and the work that's being done in order to have a fish.
In staff and efficient building on the activities that were performing for our clients.
Sure I would say that I have been exceptionally proud.
Proud of the way that the lottery team has continued to to collaborate and work together at a very high level, our utilization late based really reflect that.
Even during this time of pandemic limber all virtual.
They really come together to support these client projects and are working very efficiently and the higher utilization rate generally the better our gross margins on these projects. So they're just they're just doing a really good job.
[music].
Got it and then just one for me and I'll I'll, let them up on Iran, and maybe it's a little too early I ask this question, but with the new environment like how are you thinking about churn unfolding for that on the PFS side over the next year versus historical levels.
Well it is a little early to ask about next year churn, but I think maybe we have some kind of leading indicators that that might be helpful. In Alaska as apt to chime in a little bit my perspective is that.
We certainly seen stickier client relationships this year with the exception of a few small client relationships, where the client struggled.
With their business and May have exited our platform, which we've kind of already talked about in prior calls.
Our client relationships I believe has strengthened significantly.
Both in with regard to the quality of the relationship and the collaboration but also the confidence that they have in operation.
And I think the complexity of dealing with all the volatility that we've seen this year and will likely to continue to see to some level as we head into next year.
I believe as motivate our clients even more to work with us and to think about you expanding the relationship and renewing contracts when they come up for renewal, which certainly has been what we've seen this year the contract renewals that we had coming up this year I would say, we're we're quite easily renewed giving given where we are at this point.
In time, but unless that comment and what his expectations might be as we head into next year, whether this stickiness the carryover as a benefit into the future.
Thanks, Mike I'd like to reiterate just just what you said there we had a few key client contracts are up for renewal in the front side. The year all of those were successfully renewed and certainly the approach that we've taken with clients a year to date I think it's been appreciated by our clients and we will I think have a lasting impact on the stick.
Most of those client relationships as we've been incredibly agile and dynamic in our approach to respond to different volumes that clients have given us. This year, so with that I'm expecting that we'll continue to see success from the engagements. We currently have and then I would also point to our sales pipeline is kind of evidence around the fact that we'd expect to see some sticking.
This through 2021, just from an industry perspective.
Certainly when we shared comments with the team at the conclusion of Q2.
We'd indicated that there was a softening in the sales pipeline for PFS is come back pretty substantially in Q3 that's.
Thats a result folks that are our client prospects that are sticking with fulfillment solutions that are both agile and scalable, which we've proven through this period. So I feel really good about the stickiness of the current clients, we have as well as frankly a growth in the sales pipeline from a.
Her specs prospective clients that maybe not maybe have not enjoy that same agility from their current providers.
And then Carol you Didnt ask about library, but I would like to comment I do think that the improvements that we continue to make in our service offering online very including the recent hires that Jim spoke about in his section.
I really intended to continue to elevate our service offering and make it more even more compelling with with our clients.
And we want to position ourselves to be able to help them continue to deal with what will be a rapidly evolving digital.
Shopping experience that they need to provide for their customers and I think those strategic offerings, especially around customer experience, which is really where we're making investments I think we will continue to lead to stickier client relationships on that side of the business too so well.
We'll see but that is certainly our expectation.
Great. Thank you.
Your next question comes from George Sutton from Craig Hallum.
Thank you guys.
Been around for a long time I don't ever remember hearing this level of enthusiasm so very nice to hear.
In my view two big things are driving this or E Commerce World right now direct to consumer needs.
Needs for brands, because they're not getting heavily at retail that helps zacks business and I need to have an E commerce platform and that helps gems business.
Am I correct in those being sort of the overarching themes right now that are driving what sounds like a quicker deal cycle given that you're signing I believe Jim said letters of agreements to sort of speed up deals and then also the fact that we're seeing and what normally we wouldn't see much in the Q4 period, we're we're actually seeing.
A lot of deal activity.
George I think you're exactly right on that most of those things are in play.
I do think that the direct to consumer brand.
Trend that you spoke to is what's driving activity in Q4 for Zach.
We typically don't see Q4 is a high quarter for bookings where brands are making a decision to make us which we did last year see good activity, but I think the momentum. We're seeing now is reflective that brands realized they need to take control of their destiny. Many of them were underserved.
Or even penalised by some of the marketplaces that they use as their primary channel.
Or they may be older reliance on wholesale channels, such as department stores, which are.
Obviously very challenged and so I would totally agree with you that brands wanting to take control of their destiny and you're looking for a partner who can help them broadly and also offer a high touch experiences at scale.
It's very much driving momentum on on that side of the business.
I would also agree with your statement on.
Liberia side of our business clear the need to innovate and the need to respond to all of the things that customers are now expecting coming out of the pandemic is driving a lot of investment.
I would say that it actually is a little bit elongating the sales cycle at least the signing cycle, which Jim mentioned and the letters of the agreement that Jim mentioned are a way to creatively sort of compensate for increased red tape on our clients' subside.
And in getting contract signed and I think that's actually a positive indicator that clients are motivated to make these changes and enhancements.
And to get creative about how they get engaged with us. So we can start working in billing versus waiting for the red tape too to take care of itself that said one of our objectives. This quarter is to be very diligent at working through that red tape and making sure that these various engagements that have letters of the agreement will.
We're already working in some where we're waiting to start and so we get a signing we get through that and get our bookings back it up in the range, where we believe they need to be but.
But we do have a strong backlog as we head into 21 lot of Thats due to this creativity and I think this pent up demand.
My last GMP agrees, but I think as we head into 21, there's pent up demand for investment in E commerce platforms, particularly around getting omnichannel capabilities in those platforms Asap.
Jim Yeah I could.
With that I can agree with you yeah I couldn't agree with you more Mike on that.
I do think that there.
There is a piece that you didnt highlight which I do believe that.
We are fundamentally library, a different business than we were in the past and we have a sales growth engine that is beyond anything that this organization has ever seen.
And as a result, I think we have the market conditions that you talked about before but I think that we're we're capturing our fair share or more of that market momentum and I just wanted to highlight that.
And then you know I would say that this is Mike sort of highlights the sales process is a bit longer because of the reasons that Mike mentioned, but.
I do think that.
Keep in mind that a letter of agreement that might be for let's say two weeks till we can get through the signature process.
Might be we might be able to have a booking of $100000, but as soon as that thing sign a balance of that project, which might be 900000 or a million dollars then hit the booking number so.
So Keith So Q3 was a little lighter on that that was really about timing and as I highlighted in my.
My outlined before we've already seen a lot of that stuff convert in Q.
For us, we're quite excited and optimistic about Q4 and beyond and the other thing to US is keep in mind with the backlog that we've established as an organization and the sales pipeline that we have never seen something like that in our history as a company so very very optimistic.
Now that's not overnight yaki.
This is a pretty ask your next question George I didn't want to acknowledge your comment early on about our enthusiasm.
And actually you feel a little bit apologetic about having such enthusiasm while we're going through said, it's challenging time, but once again the challenging times have created certainly some complications for us, but by and large they created opportunities and I'm really encouraged at how well our company has take.
Taking advantage of those opportunities so you're right. We do have a high level of enthusiasm at this time.
So the one concern I know you've had Mike is flattening the curve of the quarter, given some of the surcharges and things that.
The shippers are trying to encourage and things like Amazon Prime day moving around.
Are you do you feel that your prepared well and you feel that that curve will be flat enough for you to execute the way you would hope to execute.
I do I'll, let that get a little bit more color, but I I I believe first off that we are seeing and had been saying now for a couple of weeks.
Flattening, where our clients started early or promoting early they're driving.
Volumes much earlier in the holiday and that's all good indicators for the next two weeks are going to be Super critical so we really need to see a lot of activity.
Right before Thanksgiving I personally believe that we are set up well to perform I would say that the i. believes it has a little concern as we see some of these European countries going into lockdown.
We don't yet know what the U.S. response will be to most likely continued increase in cases were what consumers response, maybe.
The the carrier surcharges in the carrier constraints are actually I think more of a concern for our clients.
We can deliver you know full capacity and if the surge in volumes continues to push all the way through Christmas, we're going to be dancing, a really interesting dance with the various transportation carriers.
Just to get them to get to parcel into their system and deliver but I would say the messages. So far so good at this point from my perspective Zack.
Thanks, I'd actually like to just kind of talk a little bit about the carriers as it relates to that curve.
As as you guys are probably aware of the carriers have implemented a number of surcharges that potentially escalate if the Q4 volumes follow a traditional curve meaning.
Some of the larger carriers have a higher package surcharge based on the percentage of mix that really hits during that peak week and on a quarter that they really created an environment, where it's incentivizing the brands to do their best to pull forward promotion. So it's not just the the leading.
Factors of an Amazon Prime day, or big box retail is doing but also the carriers have.
Been pretty vocal about the potential capacity constraints during that period and created a disincentive structure in my opinion generally follow the same curve, but the net result is that from a US perspective, we're seeing a number of the brands that we work with attempt to pull forward the promotional calendar now as Mike mentioned over the next.
Two weeks I will be critical to see how successful that is but they certainly put forth the effort and energy in the messaging around that to ensure that they are trying to flatten that curve.
As Mike also mentioned Europe, Europe's a little bit of a wildcard for us as we see multiple countries in the last couple of days go into Lockdown, we'd expect that that would have an ability to pull forward. Some of the demand now as consumers begin to start.
Shopping online.
Still early on that front, because it's really been in the last few days that thats happened, but we'd expect that also have a similar impact to the quarter.
Guys. Thank you very much appreciate it good luck this season.
Thanks, George appreciate it.
Sure.
Your next question comes from Mark Argento from Lake Street capital markets going so.
Hey, guys good morning.
The other I have also cover you for for almost forever, a nice quarter. Good to see you guys continue to have a momentum.
Just for the sake of Tom just one quick one.
Looks like you guys are really starting to embrace more of the regional.
Distribution, even regional local kind of this omni channel comps up where it's not just one big B C, but more some smaller regionals or even more localized down to the store level can you talk about kind of what your needs are going to be in terms of continuing to build out the network in terms of do you see as I know at one point you are talking about.
Our west Coast facility.
But maybe just talk about how you guys are thinking more holistic way about that is.
Good kind of evolves.
Yes.
Mark you're exactly right.
We have seen this year I think the dramatic acceleration.
In the trend toward a multi tier distribution network, that's driven by a couple of things.
First it's driven by our clients.
Expectation or desire.
They have their inventory in more than one location. That's always really been the thing that has held us back from implementing that type of a design.
Design in our fulfillment network is clients prefer to handle their inventory in one place primarily for working capital reasons, but this year, both the service level expectation as well as even more the cost associated with moving product long distances as I think change the way our clients are looking at inventory position.
Funny. We also have moved as you know two clients that tend to have a smaller inventory footprint.
Which is a positive for us and I think it's a positive for our clients as they think about working capital implications with having multiple house of inventory, but we are moving towards a.
Multi node multi tier type distribution set up where each geography will likely have that sort of super happy with where you do have a concentration Memphis will continue to be that for us for the for certainly the near the near future.
We'll have the same thing in western Europe and in the UK and then more smaller locations distributed around each region. So opening Dallas was sort of the first step for that here in the U.S. and made a lot of sense for us to open right here in our backyard at our corporate headquarters to support that quick launch with our staff.
It gives us a little bit better coverage of the U.S.
And some options for clients, but the next move for us will be west coast, we anticipate that happening early next year and it I would expect that.
Over the medium term, we didnt up having four or five locations in the U.S. to cover you each of the major regions.
And then the Metro area is really interesting, we'll continue to study opportunities for micro fulfillment in metro areas right now our strategy is to enable our clients to accomplish that by using solutions like cloud pick and retail connect even more to turn their stores and their regional facilities into.
To metro fulfillment, but if we see the opportunity where our clients want to sponsor metro fulfillment centers and we will continue to evaluate whether we should provide event hosted capability or whether we should continue in the fulfillment enablement model, which is what we're doing at this point.
I actually have any color to add or did I cover that.
I think you covered everything fully the only thing I might add to that as one of the other motivators I think to shift into multi node solution has been really independent Mick just from a disaster recovery or business continuity perspective, I think thats helped a lot of brands really think about it differently.
As they do scenario in tabletop exercises around what does the Q4 look like if there were unfortunate spikes in different regions. So that certainly helped accelerate the roadmap for us this year.
Thanks, Jack and then Marc the only thing I would add to that Jack mentioned in his comments the agility that we have as evidenced by being able to open two facilities in Q3, each one of them from the time, we signed the lease to we were in production was less than 60 days.
And also with as Tom mentioned relatively low capex, especially when you compare us to some of our competitors I just saw one competitor that announced they're opening a new DC with $40 million of investment associated with us So that is not our strategy.
Im happy that that we can move into a 700000 square foot facility.
Less than $1 million in Capex, and 45 to 60 days that kind of lightweight agility I.
I think it provides us with a nice opportunity to expand as as as needed.
Without a lot of excess capacity because current clients can sponsor that we can have them up and running fairly quickly and.
And also.
We have the ability to do that with a clear ROI.
Just don't know how spending $40 million on a facility without some 15 year contracts associated with it that you can drive a compelling ROI provisions. So I really believe our agility and the fact that we own our tech platform. Its lightweight it to deploy it gives us a strategic advantage it really helps.
Power a a capacity on demand type of an approach.
Great. Thanks, guys and good luck to dollars.
Thanks Mark.
Hi, again to ask a question. Please press Star then the number one on your kind of Funky bet.
Your next question comes from Ryan Macdonald from you Dan.
Thanks, Phil.
[noise] Yeah. Good morning, everyone I'd like I guess I, just wanted to start with us or piggy backing off of the last question and understand a little better clearly you have some some aggressive an optimistic plans on the facility expansion footprint, just wondering what you're seeing from a pipeline perspective and filling the two new facility.
He is between sort of mix between existing customers and what you've got in the pipeline in terms of new customers there.
It's a great question Ryan.
So first off I'm going to brag on back and his team a little bit in that.
They are incredibly creative in a way that they negotiate leases and virtually every situation gives us all kinds of flexibility and options to.
Expand and even contract the space that we use within the campus or building.
And I will tell you that right now the two new buildings that we have opened our dedicated to current clients.
Have yet to move a new client into either of those newbuildings. This really specifically for Q4 in place to expire.
Expand capacity for current clients who are committing.
Within their forecast to meeting more capacity than what a single location would provide.
That said Sac is designed both of those.
Arrangements to be able to expand.
To provide a space for additional clients that may go in one of our clients and it.
It has been in our pipeline.
The one that we closed in record time and are providing a sort of augmented solution to.
For Q4 May very well end up in the Dallas facility.
Exactly would you comment on kind of pipeline and as you think about moving new clients. How you think about your moving them into a multi node network.
Thanks, Mike and really just echo that we really have set up the structure such that we don't have a lot of underutilized infrastructure and neither of those facilities, where we're trying to marry the road map for the facility with our pipeline and being very intentional about how we enter into those leases.
So extremely prudent with the resources that we are deploying so as we look at the Dallas Center. For example, we are already at an 80% capacity.
The pipeline and as that materializes, we would trip or optionality to expand and Thats, how we would approach that.
Opportunity inside that space and frankly, that's the same approach we apply from a global perspective, when we look at lease structure. So.
Extremely intentional about finding opportunities where there are expansion opportunities inside of a campus or inside of the building or are things of that nature that provide us the flexibility. So that we don't have it.
Excess underutilized infrastructure sitting there as we wait for the.
The pipeline to be there that said.
As I highlighted in my comments that we have.
Really strong top of funnel activity coming into the PFS side, So I still feel very optimistic about it.
Taking down incremental space ahead of schedule and really exercising the options that we have on those leases.
Axon Super helpful. Mark as a follow up question I guess is for Jim I'm, just curious to understand a little bit better about what some of that red tape is that's maybe slowing down signings, obviously youve. If youve started to close a healthy amount of pipeline in fourth quarter, but it's an extend you can provide some color is it hesitancy around.
You know starting new projects this close to the end of the year or budgetary constraints or or just caution about.
Having the resources to to start big projects Love. Some additional color. There. Thanks, Yeah I would say, it's it's been something that thing only on since the pandemic started so it's not something that sort of popped up just just recently.
And you know Theres a couple of things right. One is the our clients are operating in sort of a new normal and they're trying to they have different a different set of priorities that.
Often cause them to not have the the focus on getting these things done and started.
So I got we've seen this since the start of the pandemic. It's it really is a timing thing. We're also seeing that some of the larger initiatives and that's been my focus on my focus is not that $200000 projects, a 2 million dollar projects as a business as some of these larger projects just require more levels of approval.
And so we're seeing as we as we move up that sort of value chain and take on these big multi cloud sort of initiatives.
At a much more strategic within an organization very transformational.
We're seeing that there's multiple levels of approval that are required to make that happen. So.
I would say and so as I mentioned before.
This letter of agreement contract we have in place allows us to get this allows us to get that.
Verbal consummation turned into a contract allows us to get the project started start to recognize revenue. So the good news is we're getting these projects underway. The bad news is that some of the sales bookings the larger part of the bookings are sometimes take a little bit longer because of the the stuff that I mentioned before hopefully that helps.
Answer your question.
Extremely outlined and as Lynn.
I hear you right now, it's just a little bit on that I totally agree with Jim and I do think that the larger more complex projects will probably drive a more complicated sales cycle, even during normal times, but I also think that a lot of companies have very special procedures in place because of co bid, where you've got senior executives having to sign off on here.
Finally every contract and you'll see us Whos got a stack of contracts on the best These kind of review that is really just indicative of these times and sometimes our sponsors can sort through that and power E commerce contract through.
Indeed fast tracked and sometimes it's they have to rely on this letter of intent creativity in order to get started either way they recognize the urgency.
And just need to work through the internal.
Red tape.
Very helpful. Thanks, Mike.
At this time I think there should be all right question answer session I would now like to trend up over back to Mr. Li for closing remarks, Sir.
Thank you I'd like to thank everyone that attended the call. This morning, we look forward to speaking with our investors and analysts.
At the upcoming conferences I mentioned earlier.
But also when we report our fourth quarter and full year results in March it's.
It's going to be a very interesting six weeks, obviously, we expect a lot of activity and we're excited to be prepared for it it.
It will be really interesting come back to you in March and wrap it all up perhaps.
Perhaps will even have a little inside the floor on March we'll see but that this does conduct todays conference. So thank you very much for your participation.
Ladies and gentlemen. This concludes today's conference call. You May now disconnect. Your line at this time. Thank you for your participation.
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Good morning, everyone and thank you for participating in todays conference call to discuss via <unk> website actual results for third quarter ended September 30, when he.
Joining us today or be a patch web CEO, Mike Willoughby and the company's CFO, Tom Madden agenda.
General manager PFS.
Selman.
And the general manager at all Siberia came Butler.
The Companys outside Investor Relations advisor, Sean <unk> with Gateway Investor Relations.
Following their remarks, well open the call for questions I would now like to turn to cold over in Eastern Missouri for some introductory comments Troy. Please go ahead.
Thank you Ray.
We go further 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 award that dissipate believe estimate expect intend will guidance call target project and other similar expressions typically are used to identify forward looking statement.
Yes.
Full disclaimer relating to forward looking statements as well as certain non-GAAP metric scenes in our filing and this presentation can be found in the investor section of <unk> website under Safe Harbor statement.
I would like to remind everyone that this call will be available for replay through November twentyth, starting at 11 30 am Eastern this morning.
Webcast replay will also be available via the link provided in today's press release.
Oh the available on the company's website at <unk> Dot com.
Any redistribution retransmission or rebroadcast of this call in any way without the expressed written consent.
That's why it is strictly prohibited.
Now I'll turn the call over to <unk> CEO, Mike Willoughby Mike.
Thank you Shawn and good morning, everyone.
Before beginning my comments I'd remind you that in response to SBC guidance, we are providing additional color and commentary on the business during uncertain times, including current information about our business. We are almost six weeks into Q4, we're doing.
Yes in an effort to be as transparent as possible about the state of our business as we respond to the ongoing prices and in being transparent we will do our best to highlight both the important challenges me base and the significant opportunities we are experiencing.
I'll point out that we continue to maintain up to date information about our response to the pandemic.
Yeah, that's web dot com and PFS commerce Dot com websites just follow the COVID-19 links.
As we support our clients through an evolving online retail environment ahead of the holiday season, our business continues to experience strong tailwinds from robust ecommerce demand, yeah, hi, fulfillment volumes ramp.
Wrapping activity levels, among our current clients drove double digit year over year growth in SMB revenue and adjusted EBITDA during the quarter.
Across PFS and Liberia, our sales teams have done an excellent job of driving new business development opportunities with a record Liberia sales pipeline and a much improved PFS pipeline compared to last quarter.
Most importantly.
Our global workforce, it's still operating safely and at high levels of productivity.
It was it on the front lines in our distribution centers or working remotely Rob professional services contact center or corporate teams.
In both segments of our business.
We have remained focused on preparing for what we anticipate will be a record digital holiday season.
Retail experts vary widely in their estimates for holiday online sales growth.
But the consensus outlook supports our expectation for.
For example.
CVR he predicts that this year's holiday E Commerce sales will come in at double the record growth rate generated in the 2019 season and continues to trend towards omni channel retailing.
Other predictions for year over year holiday online sales growth from experts at the Lloyds Forrester and Salesforce ranged from 90% to 34%.
Sales force believes that up to 30% of total us retail sales will be transacted through digital channels. This holiday.
With additional restrictions in place in several European markets and the potential for continued surge in Kobin cases in the U.S.
There's good reason to believe the higher end of these ranges as possible.
We are also encouraged by the early start to the holiday shopping season influenced by Amazon and the big box retailers and.
And our clients are largely following that trend flattening the retail curve.
It is especially important since experts also believe transportation carrier capacities will likely be exceeded between Thanksgiving and Christmas.
Considering all these factors I'm.
I am very pleased we have prepared during the quarter were record fulfillment volume holiday.
And I believe we are positioning ourselves well to deliver for our clients in this environment.
In PFS.
We are ramping operations in both current fulfillment centers and the two new fulfillment centers, we announced during the third quarter.
One in the Dallas area and one in Belgium.
These two additional centers to expand the PFS global DC footprint to nine facilities.
And increase our overall capacity to accommodate key client expansions as the peak holiday season approaches.
Government will be on the call later to provide more details on our expansion progress and the PFS strategy ahead of the holidays.
In Liberia, our team has built a record pipeline and is benefiting from the sales and marketing improvements implemented over the past year.
We have worked closely with our clients to preserve the strength of their brands all creating innovative E Commerce solutions.
To respond to both pandemic related industry changes and the upcoming holiday season.
[noise], Liberia has made strong progress and its return to growth and Jim Butler will be on to discuss additional developments and initiatives to maintain this momentum.
As we enter what will be another seasonal peak for our business.
I would like to once again recognize the hard work of our front line employees and management in our fulfillment centers.
They have demonstrated incredible flexibility as they've accommodated high order volumes and recalibrated everything from sanitation processes.
Overall workload to maintain optimal safety and efficiency.
The dedication of our entire global team has enabled our growth to this point.
And I am proud of the strong position, we have heading into the holidays.
Now I'd like to turn the call over to Tom to provide more details on our Q3 financial results and our outlook for the rest of 2020.
Tom.
Thank you, Mike and good morning, everyone.
Unless otherwise noted all the financial comparisons that I'm, making my comments are to the third quarter of 2019.
For Q3, our consolidated service fee equivalent or SFP revenue increased 21% to 60.4 million.
The increase was primarily driven by ongoing high volumes of fulfillment activity in our PFS segment.
As well as growth from new and existing clients in Liberia.
Service fee gross margin in the third quarter of 2020 was 32.1% compare.
Compared to 34.9%.
With the decrease primarily due to revenue mix.
Reflecting a higher percentage of revenues generated.
From fulfillment services and PFS.
And increased fulfillment labor cost during the quarter.
Note that gross margins for both segments continued to be within our guidance range of 25% to 30% for PFS.
And 40% to 50% provide barrier.
And we currently expect those ranges to hold through the fourth quarter.
S DNA costs were $21.4 million in the third quarter of 2020 compared to 18.9 million last year.
With the increase primarily driven by higher stock based compensation expense of 2.4 million.
Additionally, we had increases in personnel related costs.
Coding variable compensation expense.
And facility related costs incurred.
Including the impact of the two new distribution centers.
And enhanced sanitation procedures as a result of the pandemic.
These were partially partially offset by reduced travel costs.
As well as the prior year amount, including a higher level of severance related costs.
Adjusted EBITDA in the third quarter increased 10%.
3.4 million.
Care to $3.1 million in the year ago quarter.
With the improvement primarily due to sustained strength in SMB revenue growth.
Partially offset by some gross margin pressure in the PFS segment related to higher fulfillment labor costs.
Turning to the balance sheet at September Thirtyth 2020.
Cash and cash equivalents totaled $10.4 million and.
Total debt.
Excluding operating leases was 39.5 million.
This resulted in a net debt position of approximately 29.1 million.
Which was slightly improved from the June 32020, net debt position of 31.0 million.
At this point, we remain confident with our overall liquidity position as we navigate the pandemic.
We currently expect our net debt level to increase modestly as we look ahead to the December year end.
As we support the increased seasonal demand.
And then expect it to come back down in the first quarter of 2021.
Our capital expenditures in the third quarter of 2020 were approximately 4.0 million.
Primarily related to the new DC facilities.
Resulting in a year to date level of 7.2 million.
As we continue to expand our for two facilities to support current client growth.
And ramp our new facilities and new client activity.
We expect our total 2020 capital expenditure spend to be between 8 million to $10 million.
We are also reiterating all other 2020 expectations outlined on our previous calls this this year.
Coding expectations for product revenue.
DNA expense interest expense and tax expense.
These of course are subject to change given to the uncertainty amid covered 19th.
Moving onto our 2020 outlook.
Echo Mikes earlier comments, we continue to believe that both business segments are well positioned for continued growth.
Especially given the upcoming holiday season.
Elevated fulfillment volumes and PFS and.
And our record pipeline in Liberia.
With these factors in mind, we are raising our expectations for consolidated asset fee revenue growth to be in the mid teens compared to the prior year.
Which is up from our previously issued range of 9% to 12%.
Coupled with our sustained focus on prudent expense management throughout our business.
We also continue to target an improvement in adjusted EBITDA margin compared to 2019.
Well Ray remains uniquely challenging to predict how the rest of this year will play out.
Our expectations are in line with other market reports predicting this season's E commerce sales growth to outperform last year's growth rate.
The investments, we have made across PFS and wide area.
In addition to us well for the upcoming peak holiday orders and we are operating from a strong finance mission as we work to sustain our business and client growth over the long term.
In order to reach the calendar year 2020 objectives.
We are currently projecting SFP revenue growth in our upcoming fourth quarter to be up approximately mid teens as compared to the prior year fourth quarter.
With an estimated adjusted EBITDA margin in a similar range as to what we have experienced on a year to date basis. So far this year, which is me which is in the 8% range.
As we look ahead past 2020.
While we expect to benefit from the projected continued E commerce tailwinds due.
Due to the overall uncertainty of the ongoing impact of the pandemic, we have decided to postpone providing our targeted guidance for 2021 until next year.
This concludes my prepared remarks, I will turn the call over to Zach to walk through operational highlights and PFS Zack.
Thanks, Tom.
We have continued to experience high levels of fulfillment activity across our PFS client base with global fulfillment volumes in Q3 that are akin to the previous Q4 peak quarters of 2018 and 2019.
As we look past Q3 with a benefit of the retail expert guidance, Mike mentioned earlier.
Updated client forecasts and almost six weeks of Q4 activity behind us.
We reasonably expect to continue to see significantly elevated direct to consumer fulfillment activity throughout the holiday season.
With that expectation for the holiday and based on our experience over the past two quarters.
Rapidly built out incremental capacity during the quarter for our clients increasing fulfillment needs.
We have continued to demonstrate our agility and scale of operations as we have both optimize existing fulfillment centers to increase capacity and secured and launched two additional fulfillment centers.
Our new Dallas area facility opened during the third quarter, expanding our total North American fulfillment center footprint to six facilities.
This location allows us to fulfill orders for several existing clients for more than one facility and it creates opportunities to provide additional services to other clients in the future.
Facility is strategically located near the DFW International Airport has also a short drive from PFS webs Global headquarters, allowing easy access for our IP and innovation teams to test new technologies products and solutions and a new distribution center environment.
We have four client operations now live in this facility, including the second node for Kendra, Scott Augmenting the Memphis operation, we launch for them and 2019.
We are ramping up to take on more volume.
This additional capacity has already helped to ensure optimal business continuity, while scaling our operations for key client relationships, including Kendra Scott.
At the end of Q3.
Announced that we're opening an additional distribution center in Liaised, Belgium that went live in October.
This facility is strategically located near both our existing the age fulfillment center and the canal, Albert which allows for faster outbound delivery in the Netherlands and Germany.
And will serve as a valuable location for inbound product flow through ship containers. This facility has ramp quickly over the first part of Q4 to be ready for full scale operations prior to the peak surge in direct to consumer demand.
These infrastructure investments coupled with investments in personnel and wage increases did result in higher operating costs in the third quarter. However.
However, our ability to launch two new fulfillment centers within 45 to 60 days of lease commencement is a strong testament to our agile and cost effective expansion strategy.
This has allowed us to efficiently manage our capital expenditures through the period and respond dynamically to shifting client needs without maintaining a large underutilized infrastructure.
As for Q3 bookings and PFS, we signed eight new engagements, where the combined estimated $5.2 million in annual contract value or HCV compared.
Compared to four new engagements worth an estimated $7.1 million ACB in the year ago quarter.
Many of our new clients and prospects based kogan related uncertainties and their operations. During the first half of the year and were initially reluctant to make any changes to their warehouse operations as they work to stabilize their business.
Some of these headwinds persisted into Q3, we have begun to secure additional new wins as companies look to improve their distribution capabilities before the holiday and solidify growth plans in 2021.
As we have stated on prior calls we began the year targeting more high growth smbs to expand our addressable market to get involved earlier on the clients growth cycle as a result, our book.
Bookings mix to date has been comprised of higher number of smaller lower HCV engagements.
This strategy allowed us to recognize revenue from seven new programs in Q3 with an opportunity to grow these high potential brands for a long period of time.
In addition to the initially smaller but high potential opportunities. We also drove an increase in branded direct to consumer programs from large client prospects.
These larger potential deals have increased the value of our PFS sales pipeline and enabled our sales team to focus on higher value engagements in the back half of the year.
With the benefit of these tailwinds and the growth we're seeing in E. Commerce, we expect to generate a higher total HCV from bookings in the second half of 2020 than we did in the first half of the year.
To comment on some unique projects we have implemented recently, we have spoken for several years about our cloud based pop up fulfillment capabilities and how existing clients had benefited from these initiatives during previous holiday periods.
This year, we implemented a pop up distribution center within an existing client facility in Germany, Italy.
Utilizing nurse staffing running on our technology. They are already live in fulfilling customer orders. This pop up solution can seamlessly transition into a longer term fulfillment enablement solution for this client based on the results from this holiday.
Another interesting recent win is a great example of our team's agility to help new clients with flexible solutions.
We recently engaged by a major jewelry brands to help with their order fulfillment capabilities for this year's holiday season meeting.
Eating a very rapid launch we worked with the brand to quickly implement a temporary solution using their I'd systems within one of our Memphis distribution centers to fulfill orders.
This flexibility provides us new client with additional fulfillment capacity they need to meet the demands this year, while we work on a long term engagement beginning in 2021.
To reiterate Mike's earlier comments I am deeply grateful grateful for the hard work of our fulfillment center personnel as they address our elevated order volumes and influx that has only grown as we get closer to the holidays.
Further I'd like to recognize the work of Don Brewster, PFS webs area, Vice President of contact center operations and shifting our entire contact center operation from an on premise to work from home at the start of the pandemic.
This model has preserved our teen safety and resulted in better business outcomes employee retention and quality scores have risen and we have been able to recruit talented team members from across the country rather than exclusively sourcing local candidates.
Our experience has been featured several contact center industry focus magazines as an example of it extremely extreme agility during the crisis.
These results give us confidence that we can sustain a more efficient hybrid contact center model going forward.
As of the end of October we have already completed the reductions space in our Dallas contact Center.
Which further promotes operational efficiency and should benefit benefit margins longer term.
Throughout PFS, our collective adaptability has enabled us to either a year filled with many obstacles related to the pandemic and will enable us to carry our momentum through the fourth quarter and into 2021.
I'll pass the call over to Jim for an overview of Liberia's operations Jim.
Great. Thanks, and good morning, everyone.
After implementing significant operational improvements within our sales and marketing teams throughout the past year we.
We have continued to build upon record pipeline of opportunities as we enter the fourth quarter and begin our planning for 2021.
Q3, we booked 39 projects worth a combined estimated 8.6 million in project value. This.
This compares to 60 projects in the year ago quarter.
Were they combined for then estimated $12.5 million in project value.
We also booked 23 engagements for library are working combined estimated $4.5 million in annual contract value or HCV.
This compares to 15 engagements with the combined then estimated $3.3 million.
TV in the year ago quarter.
As we've stated in the past all types of bookings quite hopeful leading indicators of future revenue streams.
While our Q3 sales bookings were down our challenge was getting several large key new client contracts and their signature process.
We've experienced delays in getting contract signed.
Due to enhanced scrutiny many clients put on irrigation sales during this extraordinary time.
In many cases multiple senior executives within these organizations, but now signed off on the large project engagements.
The good news is that we had been awarded the business new situations and in many cases, we have been able to begin work under a letter of agreement, which allows us to provide services.
Payment and recognize revenue, while we work through the clients procurement processes.
The substantial logjam of contract signings, we experienced that we ended the quarter should result in a big boost to our Q4 bookings and contribute to the already strong backlog, we have as we head into 2021.
But so far.
First six weeks of Q4, we have already signed nearly 8 million total bookings.
As consumer demand for E. Commerce continues to grow amidst the pandemic and ahead of the holidays are.
Im excited but not surprised that our sales leadership has generated another record pipeline of qualified opportunities.
We are very excited to see momentum in our EMEA business, along with our strong pipeline of large multi cloud projects with major brands you us.
However, we may still experience delays in our official project and recent launches.
Clients work to manage their operations I Miss the pandemic once.
One thing is clear.
We are optimistic about our momentum for the remainder of 2020 and into 2021.
Subsequent to the third quarter, we announced several additional developments that will continue to grow libraries global footprint and enhance our suite of service offerings.
First is our expansion into Europe spend a lux and dark regions coal.
Actively covering Belgium, the Netherlands, Luxembourg, Germany, Austria and Switzerland.
Our presence there.
He led by our newly appointed regional sales director Walter banker, who has over 25 years of experience generating new business in information technology.
We have already serve several key clients within these regions, including while Peri and Pandora with.
With this formal expansion we plan to build upon our existing client relationships and technology partnerships to grow our European presence.
Just weeks after we announced the expansion we officially launched our partnership with leading German footwear brands of yours.
The modernizing the brand's ecommerce presence by building launch new digital store on the Big Commerce platform, which we expect will rival its award winning in store experience.
We're excited about our growth.
Our growing global partnership with Big Carlos who announced that their platform drove total revenue growth of 33% year over year in Q2.
We are seeing increased demand for their headless commerce offerings, especially in EMEA as.
Brands demand more innovative experiences to support their commerce initiatives.
In addition to pick homeless, we're beginning to work with other emerging commerce platforms, including the tax commerce tools and an actor to ensure we remain the leader in the evolving commerce platform ecosystem. These.
These platforms represent a growing shift in the industry towards micro services based foundations that will allow for a richer customer experiences.
The teacher deployment and increased overall agility.
We are continually expanding our skills and expertise to ensure we are meeting our clients' success in adapting and evolving these architectural approaches 2021.
Further supporting stem, our global partnership with sales force, we appointed Swanzy inside.
As sales force purposely putting a major EMEA region.
It's more than 20 years experience in information technology systems integration digital consulting expertise and B to C and B to B E Commerce technology.
Shallow solutions in digital marketing automation.
Science specialists in the sales force multi cloud environment with considerable implementation and consulting experience.
Sales Force Commerce Club sales force marketing cloud sales force CRM and sales force cloud craze.
Growing our global footprint is already providing us with expect with expanded opportunity set as we look forward to driving additional growth.
2021.
Well, we're excited to have appointed Barry sales and accomplished experience transformation leader as our new senior Vice President of global experience and innovation.
He has a long track record of delivering new business growth and piloting innovation, leading brands, combining the power technology and design.
His leadership will help us enhance our award winning design services as we elevate our clients' customer experience to keep pace with the changing almost landscape.
In an environment, where there is increased demand for expertise in product innovation service design performance marketing and overall customer experience, having leaders like burial Gord will help us further improve the breadth and quality of our offerings.
Walter Sanjeev Barry.
Just the latest addition to our deep roster of industry leaders assembled over the past year enhanced.
Our team of industry leaders has accelerated libraries, both platform and its introduced innovative solutions and strategic insights our clients require.
Look to transform their businesses.
Where clients and prospects increasingly need solutions beyond commerce design and implementation services.
Gary has a unique value proposition and our ability to globally deliver connected commerce experiences and pricing strategy experienced design product and service design technology performance marketing and orchestrated services.
We approach projects with a focus on innovation to help brands and realize the full potential of their digital business.
Rapidly exploring future opportunities.
That's the nature of Commerce continues to evolve and accelerate the pace. We are committed to aligning our professional services to best support their needs and elevate the connected commerce offerings with that I'll turn it back over to Mike for his closing remarks, Mike.
Thank you Jim.
I want to emphasize that across both segments of our business.
We have worked diligently not only to meet the needs of our clients, but also address larger scale changes in consumer digital shopping preferences.
To that end I wanted to conclude our call with a brief update on several of our privatized offerings that are enhancing the value of our services.
In addition to the cloud Pic based pop up solutions as highlighted earlier.
We are implementing retail connect and then another clients' physical stores this coming holiday.
And this installation also has the opportunity to become a larger deployment that could include international retail locations.
Retail connect is an in store solution compliant comprising lightweight technology integrated scanning.
And staffing hardware that enables the online sales of store inventory and keeps track of the steps associated with billing each order.
Like cloud pick it can integrate seamlessly with retailers existing software systems.
And the efficient tracking allows retailers to easily facilitate the buy online pickup in store capability that has been in high demand during the pandemic.
As we mentioned last quarter, we are looking to pair this solution with liberia's scan and go capability, which allows shoppers to use their mobile devices to scan and in store QR code.
Or visit the retailer's website, and then scan pay and go all about visiting the point of sales system.
Given that 87% of shoppers are seeking out touchless or self checkout options.
We believe these two paired capabilities will help our clients further evolve their customer experiences to adapt to this new normal spurred by the pandemic.
We have been both proactive and innovative and our response to these industry wide changes in both E commerce and the broader retail industry.
Looking ahead to the fourth quarter as well as into 2021, we remain confident in our ability to navigate these changes and continue elevating the customer experiences for our clients that they have come to expect as Tom mentioned, we are raising our expectations for SMB revenue.
New growth to be in the mid teens compared to last year.
And we continue to expect growth within both business units and adjusted EBITDA margin expansion for 2020.
As Tom mentioned, we have decided to postpone providing our targeted guidance for 2021 until next year, we have already experienced the Q twos, which likely has some one off Kobe fulfillment volumes and we have yet to complete what we believe will be a record fourth quarter also likely with some one off because of its fulfillment volume increase.
Pieces, which could create interesting comps next year right.
Recognizing the uncertainties, we still currently reiterate our overall long term objectives of the business business segments that we have previously provided which is for PFS segment to grow SP revenue at an annual rate of 5% to 10% our libraries segment to grow SSD revenue at an annual rate of 10% to 15% as well.
Well add an overall target to improve our consolidated adjusted EBITDA margin.
As always Tom and I are happy to engage with our investors to answer your questions and communicate our exciting business updates and we're happy to make our sales available by phone and video chat, we will be presenting and holding virtual meetings during the Craig Hallum Alpha Select conference on November 17.
And the Stephens Nash 2020 investment conference on November 18.
And we hope to speak with some of you that.
We'll now open the call up for questions.
Thank you Sir.
As a reminder to ask a question you want or need to press star.
On your telephone keypad to enjoy a question profit bounty.
Please standby letter, we compiled making irrational.
And our first question will come from Kara Anderson from B. Riley Securities. Your line is open.
Hi, good morning.
Good morning, Sarah.
Hi, I wanted to ask some questions on the gross margin.
I guess, starting with PSS sales gross margin in the quarter I'm. Just if you can provide a little bit more color around that and whether there is any part of that.
Facilities pressure from that in that and if you could bucket that out that'd be great on that one.
So now I'll kind of two things I'll, let Tom give you the sort of technical answer to it.
Within the gross margin I would say we are primarily talking about.
Costs associated with.
Labour inflow.
Inflation during the quarter on the PFS side of the business.
There are some costs associated with opening new facilities, but I think primarily gross margin you're going to find some.
Wage pressures and Zach may comment a little bit on what were doing headed into Q4.
To make sure that we are mitigating that.
But I would say that's probably the one off Tom you agree.
Yes, Mike I do so we do have again as Mike indicated most of the costs there from a labor standpoint would be impacted the gross margin some of the cost of the new facilities.
[music].
While they are getting ready to be go live during the quarter. Some of those initial cost would end up as a sq. They component. So thats one of the components of our SGN, a fluctuation year over year, but.
But.
Tackle that you did.
Discuss a little bit more on the labor cost side.
Certainly so as Mike was pointing out the increased wage pressure that we saw inside the fulfillment centers did.
Have an impact on the gross margins. We have there. In addition to that we intentionally were building out staff across a 24 by seven operation inside of Q3 that did have an impact on our gross margins as very intentional as we wanted to make sure. We have the capacity available for us to respond to what we believe will be a.
An elevated Q4 for PFS.
In addition to that as we have more of a concentration and mix towards fulfillment, you're also going to see the PFS business have a little bit of pressure on the gross margins.
Compared to some of the other service offerings that we have that PFS.
I mean Tara.
Yes, there is probably important to that too as we look forward to Q4 I also want to give credit to Zach and his team are they spent a lot of time during Q3 working with clients to.
Adjust to those rising labor rates in Q4.
Through various holiday surcharge programs and other kinds of programs to help cover what we believe will be sort of a continued increase in those rates as we go as we move through Q4 and support our clients during the holiday peak so.
Hopefully, we will see less impact to our gross margin in Q4 from the wage rates.
Got it that's very helpful and then on the line area gross margin.
And I guess, what news or what level of won't happen.
For you to get towards the top end of that targeted range at 50%.
Yep.
Over the last three to four quarters, we've been generally right in that the mid range there.
It is I think.
Appropriate.
Expectation for the business. So we've been out the 45% to 46% range. So we continue to monitor look and look for opportunities to.
Utilize our international resources.
At a higher level in certain project opportunities, where they're available to assist so that can that benefits us in terms of our profitability component there and just continuing to drive towards making sure. We've got good tight controls in regards to the project planning and the work that's being done in order to have a fish.
And staffing efficient building on the activities that were performing for our clients.
Sure I would say that I have been exceptionally proud.
Proud of the way that the library team has continued to collaborate and work together at a very high level, our utilization late based really reflect that.
Even during this time of pandemic when we're all virtual.
They really come together to support these client projects and are working very efficiently and the higher utilization rate generally the better our our gross margins on these projects. So they're just they're just in a really good job.
Got it and then just one from me and I'll I'll, let them up on and and maybe it's a little too early to ask a question, but with the new environment like how are you thinking about churn unfolding for that on the PFS side over the next year versus historical levels.
Well it is a little early to ask about next year churn, but I think maybe we have some kind of leading indicators that might be helpful. In Alaska Zap to chime in a little bit my perspective is that.
We certainly seen stickier client relationships this year with the exception of a few small client relationships, where the client struggled.
With their business and May have exited our platform, which we've kind of already talked about in prior calls.
Our client relationships I believe has strengthened significantly.
Both in with regard to the quality of the relationship and the collaboration but also the confidence that they have in operation.
And I think the complexity of dealing with all the volatility that we've seen this year and will likely to continue to see to some level as we head into next year.
I believe as motivate our clients, even more to work with us and to think about expanding the relationship and renewing contracts when they come up for renewal, which certainly has been what we've seen this year the contract renewals that we had coming up this year I would say, we're we're quite easily renewed giving given where we are at this point.
In time, but unless that comment on what his expectations might be as we head into next year, whether this stickiness the carryover as a benefit into the future.
Thanks, Mike I'd like to reiterate just just what you said there we had a few.
Key client contracts that were up revenue on the front side the year all of those were successfully renewed and certainly the approach that we've taken with clients year to date I think's been appreciated by our clients and will I think have a lasting impact on the stickiness of those client relationships as we've been incredibly agile in dynamic in our approach to respond to that.
And volumes that clients have given us this year, so with that I'm expecting that we'll continue to see success from the engagements. We currently have and then I would also point to our sales pipeline is kind of evidence around the fact that we'd expect to see some stickiness through 2021, just from an industry perspective.
Certainly when we shared comments with the team at the conclusion of Q2.
We'd indicated that there was a softening in the sales pipeline for PFS is come back pretty substantially in Q3.
That's a result folks that are our client prospects that are sticking with the film it solutions that are both agile and scalable, which we've proven answer this period. So I feel really good about the stickiness of the current clients, we have as well as frankly growth in the sales pipeline from.
Our specs prospective clients that maybe not maybe have not enjoy that same agility from the current providers.
And then Carol you Didnt ask about libraries, but I would like to comment I do think that the improvements that we continue to make in our service operating on library, including the recent hires that Jim spoke about in his section.
I really intended to continue to elevate our service offering and make it more even more compelling with with our clients.
And we want to position ourselves to be able to help them continue to deal with what will be a rapidly evolving digital.
Shopping experience that they need to provide to their customers and I think those strategic offerings, especially around customer experience, which is really where we're making investments I think we will continue to lead to stickier client relationships on that side of the business too so well.
We'll see but that is certainly our expectation.
Great. Thank you.
Your next question comes from George Sutton from Craig Hallum.
Thank you guys I have been around for a long time I don't ever remember hearing this level of enthusiasm so very nice to hear.
In my view two big things are driving this E.
Ecommerce World right now direct to consumer.
Needs for brands, because they're not getting heavily at retail that helps zacks business and I need to have an E commerce platform and that helps gems business am I correct in those being sort of the overarching themes right now that are driving what sounds like a quicker deal cycle.
Isn't that you're signing I believe Jim said letters of agreement the sort of speed up deals and then also the fact that we're seeing and what normally we wouldn't see much in the Q4 period, where we're actually seeing a lot of deal activity.
[music].
George I think you're exactly right on that both of those things are in play.
I do think that the direct to consumer brand.
Trend that you spoke to is what's driving activity in Q4 for Zach.
We typically don't see Q4 is a high quarter for bookings where brands are making a decision to make us which we did last year see good activity, but I think the momentum. We're seeing now is reflective that brands realized they need to take control of their destiny. Many of them were underserved.
Curved or even penalised by some of the marketplaces that they use as their primary channel or.
Or then maybe older reliance on wholesale channels, such as department stores, which are.
Obviously very challenged and so I would totally agree with you that brands wanting to take control of their destiny and looking for a partner who can help them broadly and also offer a high touch experiences at scale.
It's very much driving momentum on on that side of the business.
I would also agree with your statement on.
Our library side of our business, where the need to innovate and the need to respond to all of the things that customers are now expecting coming out of the pandemic is driving a lot of investment.
I would say that it actually is a little bit elongating the sales cycle at least the signing cycle, which Jim mentioned and the letters of the agreement that Jim mentioned are a way to creatively sort of compensate for increased red tape on our clients' subside.
And in getting contract signed and I think thats actually a positive indicator that clients are motivated to make these changes and enhancements.
And get creative about how they get engaged with us. So we can start working in billing versus waiting for the red tape too to take care of itself that said one of our.
Objectives. This quarter is to be very diligent at working through that red tape and making sure that these various engagements that have letters of agreement, where we're already working and some where we're waiting to start and so we get a signing we get through that and get our bookings back up in the range, where we believe they need to be but.
But we do have a strong backlog as we head into 21, a lot of Thats due to this creativity and I think this pent up demand.
I'll ask Jim he agrees, but I think as we head into 21, there's pent up demand for investment in E commerce platforms, particularly around getting omnichannel capabilities in those platforms.
SAP.
Jim Yes I.
I could do that integrated yeah, I couldn't agree with you more Mike on that.
I do think that.
Theres a piece that you didnt highlight which I do believe that.
We are fundamentally library, a different business than we were in the past and we have a sales growth engine that is beyond anything that this organization has ever seen.
And as a result, I think we have the market conditions that you talked about before but I think that we're we're capturing our fair share or more of that market momentum and I just wanted to highlight that.
And then you know I.
I would say that as Mike sort of highlighting the sales process is a bit longer because of the reasons that Mike mentioned, but.
I do think that.
Keep in mind that a letter of agreement that might be for let's say two weeks till we can get through the signature process.
Might be we might be able to have a booking of $100000, but as soon as that thing sign a balance of that project, which might be 900000 or a million dollars that hits the booking number so.
So Q3 was a little lighter on that that was really about timing and as I highlighted in my.
My outlined before we've already seen a lot of that still convert in Q4. So we're quite excited and optimistic about Q4 and beyond and the other thing too and just keep in mind with the backlog that we've established as an organization and the sales.
Sales pipeline that we have never seen something like that in our history as a company so very very optimistic.
And our sales yeah.
Just as a pretty ask your next question George I just wanted to acknowledge your comment early on about our enthusiasm.
And I actually feel little bit apologetic about having such enthusiasm, while we're going to set a challenging time, but once again the challenging times have created certainly some complications for us, but by and large they created opportunities and I'm really encouraged at how well our company has.
Taking advantage of those opportunities so you're right. We do have a high level of enthusiasm at this time.
So the one concern I know you've had Mike is flattening the curve of the quarter given some of the surcharges and those that are the shippers are trying to encourage and things like Amazon Prime day moving around.
Do you feel that your prepared well and you feel that that curve will be flat enough for you to execute the way you would hope to execute.
I do I'll, let that get a little bit more color, but I I believe first off that we are seeing and had been saying now for a couple of weeks.
That flattening, where our clients started early or promoting early they are driving both.
Volumes much earlier in the holiday and that's all good indicators for the next two weeks are going to be Super critical so we really need to see a lot of activity right.
Right before Thanksgiving I personally believe that we are set up well to perform I would say that the i. believes it has a little concern as we see some of these European countries going into lockdown.
We don't yet know what the U.S. response will be to most likely continue to increase in cases were what consumers response, maybe.
The the carrier surcharges in the carrier constraints are actually I think more of a concern for our clients.
We can deliver you know full capacity and if the surge in volumes continues to push all the way through Christmas, we're going to be dancing, a really interesting dance would be various transportation carriers.
Just to get them to get to parcel into their system and delivered but I would say the messages. So far so good at this point from my perspective Zack.
Thanks, I'd actually like to just kind of talk a little bit about the carriers as it relates to that curve.
As as you guys are probably aware of the carriers have implemented a number of surcharges that potentially escalate if the Q4 volumes follow a traditional curve meaning.
Some of the larger carriers have a higher package surcharge based on the percentage of mix that really hits during that peak week and on a quarter that they really created an environment, where it's incentivizing the brands that do their best to pull forward promotion. So it's not just the leading.
Factors of an Amazon Prime day, or big box retail is doing but also the carriers have.
Been pretty vocal about the potential capacity constraints during that period and created a disincentive structure in my opinion generally follow the same curve, but the net result is that from a US perspective, we're seeing a number of the brands that we work with attempt to pull forward the promotional calendar now as Mike mentioned over the next.
Two weeks I will be critical to see how successful that is but they've certainly put forth the effort and energy in the messaging around that to ensure that they are trying to flatten that curve.
As Mike also mentioned Europe, Europe's a little bit of a wildcard for us as we see multiple countries in the last couple of days go into lockdown, we'd expect that that would have.
An ability to pull forward some of the demand now as consumers begin to start shopping.
Shopping online.
It's still a little early on that front, because it's really been in the last few days that thats happened, but we'd expect that to also have a similar impact to the quarter.
Guys. Thank you very much appreciate it good luck this season well thanks.
Thanks, George appreciate it thanks.
Thanks.
Your next question comes from Mark Argento from Lake Street Capital markets. Your line so.
Hey, guys good morning.
The other I have also covered it for for almost forever nice quarter. Good to see you guys continue to have a momentum.
Just for the sake of Tom just one quick one.
It looks like you guys are really starting to embrace more of the regional.
Distribution, even regional local kind of this omnichannel concept, where it's not just one big B C, but more some smaller regionals or even more localized down to the store level can you talk about kind of what your needs are going to be in terms of continuing to build out the network in terms of do you see as I know at one point you are talking about it.
Escos facility.
But maybe just talk about how you guys are thinking more holistically about that as.
The end market kind of evolves.
Yes.
Mark you're exactly right.
We have seen this year I think a dramatic acceleration.
In the trend toward a multi tier distribution network, that's driven by a couple of things.
First it's driven by our clients.
Expectation or desire.
They have their inventory in more than one location and that's always really been the thing that has held us back from implementing that type of a design.
Design in our fulfillment network is the declines preferred to have all their inventory in one place primarily for working capital reasons, but this year, both the service level expectation as well as even more the cost associated with moving product long distances as I think change the way our clients are looking at inventory position.
Funny. We also have moved as you know two clients that tend to have a smaller inventory footprint.
Which is a positive for us and I think it's a positive for our clients as they think about working capital implications of having multiple house of inventory, but we are moving towards a.
Multi nodes multi tier type distribution set up where each geography will likely have that sort of Super high book, where you do have a concentration in Memphis, we will continue to be that for us for the for certainly the near the near future. We will have the same thing in Western Europe and in the UK and then more smaller locations to show.
If you did around each region. So opening Dallas was sort of the first step for that here in the U.S. and made a lot of sense for us to open right here in our backyard at our corporate headquarters to support that quick launch with our staff.
It gives us a little bit better coverage of the U.S. and.
And some options for clients, but the next move for us will be west coast, we anticipate that happening early next year and it I would expect that.
Over the medium term, we didnt up having four or five locations in the us to cover you each of the major regions.
And then the Metro area is really interesting, we'll continue to study opportunities for micro fulfillment in metro areas right now our strategy is to enable our clients to accomplish that by using solutions like cloud pick and retail connect even more to turn their stores and their regional facilities into.
Metro fulfillment, but if we see the opportunity where our clients want to sponsor metro fulfillment centers than we will continue to evaluate whether we should provided that hosted capability or whether we should continue in the fulfillment enablement model, which is what we are doing at this point.
I actually have any color to add or does that cover that.
I think you covered everything fully the only thing I might add to that as one of the other motivators I think to shifting to multi node solution has been really independent Nick and just from a disaster recovery or business continuity perspective, I think thats helped a lot of brands really think about it differently.
As they do scenario in tabletop exercises around what does the Q4 look like if that were unfortunate spikes in different regions. So that certainly helped accelerate the roadmap for us this year.
Thanks, Jack and then Marc the only thing I would add to that Jack mentioned in his comments the agility that we have as evidenced by being able to open two facilities in Q3, each one of them from the time, we signed the lease to we were in production was less than 60 days.
And also with as Tom mentioned relatively low capex, especially when you compare us to some of our competitors I just not one competitor that announced they're opening a new DC with $40 million of investment associated with us So that is not our strategy.
Im happy that that we can move into a say 100000 square foot facility.
Less than a million dollars in Capex and 45 to 60 days that kind of lightweight agility I.
I think provides us with a nice opportunity to expand as as as needed.
Without a lot of excess capacity because current clients in sponsor that we can have them up and running fairly quickly and also where we have the ability to do that with a clear ROI.
I, just don't know how spending $40 million on a facility without some 15 year contracts associated with it that you can drive a compelling ROI provision. So I really believe our agility and the fact that we own our tech platform. Its lightweight it to deploy it gives us a strategic advantage and really help.
His power or a capacity on demand type of an approach.
Great. Thanks, guys and good luck to dollars.
Thanks Mark.
Hi, guys to ask a question. Please press Star then the number one on your telephone keypad.
Your next question comes from Ryan Macdonald from Needham.
Your line is open.
Yeah. Good morning, everyone I'd like I guess I, just want to start with as sort of piggybacking off of the last question and understand a little better.
Surely you have some super aggressive an optimistic plans on the facility expansion footprint, just wondering what you're seeing from a pipeline perspective and filling the two new facilities between sort of mix between existing.