Q2 2023 PFSweb Inc Earnings Call
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Good afternoon, everyone and thank you for participating in today's conference call to discuss the P. O S Web Q2, 2023 results.
Joining us today are P. F S 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 adviser, Jackie Kashner with Gateway group.
Following their remarks, we'll open the call for your questions.
Do you have a question.
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To withdraw your question. Please press star one one again.
Please be advised that today's conference is being recorded.
I would now like to turn the call over to MS. Casner for some introductory comments.
Thank you.
Okay.
Thank you before we go further I would like to make the following remarks concerning forward looking statements. All statements in this conference call other than historical facts are forward looking statements.
As anticipate believe estimate expect intend will guidance confidence target project and other similar expressions typically are used to identify forward looking statements.
Disclaimer relating to forward looking statements as long as certain non-GAAP metrics used in our filings and the presentation can be found in the company's 10-K in investors section of the PFS website under Safe Harbor statement.
A webcast replay will also be available via the link provided in today's press release as long as available on the company's website at PFS Commerce Dotcom.
Any redistribution retransmission or rebroadcast of this call in any way without the expressed written consent of PFS is strictly prohibited.
Now I would like to turn the call over to the Chief Executive Officer of PFS, what Mr. Mike Willoughby Mike.
And <unk> <unk>.
Reflect the resiliency of the premier in luxury brands, we serve across our core verticals and are strong reputation as a service provider to these vehicles.
Which drives a high level of references from current and former clients and supports are strong sales pipeline.
Through the second quarter. These sales pipeline in order fulfillment demand patterns continue to be driven primarily by health and beauty with additional pick up from apparel and jewelry during the quarter.
With our current visibility we believe our pipeline remains strong as we enter the second half of the year while.
While the bulk of the 2023 selling season is complete we expect another strong Q3, as we work to close several incremental deals and time to launch before a holiday peak season.
Zac will provide additional details on a record Q2 performance sales opportunities.
And our work to expand our fulfillment platform offerings later in the call.
Our growth was aided by our sustained progress with driving operational and cost efficiencies.
Having completed the bulk of our restructuring work by the outset of this year, we have continued to right size or corporate cost and work to maintain a more traditional level of operating liquidity.
To this and we close a 25 million dollar asset based secured lending agreement with Texas Capital Bank lending affiliate of Texas Capitol Bancshares, Inc. Near the end of the second quarter.
The agreement provides us with a $25 million revolving loan facility for a period of five years.
While we continue to believe that we are sufficiently capitalized to support our current business activities.
Thereby do not anticipate making any near term drawdowns he.
Having the facility in place enhances our flexibility to support our strong growth outlook over the longer term.
The work, we have done to streamline and strengthen our foundation as a stand alone order fulfillment provider reflects our confidence in the long term trajectory for our business.
And our accompany commitment to optimizing the value we create for our shareholders.
Our credit facility and the share buyback program, we announced in Q1 represent two of our most recent initiatives to enhance our flexibility towards continued strategic execution and value creation.
Tom will share further updates on both of these items to just a few minutes.
More broadly we continue to target completing our current strategic alternatives review process with our financial advisor Raymond James before the end of this year.
Our strongest priority is maximizing value for our shareholders as we evaluate potential strategic pathways for our surging business.
Based on our current visibility and given the continued strength of the consumer fulfillment service and sales pipeline demand trends across our core verticals.
We are raising our 2023 guidance for PFS annual service fee revenue growth.
We now expect full year service fee revenue growth within the range of 8% to 13% compared to our prior range of 5% to 10%.
In conjunction we are reiterating our previously disclosed expectations for our 2023 total company consolidated adjusted EBITDA to be within the range of 6% to 8% of annual service fee revenue <unk>.
Inclusive of our remaining public company costs.
Excluding the public company cost, which constitute approximately 2% of service you revenue. We are targeting total company adjusted EBITDA as a percentage of service fee revenue.
Two range between 8% to 10% in 2023.
We continue to believe our focus on total company adjusted EBITDA as a primary financial metric. In addition to service fee revenue is appropriate for a restructured and optimize business. This year.
We also believe our estimates of total company adjusted EBITDA, excluding the remaining estimated public company costs.
More aligned with the current size and focus of our business and that they represent an appropriate comparison to the estimated pro forma PFS standalone adjusted EBITDA margin as a percentage of service fee.
Equivalent revenue metric, we've been providing over the past two years.
We look forward to providing providing additional color on our progress and upcoming trajectory.
Turn the call now over to Tom just to discuss our second quarter financials in greater detail Tom.
Thanks Mark.
As a reminder, for our Q2 2023 financial presentation. We are now reporting service fee revenue as our principles topline metric.
Rather than our historical metric of non-GAAP service fee equivalent revenue.
After discontinuing our product revenue model with Rico upon termination of their distribute <unk> agreement last year, we are tracking towards eventually eliminating product revenue from our P&L altogether.
With this development along with eliminating the discontinued operations presentation of the divested I've area business, we have progressed towards eliminating the term service fee equivalent revenue.
And further clarifying and streamlining our financial presentation with minimal expected impact on our consolidated adjusted EBITDA comparisons.
With that background in mind.
R Q2, 2023 service fee revenue increased 7% to $48 $2 million compared to $45.3 million during the year ago period.
The increase was primarily driven by continued fulfillment revenue growth across both new and existing clients.
Partially offset by the impact of <unk> certain quiet transitions.
R 2020, 322 service fee gross profit margin increased by 350 basis points to 24.7% of PFS service fee revenue.
Compared to a service fee gross profit margin of approximately 21.2% in the year ago period.
Our year over year and sequential improvement in this metric continued to reflect the benefits of increased productivity.
And the implementation of several pricey modifications last year.
Which began taking effect late in the year ago quarter, and the latter half of 2022.
The growth during Q2 of this year was partially offset by reduced higher margin Nonfulfillment related service fee revenue.
Such as technology related services and project activity.
As more of our service fee mix continues to be increasingly comprised of corp. Fulfillment activities. We believe our near term gross margins or remain within the typical range for the services, which is generally between 20% and 25%.
With our booking opportunities remaining skewed towards both fulfillment and transportation management opportunities Zach will shortly provide some additional details on the expected growth and adjusted EBITDA margin characteristics of our transportation management offerings.
During the second quarter, we also drove a 13% year over year decrease in our SG&A as a result of our cost reduction and operational improvement activities.
Along with the reduced professional fees and other related expenses related to the library transaction.
Our work to streamline our expenses has focused on the lining our cost structure more closely with our smaller fulfillment oriented business coming out of the library divestiture.
All remaining restructuring related costs constitute incremental expenses related to the strategic alternative process and professional tax fees related to tax work and dividends along with certain severance costs.
In the second half of the year, we will continue working to drive additional savings and implement further productivity improvements and.
And reductions in SG&A and corporate overhead costs wherever possible.
Arkansas related adjusted EBITDA in the second quarter of 2023 increased significantly to $2 to $3.3 million compared to an adjusted EBITDA loss of 0.4 million in the year ago period.
The improvement reflects our ongoing coin growth sustained growth gross margin improvements and the benefits of our cost optimization initiatives.
R capital expenditures on a year to date basis as of June 30th 2023, where approximately $3.1 billion.
And we are maintaining our expectations for our full year 2023 capital expenditures to range between $8 million to $10 million.
Ah remaining capex for the second half of the year is expected to be primarily growth capex related which will be closely tied to the activation and ramp of our most recently opened facilities.
As such we expect to generate more of a sequential uptick in Q3.
As we get our newest facilities primed for the upcoming holiday peak season in Q4.
Our liquidity position as of June 30th 2023 includes approximately $39.0 million of cash.
In less than $60000 in debt.
Similar to our liquidity position at the end of the first quarter.
The increase in our cash balance relative the end of 2022, primarily reflects the impact of converting some of the seasonally hi, working capital requirements. We had at the end of last year to cash.
As well as the benefits of tax refund received from previous excess estimated tax payments related to the library a transaction.
Net of dividend equivalent payments capital expenditures and share repurchases during the first six months of 2023.
We have continued to support the growth of the business through working to maintain a reasonable level of operating cash.
Most recently as Mike mentioned earlier, we closed a 25 million dollar <unk> based secured lending agreement with Texas Capital Bank near the end of the second quarter.
Which provides incremental liquidity and flexibility to support our long term growth initiatives.
The agreement entails a $25 million revolving loan facility for a period of five years.
An availability under the credit facility may not exceed a borrowing base of 85% of eligible accounts receivable minus certain reserves and hold backs.
As we shared earlier in the call. We do not currently expect any near term drawdowns and will provide updates on any future activity as necessary.
We are appreciative of Texas capital Bank for their partnership and providing us access to this additional capital.
In addition, pursuant to the share repurchase program, we put in place near the end of Q1, we.
We have purchased accumulative amount of 339563 shares for approximately $1.4 million as of June 30th 2023.
We continued to view the program as an extension of our confidence and our longterm growth trajectory.
As Mike indicated earlier, we are increasing our service fee revenue growth guidance to a range of 8% to 13% for calendar year 2023.
And we continue to target a range of 6% to 8%.
<unk> adjusted EBITDA as a percentage of service fee revenue.
On a year to date basis through June our service fee revenue growth has been approximately 6%.
So to achieve this higher service fee revenue guidance, we will need to achieve over 10% service fee revenue growth in the second half of the year as.
As we offset the incremental client onboarding and operating costs related to our new facilities prior to them becoming fully utilized.
Based on our current visibility to our clients projected volumes incur.
Including the expected favorable impact of client signed this year.
We are comfortable with this updated service fee revenue target and maintaining our adjusted EBITDA margin targets for the full year.
We believe we remain well capitalized for our near term opportunities in the balance of 2023.
And our financial performance during the corner demonstrates our continued progress on the strategic initiatives we have in place.
I will now turn the call over to Zac to review, our queue to operational update and forthcoming opportunities in greater detail.
Thanks, Tom.
Our platform continued to perform strongly for existing clients as we addressed ongoing ramping demand in our sales pipeline as.
As Mike mentioned are two two sales performance set a new all time record for quarterly bookings.
Five bookings worth an estimated $35.1 million in annual contract value or ACB recorded during the quarter.
With the resiliency of consumer demand trends across our poor verticals and the premium brands within them. We continued to support hi renewal rates among current clients and engage new brands at a rapidly investing in their e-commerce infrastructure.
Another driver of a record bookings performance in the second quarter was are emerging transportation management services.
Which were coupled with our new order fulfillment contracts or.
Transportation management offering focuses on helping clients mitigate carrier and delivery delivery related complications such as network capacity constraints carrier dependency environmental initiatives and labor market shortages.
And our position as an e-commerce order fulfillment provider, we have close oversight of the transportation and delivery of orders, leaving our facilities and we have thereby build a deep and growing network of regional and national carrier relationships.
These advantages presented an opportunity to provide valuable solutions to our clients and increase the stickiness of our engagements through our transportation management service.
Using our parcel optimization engine, which is directly integrated into our warehouse management system, we facilitate flexible carrier selection based on our clients needs and preferences.
It allows our clients to eliminate the administrative hassle of managing multiple carrier contracts as well as more effectively balanced service level and cost for each order that leaves our fulfillment centers.
On a contract level growing this service could include converting some existing clients from pass through transportation revenue contracts. The service fee contracts and these scenarios will take on the management of the contract and provide the administrative services to track Bill and reconcile carrier <unk>.
<unk> for a given client <unk>.
Transportation management could also be included as part of a of a new order fulfillment service booking or as a service fee revenue add on to an existing client contract.
As a recent example, the order fulfillment solution, we launched for Kocis cosmetics earlier this year span that only direct to consumer and business to business order fulfillment, but also transportation management services for inbound and outbound parcel management.
All the opportunities to convert both new and existing clients in the service.
With the opportunities to confront both new and existing clients and the service. We expect transportation management to continue contributing to top line growth moving forward as such we have started reporting manage transportation bookings revenue as an additional sales bookings metric.
Expect to maintain this level of disclosure going forward.
For the second quarter manage transportation bookings accounted for approximately $26 million of the $35.1 million in a C V. We booked we.
We expect the mix of services and margin profile between our transportation and fulfillment related services to fluctuate from quarter to quarter and I will provide some additional details on our expectations here in a few minutes.
On our overall sales over our overall sales pipeline remains robust as Mike mentioned, we are currently tracking towards another strong Q3, as we work to close and launched several new deals ahead of the season.
As we entered the second half of the year, we remain focused on executing our three pronged growth strategy, which comprises at 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.
And three driving our fulfillment as a service product offering to allow for more dynamic and flexible fulfillment networks.
Starting with our multi no fulfillment expansion initiatives, we continued to progress the international and domestic expansion of our fulfillment footprint to best support our growing client base.
Our newest fulfillment center openings have maintained our historical cadence of launching an average two new facilities per year further solidifying are proven expansion strategy.
And the U S are previously announced second Dallas area fulfillment Center is now operational.
This new 186000 square foot building gives us greater flexibility for a regional fulfillment in the southwestern United States as well as for our local team members and customer service agent models.
<unk> on track for our first client launch out of this facility in Q3, illustrating the speed and agility with which we can ramp our newest footprint additions.
In a similar vein. We also recently opened our second 70000 square foot Southampton area fulfillment Center and fair in England, enhancing our European footprint we.
We also successfully launched our first client out of this facility the luxury beauty and wellness brand beauty pie.
Our services for beauty pie comprise a highly branded order fulfillment solution.
Swift and comprehensive wrap for this first client launch is a testament to the success of our multi node expansion strategy and the strength of our.
Of our playbook for brands and our core verticals.
As we mentioned last quarter redesign the new farrowing facilities, specifically for health and beauty brands and we look forward to sharing more about our beauty pie engagement and similar opportunities to serve brands and our largest product vertical.
Moving into our sales pipeline conversions, we maintain success with converting recent client wins into several new order fulfillment launches. Several went live in the past four weeks and we anticipate this to continue into late Q3 <unk>.
To summarize some of our recent launches a total of four brands recently went live from our Las Vegas fulfillment footprint three.
Three of these brands stem from a new luxury multibrand portfolio beauty deal and one brand as an existing UK base beauty brand client that will also seem launched from our new Dallas area distribution Center.
We also launched a jewelry brand from our existing Dallas area facility, and and apparel brand from one of our Memphis facilities, indicating a strong ramp patterns for clients regional fulfillment operations in the western and southwestern United States Oh.
Overall, our pipeline <unk>, our pipeline opportunities and sales efforts continue to be focused on fulfillment and transportation services, reflecting the strong demand and growth prospects for <unk> and direct to consumer multi node fulfillment services.
Intentional shift and our overall mix has helped facilitate a higher ACB per booking for the first half of 2023.
As I mentioned earlier, we expect them mixed between fulfillment and transportation to shift from quarter to quarter and it's important to note that these two types of service contracts carry different term lengths and margin profiles.
As we have historically disclosed our fulfillment contracts tend to be three to five year engagements with a gross margin profile in the range of 20% to 25 per cent.
By contrast are transportation management contracts typically renewed every year when carrier contracts are renewed which could lead to a potential churn on a year over year basis.
The transportation management gross margin profile is also typically lower than the fulfillment range well adjusted EBITDA margin for this service trends higher because the service does not require the same level of additional corporate overhead costs inherent in our traditional fulfillment operations.
This profitability characteristic helps underscore a reiteration of our full year 2000 twenty-three guidance for adjusted EBITDA as a percentage of service fee revenue as well as our increase top line growth expectations.
To enhance the mix and the expansion of our platform capabilities. We also continued to support our fulfillment as a service products. These products improve the speed with which we can lodge and scale, new fulfillment centers and client engagements alike, as well as increase the innovation and our sales cycle <unk>.
<unk> and innovation continue to be key Differentiators for P. F S and we will share any updates on our new fulfillment as a service deployments over the coming quarters, particularly as we approach peak season.
<unk> is executed at record levels through the first half of this year or performance has benefited from the robust custom consumer and service to men in our core verticals and platform offerings respectively.
As well as from the streamline operational efficiencies, we've driven as a result of our steady optimization initiatives with.
With our increased service fee revenue growth outlook and sustained profitability expectations for the full year, we're entering the second half of the year on confident footing.
Based on our current visibility are strong foundation and are growing pipeline opportunities. We also believe we remained primed to drive sustainable double digit growth over the longer term.
I am extremely proud of our teams tireless efforts and commitment to delivering further strategic progress with that will now open the call for Q&A.
Thank you.
Okay.
As a reminder to ask your question. Please.
One one on your telephone and wait for your name to be announced.
Can withdraw your question. Please press one one again.
Please stand by while we compile the roster.
And our first question comes from George Patton with Craig Hallum. Your line is open.
Hey, George.
Okay.
[laughter].
Oh, Hey, guys I I apologize I was on mute, but thank you. This does actually add a monitor George Mike I I wanted to start with more of a big picture question that I have a few more pointed one from my perspective, though this is actually a very unique scenario as you mentioned.
Uhm best bookings quarter ever another thing you didn't mention this is actually the best free cash flow start since the pandemic on top of that you're buying back stock in the market you'd seen competitors of yours, not do as well at the same time, all the while you're going through a strategic.
<unk> process. So my question is in answering whatever turns you deem appropriate but can can you just talk about for a minute. How you think about the gap between where the market values the company versus where you perceive it should be.
Well certainly I have my personal perspective on that.
Yeah, you were just have turned into such a strong performance across the first two quarters of the year.
Which I believe is in line with your expectations, we sent coming into the year with all of the hard work around you know resetting this business around but we believed.
Was a core that was experiencing strong tailwinds coming out of the pandemic.
And enhanced by the kind of.
Client portfolio that we're supporting so we we we've been very bullish on this business for quite some time, but I think you really have to put the score school on the scoreboard.
And that's what we've done in Q2, Q1 and Q2, so proud of the score that's posted there.
I think I've been very consistent in saying my expectations for this business or that it ought to be valued and an EBITDA multiple range of eight to 12 times.
I still continue to believe that ought to be the expectation for the business. That's transactional type multiples that you see in the market.
So we're going to continue to work hard and ultimately have an expectation that we start to see that range come into view as we continue to post scores on this on the scoreboard.
And at the same time, you mentioned are strategic alternatives review, we will wrap that up this year is committed we are looking at all alternatives, but our focus is on shareholder value.
And we believe that whether it's through the public market or with alternatives. We have an amazing opportunity right now with an asset is very differentiated the market as you pointed out out of compared to many of our competitors who are not enjoying the same successes we are so.
We certainly feel lucky to be in that situation, but we're also expecting that people are gonna pay attention and I. Appreciate your information and your lead into the question.
Yeah, absolutely and I, obviously, you know one of the key highlights was the $21 million in transport bookings I'd love to get some more detail on that and especially you know if you wouldn't mind, providing a little historical contacts on what you have done transport revenue in the past, but more specifically.
<unk>, what what did this when how do you see this business growing what do you need to invest to make sure that that business can maintain whatever grocery and you think is appropriate.
Sure sure Great question that this is Zack I'll jump in and give a little bit of context, I'll start with the historical perspective, and we tried to give some language around that and describe but historically as we engage with some of our enterprise level contracts that came into our portfolio for fulfillment often.
Often times they would historically bring their own carrier relationship that was generally tied to a single carrier that they're bringing to market or we'd have clients that engaged with P. F S and as such we allow them to right on our current rate cards with various clients and offer that up in a cost plus manner and as.
<unk> typically see those revenues as well as costly and or pass through revenue and cost basis, and that's how it had gone to market prior to really 2020.
What we saw really 2024 word is a lot of disruption in the carrier space and so much that some of the carrier is actually a restricted capacity for a number of clients that own their own carrier contracts and we also saw significant rising costs my way of surcharges from various carrier relationships.
So we saw increasing costs and declining service on a macro level and as such you saw disruptions start to occur where new entrance came in and the market's specifically regional carriers et cetera, and you're starting to see more of a fragmentation of what the carrier network could be and as such PFS saw an opportunity to really step in there provide.
A real value to our clients to really manage all those various carrier relationships and as such handled a reconciliation all the mitigation associated with that and really provide a blended carrier solution for clients and that's really what we're seeing gain traction right now on the market place and and it really fits with what our Corvair.
<unk> brands are really trying to accomplish as they look and continued to do multi node fulfillment looking for how do we drive sustainability in cost savings across that and really the solution points to all of that and really allows us to present, a holistic solution for transportation management to our clients and that's what you're seeing really recorded in the queue.
Two bookings metric.
That's great and Zac Alaska.
Hello up question to that you pointed to pretty strong bookings ahead for Q3 potentially would love to also better understand what exactly is driving that that just no.
Bookings that just haven't closed that you've been working on from earlier or are these more people coming to you in a later in the cycle that are that are looking to get things done.
<unk>, so you're a as we report numbers and talk about ourselves pipeline. Obviously, we have a lot of conversations we feel really confident in the business. That's out there. That's why we speak with confidence that we're projecting a pretty strong booking season for the whole year, but you're exactly right. Some of them are engagements that we just didn't get signature before the end of the quarter and.
And those will come naturally in Q3, and we also see really in this space opportunities present themselves inside of a quarter and frankly with our ability to quickly launch a business. It certainly well within the framework to see an opportunity in Q3 close and launch it before peak season, that's really a test.
Submit to the agility of the platform so a little bit of both but as we look out. We're also same pipeline bill for subsequent year as well. So we project that's a really positive lean into 2024 and.
And Adam it's.
Probably a unique characteristic of the transportation management service that you can have an opportunity that closes later in the year and start to generate revenue going into the holiday peak, because there's really not a significant implementation associated with that it's fairly easy to cut an existing client over from that pass through oriented service to the manage service offering or even.
Onboard a new client onto that platform. So sale season of that is probably a three quarter sailing season versus our traditional fulfillment services, which are kind of two two and a half quarter for 222, and a half quarters of the year.
Awesome, Great perspective, thanks, guys I appreciate it.
Thanks I appreciate it.
Thank you.
And as far as telling no further questions at this time I'd like to now turn the conference back to Mister Willoughby for closing remarks.
Thank you Theresa and I'd like to thank everyone that attended the call. This afternoon, hopefully you hear the optimism in the tone of our voice and the content that we presented a day and looking forward to continue to.
Engage with you as we finish out the year strong. Thank you.
This concludes today's conference you may now disconnect. Thank you for participating.
Mmm Mmm mmm.
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