Q3 2022 PFSweb Inc Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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Yes.
Good afternoon, everyone and thank you for participating in today's conference call to discuss the P. F. F Q3 2022 results.
Joining us today are PFS web CEO , Mike Willoughby the C O O and president of PFS, Zach Thomann, the company's CFO , Tom Madden and the company's outside Investor Relations advisor Cody Slog with Gateway group.
Following their remarks, we'll open the call for your questions.
I would now like to turn the call over to Mr. Small 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 conference call other than historical facts are forward looking statements. The words anticipate believe estimate expect intend will guidance confidence target project and other similar expressions typically are used to identify forward looking statements.
The full disclaimer relating to forward looking statements as well as certain non-GAAP metrics used in our filings and this presentation can be found in the company's 10-K and investors section of the PFS website under Safe Harbor statement.
I'd like to remind everyone that this call will be available for replay through November nine 2023.
Cast replay will also be available via the link provided in today's press release as.
As well as available on the company's website at PFS Commerce Dot com.
Any redistribution retransmission or rebroadcast of this call in 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 Lab.
Mr. Mike Willoughby Mike.
Thank you Cody and good afternoon, everyone.
Earlier. This afternoon, we issued a press release, highlighting our strong third quarter results.
Planned special dividend distribution and update on our strategic alternatives review process.
And the status of our restructuring processes. Following our successful divestiture of our library of business last year.
Please refer to that press release for details in these areas and I will provide some color commentary before handling handing the call over to Tom for a review of our financial results in Q3 and year to date.
First I am very encouraged by our third quarter operational and financial performance as we continue to experience significant momentum in the business.
Our year to date performance has been buoyed by a record PFS sales booking year with Q4 remaining to add to that record.
And an intentional focus on premier and luxury brands within our core verticals of health and beauty fashion, and apparel jewelry and collectibles and consumer packaged goods.
These verticals have generally demonstrated resilience despite the macroeconomic headwinds impacting major big box and ecommerce retailers.
I am proud of the year to date service fee equivalent revenue growth rate of over 8% and.
And the continued sequential improvement in our gross margin as we benefit from increased productivity and the benefits of client contract pricing adjustments that went into effect this year.
Based on sustained strong consumer and fulfillment service demand across our core verticals. We are maintaining our previously stated 2022 financial outlook, which targets 2022, PFS annual service fee equivalent revenue growth in the range of 5% to 10%.
We remain optimistic that we can achieve <unk> revenue growth at the upper end of this targeted range.
As we continue working to mitigate wage inflation pressures on our service fee gross margin. We are also continuing to target estimated pro forma PFS standalone adjusted EBITDA percentage of service fee equivalent revenue.
To be within the range of 8% to 10%.
As we look to the future our objective is to support our growth as a standalone platform by continuing to optimize our cost structure to align more closely with our current operations size and focus Tom.
Tom <unk> will have more details on the accomplishments of our corporate restructuring plan.
Which have already generated cost savings so far this year and are expected to generate significant further cost savings next year.
From where we sit today, we believe we are well positioned for the upcoming holiday peak season and.
And we built a solid foundation to realize additional client growth.
And maximize shareholder value headed into next year.
As we look to 2023, we expect our consolidated adjusted EBITDA to be substantially more aligned with the current size and focus of our business.
And we expect to provide guidance for service fee revenue and consolidated total company adjusted EBITDA with a high level transparency into our remaining public company costs for 2023.
We believe returning to a focus on total company adjusted EBITDA as a primary financial metrics.
In addition to service fee revenue.
He is appropriate for our restructured and optimize business in 2023.
We also expect that the total company adjusted EBITDA net of the remaining public company costs, we will still provide an appropriate comparison to the estimated pro forma PFS standalone adjusted EBITDA margin metric, we've been providing over the past two years.
Before commenting further on the significant news contained in our press release I'll turn the call over to Tom to discuss our third quarter financials in further detail.
Tom.
Thank you Mike.
As Youll see in our non-GAAP PFS presentation, our Q3 2020 to PFS service fee equivalent revenue, our SMB revenue increased 4% to $43 7 million compared to 42.
There are $1 million during the year ago period.
The increase was primarily driven by growth across both new and existing clients, partially offset by client terminations and by foreign currency declines in Europe .
Excluding the foreign currency impacts.
SMB.
Revenue applicable to the PFS business would have increased by approximately 6% relative to the year ago period.
Q3 is typically a seasonally softer period for our business as we do not experience high order volumes related to major holidays during this quarter.
In addition, several of our newer client engagements that were expected to launch during Q3 were shifted to early Q4.
Primarily due to non PFS related case by case, Onboarding and transition delays.
That said, we completed the final implementations of these in October and expect to begin seeing these corresponding revenue contributions starting in Q4.
We also recorded minimal product revenue during the third quarter following the termination of our distributor agreement with Rico earlier this year.
As a reminder, this termination subsequently discontinued our product revenue model with them. After we've significantly reduced the size of this program over the past few years.
Going forward, we expect to eliminate product revenue from our P&L and ultimately discontinue the term service fee equivalent revenue.
While this transition may lead to some short term confusion in our comparative financial analysis.
We believe the change will middle minimally impact our comparative consolidated adjusted EBITDA results and it will benefit and clarify our financial presentations and the longer term.
Our 2022 Q3 gross profit margin was approximately 23% of PFS service fee revenue.
<unk> gross profit margin of approximately 24% in the year ago period.
Consistent with prior quarters the year over year decrease continues to reflect the impacts of industry wide wage inflation pressures.
And reduced higher margin nonfulfillment related revenue.
Such as technology related services and project activity.
However, our Q3 margin improved sequentially relative to the second quarter of this year due to increased productivity and implementation of several client contract pricing adjustments.
These adjustments have included both permanent price increases and either incremental or reinstitute reinstituted surcharges on certain client programs.
And they largely took effect later in Q2 and the beginning of Q3.
As such we saw incremental benefit during Q3.
And expect to see a higher level of revenue and gross margin impact going forward.
With more of our mix comprising our core fulfillment and contact center services.
We believe our gross margins will continue to align more closely with the typical range for these services, which is generally between 20% to 25%.
We continue to believe our price adjustments cost controls and ongoing productivity enhancements will help us mitigate broader inflationary pressures and ultimately operate with greater profitability.
As we monitor economic conditions and progress into peak season.
We are prepared if necessary to make additional adjustments to our pricing structure.
Similar to the successful pricing measures measures, we implemented during the 2020 and 2021 holiday peak periods.
We remain committed to driving additional savings implementing.
Implementing further productivity improvements.
SG&A and corporate overhead cost reductions.
And aligning our cost structure more closely with our smaller business model post the library of transaction completed in August 2021.
Since August 2021, several key milestones have already been completed.
And the company is targeting substantial completion of its corporate restructuring plan by year end 2022.
These have primarily included personnel reductions throughout the organization.
But also include reductions in certain ongoing professional services costs.
And other costs.
Most recently, we've made progress on these through the disposition of our corporate headquarters building.
The disposition agreement, we signed in September entailed a cash buyout of $2 5 million.
Which was paid in October 2022.
Resulting in a net incremental restructuring cost impact of approximately $1 6 million in the third quarter.
Including the net impact of the buyout as well as the elimination of the related right of use assets and operating lease liability for this facility.
However, the divestiture is expected to generate approximately $2 million per year in annual savings.
With most of our corporate office functions already performed remotely or Colgate co located with our production operation centers as part of our work anywhere initiative.
We expect our corporate office functions to also operate on a hybrid basis going forward.
We are currently planning to.
Locate additional corporate activity into our second Dallas area fulfillment center, which exactly will describe in greater detail shortly.
Additionally, we are undergoing a restructuring of the executive leadership team.
And the CEO compensation program to more closely reflect the estimated normalized leadership cost of our continuing operations.
On a.
Adjusted EBITDA Standalone basis.
Taken together.
In August 2021, the various initiatives are estimated to have resulted in a total annual cost savings of approximately $9 million.
Our actual consolidated adjusted EBITDA from continuing operations in the third quarter of 2022 improved significantly to <unk> 2 million compared to an adjusted EBITDA loss of $1 3 million in the year ago period.
This primarily reflects the benefits of our client growth and ongoing cost reductions and restructuring initiatives.
Partially offset by the gross margin impacts I discussed earlier.
Our capital expenditures for PFS in Q3 were approximately $3 million.
Giving us year to date total capital expenditures of approximately $7 5 million.
We continue to expect our total 2022 capital expenditures to range between 8 million to $10 million.
As we further support new contracts.
Our liquidity position as of September 32022 includes over $140 million of cash and only approximately zero point $1 million of debt.
This sequential decrease in our cash balance relative to Q2 was primarily driven by the funding of capital expenditures.
Working capital changes and certain exchange rate fluctuations.
As Mike mentioned.
And we are targeting are.
Calendar year, 2022 service fee equivalent revenue growth to be at the upper end of the targeted 5% to 10% growth range.
Driven by our strong sustained fulfillment demand.
Right.
We are also reaffirming our previously stated 2022 financial targets for estimated PFS pro forma Standalone adjusted EBITDA percentage of service fee revenue.
Which is targeted to range between 8% to 10%.
As a reminder, this metric measures our estimated adjusted EBITDA profitability for the PFS business.
As if we were operating in a nonpublic environment without certain corporate overhead costs.
I'll now turn the call back over to Mike for an update on our strategic alternatives review process Mike.
Thanks, Tom.
We continue to work with Raymond James to review, a full range of strategic opportunities for the business.
Though the completion of our strategic evaluation has been slowed by a combination of macroeconomic headwinds.
Excess cash on our balance sheet and the need to complete our internal restructuring.
As indicated earlier in the call we have made significant strides in streamlining our organization through right sizing our SG&A.
And we are now in an optimal position to address the cash balance on our balance sheet from the library of transaction in 2021.
We believe we can best position successful completion of our strategic review process and respond to any continued macroeconomic headwinds in 2023.
Returning excess cash to our shareholders.
And maintaining a reasonable level of operating cash and establishing a traditional finance facility.
Consistent with this strategy our board approved a $4 50 per share special dividend.
Which result in the return of approximately $111 million of capital.
The library of transaction to shareholders.
This special dividend will be paid on December 15th 2022 to shareholders of record on December one 2022.
And our view after a thorough evaluation of our all of our viable options. The special dividend is the optimal pathway available to us to return capital to our shareholders in a timely fashion.
We also believe these initiatives along with our expectation of improving financial results.
Will allow us to continue our strategic alternatives process in 2023 on a much stronger footing.
We remain focused on maximizing any potential return for our shareholders and currently expect to complete this review process in 2023.
With a view towards completing our review process next year I will be devoting most of my time and energy to seeing the strategic alternatives process through to completion.
In addition to my role as CEO I will take on the role of executive director of the board to help facilitate completion of our review process and to manage our planned transition to my CEO responsibilities to that.
<unk> is expected to take on the CEO role mid to late next year. Following the expected conclusion of our strategic process.
<unk> leadership has been a driving force behind our three consecutive years of record order fulfillment performance.
And he has played a critical role in enhancing the strength and stability of our business.
I strongly believe the best time for an intentional and orderly leadership transition is during a time of strength and stability.
The time that we are currently enjoying.
That I expect will continue under <unk> leadership.
Zack and I have been preparing for this transition for several years.
And I am confident in <unk> ability to lead PFS through its next phase of evolution and growth in the years to come.
Congratulations.
I am proud of you and I'll, let you have accomplished so far and your impressive career with PFS and I look forward to staying close and routing you on to even greater success as you take over leadership next year of this company that I Love and have served for almost all of my career.
Jack I think it's a great time to be at PFS.
Indeed, it is Mike. Thank you for your continued support I really appreciate it.
During the third quarter and throughout 2022, we have continued to build on our existing momentum evidenced by the fact that we have already achieved a record sales bookings here with the fourth quarter still remaining.
Within the third quarter, specifically, we reported nine new bookings worth an estimated $19 million in annual contract value or ACB, making this our strongest quarter for new bookings since we began reporting bookings separately for our business units in 2018.
Year to date through the third quarter, we reported a total of 26 bookings with an estimated $37 million and combined ACB, which eclipsed our previous full year bookings record before the fourth quarter of 2022, even began.
This momentum is a testament to the quality and agility of our fulfillment platform and the success of the clients that we serve as.
As we've discussed throughout 2022, we've had robust new client growth with many of these new engagements coming with higher ACB.
Importantly, <unk> also had a strong level of renewals with existing clients.
With both of these trends and play PFS now serves over 100 brands across our total client base compared to 68 brands in 2018, demonstrating the strength of our sales capabilities.
Ability to expand and the enduring value and flexibility of our partnerships.
The new client engagements, we've announced this year has spanned both growing and established brands for brands, such as Blenders eyewear and Toby thought that company, we provided scalable high quality e-commerce fulfillment operations to support to support rapid growth in their e-commerce channels as well.
As offer additional flexibility amid evolving supply chain conditions.
Our direct to consumer capabilities strong performance during peak season, and fulfillment presence in both the U S and the UK I've also helped facilitate new client growth, including our recently announced engagement with Wimbledon.
In August we announced that we were selected by the all England Lawn tennis club to operate its global order fulfillment operations with the online Wimbledon shop.
As a cherished and iconic sports event Wimbledon carries a rich brand history and has generated growing global demand for official merchandise, especially during the Grand Slam tournament or.
Our ability to swiftly scale our operations during these high demand periods, while maintaining the brand's high quality standards has made us a valued fulfillment partner for them and we look forward to further supporting this partnership.
Across our core verticals of health and beauty fashion, and apparel jewelry, and collectibles and consumer packaged goods premiering luxury brands have generally remained resilient to the headwinds that challenged many big box and e-commerce retailers.
This growth is not only buoyed by maintaining spending habits among legacy luxury consumers, but also by evolving spending habits within a changing macroeconomic backdrop.
With high inflation broadly pressuring consumers discretionary income some shoppers have begun operating in line with Leonard Lauder Lipsticks Index shop.
Shoppers have focused their luxury spending on smaller indulgences, such as cosmetics and times, where prices have risen on household essentials.
Others have become more selective about luxury pieces, they by seeking to make sustainable investments and items from high quality long lasting brand, including for many of the clients we serve.
With a recent Gartner consumer community survey, revealing that over half of them.
Over half of consumers will remain loyal to their favorite brands, despite inflation and that brand quality significantly fuels the customer loyalty offering a premium brand experience has never been more crucial.
These broader consumer behaviors are expected to carry into the peak holiday season, which we anticipate will remain strong this year despite inflation impacts.
Just last week, the National retail Federation announced that online and non store holiday sales are predicted to increase between 10% and 12% compared to last year, representing an expected total of between $262 8 billion.
And 267 6 billion.
In a recent study in addition, a study conducted by global research firms Harris X and Samba TV found that 74% of U S. Adults expected spend as much or more on holiday gift. This year as they did last year, indicating that consumers still plan to allocate a consistent level.
Of their discretionary spending toward holiday purchases.
That said <unk>.
Turns about inflation in product availability have translated into a longer holiday season than in years past for sellers and consumers alike.
Many shoppers have already taken advantage of early discounts in October and are expected to spend more on black Friday and cyber Monday in particular to make the most of their holiday holiday discretionary dollars.
Our branded scalable multi node approach to fulfillment allows us to help our clients address these trends and swiftly adapt to the customers' needs with.
With consumer demand remaining strong within our core verticals, we have the ability to ensure that our new and existing clients can keep pace with customers buying and consumption patterns as well as quickly ramped new engagements ahead of the approaching peak season.
We are focused on the future as we continue to convert client prospects in our sales pipeline two launches in early 2023, and we expect continued demand for our brand centric multi notebooks element service offerings, we remain.
<unk> committed to our three pronged approach to growth comprising of the following initiatives number one expanding our multi node fulfillment strategy to better serve our clients customers to converting our strong sales pipeline for continued growth and three driving our fulfillment as a service product offering to allow them.
More dynamic and flexible fulfillment network.
The first provide some additional detail on our fulfillment network. We have already launched our first two clients out of our newest facility fulfillment center in North Las Vegas, Nevada, which officially opened during the third quarter. This facility as our second in the Las Vegas area and that grants us additional capacity to build out.
Our west coast, multi node fulfillment network and enhance the speed with which we can deliver to west coast customers. As we continue ramping several newer client engagements. We expect this facility to reach over 75% utilization by the end of the year.
To further expand our fulfillment network, we recently signed the lease for our second Dallas area fulfillment Center we.
We expect to open this facility in the second quarter of 2023 and it provides additional seating for our corporate staff. Following the disposition of our Allen, Texas location. This new facility in Irving, Texas expands our fulfillment capability in the southwest and provides an additional hybrid work environment for our DFW based.
Team members as we continue to uphold the work anywhere culture, we've established for much of our team through and beyond the pandemic to facilitate optimal productivity and flexibility.
We've built a strong track record with quickly expanding and ramping our fulfillment networks to support new and existing client growth.
In addition, we expect to also rollout select pop up distribution centers. This peak season and leverage our fulfillment as a service solutions to provide additional flexible capacity consistent with what we've done in past holiday season.
Following the success of our recent pop up deployment for L'oreal USA skin suitable brand.
We look forward to executing an additional opportunities throughout the holidays. This experience and dynamic solutions Grant us a solid foundation to continue supporting robust growth within our current client base and our current pipeline over the coming years.
Looking ahead, we believe we are entering a new chapter of growth for our business. We expect contributions from our new client engagements to increase through Q4 and into next year as you ramp this activity and we continue to work to convert client prospects and our substantial sales pipeline two launches in early 2020.
Three.
We've proven that we can quickly open and scale, our new fulfillment centers to address additional client needs.
I am proud of the progress that we've made throughout 2022, and we remain committed to further optimizing our operational framework and maximizing the value that we create.
I will now turn the call back over to Mike for his closing remarks. Thanks.
Zach.
I believe it's an exciting time for the business and I'm proud of our progress so far in 2022 or.
Our momentum going forward and the tangible shareholder value that we've created with the special dividend that we declared today.
With that we'll now open the call for questions and answers.
Shannon.
Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced.
Please standby, while we compile the Q&A roster.
Our first question comes from James <unk> from Craig Hallum. James Your line is open.
Hey, guys James on for George Sutton.
Congrats on the solid results in the special dividend.
So first can you sort of touch on whats driving.
The strike and momentum that we're seeing in bookings in the pipeline are there any verticals or customer types doing better than others.
Sure. This is Zach I think what we're continuing to see and we tried to illustrate on the call is that within our core verticals.
Specifically for branded manufacturers that offer a premier our luxury experience. They are continuing to see growth in their E. Commerce channel, we've seen that really from the pandemic forward and it's really driving their investment into their E. Commerce channel. We're also seeing a trend that we've seen over the last couple of quarters that we've highlighted which is where.
Seeing much more engagement for both <unk> as well as direct to consumer engagements together, that's helping drive a higher ATV per booking and thats really helping us drive the momentum and really our platform is really catered towards that end and providing a full service for those brands.
Okay.
Gotcha.
And then it sounds like you are ramping some new customers.
Strong pipeline.
Can you help us get a sense of sort of what to expect in 2023 in terms of revenue growth margins are sort of changes in potential growth or strategic initiative.
Yes, so I think James the trends that we're seeing in the business currently around our ability to.
Performed within the targeted gross margin range mitigate any of the cost pressures that we do experiences.
We've done over the past couple of quarters and expect to continue to do as we move into Q4 those trends should continue into next year and while we're not providing guidance for 'twenty three yet I think that the current expectation that we have four.
5% to 10% growth and we're looking at kind of <unk>.
EBITDA margins that we've provided I don't see any reason that those would be lower so.
Not to set a bar necessarily but I think thats, probably a bar that we're comfortable with at this point and they will give you a specific 'twenty three guidance as we kind of move into the first part of the year as well along with how we did during the holiday like we typically do.
Great.
And then at a high level can you just sort of give us an update on how that strategic sale process is going or any changes since your last update.
Just in terms of like what Youre seeing or hearing in the market. I mean, they are back couple of private transactions happen and I just think it would be helpful to sort of hear about how your thought process may have changed your changes in what you're hearing.
Sure. So I think consistent with what we said in the last call. We have experienced these headwinds or points of friction.
I don't think are unique to us we've noticed that in the M&A markets transactions are down pretty significantly year over year. The Wall Street Journal reported a 43% decrease in M&A transactions in the U S.
This year compared to last.
So we certainly see.
Macro.
Condition, that's not overly friendly to getting deals done.
I think we also experienced some specific points of friction that we pointed out in our prepared comments in the press release.
Including the fact that it's really a market where I think buyers are looking either for a bargain, which may be a turnaround story or something thats got some significant complication to it or they're looking for a pristine.
Situation and we're neither a bargain nor were we proceed as we came to market. So the corporate restructuring activities that we have been doing all year.
Really in my opinion needs to be complete in order for us to provide a good clean story and so as we are completing those towards the end of this year will be in a better position to have that more.
More pristine story to tell.
Also believe that the excess cash that we had on our balance sheet is appointed friction.
That is the point of friction not only for current investors as they try to understand the intrinsic value of our company and you've got <unk>.
Significant amount of excess cash there. It also ends up being a complication for prospective buyers, especially financial sponsors that they have to figure out how theyre going to buy that excess cash.
Or require us to do the special dividend as part of the transaction all of those things are just complicated conversations that you don't want to have when youre talking to prospects.
So these things that we're doing including the special dividend and completing our restructuring are.
Hey aimed at <unk>.
Eliminating the points of friction we have control over and the question is as we go into next year, what's the market going to be like none of us have the answer to that question, but.
But I think even in a market that continues to be difficult having.
Having a really good story to tell Thats free of the.
Patients I mentioned positions.
Positions us much better to have those.
Conversations and Thats really is my job as I indicated in my prepared comments. The board has asked me to concentrate on that in the first part of the year with an expectation that we can bring that to a close.
Way or another in 2023.
Great. Thanks for the color that's it for me.
Thank you.
At this time that concludes our question and answer session I would now like to turn the call back over to Mr. Willoughby for closing remarks.
Thank you Shannon I'd really like to thank everyone, who attended the call. This afternoon, Tom and I and snack.
We remain very open to hearing from all of our investors. If you have follow up questions. Please work with gateway.
To schedule those and we look forward to having those conversations hope you're rooting for US. This holiday season, we're looking for a great holiday season, and hope to bring you. Some really good stats early in January .
And wish all of you a happy holidays.
Thank you for being with us today.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.
The conference will begin.
<unk> team to raise your hand during Q&A you can dial one one.
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Thank you.
Sure.
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Yes.
Sure.