Q1 2021 PFSweb Inc Earnings Call
Good morning, everyone and thank you for participating on today's conference call to discuss PFS with its financial results for the first quarter ended March 31st 2021.
Wanting us to day, our P. S S web CEO.
Nick Willoughby and see it <unk> company's CFO.
Net in the precedent of PFS Zach Coleman, the president of life area, Jim Butler, and the company's outside Investor Relations advisor Cody floor with Gateway Investor Relations.
Following their remarks, we will open the call for your questions.
I'd now like to turn the call over to Mr. Slaw for some introductory comments.
Thank you before we go further I'd like to make the following remarks concerning forward looking statements. All statements in this call other than historical facts are forward looking statements. The words anticipate believe estimate expect intend will guidance confidence target project and other.
Similar expressions typically are used to identify forward looking statements.
The full disclaimer relating to forward looking statements as well as certain non-GAAP metrics used in our filings and this presentation.
It can be found in the investors section on the PFS web website under Safe Harbor statement.
I'd like to remind everyone on this call will be available for replay through may 21st starting at 11 30, a M. Eastern this morning.
A webcast replay will also be available via the link provided in today's press release as well as available on the company's website at P. S. S Dot com.
Any redistribution retransmission or rebroadcast of this call on any way without the express written consent of PFS is strictly prohibited.
Now I'd like to turn the call over to the Chief Executive Officer of PFS wed Mr. Mike Willoughby Mike.
Thank you Cody and good morning, everyone.
Our momentum from 2020 has carried into the first quarter of 2021, as we recorded record sales bookings in Liberia.
Research into <unk>, and PFS bookings and continued strong fulfillment volumes and PFS.
This performance allowed us to achieve a 16% increase in year over year service fee revenue as our teams executed at high levels across both business units.
In PFS, we achieved the segments highest level of quarterly sales bookings since Q2 2019.
And the second highest level since we began tracking sales booking separately for our two business units in 2018.
Buoyed by the increasing fulfillment needs of current and new clients, we have already fully allocated the space and our newest U S facility in Dallas and Las Vegas, prompting.
Prompting us to expand those operations further.
In addition, we have continued our momentum outside of our facilities as we expanded our holiday retail connect deployment from its initial five store footprint in Q4.
Two what is planned to be approximately 50 retail connect modules and over 30 stores by the end of Q2 this year.
While we continue to experience margin pressure around facilities sanitation and supplies cost as well as increased fulfillment related labor rates for our frontline workers.
We remain committed to keeping our team healthy safe and productive.
We believe we have contemplated higher U S wage costs in our new PFS client agreements and recent current client renewals.
And we are currently targeting Q3 of this year to adjust to current client engagements for prevailing wage cost as they are expected to stabilize.
Zach will be on later in the call to share more detail about these initiatives, but I'm proud of the consistent operational agility and dedication that the PFS team has demonstrated.
During the quarter, we generated record bookings in Liberia, reflecting the benefit of both our ongoing investment in our sales and marketing teams.
And the recovery of our pipeline from the sales booking lows of the pandemic last year during Q2 and Q3.
As previously discussed we did experienced some delayed project starts and overall bookings softness around the onset of the pandemic and through the first six months of the crisis.
But with brands rapidly seeking to revamp their ecommerce presence as online order volume has increased we have seen a significant demand resurgence since that time.
I'm proud of the way our library team under Jim's leadership has responded to a very challenging 12 months and Jim will be on the call later to provide more color on liberias strong sales rebound and our strong outlook for the remainder of the year.
The progress we have driven across both segments. So far this year demonstrates the continued success of our strategy as well as our ability to optimize the resources we have.
We greatly look forward to continuing to capitalize on the momentum in our business over the course of the year.
And I'm proud of the solid foundation, we have built to date.
Now I'd like to pass the call over to Tom to provide greater detail on our financial performance during Q1.
Tom.
Thanks, Mike and good morning, everyone.
Unless otherwise noted all quarterly financial comparisons are to the first quarter of 2020.
For Q1, our consolidated service fee revenue increased 16% to $62 8 million.
Service fee revenue for PFS increased by 27% to $42 4 million as compared to the prior year.
Primarily driven by continued strength in PFS fulfillment activity.
While library of service fee revenue decreased by 0.5 million to $20 4 million.
Why various service fee revenue in the first quarter of 2021 was impacted by softness in new and existing client bookings during the June and September 2020 quarters.
Primarily as a result of the COVID-19, pandemic, causing client delays or cancellations of potential technology related projects.
Significantly improved levels of client project and engagement bookings by Iberia. During the December 2020, and March 2021 quarters are expected to generate increased service fee revenue during the remainder of 2021 as these projects are implemented.
Service fee gross margin in the first quarter of 2021 was 31, 1%.
<unk> to 36, 1%.
With the decrease primarily due to the sustained changes in our revenue mix towards a higher percentage of revenues generated from fulfillment services in PFS.
As well as increased fulfillment related labor cost in certain U S fulfillment centers and sanitation cost during the quarter.
During Q1, we estimate that the labor rate increases in our D. U S D CS impacted our costs by an approximate incremental $1 1 billion.
Additionally, gross margin for the PFS segment continued to be impacted by reduced I T related project startup and technology related activity as compared to the year ago quarter.
Our library of gross margin continued to be within the segments typical 40% to 50 per cent range.
So it was somewhat lower than the comparative quarter of 2020, as a result of incremental costs incurred on certain client projects.
As well as reduced benefit on moneys earned on indirect technology related product sales.
Adjusted EBITDA in the first quarter of 2021 was $3 1 billion.
Compared to 4.0 million in the same period of 2020.
By segment PFS, adjusted EBITDA increased by zero point $5 million.
And one area adjusted EBITDA decreased by $1 3 million compared to the prior year.
This reduction was in line with our expectations that we forecasted during the March conference call.
As we continue to face incremental wage and COVID-19 related costs as.
As well as certain incremental costs to support our growth initiatives in Liberia.
Which remain on track for the balance of the year.
Turning to the balance sheet at March 31, 2021, cash and cash equivalents totaled $10 8 million.
And total debt, excluding operating leases was $36 3 million.
This resulted in a net debt position of approximately $25 5 million.
Overall, we continue to be comfortable with our liquidity position as we progress through 2021.
And we are we believe we are well capitalized to navigate future changes in our industry coming out of the pandemic.
Our capital expenditures in the first quarter of 2021 were approximately $1 6 million.
Including capital expenditures funded through debt.
And these capital expenditures were primarily driven by the ramping operations in our new fulfillment center and other capacity expansions.
And this also falls within our previously stated expectation.
Moving on to our 2021 outlook.
We continue to expect strong e-commerce demand to drive expansion in our service fees for both business segments.
As such we are reiterating our 2021 outlook.
However, two free help frame our comparisons to 2020, we.
We estimate that last year's COVID-19 shock to our E Commerce business.
Added roughly 10 million to $12 million in incremental service fee revenue for our PFS operations to our 2020 revenue.
Which was higher than what would have been expected due to the recent retail footprint closures in calendar year 2020.
Given the continued rollout of the vaccine, which will gradually bring more volume back to brick and mortar retail.
Consumers have expanded optionality in today's retail landscape relative to where we were sitting at this time last year.
With this backdrop in mind the outlook, we are reiterating today calls for 2021 wide area of service fee revenue growth of between 10% to 15% compared to 2020.
For the PFS segment, we expect to generate five to.
Per cent to 10% service fee revenue growth compared to 2020.
We also continue to expect consolidated adjusted EBITDA margin expansion in 2021 compared to 2020.
Inclusive of our investments to support additional capacity in sales in PFS as well as both sales and delivery resources in library.
Specifically in relation to the current one.
June 2021 quarter, we do expect service fee revenue for library, you to increase in the 10% to 15% level during the quarter as compared to the prior year.
And we expect PFS to generate modest service fee revenue increases against a challenging Q2 of 2020 comparable quarter.
We do expect these targeted revenue improvements to generate a moderate increase in adjusted EBITDA as compared to our March 2021 quarter.
This concludes my prepared remarks, I'll turn the call over to Jim to walk through operational highlights in Liberia Kim.
Thanks, Tom and good morning, everyone.
Building on a very solid sales results in Q4 of last year. We're proud to have achieved an all time record sales booking quarter in Liberia during Q1 of.
$30 8 million and were pleased that the steady business development progress. We drove throughout last year is now converting steadily to backlog and recognize revenue as we work to drive double digit growth for library again in 2021.
The statistics behind our record sales performance from Q1 include a combined set of projects and engagements annual contract value or a C D.
Totaling an estimated $30 8 million compared to $24 5 million in the year ago quarter.
Which was our previous all time record.
During the quarter, we added seven new logos that have further fueled our revenue backlog for 2021.
To provide further color on our performance this quarter, we booked 52 projects worth a combined estimated at $13 5 million in project value during Q1.
This compares to 54 projects in the year ago quarter, where they combine for an estimated $13 1 million in project value.
We also enjoyed a very strong engagements booking quarter with 31 engagements from library of worth a combined estimated $17 3 million in ACP as.
This compares to 19 engagements worth a combined then estimated at $11 4 million in ACP from a year ago quarter.
We came into 2021 with significant sales momentum.
And that's a testament to the efforts of our sales and marketing team building on her.
Pipeline and fueling our recoveries from sales from the sales impact on the.
Pandemic.
The onset of the pandemic near the end of Q1 last year made visibility very difficult for our clients and client prospects, causing project delays and the drop in bookings during Q2 and Q3 last year as Mike mentioned earlier on.
Proud of the hard work in 2020 to drive over 10% growth in 2020, and I'm very encouraged by the sales rebound in Q4 of last year and of course, our record sales performance in Q1 2021.
We look to grow our library business at least 10% to 50% in 2021.
As we look to sustain double digit growth and take advantage of the increase in commerce services spending coming out of 2020, we continue to build our senior leadership team with the recently announced addition of two new commerce industry veterans in Europe.
Samantha Mansfield, our senior strategy director on EMEA.
And then Rainbow our alliances director in EMEA.
Samantha brings more than 20 years of experience in planning designing and managing from digital products and services across many iconic global brands Bank.
Ben contributes 11 years of Commerce technology, and alliances experience most recently with Astound commerce, having spearheaded during his career the formation of foundational technology partnerships with firms such as Adobe corner sales force and yacht zone.
We look forward to leveraging their leadership, because we need from libraries presence in India.
We're also adding top talent.
Here in North America, just last week, we announced the appointment of Michael Me on.
Our area Vice President of growth and engine merchant on new area, Vice President of program delivery.
As we expand our capabilities look to fuel growth in new markets and enhance our delivering with leading design and technology.
Michael on engine will bring valuable perspective to our portfolio of work.
Further help our clients differentiate and grow.
We also look to support our growth through additional tech enabled partnerships like our recently announced strategic partnership with three kids.
And which we are adding three D product visuals and augmented reality for commerce to our customer experience portfolio.
It was this service our clients can create shopper Bowl interactive three D photo realistic images and augmented reality for the products on their sites.
The use of photography.
And customization heavy verticals like apparel and accessories furniture technology and more.
<unk> and DTC buyers will be able to see and interact with the products need desire real time.
This takes the customers experience to the next level and helps our clients drive ROI within their digital businesses.
As we work to continue driving our growth targets through the rest of 2021.
Proud of our Q1 record sales booking growing pipeline of multi clouds transformational opportunities new services, New leadership and continued momentum in our business with that with that I'll turn the call back over to you.
Zac Zac.
Thanks, Jim.
Our team enters 2021 with strong operational momentum and high client satisfaction ratings following a successful and record peak season, and we've been able to continue that momentum throughout Q1.
The film and contact center volumes continued to significantly outpace year over year comparison.
Particularly in the fulfillment centers, where a PFS fulfilled over $6 7 million orders on behalf of our global clients, representing a 78 per cent increase compared to the year ago quarter.
In addition to the strong operational performance in the quarter, our sales and sales solutions teams more than recovered our sales momentum within the quarter signing seven new engagements worth a combined estimated $12 $8 million and a C V compared to four new engagements worth a combined.
Then estimated $3 7 million and a C D and the year ago quarter.
This activity reflects some large new client engagement and also some significant expanded engagements with current client as they take advantage of our increased capacity and enhanced geographic fulfillment footprint.
In addition, we booked two projects worth a combined estimated $1 million in project value during Q1.
These short term projects include the retail connect expansion project previously mentioned and an interim fulfillment contract for an iconic jewelry brand that we expect to expand into a long term contract later this year.
With clients, making increased use of our fulfillment centers, we have continued to expand capacity in several key locations.
This includes our Las Vegas facility were less than two months. After opening we are expanding our 125000 square foot facility by another 59000 square feet.
To accommodate anticipated demand later in the year.
As a reminder, our Vegas facility will soon house the fulfillment operations of a large skincare company that will also make use of our fulfillment and transportation management services from our Memphis, and Toronto area distribution centers.
With this contract set to go live in Q2, we are excited to expand the utilization of our facilities to an even greater extent for the regional fulfillment in the United States and Canada.
As Mike and Tom previously mentioned, we continue to experience in the first half of 2020, one margin pressure within certain of our legacy client engagements related to elevated wages and COVID-19 sanitation measures within our facilities.
I believe that weathering. This short term margin pressure is key to further strengthening the stickiness of our client relationships, our competitive position in the market and our ability to capture current and future growth opportunities.
As we continue to add new client engagements in line with our target margin profile and seek to rework our existing client pricing structures commensurate with stabilized wages in each market as continue as conditions began subsiding.
We expect that the profitability improvements will follow suit.
Wrapping up my comments with an exciting update on our retail connect initiatives.
We built on the successful five store holiday deployment for one of our existing international apparent clients last quarter.
We announced an extension of that contract to deploy over 50 retail connect modules and to more than 30 of the client stores in the U S. By the end of Q2.
To date, we have currently we currently have more than 17 modules lives at seven stores and these modules have collectively fulfilled more than 38000 orders since the beginning of the year.
Retail connect currently supports the client ship from store and both this activity and we anticipate this to expand to support gift wrap and personalization as well as distribution center to store transfers.
As a reminder, retail connect and other fulfillment as a service products operate at a higher margin like our water management platform and the growth of these products would be expected to help offset the margin pressures previously discussed over time.
We are already receiving positive feedback about the ease of integrating retail connect and our distributed order management technology and the clients U S. Omni channel enabled stores and we look forward to completing this rollout over the next couple of months.
I am proud that our teams have continued to stay healthy productive and poised to drive further growth through the remainder of the year.
We will continue working to support the evolving fulfillment and omni channel need of our current and prospective client partners and we are confident that our flexible operating model will keep us well supported through these efforts.
I'll now pass the call back to Mike for closing remarks, Mike.
Thank you Zack.
Progress throughout the first quarter has given us a solid financial and operational foundation for the rest of 2021 as we work to take advantage of the ecommerce tailwind coming out of the pandemic.
As the recovery progresses in North America and Europe.
Must still contend with ongoing COVID-19 complications as.
As we adapt to the evolving state of recovery, we are still working to reduce or eliminate the increased COVID-19 cost we have faced in our PFS business.
And ultimately adjust our pricing overtime to reflect a new post COVID-19 reality for workplace safety and wages.
However, I'll reiterate that the demand trends that we are currently seen as well is what's in our pipeline are expected to drive profitability benefits as we prepare for a post pandemic future.
Within this context, we are working to leverage the benefits of our operational agility and the scale. We have created in our organization to expand our bottom line and drive shareholder value, which is our foremost objective.
Regarding our efforts to create shareholder value, we continue to make good progress in our ongoing restructuring of our business to reflect the distinct Liberia, and PFS operations and go to market strategies.
Over the past three years, we have been steadily progressing toward a model, which facilitates an optimized strategy for Liberia and PFS within the distinct competitive landscape in which each business operates.
We've also been working to preserve the unique value PFS on library provides to clients, who engage with PFS, plus Liberia and an end to end relationship.
We began this work by establishing each brand in the market and refining the go to market approach for each business to be consistent with their competitors such that we would be positioned to win it gets direct competitors for PFS and library individually.
We then moved to also segment, our two businesses financially to provide enhanced internal financial visibility to our leadership teams and improve transparency to our shareholders.
This year, we are moving towards completion of this effort through an organizational restructuring, which aligns our back office functions Workforces systems and legal entities with this segmented approach.
Much of this work will be completed in the first half of the year and will position us to further optimize the operations and opportunities of our two business units.
Finally, it's important in closing that I recognize that while North America, and Europe are moving through various stages of recovery from the pandemic.
Our friends and colleagues in India are experiencing a very difficult time with the second and far more serious COVID-19 search.
With a strong presence of our global work force in India or with family and friends in India, We are especially attuned to the difficulties in that country.
We continue to do everything we can to keep our colleagues safe to a virtual workplace.
We're surrounding them with support and encouragement, but many of our teammates are experiencing suffering within their families and communities from the virus.
Please join me in keeping our colleagues and all of the citizens of India, and your thoughts and prayers.
We still are all living in a COVID-19 complicated world, but we are optimistic about our future.
Greatly look forward to further building upon the strong progress we've driven in both PFS on Liberia throughout the year ahead.
As always Tom and I are happy to engage with our investors to share our exciting business updates.
And answer questions, including making ourselves available by phone.
And at this point as we open up the call for question and answer.
Summer, we're ready for questions.
Thank you Sir as a reminder to ask a question you will need to press star one on your telephone.
To withdraw your question press the pound key.
And our first question will come from Mark Argento of Lake Lake Street.
St.
Yeah.
Good morning, guys.
A couple of questions first off on <unk>.
Maybe for Jim on library on in terms of the sales cycles are you seeing those pick up RFP activity.
If you can give us a little color on <unk>.
People.
They've got their hands around COVID-19, a little bit more think of them a little bit more longer term.
Yeah, absolutely we are definitely seeing an increase in.
And opportunities are the deals that we're seeing are.
There are larger in nature than they have been in the past and that's partially through our investments in marketing and our great sales team to get in front of these deals and the relationships we have with our our partners like sales force.
So we're seeing bigger multi cloud really transformational projects come our way.
More volume than we've ever seen before.
Q4 was a great sort of rebound.
From my perspective capital is really just starting to get opened up and I think you know there's a lot of a lot of capital to be opened up over the coming months and that obviously fueled not only Q4 rebounding from Saint.
<unk> 15 per cent or so sales bookings in Q3 up to $22 million in Q4, and then $30 8 million in Q1, so really good momentum and obviously that drives.
Yes that was very helpful for us if you remember back Q3, and Q4 of 19, we had record sales bookings back to back followed by our record sales booking quarter in Q1 of 2020 all of that backlog really helped fuel our growth.
In 2020, which.
Many of our competitors were not able to claim so we're really excited about the momentum that started in Q4 of 2020 Q1 momentum that we're seeing and how that drives additional backlog into our business heading into U on the balance of the year of 2021, the visibility we have into our businesses better than I've ever seen within the business.
Here and maybe within in my career.
Great. That's helpful. And then just a quick one for Zach I know you had mentioned.
Mike I think you had mentioned in his prepared remarks.
Figured out how to try to mitigate some of the labor cost issues with.
Renewals could you just talk through how you're working on with your accounts from your clients dealing with the situation when it comes to labor.
Certainly there's a quite a few things that we're doing first and foremost as we look at new opportunities.
On my contemplating what the existing labor costs would be in each of the submarkets by which we're operating so having a very successful Q1 of 2021 with new sales bookings will help with.
With the margin over time.
And then when we as we look to the legacy contract certainly as they naturally come up for renewal or as we proactively renew those engagements, we're taking that opportunity to renegotiate pricing.
To ensure that it's in line with the the market wages that we're seeing and then lastly, and kind of the the third bucket of activity of our clients activity where.
It is not up for renewal of legacy where we're currently leveraging a combination of contractual language around what the cost of living adjustments would be inside of that contract.
But Moreover, as Mike alluded to in the prepared remarks, we have an action plan associated with any client engagement, where we're not in line with expectations that the needs of those clients as we see the wages stabilize over the next two quarters.
Great. Thank you.
Your next question comes from Ryan Macdonald of Needham.
Please proceed.
Hi, Thanks for taking my question I guess first question is from Mike and Zach on the outlook here for second quarter and it sounded like I think you mentioned that the PFS ops, our SSD revenue should be up.
Our year over year, despite a difficult comp, but just love to know sort of how youre thinking about that in terms of mix versus just general market you know heightened.
Tightened G M D levels that are resulting in more fulfillment versus you know the expanded capacity that you have with the new facilities you've added over the past year. Thanks.
Yeah, I'll, let Jack they'll provide some detailed commentary, but it definitely is a combination of.
Sustained volumes from current clients.
Not at the levels that we saw in Q2 of last year with the store closures driving so much of the volume.
The addition of new client engagements on top of that as well as current clients taking advantage of the expanded footprint that we have are all sort of driving.
The growth in the quarter that helps us to deal with that difficult comp.
Do you have some details you want to provide.
I think you hit the nail right on the head Mike. So if you look back to Q2 of 2020, certainly there was a large.
Impact related to COVID-19 that produce significant organic growth for us in the quarter.
Which presents a challenging comparison when you think about it given day.
Normalization of the of activity around E Commerce, and the current year that being said, we still see significant organic.
Organic growth from existing clients.
With the sales bookings that we captured in the back half of 2020 in Q3 and Q4 those programs are beginning to go live in Q2 as well.
On the opening of the facility in Las Vegas, and the clients coming on line there that combined with the organic growth is driving the topline volume that you see it's still certainly being led in the PFS business unit by fulfillment.
We're also seeing an incremental <unk> <unk>.
Revenues come from services like contact center, and new additions like retail going up as well.
Gotcha, and yeah, that's where I wanted to focus on my follow up as well as you know great to see the success of our continued increase in success with retail connect and expanding our footprint with that customer I'm wondering as you're as you're having these.
New conversations with new engagements and new perspective customers is retail connect being brought into the conversation more as more of a I guess, a flexible way to expand your those engagements.
Absolutely. It is so if you look at retail connect and our other products I think they really point directly at.
A distributed fulfillment.
But print so you look at marquee locations, we've increased our fulfillment nodes, but frankly speaking getting closer to the customer.
Delivering more effectively and leveraging inventory piles inside the stores is paramount to each of the brands that we deal with and it's a top of mind conversation. So as we look at strategy meetings with existing clients as well as prospects on our pipeline. That's an active conversation that we're having and I think over the last 12 months, particularly with the store closures.
That we saw last year and retail has accelerated the adoption and interest of that product and it's certainly reflective in our top of funnel activities on our sales pipeline.
Great. That's all from me I'll hop back in the share. Thanks.
Thanks Ryan.
Your next question comes from George Sutton of Craig Hallum.
Thank you I'm curious how you are selling differently with the PFS operations given the multiple locations that you have in other words being able to serve customers from a number of different geographic locations has that changed your go to market strategy.
I don't think that it's inherently changed our go to market strategy, we're still targeting a similar class of clients, but the backdrop of it is there's been a fundamental shift.
And the buying audience to be closer to the end consumer and really look at ways to rapidly and quickly deploy e-commerce footprints.
Really our strategy of expanding into Las Vegas, as well as Dallas points directly asked that I mentioned in kind of the question before about how our prospects and existing clients are also looking at retail clinics as an avenue to continue to get closer to the customer and decentralized fulfillment.
That's part of the strategy conversation, we're having with clients, but it doesn't change our approach in terms of who we're going after and the initial conversation that we're having which is how do we how do we deliver a premier ecommerce fulfillment experience for our brands.
So coming out of last year's holiday season, which was you know what.
Unprecedented in terms of demand and frankly stress on the system I'm curious from a churn perspective.
We might know or maybe we already know relative to what kind of churn issues might have occurred as a result, I would say that in the context of understanding I think performed very well. The other question around churn would be as we go into Q3, and we should try to re price. Some of these contracts do you expect.
Legitimate pushback on that thanks.
Great Great question George.
So I think we do know on the PFS side of our business at this point around client stickiness for the year.
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Where the.
Client portfolio is very strong and I think the loyalty factor coming out of the holiday, where we really performed at a high level for our clients.
Has engendered a lot of loyalty and appreciation and has helped us as we looked at some of the renewals that we had in the first half of the year and as typical with this business that about this time of day, you're you pretty much know if you're going to do.
Client to a to a renewal or a competitive situation and of course, we always maintain a sort of visibility to our clients financial strength and we feel like were in real good shape there. So.
Yeah, I think we feel good about the back half of the year as far as Youre not having unexpected churn you can always have surprises, but we don't see anything right now on the horizon that would give us.
Cost per concern.
On the pushback question is interesting.
From my perspective, we think we've got one shot this year to have that conversation with the client.
And we want to make sure that we're not going back to them quarter after quarter with.
That same conversation so what we're looking for is the stabilization that we referred to earlier, which we believe is starting to happen now so we're targeting into Q2 first part of Q3.
And those conversations with clients that are in these legacy contracts.
We'll be around you know what do we do to reset around the reality that we're seeing in each sub market.
Or if we don't feel like we have that stabilization and then we'll have a conversation about holiday surcharges like we did last year, but at this point, we believe that we should be able to have that more long term discussion. So that's currently targeted for Q3 I don't expect it to be easy conversations I think our business management teams will clearly have some challenge.
As they.
Have those conversations outside of a renewal period.
But there's it's not unprecedented forced to do this and you have been putting back to last Q3, where we had holiday surcharge conversations, but it won't be a surprise to our clients that we have a new reality as far as wages are concerned it's evident to everybody. It's evident to our clients when they operate their own hourly workforces. So it's a match.
Gross situation.
Sure.
It shouldn't be a surprise.
One last thing if I could.
Could you just walk through what the economics of retail connect looked like obviously when it was just a few few.
Situations, we didnt really worry much about that but with 50 now it starts to become more meaningful.
Yes.
As we look at the back half of the year I think there might be an opportunity for us to provide some some actual data around the economics from this one client deployment.
But it is a variable model, where you've got you know on a minimum charge per module. That's deployed in the store, which is intended to sort of cover base operational costs.
But it's.
It is expected that pretty much on each store.
Variable charge would exceed the minimum so what you have is a SaaS looking model, where we're charging us by the order that gets processed through the system. So the more volume that flows through the system. The more revenues that we generate.
And.
Frankly the.
Hi on the margin is on on those volumes so.
The best thing I can say is it really compares to a SaaS type model.
And so our revenues are dependent on our clients' flowing volume through in this particular case, our client has ambitions to do a large percentage of orders from their their store footprint.
Because of the reasons that I mentioned earlier are minimizing transportation costs improving customer service.
The use of those store inventories so with the.
The impressive volumes done in the first couple of months of deployment.
We're optimistic that we'll see some.
Material enough revenues than it's worth.
Giving you some color on the back half of the year.
Great. Thanks, guys.
Thanks George.
Again to ask a question. Please press star one on your telephone again star one.
The next question comes from cash.
Anderson of B Riley Securities.
Hey, good morning.
Thank God.
Good morning.
I just have a couple of follow ups on things that were already asked I guess on PFS.
How much is up for renewal on any one year and then how much of that business are you.
Targeting can be kind of rates that are on adjusted <unk>.
So in a given year, we typically have a handful of contracts that are going up for renewal. The contract terms are typically three to five years in duration that being said over the first quarter of this year as well as in the back half of last year, we actually renewed all of our.
Larger client engagement, so theyre all in from three to five year.
Revenue cycles, so I don't anticipate a significant amount of re signing activity of renewal work from the back half of the year based on the efforts that we've had over the last six to eight months.
And that being said from a a adjustment perspective on the rest of the clients out there.
We probably have around a third of our portfolio that I consider to be a legacy client contracts that are up for renewal not all of those certainly require any pricing adjustments based on when their assigned on when they brought into the portfolio.
Got it and then can you provide a little color on the new debt net that you're bumping up yet.
Joining today is just a function on.
Do you expect that kind of pulled back to Christopher.
I'm, sorry, I misunderstood your question could you repeat it.
Sure.
It looks like you're budgeting on tip off like is that a function of pent up demand over the course of 2020 or and do you think that this is on new elevated level that you would expect to see going forward.
I think it's actually both so if you look at the trends that we saw inside of a calendar year 2020, typically you see a significant bump in terms of the natural cycle for PFS in sales around Q2 of 2020.
We certainly saw on the back half of 2020, a resurgence in top of funnel activity.
Representative of what I would consider to be a pent up demand. In addition to that though across the entire entity of PFS web I believe that a lot of customers and prospects are reevaluating, what direct to consumer channel looks like for them in placing big investments into that and certainly looking to grow that channel as such that's creating more.
Or opportunity in larger contracts.
Across both segments of the business.
Got it thank you.
Yeah.
Your next question comes from Matt sort of Nathan's isn't it.
Hey, guys good morning.
And so on for for Mike and Tom but.
I missed some of your prepared comments at the very end of your of your speech regarding some organizational changes can you help me just further understand.
The moves that you're making there to help investors are improved transparency and just what's the kind of the overarching goal there.
Sure.
It's actually part of the.
We've had over the past couple of years to really align our two businesses both with regard to the go to market.
The reality is that with Liberia, It's a professional services business.
Congress consultancy that competes with you know.
Other professional services businesses.
And we need to have library going to market in a way that positions us to win we're going head to head with these competitors and the same thing is true for PFS.
In their particular competitive market. So the first step that we took you know going back two and a half three years ago was to align the go to market strategy and the branding and the way that we're selling in the competitive landscape.
And then we followed up with the financial segmentation, so that investors could see you in more detail how each of the two business units was performing.
This effort to complete that process is really more about back office legal entities in just the operation.
That these two businesses are largely operating.
You independently with regard to internal mechanisms in the way that we segment, our work force and systems et cetera.
Reason for that is that we want to optimize each business and as we've seen over the past year.
You can have opportunities coming into the business that are unique to each business model with obviously PFS showing growth.
The rapid increase in fulfillment volume.
Library at the same time seeing a shift in which platforms are preferred in these transformational type projects that we're working on we need to be able to respond to those opportunities.
Basically as we possibly can.
The other reality is that each of these businesses has pretty different financial dynamics, and we need to be able to per.
Provide to our investors as clear as possible.
Are you on how they're performing.
So that you can understand sort of the total value as you look at the two businesses combined and what that how that should be represented in our value as a public company and the last thing I'll say is that we always wanted to preserve the options that we have for generating shareholder value and we think that this process, we've been going through positions us to have the right options on the table.
With regard to shareholder value creation.
Okay are we talking a lot of those costs are captured in an unallocated corporate and that's going to be allocated to the divisions or.
Or is it already captured within the divisional cash it's just not a.
You know more app can be more accurately are divvied up.
Yep Yep.
Go ahead Tom.
We've been working over the last couple of years trying to allocate more and more of the cost of the business that are directly tied towards the individual segments to those particular business units.
And so we will continue as we go through this reorganization process to continue to refine that our allocation methodology and look to drive.
An increased amount of those corporate shared.
Shared services cost to the individual business units.
Okay got it and then did you just did you mention a timeframe where you hope to have the.
This wrapped up.
Yes, the organizational aspects of the restructuring is primarily wrapping up in the first half of this year the additional financial segmentation.
I think we're probably targeting looking at what we do for the next fiscal year as far as making changes we wouldnt make a change in the middle of the fiscal year, so that that additional financial visibility would probably come in.
Next year.
Yeah.
Okay got it alright, thank you.
Thanks, Matt.
At this time.
This concludes our question and answer session I will now turn the call back over to Mr. Willoughby for closing remarks.
Thanks, I appreciate that.
On mute I'd.
I'd like to thank everyone that attended the call. This morning, and we look forward to speaking with our investors and analysts when we report our second quarter results are in.
August time, as I said, Tom and I continue to be available by phone and.
I always get involved Zach and Jim as well.
Thank you have a great day.
Okay.
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