PFSweb, Inc.
Q1 2021 Earnings Call Transcript

Published: 9 May 2021

[Operator:]

Good morning, everyone, and thank you for participating in today's conference call to discuss PFSweb's Financial Results for the First Quarter Ended March 31, 2021. Joining us today are PFSweb's CEO, Mike Willoughby; and Company's CFO, Tom Madden; the President of PFS, Zach Thomann; the President of LiveArea, Jim Butler; and the Company's outside Investor Relations Adviser, Cody Slach with Gateway Investor Relations. Following their remarks, we'll open the call for your questions. I would now like to turn the call over to Mr. Slach for some introductory comments.

[Cody Slach:]

Thank you. Before we go further, I'd like to make the following remarks concerning forward-looking statements. All statements in this call other than historical facts are forward-looking statements. The words anticipate, believe, estimate, expect, intend, will, guidance, confidence, target, project and other similar expressions typically are used to identify forward-looking statements. The full disclaimer relating to forward-looking statements as well as certain non-GAAP metrics used in our filings, and this presentation can be found in the Investors section of the PFSweb website under safe harbor statement. I'd like to remind everyone this call will be available for replay through May 21, starting at 11

[Mike Willoughby:]

Thank you, Cody, and good morning, everyone. Our momentum from 2020 has carried into the first quarter of 2021 as we recorded record sales bookings in LiveArea, a resurgence in PFS bookings and continued strong fulfillment volumes in PFS. This performance allowed us to achieve a 16% increase in year-over-year service fee revenue as our teams executed at high levels across both business units. In PFS, we achieved the segment's highest level of quarterly sales bookings since Q2 2019 and the second highest level since we began tracking sales bookings separately for our two business units in 2018. Buoyed by the increasing fulfillment needs of current and new clients, we have already fully allocated the space in our newest U.S. facilities in Dallas and Las Vegas, prompting us to expand those operations further. In addition, we have continued our momentum outside of our facilities as we expanded our holiday retail connect deployment from its initial 5 store footprint in Q4 to what is planned to be approximately 50 retail connect modules in over 30 stores by the end of Q2 this year. While we continue to experience margin pressure around facility sanitation and supplies costs as well as increased fulfillment related labor rates for our frontline workers, we remain committed to keeping our team healthy, safe and productive. We believe we have contemplated higher U.S. wage costs in our new PFS client agreements and recent current client renewals. And we are currently targeting Q3 of this year to adjust current client engagements for prevailing wage costs as they are expected to stabilize. Zach will be on later in the call to share more detail about these initiatives, but I'm proud of the consistent operational agility and dedication that the PFS team has demonstrated.

[Tom Madden:]

Thanks, Mike, and good morning, everyone. Unless otherwise noted, all quarterly financial comparisons are to the first quarter of 2020. For Q1, our consolidated service fee revenue increased 16% and to $62.8 million. Service fee revenue for PFS increased by 27% to $42.4 million as compared to the prior year, primarily driven by continued strength in PFS fulfillment activity while LiveArea service fee revenue decreased by $0.5 million to $20.4 million. LiveArea service fee revenue in the first quarter of 2021 was impacted by softness in new and existing client bookings during the June and September 2020 quarters, primarily as a result of the COVID-19 pandemic causing client delays or cancellations of potential technology-related projects. Significantly improved levels of client project and engagement bookings by LiveArea during the December 2020 and March 2021 quarters are expected to generate increased service fee revenue during the remainder of 2021 as these projects are implemented. Service fee gross margin in the first quarter of 2021 was 31.1% compared to 36.1%, with the decrease primarily due to the sustained changes in our revenue mix towards a higher percentage of revenues generated from fulfillment services and PFS as well as increased fulfillment-related labor costs in certain U.S. fulfillment centers and sanitation costs during the quarter.

[Jim Butler:]

Thanks, Tom, and good morning, everyone. Building on a very solid sales result in Q4 of last year, we're proud to have achieved an all-time record sales booking quarter in LiveArea during Q1 of $30.8 million, and we're pleased that the steady business development progress we drilled throughout last year is now converting steadily to backlog and recognize revenue as we work to drive double-digit growth for LiveArea again in 2021. The statistics behind our record sales performance in Q1 include a combined set of projects, and engagements annual contract value, or ACV, totaling an estimated $30.8 million compared to $24.5 million in the year ago quarter, which was our previous all-time record. During the quarter, we added 7 new logos that have further fueled our revenue backlog for 2021. To provide further color on the performance this quarter, we booked 52 projects worth a combined estimated $13.5 million in project value during Q1. This compares to 54 projects in the year ago quarter, where they combined for then estimated $13.1 million in project value. We also enjoyed a very strong engagements booking quarter with 31 engagements for LiveArea worth a combined estimated $17.3 million in ACV. This compares to 19 engagements worth a combined then estimated $11.4 million in ACV in the year ago quarter. We came into 2021 with significant sales momentum and that's a testament to the efforts of our sales and marketing team building our record pipeline and fueling our recovery from the sales impact of the pandemic. The onset of the pandemic near the end of Q1 last year made visibility very difficult for our clients and client prospects, causing project delays and the drop in bookings during Q2 and Q3 last year, as Mike mentioned earlier. I'm proud of the hard work in 2020 to drive over 10% growth in 2020, and I'm very encouraged by the sales rebound in Q4 of last year and of course, the record sales performance in Q1 2021 as we look to grow our LiveArea business at least 10% to 15% in 2021.

[Zach Thomann:]

Thanks, Jim. Our team entered 2021 with strong operational momentum and high client satisfaction ratings following a successful and record peak season, and we've been able to continue that momentum throughout Q1. Fulfillment and contact center volumes continue to significantly outpace year-over-year comparisons, particularly in the fulfillment centers, where our PFS fulfilled over 6.7 million orders on behalf of our global clients, representing a 78% increase compared to the year ago quarter.

[Mike Willoughby:]

Thank you, Zach. Our progress throughout the first quarter has given us a solid financial and operational foundation for the rest of 2021, as we work to take advantage of the e-commerce tailwinds coming out of the pandemic. As recovery progresses in North America and Europe, we must still contend with ongoing COVID complications. As we adapt to the evolving state of recovery, we are still working to reduce or eliminate the increased COVID cost we have based in our PFS business and ultimately adjust our pricing over time to reflect a new post COVID reality for workplace safety and wages. However, I'll reiterate that the demand trends that we are currently seeing as well as what's in our pipeline are expected to drive profitability benefits as we prepare for a post pandemic future. Within this context, we are working to leverage the benefits of our operational agility and the scale we have created in our organization to expand our bottom line and drive shareholder value, which is our foremost objective. Regarding our efforts to create shareholder value, we continue to make good progress in our ongoing restructuring of our business to reflect the distinct LiveArea and PFS operations and go-to-market strategies. Over the past 3 years, we have been steadily progressing toward a model, which facilitates an optimized strategy for LiveArea and PFS within the distinct competitive landscape in which each business operates. We've also been working to preserve the unique value PFS and LiveArea provides to clients who engage with PFS plus LiveArea in an end-to-end relationship. We began this work by establishing each brand in the market and refining the go-to-market approach for each business to be consistent with their competitors such that we would be positioned to win against direct competitors for PFS and LiveArea individually. We then moved to also segment our two businesses financially to provide enhanced internal financial visibility to our leadership teams and improve transparency to our shareholders. This year, we are moving towards completion of this effort through an organizational restructuring, which aligns our back-office functions, workforces, systems and legal entities with this segmented approach. Much of this work will be completed in the first half of the year and will position us to further optimize the operations and opportunities of our two business units. Finally, it's important in closing that I recognize that while North America and Europe are moving through various stages of recovery from the pandemic, our friends and colleagues in India are experiencing a very difficult time with a second and far more serious COVID surge. With the strong presence of our global workforce in India or with family and friends in India, we are especially attuned to the difficulties in that country. We continue to do everything we can to keep our colleagues safe through a virtual workplace and we are surrounding them with support and encouragement, but many of our teammates are experiencing suffering within their families and communities from the virus. Please join me in keeping our colleagues and all the citizens of India in your thoughts and prayers. We still are all living in a COVID complicated world, but we are optimistic about our future, and we greatly look forward to further building upon the strong progress we've driven in both PFS and LiveArea throughout the year ahead. As always, Tom and I are happy to engage with our investors to share our exciting business updates and answer questions, including making ourselves available by phone and at this point as we open up the call for question-and-answer. Summer, we're ready for questions.

[Operator:]

And our first question will come from Mark Argento of Lake Street.

[Mark Argento:]

Just a couple of questions. First off, on maybe for Jim on LiveArea. In terms of the sales cycles, are you seeing those pick-up RFP activity? Anything you can give us a little color on. Are people, now that they kind of have their hands around COVID a little bit more, thinking a little bit more longer term?

[Jim Butler:]

Yes, absolutely. We are definitely seeing an increase in opportunities. The deals that we're seeing are larger in nature than they have been in the past, and that's partially through our investments in marketing and our great sales team to get in front of these deals and the relationships we have with our partners like Salesforce, so we are seeing bigger for multi-cloud, really transformational projects come our way in more volume than we've ever seen before. Q4 was a great sort of rebound. From my perspective, capital is really just starting to get opened up, and I think there's a lot of capital to be opened up over the coming months. And that obviously fueled not only Q4 rebounding from, say, 15% or so sales bookings in Q3, up to $22 million in Q4 and then $30.8 million in Q1, so really good momentum. And obviously, that drives - that was very helpful for us. If you remember about Q3 and Q4 of '19, we had record sales bookings back-to-back, followed by a record sales booking quarter in Q1 of 2020. All of that backlog really helped fuel our growth in 2020, which many of our competitors were not able to claim. So, we're really excited about the momentum that started in Q4 of 2020, the Q1 momentum that we're seeing and how that drives additional backlog into our business heading into the balance of the year of 2021. The visibility we have into our business is better than I've ever seen within the business here and maybe within my career.

[Mark Argento:]

Great, that's helpful. And then, just a quick one for Zach. I know you had mentioned that - it was Mike, I think had mentioned in his prepared remarks that you guys have figured out how to try to mitigate some of the labor cost issues with - on the renewals. And can you just talk through how you're working with your accounts, your clients dealing with this kind of unique situation when it comes to labor?

[Zach Thomann:]

Certainly. There's quite a few things that we're doing. First and foremost, as we look at new opportunities, we're certainly contemplating with the existing labor costs would be in each of the submarkets by which we're operating. So having a very successful Q1 of 2021 with new sales bookings will help with the margin over time. Then as we look to the legacy contract, certainly, as they naturally come up for a renewal or as we proactively renew those engagements, we're taking that opportunity to renegotiate pricing to ensure that it's in line with the market wages that we're seeing. And then lastly, and kind of the third bucket of activity, our clients' activity where it is not up for renewal, it's legacy, and we're currently leveraging a combination of contractual language around what the cost-of-living adjustments would be inside of that contract. But moreover, as Mike alluded to in the prepared remarks, we have an action plan associated with any client engagement where we're not in line with expectations to move with those clients as we see the wages stabilize over the next two quarters.

[Operator:]

Your next question comes from Ryan MacDonald of Needham.

[Ryan MacDonald:]

I guess first question is for Mike and Zach on the outlook here for second quarter. It sounded like you - I think you mentioned that PFS ops SFE revenue should be up year-over-year despite a difficult comp. Would just love to know sort of how you're thinking about that in terms of mix versus, just general heightened GMV levels that are resulting in more fulfillment versus the expanded capacity that you have with the new facilities you've added over the past year?

[Mike Willoughby:]

Yes. I'll let Zach let provide some detailed commentary, but it definitely is a combination of sustained volumes from current clients, probably not at the levels that we saw in Q2 of last year with the store closures driving so much of the volume, but the addition of new client engagements on top of that as well as current clients taking advantage of the expanded footprint that we have are all sort of driving the growth in the quarter that helps us to deal with that difficult comp. Zach, do you have some details you want to provide?

[Zach Thomann:]

I think you hit the nail right on the head, Mike. So if you look back to Q2 of 2020, certainly, there's a large impact related to COVID that produced significant organic growth for us in the quarter, which presents a challenging comparison when you think about it given the normalization of activity around e-commerce in the current year. That being said, we still see significant organic growth from existing clients. With the sales bookings that we captured in the back half of 2020 in Q3 and Q4, those programs are beginning to go live in Q2 as well with the opening of the facility in Las Vegas and the clients coming online there. So that combined with the organic growth, is driving the top line volumes that you see. It's still certainly being led in the PFS business unit by fulfillment. We're also seeing incremental revenues come from services like contact center and new additions like RetailConnect as well.

[Ryan MacDonald:]

Got you. And yes, that's where I wanted to focus on my follow-up as well is, great to see the success our continued increase in success with RetailConnect and expanding your footprint with that customer. I'm wondering as you're having these new conversations with new engagements and new prospective customers, is RetailConnect being brought into the conversation more as more of a, I guess, a flexible way to expand your - those engagements?

[Zach Thomann:]

Absolutely, it is. So if you look at RetailConnect and our other products, I think they really point directly at a distributed fulfillment footprint. So as you look at the marquee locations, we've increased our fulfillment notes, but frankly speaking, getting closer to the customer delivering more effectively and leveraging inventory piles inside of stores is paramount to each of the brands that we deal with, and it's a top-of-mind conversation. So as we look at strategy meetings with existing clients as well as prospects in our pipeline, that's an active conversation that we're having. And I think over the last 12 months, particularly with the store closures that we saw last year in retail has accelerated the adoption and interest of that product and it's certainly reflective in our top of funnel activities in our case pipeline.

[Operator:]

Your next question comes from George Sutton of Craig-Hallum.

[George Sutton:]

I'm curious how you are selling differently with the PFS operations, given the multiple locations that you have. In other words, being able to serve customers from a number of different geographic locations, has that changed your go-to-market strategy?

[Zach Thomann:]

I don't think that it's inherently changed our go-to-market strategy. We're still targeting the similar class of clients. But the backdrop of it is there's been a fundamental shift in the buying audience to be closer to the end consumer and really look at ways to rapidly and quickly deploy e-commerce footprint. And really, our strategy of expanding into the Las Vegas as well as Dallas points directly as that, I mentioned in kind of the question before about how our prospects and existing clients are also looking at RetailConnect as an avenue to continue to get closer to the customer and decentralize fulfillment. That's part of the strategy conversation we're having with clients, but it doesn't change our approach in terms of who we're going after and the initial conversation that we're having, which is how do we deliver a premier e-commerce fulfillment experience for our brands.

[George Sutton:]

So coming out of last year's holiday season, which was unprecedented in terms of demand and frankly, stress on the system, I'm curious, from a churn perspective, when we might know or maybe we already know relative to what kind of churn issues might have occurred as a result? I say that in the context of understanding, I think you performed very well. The other question around churn would be as we go into Q3 and we try to reprice some of these contracts, do you expect legitimate pushback on that?

[Mike Willoughby:]

Yes. That's a great question, George. So I think we do know on the PFS side of our business at this point around client stickiness for the year where the client portfolio is very strong. And I think the loyalty factor coming out of the holiday where we really performed at a high level for our clients has engendered a lot of loyalty and appreciation and has helped us as we looked at some of the renewals that we had in the first half of the year. And it's typical with this business that about this time of the year, you pretty much know if you're going to lose a client to a renewal or a competitive situation and of course, we always maintain sort of visibility to our clients' financial strength, and we feel like we're in real good shape there. So I think we feel good about the back half of the year as far as not having unexpected churn. You can always have surprises, but we don't see anything right now on the horizon that would give us cause for concern. The pushback question is interesting. From our perspective, we think we've got one shot this year to have that conversation with the client, and we want to make sure that we're not going back to them quarter after quarter with that same conversation. So what we're looking for is the stabilization that we referred to earlier, which we believe is starting to happen now. So we're targeting into Q2, first part of Q3. And those conversations with the clients that are in these legacy contracts will be around what do we do to reset around the reality that we're seeing in each submarket. Or if we don't feel like we have that stabilization, then we'll have a conversation about holiday surcharges like we did last year. But at this point, we believe that we should be able to have that more long-term discussion. So that's currently targeted for Q3. I don't expect there to be easy conversations. I think our business management teams will clearly have some challenge as they have those conversations outside of a renewal period. But there's - it's not unprecedented for us to do this. And you've been pointing back to last Q3 where we had holiday surcharge conversations. It won't be a surprise to our clients that we have a new reality as far as wages are concerned. It's evident to everybody. It's evident to our clients when they operate their own hourly workforces. So it's a macro situation that it shouldn't be a surprise.

[George Sutton:]

One last thing, if I could. Could you just walk through what the economics of RetailConnect look like? Obviously, when it was just a few situations, we didn't really worry much about that. But with 50 now, it starts to become more meaningful.

[Mike Willoughby:]

Yes. And as we look at the back half of the year, I think there might be an opportunity for us to provide some actual data around the economics from this one client deployment. But it is a variable model where you've got a minimum charge per module that's deployed in a store, which is intended to sort of cover base operational costs. But it's expected that pretty much in each store, the variable charge would exceed the minimum. So what you have is a SaaS-looking model where we're charging by the order that gets processed through the system. So the more volume that flows through the system, the more revenues that we generate and frankly, the higher the margin is on those volumes. So the best thing I can say is it really compares to a SaaS-type model. And so our revenues are dependent on our clients' flowing volume through. In this particular case, our client has ambitions to do a large percentage of orders from their store footprint, because of the reasons Zach mentioned earlier, minimizing transportation costs, improving customer service and making use of those store inventories. So, with the impressive volumes done in the first couple of months of deployment, we're optimistic that we'll see some material enough revenues that it's worth giving you some color on the back half of the year.

[Operator:]

Your next question comes from Kara Anderson of B. Riley Securities.

[Kara Anderson:]

I just have a couple of follow-ups on things that were already asked. I guess on PFS, how much is up for renewal in any 1 year? And then how much of the business are you targeting to be kind of reset or adjusted ahead of 4Q?

[Zach Thomann:]

So in a given year, we typically have a handful of contracts that are going up for renewal. Contract terms are typically 3 to 5 years in duration. That being said, over the first quarter this year as well as in the back half of last year, we actually renewed all of our larger client engagements. So they're all in fresh 3- to 5-year revenue cycles. So I don't anticipate a significant amount of resigning activity or renewal work in the back half of the year based on the efforts that we've had over the last 6 to 8 months. And that being said, from an adjustment perspective on the rest of the clients out there, we probably have around 1/3 of our portfolio that I consider to be legacy client contracts that aren't up for renewal, not all of those certainly require any pricing adjustments based on when they're signed and when they're brought into the portfolio.

[Kara Anderson:]

Got it. And then, can you provide a little color around the new business that you're booking at PFS that you're winning today? Is this a function of some pent-up demand? Or do you expect that to kind of pick up ?

[Zach Thomann:]

I'm sorry, I misunderstood your question. Could you repeat it?

[Kara Anderson:]

Sure. The new business that you're booking at PFS like - is that a function of pent-up demand over the course of 2020? Or do you think that this is a new elevated level that you would expect to see going forward?

[Zach Thomann:]

I think it's actually both. So if you look at the trends that we saw inside of calendar year 2020, typically, you see a significant bump in terms of the natural cycle for PFS and sales around Q2 of 2020. We certainly saw in the back half of 2020, a resurgence in top of funnel activity representative of what I would consider to be pent-up demand. In addition to that, though, across the entire entity of PFS web, I believe that a lot of customers and prospects are reevaluating what direct-to-consumer channel looks like for them and placing big investments into that and certainly looking to grow that channel as such, that's creating more opportunity in larger contracts across both segments of the business.

[Operator:]

Your next question comes from .

[Unidentified Analyst:]

It's the one for Mike and Tom. But I missed some of your prepared comments at the very end of your speech regarding some organizational changes. Can you help me just further understand the moves that you're making there to help investors or improve transparency? And just what's the kind of the overarching goal there?

[Mike Willoughby:]

Sure. It's actually a part of the strategy we've had over the past couple of years to really align our two businesses, both with regard to the go-to-market. The reality is that with LiveArea, it's a professional services business, e-commerce consultancy that competes with a number of other professional services businesses. And we need to have LiveArea going to market in a way that positions us to win, and we're going head-to-head with these competitors. And the same thing is true for PFS in their particular competitive market. So the first step that we took, going back 2.5, 3 years ago, was to align the go-to-market strategy and the branding and the way that we're selling in the competitive landscape. And then we followed up with the financial segmentation, so that the investors could see in more detail how each of the two business units was performing. This effort to complete that process is really more about back office, legal entities and just the operation such that these two businesses are largely operating dependently with regard to internal mechanisms and the way that we segment our workforce and systems, etcetera. The reason for that is that we want to optimize each business. And as we've seen over the past year, you can have opportunities coming into the business that are unique to each business model with obviously PFS showing the rapid increase in fulfillment volumes, and LiveArea, at the same time, seeing a shift in which platforms are preferred and these transformational-type projects that we're working on. We need to be able to respond to those opportunities as surgically as we possibly can. The other reality is that each of these businesses has pretty different financial dynamics, and we need to be able to provide to our investors as clear as possible a view on how that they're performing, so that you can understand sort of the total value as you look at the two businesses combined and what that - how that should be represented in our value as a public company. And the last thing I'll say is that we always want to preserve the options that we have for generating shareholder value, and we think that this process we've been going through positions us to have the right options on the table with regard to shareholder value creation.

[Unidentified Analyst:]

Okay. Are we talking - a lot of those costs are captured in unallocated corporate, and that's going to be allocated to the divisions? Or is it already captured within the divisional costs and it's just not a - it's just more going to be more accurately divided up?

[Mike Willoughby:]

Yes. Go ahead, Tom.

[Tom Madden:]

We've been working over the last couple of years of trying to allocate more and more of the cost of the business that are directly tied towards the individual segments to those particular business units. And so we will continue as we go through this reorganization process to continue to refine that allocation methodology and look to drive an increased amount of those corporate shared services cost to the individual business units.

[Unidentified Analyst:]

Okay, got it. And then, did you just - did you mention a time frame where you hope to have this wrapped up?

[Mike Willoughby:]

Yes. The organizational aspect of the restructuring is primarily wrapping up in the first half of this year. The additional financial segmentation, I think we're probably targeting - looking at what we do for the next fiscal year. As far as making changes, we wouldn't make a change in the middle of a fiscal year. So that additional financial visibility would probably come in next year.

[Operator:]

At this time, this concludes our question-and-answer session. I will now turn the call back over to Mr. Willoughby for closing remarks.

[Mike Willoughby:]

Thanks, Summer. Appreciate that. Unmute. I'd like to thank everyone that attended the call this morning, and we look forward to speaking with our investors and analysts when we report our second quarter results in August. In the meantime, as I said, Tom and I continue to be available by phone and always can involve Zach and Jim as well. Thank you, have a great day.