Q4 2022 PFSweb Inc Earnings Call
Speaker 1: For you, you.
Speaker 1: Music
Speaker 2: Good afternoon, everyone, and thank you for participating in today's conference call to discuss PSS Web Q4 and full year 2022 results.
Speaker 2: Joining us today are PFS Web CEO Mike Morleby, the COO and President of PFS Zach Tolman, the company's CFO Tom Maddon, and the company's outside investor relations advisor Jackie Epschel with Gateway Group.
Speaker 2: Following their remarks, we'll open the call for your questions.
Speaker 2: I would now like to turn the call over to Ms. Keshner for some introductory comments. Please go ahead.
Speaker 3: Thank you, Lisa. Before we go further, I would like to make the following remarks concerning forward-looking statements.
Speaker 3: All statements in this conference call, other than historical facts, are forward-looking statements. The words anticipate, believe, estimate, expect, intend, will, guidance, competence, target, project, and other similar expressions typically are used to identify forward-looking statements.
Speaker 3: The full disclaimer relating to forward-looking statements, as well as certain non-GAAP metrics used in our filings in this presentation, can be found in the company's 10-K and Investors section of the PFS Web website under Safe Harbor Statement.
Speaker 3: 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 pfscommerce.com.
Speaker 3: Any redistribution, retransmission, or rebroadcast of this call in any way without the express written consent of PFS-WEB is strictly prohibited. Now, I would like to turn the call over to the Chief Executive Officer of PFS-WEB, Mr. Mike Willoughby. Mike?
Speaker 4: Thank you, Jackie, and good afternoon, everyone.
Speaker 4: Our fourth quarter and full year 2022 results highlight the strong operational and financial momentum we continue to sustain in our business.
Speaker 4: We had a record year for PFS sales bookings.
Speaker 4: and achieved our third straight year of record order fulfillment.
Speaker 4: Our annual service fee equivalent revenue or SFE growth of 7% came within our targeted guidance range.
Speaker 4: And, adjusting for $3.5 million in annual FX SFE revenue impacts
Speaker 4: SFE revenue would have increased by approximately 9%.
Speaker 4: which is at the upper end of our previously communicated targeted guidance range.
Speaker 4: Our estimated pro forma PFS standalone adjusted EBITDA percentage of SFE revenue of 8% also came within our targeted guidance range.
Speaker 4: As a reminder, 2022 was a year of transition for our company.
Speaker 4: On the corporate level, we completed the accounting for our Live Area transaction and successfully concluded transition services following the sale of Live Area to Markle.
Speaker 4: At the same time, we focused on executing our corporate restructuring plan to quickly reduce overhead costs in the business and improve our positioning for the strong opportunities and tailwinds in our core fulfillment business.
Speaker 4: To cap off this work, we paid a $4.50 per share special dividend on December 15, 2018.
Speaker 4: returning approximately $110 million of capital from the library of divestiture to our shareholders.
Speaker 4: These measures demonstrated our commitment to streamlining our organization and maximizing shareholder value.
Speaker 4: While we've entered 2023 with our restructuring work largely complete,
Speaker 4: We continue to be focused on optimizing the business.
Speaker 4: with the objective to drive down our public company cost as a percentage of SFE revenue.
Speaker 4: which we are projecting to be approximately 2%
Speaker 4: of SFE revenue for 2023.
Speaker 4: Our restructuring initiative and our focus on optimizing our business around our order fulfillment platform positions us to drive greater cost savings and operational efficiency going forward. Kris tend to offer a Electronic economists inw They yearn its
Speaker 4: Right-sizing our corporate SG&A and maintaining a more traditional level of operating liquidity also enables us to provide a clearer, more transparent picture of our financial performance and remain open to additional strategic pathways towards creating shareholder value.
Speaker 4: Importantly, we can place an even greater emphasis on supporting our growth as a standalone platform.
Speaker 4: and capturing the significant order fulfillment demand opportunities ahead of us. To this end, our core verticals of health and beauty, fashion and apparel, and the entire world are in the hands of the world's most experienced and most experienced.
Speaker 4: jewelry and collectibles, and consumer packaged goods.
Speaker 4: have remained generally resilient through Q4 of 2022 and into these early months of 2023.
Speaker 4: Further, Bain and Company's November 2022 luxury study projected that the global luxury goods industry is expected to continue expanding this year through 2030, off the heels of a strong sales year for personal luxury goods in 2022.
Speaker 4: In addition, the international luxury consumer base is expected to grow from 400 million consumers in 2022 to 500 million in 2030.
Speaker 4: This growth is buoyed by increased participation from Millennial and Gen Z consumers.
Speaker 4: well as particular sales strength among US consumers.
Speaker 4: From a product perspective, sales across all luxury categories are estimated to have recovered to their pre-pandemic 2019 levels or better.
Speaker 4: with Bain noting that these categories have stayed largely immune to rising interest rates, a slowing economy, and high inflation.
Speaker 4: With our focus on premier brands and products,
Speaker 4: We believe we remain well positioned to continue benefiting from these tailwinds.
Speaker 4: Coming off our record annual bookings and order fulfillment performances in 2022.
Speaker 4: We are seeing strong early demand indication for our order fulfillment platform.
Speaker 4: Zach will offer some additional perspective on our performance and our outlook later in the call, but I am proud of the momentum we have maintained among new and existing clients.
Speaker 4: Looking towards 2023, we have enjoyed a very strong start to the year.
Speaker 4: Based on the first two months of the quarter, we currently expect order fulfillment levels to be up at least 5-10% compared to Q1 of 2022.
Speaker 4: without the significant unmitigated wage pressure we experienced in the year-ago quarter.
Speaker 4: Based on this strong start, a robust sales pipeline, and continued strong consumer and fulfillment service demand across our core verticals.
Speaker 4: We are targeting 2023 PFS annual service fee revenue growth in the range of at least 5 to 10 percent.
Speaker 4: And we are optimistic that we can achieve service fee revenue growth at the upper end of this targeted range.
Speaker 4: From a profitability perspective, we continue to expect our 2023 Total Company Consolidated Adjusted EVDA
Speaker 4: to be substantially more aligned with the current size and focus of our business as compared to 2022.
Speaker 4: As a percentage of service fee revenue, we thereby are targeting our annual total company Consolidated Adjusted EBITDA
Speaker 4: to be within the range of 6% to 8% inclusive of our remaining public company costs.
Speaker 4: excluding the public company cost of approximately 2% of service fee revenue.
Speaker 4: We are targeting total company adjusted EVA DA as a percentage of service fee revenue to range between 8 to 10 percent.
Speaker 4: total company adjusted EVA DA as a percentage of service fee revenue to range between 8 to 10 percent in 2023.
Speaker 4: We believe returning to a focus on total company adjusted EBITDA as a primary financial metric.
Speaker 4: We believe returning to a focus on total company adjusted EBITDA as a primary financial metric, in addition to service fee revenue.
Speaker 4: is appropriate for our restructured and optimized business in 2023.
Speaker 4: We also believe our estimates of total company adjusted EBITDA net of the remaining public company cost.
Speaker 4: We'll still provide an appropriate comparison to the estimated pro forma PFS stand-alone adjusted EBITDA margin metric we have been providing over the past two years.
Speaker 4: Overall, we believe we are entering 2023 from a position of strength.
Speaker 4: We expect to leverage our more streamlined operational and financial foundation to support ongoing client growth.
Speaker 4: And we believe this strengthening position will also allow us to continue to evaluate strategic alternatives with Raymond James
Speaker 4: with a strong priority on maximizing value for our shareholders amidst a admittedly challenging M&A market.
Speaker 4: We continue to target completing this review process in 2023. Before we provide additional color on our progress and our strategic objectives in the year ahead, I'm going to turn the call over to Tom to discuss our fourth quarter.
Speaker 4: full year financial results in greater detail.
Speaker 4: detail. Tom?
Speaker 5: Thank you, Mike.
Speaker 4: As you will see in our non-GAAP PFS presentation, our Q4 2022 service fee equivalent revenue, or SFB revenue, increased 4% to $65.6 million compared to $63.1 million during the year-ago period.
Speaker 4: The increase was primarily driven by growth across both new and existing clients.
Speaker 4: This was partially negatively impacted by certain client launches that were delayed during the quarter due to later inventory deliveries.
Speaker 4: as well as by foreign currency declines in Europe and Canada. Excluding foreign currency impacts, SFE revenue would have increased by approximately 6% relative to the year ago period.
Speaker 4: Our full year 2022 service fee equivalent revenue or SFE revenue increased 7% to $200.3 million compared to $187.7 million during 2021.
Speaker 4: For 2022, our full year foreign currency impacts amounted to approximately $3.5 million.
Speaker 4: Excluding these impacts, SFE revenue would have increased by approximately 9% to $204 million.
Speaker 4: which would have taken us to the upper end of our annual guidance range for service fee equivalent revenue growth.
Speaker 4: We expect foreign currency impacts to remain a headwind for our revenue performance, at least over the next quarter, and our closely monitoring developments on this front.
Speaker 4: As we disclosed in January , our strong Q4 and peak period fulfillment performance also occurred against the backdrop of normalizing client promotional cycles. With more brands choosing a more traditional promotional cycle, we are now in a more traditional
Speaker 4: in which promotional activities slowed following Cyber Week and through the end of Q4, our fulfillment volumes subsequently decreased to levels that were more comparable to 2018 and 2019 than to the elevated periods of 2020 or 2021.
Speaker 4: While our annual SFE revenue growth still came within our targeted range, the return of these pre-pandemic dynamics negatively impacted our year-over-year comparisons.
Speaker 4: Finally, Q4 2022 also marked our first quarter with no product revenue.
Speaker 4: following the discontinuation of our product revenue model with Ricoh after the distributor agreement with them was terminated earlier in the year.
Speaker 4: We expect product revenue to be ultimately eliminated from our P&L going forward.
Speaker 4: which along with moving past the discontinued operations presence of the divested library business will allow us to then discontinue the term service fee equivalent revenue going forward.
Speaker 4: This transition is in line with our commitment to clarifying and streamlining our financial performance over the longer term.
Speaker 4: And we believe it will minimally impact our comparative, consolidated, adjusted EBITDA results.
Speaker 4: Our 2022 Q4 gross profit margin was approximately 23% of PFS service fee revenue.
Speaker 4: compared to a gross profit margin of approximately 24% in the year-ago period.
Speaker 4: This year-over-year decrease primarily reflects the impact of reduced higher margin non-fulfillment related service fee revenue, such as technology related services and project activity.
Speaker 4: We continue to benefit from increased productivity and our implementation of several client contract pricing adjustments in 2022.
Speaker 4: which began taking effect late in Q2 and early Q3.
Speaker 4: In fact, our gross margins continued to increase on a sequential basis throughout calendar year 2022 as we gained further impact from these initiatives.
Speaker 4: Yet, as more of our service mix comprises our core fulfillment activities,
Speaker 4: We believe our growth margins will continue to closely align with the typical range of these services.
Speaker 4: which is generally between 20% and 25%.
Speaker 4: As Mike mentioned, we achieved substantial completion of our corporate restructuring plan by the end of 2022.
Speaker 4: which marks a significant milestone. We've had this plan underway since August 2021.
Speaker 4: And the major initiatives we had completed by year end are estimated to have resulted in total ongoing annual cost savings of approximately $9 million.
Speaker 4: Our remaining restructuring work this year is primarily related to incremental streamlining of certain corporate support activities.
Speaker 4: including areas where we utilized a higher level of contractor resources in 2022 to help us complete our challenging financial and tax reporting processes related to the live area domesticure.
Speaker 4: We will continue working to align our cost structure more closely with our smaller business model post the live area transaction.
Speaker 4: As such, we aim to drive additional savings and implement further productivity improvements, SG&A, and corporate overhead cost reductions where possible in 2023.
Speaker 4: Our consolidated adjusted EBITDA from continuing operations in the fourth quarter of 2022 increased 10% to $5.6 million.
Speaker 4: compared to an adjusted EBITDA of $5.0 million in the year-ago period.
Speaker 4: Our full year 2022 actual consolidated adjusted EBITDA from continued operations increased 67% to 5.0 million, compared to an adjusted EBITDA of 3.0 million in the year-ago period. The increases reflect the continued benefits in staying up to date on the latest and latestarticles.
Speaker 4: million dollars.
giving us annual total capital expenditures of approximately $10.4 million for 2022.
As we further support new contracts and the growth of our fulfillment network, we are
We currently expect our total 2023 capital expenditures to range between eight million dollars to ten million dollars
Our liquidity position as of December 31, 2022 includes over $30 million of cash and less than $100,000 a day.
The sequential decrease in our cash balance relative to Q3 primarily reflects the issuance of our $4.50 per share dividend, special dividend, on December 15, 2022. This special dividend returned approximately $110 million.
related to various equity awards.
We believe the special dividend represented the optimal pathway to return capital to our shareholders before year end 2022.
With the issuance of the dividend significantly complete, we believe that we can best see our strategic review process to completion this year.
support the continued growth of our business by maintaining a reasonable level of operating cash and establishing a traditional finance facility. With the recent news regarding the US banking environment, it is important to note that a significant portion of our excess cash over normal daily operating cash requirements in the US.
is maintained in US Treasury backed overnight securities.
We believe all other cash balances are maintained with strong banking partners. As Mike mentioned, we are targeting our calendar year 2023, service fee equivalent revenue growth to be within the range of at least 5% to 10% growth range.
This is driven by the ongoing strength of demand for our fulfillment services.
and sustained growth tailwinds across our core client verticals, which we believe will allow us to achieve growth in the upper end of this range.
We also expect annual total company consolidated adjusted EBITDA to be within the range of 6% to 8% as a percentage of service fee revenue inclusive of our remaining public company costs.
total company consolidated adjusted EVA DA to be within the range of 6% to 8% as a percentage of service fee revenue inclusive of our remaining public company costs.
Excluding our estimated public company related costs, we expect total company adjusted EBITDA as a percentage of service fee revenue to range between 8% to 10% of service fee revenue in 2023.
This latter metric is comparable to the estimated PFS pro forma stand-alone adjusted EBITDA percentage of service fee revenue we have previously disclosed.
which measures our estimated adjusted EBITDA profitability for the PFS business as if it were operating in a nonpublic environment without certain current corporate overhead costs. A few more comments regarding our calendar year 2023 guidance. We expect to continue to be in the mid-range of our service fee growth...
As we indicated, we expect our total annual service fee revenue growth to be between 5% to 10% in calendar year 2023.
From a quarterly standpoint, due to the ongoing impact of foreign currency rates headwinds in the first part of the year, the timing of our new client implementations, as well as changes in our call center activity that Zach will discuss later, we expect to be somewhat below this range in the March quarter.
then followed with stronger growth as the year progresses.
I will now turn the call over to Zach to review our 2022 operational progress and our 2023 objectives.
Zach to review our 2022 operational progress and our 2023 objectives. Zach. Zach to review our 2022 operational progress and our 2023 objectives.
Thanks, Tom. PFS executed at high levels for our clients throughout 2022, setting several new company records during the fourth quarter and the full year. As we previously disclosed, we achieved a record year in new sales bookings, recording 31 bookings with an estimated $44.9 million in annual contract value.
We had already eclipsed our previous full year bookings record before Q4, and we recorded five additional new bookings worth an estimated $8 million in ACB before the end of the year.
With the diligent work of our sales team and the strong demand for our brand-centric, multi-node fulfillment services, our record sales performance has given us solid visibility for our targeted service fee revenue activity as we enter 2023.
We also set our third consecutive year of record fulfillment volume, demonstrating the quality and agility of our platform. Our order fulfillment volume in Q4 of 2022 surpassed our previous quarterly fulfillment record in Q4 of 2020.
and our Thanksgiving week and Cyber Week order fulfillment volumes also surpassed our previous comparable 2020 records. During Cyber Week alone, we eclipsed our previous single-day records of orders fulfilled four separate times, and we supported multiple clients to achieve record revenue days. We are immensely proud and extend gratitude to our entire community.
served within our core verticals. Deploying a multi-node fulfillment operation for several large clients helps us maximize our available labor pool in each geography.
and achieve record daily volumes during peak season. With consumer demand remaining strong for premier and luxury brands in our primary client verticals, as Mike described earlier, we were able to facilitate strong growth in new client additions and existing client renewals from the start of 2022.
The combination of our new client wins with the existing client performance drove our record order fulfillment volumes and solidified our multi-node strategy as a sustainable growth model.
As we enter 2023, PFS now serves over 100 brands across our total client base, compared to 68 brands in 2018.
And we now have 18 of those brands shipping from multiple TFS fulfillment centers compared to just 15 in 2021.
As we progress further into 2023, we will continue working to convert client prospects and our sales pipeline to client launches. And we're seeing promising early indications for both pipeline conversions and new sales opportunities so far this year.
We also remain focused on continuing to execute on our three-pronged growth strategy, which comprises of the following initiatives. Number one, expanding our multi-node fulfillment strategy to better serve our clients' customers. Two, converting our strong sales pipeline for continued growth. And third, driving our fulfillment as a service product offering to allow for more dynamic atmospheric environmental improvements by onlyaggrelating our individuals with Vet ladies and Merrillstein, and three, best-washing senior management executives, and, one,
and flexible fulfillment networks. To address our expanding fulfillment network,
We quickly grew utilization of our second fulfillment center in the Las Vegas area, which is in North Las Vegas, Nevada, as we leveraged this additional capacity to further support our West Coast clients during peak season.
We reached over 75% utilization of this facility by the end of 2022.
Launching this facility and ramping it to peak level volumes in the first few months of operation continues to underscore our team's agility, which uniquely positions PFS as a scalable, brand-centric order fulfillment platform.
Further, we remain on track to grow our fulfillment footprint even further this year. Our previously announced second Dallas Area Fulfillment Center is scheduled to open in early Q3. The gate- flats are open with sites like northwest Dallas, Dallas, and San Jose Master Chris and his children.
We expect this facility to expand our Southwest's fulfillment capacity, offer flexible customer service agent models, and afford a hybrid work environment for our DFW-based team members following the disposition of our Allen, Texas, headquarters location last year.
As we announced in our 2022 Order of Fulfillment press release in January , we are also exploring new fulfillment space in the United Kingdom.
This new space will provide additional support to our European clients in conjunction with our existing fulfillment center in Southampton, UK.
We continue to see opportunities for growth and market share expansion in this geography and expect to provide further updates in the coming quarters. In terms of our pipeline and current client demand, we have continued to capitalize on growth tailwinds across our four verticals.
In particular, we are seeing double-digit growth in health and beauty, as well as jewelry and collectibles, even relative to the growth we generated during 2020.
And many of our new sales opportunities are within the health and beauty category.
Within our client base, premium and luxury brands have benefited from strong consumer demand tailwinds, and we have continued to see these trends persist into the year. Many branded manufacturers that offer premier or luxury experiences have been investing in their ecommerce channel and benefit from our partnership on this front as they support their ecommerce sales growth.
As Mike mentioned earlier, younger generations of consumers are becoming significant participants in the luxury market.
with many of these customers placing a strong premium on having tailored and convenient shopping experiences.
These expectations extend to how their orders are fulfilled, as well as their unboxing experience, and our focus on efficient, highly branded fulfillment services allows our clients to meet this need for their customers.
Within our existing engagements and pipeline, we've continued to address strong demand for shared business-to-business and direct consumer multi-node fulfillment services.
Our pipeline opportunities and recent sales efforts are largely skewed toward fulfillment and transportation services, with static demand from our contact center services.
We expect to also experience commoditization of our contacts and our services with a shift towards lower cost offshore markets and offsets in revenue due to an increasing adoption of AI-based technologies.
and we expect some churn within our existing client programs related to customer contact center services.
The mix shift towards a robust fulfillment and transportation led sales pipeline first appeared at the height of the pandemic and is continuing to fuel double digit growth within that service line.
This pattern, coupled with the emergence of multi-node business-to-business and direct-to-consumer opportunities, has helped drive a higher ACB per booking. Off the heels of our record sales bookings year in 2022 and strong Q4 bookings, this pattern is a
We have immediately begun implementing new clients at the top of the year as we continue to quickly convert our new sales bookings into new client launches. Across our business, we have worked to further strengthen our ability to deliver a flexible fulfillment platform for both new and existing clients.
as we recognize the constantly evolving consumer consumption patterns.
Our fulfillment as a service products continue to demonstrate innovation in our sales cycle and give us the ability to quickly launch and scale new client engagements.
These capabilities, in conjunction with our focus on growing our fulfillment capacity in a brand-forward manner, allow us to be an agile partner to premium established and emerging brands alike.
As Mike indicated in his opening comments, we are off to a great start in 2023. With two months of impressive increases in fulfillment levels compared to January and February of 2022, and without the drag on margins from the unmitigated wage pressures in the year-ago quarter, we believe this strong start to 2023 will be a great start to 2021.
and the progress we have made over the past year to streamline our organization positions us to grow as quickly as opportunity will allow in 2023.
I look forward to wrapping up the March quarter and sharing more details about the quarter and business updates in about two months.
I look forward to wrapping up the March quarter and sharing more details about the quarter and business updates in about two months. With that, we'll now open the call up for Q&A.
Thank you, sir. If you would like to ask a question, please press star 11 on your telephone.
One moment while we get ready for the Q&A session. The first question that we have is coming from George Sutton of Craig Helen. Please proceed with your question.
Hey, good afternoon guys is Adam on for George. Thanks for taking my questions. Really encouraging to hear that 2023 is off to a strong start. I'd love if you could provide a little more detail on exactly what you're seeing. And in particular, are there any pockets of weakness? Are you seeing or is it pretty much green across the board? So, I'll comment a little bit and then pass over to Zach for some details, but.
The reference we made was from the first two months of the year. We're halfway through the third. What we've seen pretty consistently is strong fulfillment volumes throughout our network.
And part of that is the multi-node network kicking into gear. We've got some new client launches that launched in the last half of last year, and even some that are launching in the first quarter of this year that are contributing as well.
Zach, I'll let you comment on the consistency there. I don't know that we necessarily have any yellow flags or any concerns, but I'll let you comment. No, I think the year is also a phenomenal start as we tried to indicate. As we look at it, if you were asked anything to look out for, we tried to give a lot of Orb's Lemmo today.
commentary around where we're seeing some decline in revenue as a total percentage in the contact center. And what I mean by that is primarily the amount of contacts that are coming into customer contact centers are declining as a function of total orders. And that's really driven by a lot of AI based technologies coming into the fold. In addition to that, we still see FX as a bit of a headwind for us.
contact center services or in
center services or in technology related services.
That's going to unveil the higher growth rate in the fulfillment and transportation segment that we're currently seeing. And we look as we look towards 23, you should expect quarter after quarter to start to see those growth rates in the core business show up in our overall growth rates.
class has full explanation on the lower rate of growth with some of the non-core services.
I just have a full explanation on the lower rate of growth with some of the non-core services.
How would you quantify the headwind, the non-fulfillment revenue provides to the overall growth?
So, you're going to see this year there's a drag on the percentage growth.
overall growth. And while we're very comfortable with the 5 to 10 percent range, with the performance towards the top end of that, if you were to factor in the
the stability or decline as a percentage of overall revenue of these other segments, you'd see a double-digit growth rate from the core business.
Great, thanks guys. Thank you. If you would like to ask a question, please press star 1 1 on your telephone.
Thank you. If you would like to ask a question, please press star 1 1 on your telephone. One moment please.
The goodbye.
This concludes the Q&A session. I would like to turn the call back over to Ms. Stilwell. Please go ahead, sir.
Thank you, Lisa. I'd like to thank everyone that attended the call this afternoon. As always, Tom, Zach, and I are available to take calls or Zoom meetings. And we also look forward to seeing you in just about 60 days with our updates from this quarter. As we said, we're starting off with a strong quarter, so we're looking forward to that time with you.
Thank you. Ladies and gentlemen, this does conclude today's conference teleconference. You may disconnect your lines at this time. Thank you for your participation and you all have a good evening.
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