PFSweb, Inc.
Q4 2020 Earnings Call Transcript

Published: 25 Mar 2021

[Operator:]

Good morning, everyone, and thank you for participating in today's conference call to discuss PFSweb’s Financial Results for the Fourth Quarter and Full Year Ended December 31, 2020. Joining us today are PFSweb's CEO, Mike Willoughby; the company's CFO, Tom Madden; the President of PFS, Zach Thomann; the President of LiveArea, Jim Butler; and the company's outside Investor Relations Advisor, Sean Mansouri with Gateway Investor Relations. Following their remarks, we'll open the call for your questions.

[Sean Mansouri:]

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. 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 that this call will be available for replay through April 8, starting at 11

[Mike Willoughby:]

Thank you, Sean, and good morning, everyone. Before beginning my prepared comments, I would like to congratulate both Jim Butler and Zach Thomann on their recent promotions to president of their respective business units. This recognition is indicative of our continued progress toward elevating our PFS and LiveArea brands in the marketplace and further optimizing our operational and financial performance. Even more, their promotion speak to Zach and Jim's amazing performance over the past year, as a partner with me to lead our company through a truly unusual year in the most dynamic and unpredictable industry conditions we have ever faced. I also thank our clients for continuing to trust us with their brands and for working with us through the unexpected turnout against beginning last March, through all the planning required to prepare for a successful holiday. The last year has proven the value of the true partnerships we have with our clients, as opposed to the more typical customer vendor relationships in our industry. Finally, and most importantly, I must thank our global PFSweb team for all the hard work and agility they have demonstrated over the past year, as we have implemented massive changes to our organization in response to the COVID crisis. The crisis has brought an abundance of challenges and opportunities, and our teams have dealt with the challenges with grace and perseverance while making the most of the opportunities to drive the unprecedented growth, we've experienced in 2020. Their performance over the past year has made it possible for us not to just survive the crisis, but to thrive, as we look to exit the worst of the pandemic this year.

[Tom Madden:]

Thank you, Mike, and good morning, everyone. Unless otherwise noted, our quarterly financial comparisons are to the fourth quarter of 2019. And our annual comparisons are to the full fiscal year 2019. For Q4, our consolidated service fee equivalent revenue or SFE revenue increased 29% to $81.5 million. The increase was primarily driven by continued robust fulfillment activity in our PFS segment, as well as growth from new and existing clients in our LiveArea segment.

[Jim Butler:]

Great. Thanks, Tom, and good morning, everyone. LiveArea continues to benefit from the steady investments in our sales and marketing teams and the introduction of new services, which have fueled our recovery from the pandemic related disruptions we experienced in mid-year 2020. I'm thrilled that our sales bookings rebounded in Q4 as we achieved our second highest level of sales bookings in company history. Our combined projects and engagements for ACV totaled an estimated $22 million. During the quarter, we added nine new logos that have further fueled our revenue backlog for 2021. Brands are placing increased emphasis on ensuring that their front and back office operations are comprehensive, efficient and tailored to the customer needs as they respond to the obvious acceleration of e-commerce as the primary channel. To break our Q4 performance down, we booked 52 projects worth a combined estimated $17.3 million in project value during Q4. This compares to 56 projects in the year ago quarter, where they combined for then estimated $11.5 million in project value. We also booked 24 engagements for LiveArea worth a combined estimated $4.7 million in annual contract value or ACV. This compares to 16 engagements worth a combined then estimated $9.1 million in ACV in the year ago quarter. Turning to our year-to-date performance. We booked 178 projects worth a combined estimated $50.1 million in project value. This compares to 194 projects and then estimated $38.9 million. Our engagement bookings for the full year totaled 79 for an estimated $23.7 million in ACV compared to 62 bookings worth then estimated $22.9 million. This brings our total 2020 bookings, projects plus engagements for LiveArea to $78.3 million compared to our then estimated $61.8 million in 2019. As pleased as I am with our Q4 performance and our sales team’s performance through a very difficult COVID year, I'm even more excited with the momentum we have carried over into 2021 with the largest pipeline of LiveArea opportunities in the history of the company. Our later-stage pipeline, where we have been verbally awarded the work and are finalizing the commercial terms suggests that Q1 2021 will almost certainly set an all time sales booking record topping our previous record in Q1 of last year. Regardless of whether the timing of the contract signatures all occur before the end of Q1, the late stage pipeline, such an early part of the year suggests that 2021 will be another year of continued double digit growth. We’re also seeing an increase in follow-on projects with many of our launches. Follow-on projects can be even larger than the initial project and they add to that critical reoccurring component of our revenue backlog, which provides us good visibility and confidence in the strength of our revenue stream over the next several quarters. Attracting top talent to LiveArea is very critical to our growth strategy as we continue to rapidly evolve our service offering. In Q3, we announced the addition of Barry Fiske as our new SVP of Global Experience and Innovation to elevate our award-winning design services. Barry’s contributions in Q4 were substantial, including the addition of three new service offerings, next intelligence, service design and product innovation, along with repositioning our other services in the more structured service offerings of connected commerce, performance marketing and orchestrated services. To help deliver on the new services at scale, we recently announced the appointment of Rashmi Sethi as Group Creative Director and Head of our newly incubated Innovation Lab and Creative Studio in Bangalore, India. As we design and build prototypes and accelerators for global clients, this new facility will act as a centralized hub for these initiatives and leverage other members of Barry’s team across the globe. Further, it will establish a broader footprint for LiveArea in India and the APAC region. As we look at our record sales pipeline and strong backlog headed into Q2, we’re seeing impressive strengthening and opportunities with our most strategic partner Salesforce. I’m very excited to see an increase multi-cloud opportunities with serous to strengthen our strategic value as Salesforce partner. I’m also encouraged to see a bit of a rebound in SAP-CX and what was known as SAP Hybris opportunities with several large B2B projects and various stages of our pipeline and an implementation. With an eye to the ever evolving platform landscape, we’ve also continued to deepen our partnerships with commerce platforms, such as BigCommerce, Commercetools, and most recently Yotpo, an e-commerce marketing platform provider. LiveArea and Yotpo partnered last year to build and launch a customer loyalty program for Nuun Company, a leading sports hydration brand. We also recently announced that we have since expanded this collaboration into multiple experience redesign projects for Nuun’s online store. In addition to the great work we’re doing for Nuun and many others, LiveArea won top honors in the annual AVA Digital Awards competition. As I said in past calls, I love to win. And this recognition is a team win, which is the best kind of win that I can think of. This year, my team won a total of six awards, including four for client work. I was thrilled that we earned two gold awards for our work with Saks Fifth Avenue, which launched a new digital storefront built by LiveArea last year on Salesforce Commerce Cloud in time for the 2020 holiday. Luxury detailed name Saks Fifth Avenue, Luxury Retailer of the Year for its adaptability and successful digital advancements amid the COVID-19 pandemic. And it’s certainly gratifying to be a big part of their success. I’m also encouraged that our award-winning work should position us very well to continue to support Saks as they embark on an exciting transformation, focused entirely on their online channel. With the exciting initiatives we have underway and the record sales pipeline momentum we have built, our team has done an excellent job of advancing our business development and improving our client’s capacity to offer premium digital custom experiences around the globe. We anticipate driving strong growth through the rest of 2021, and look forward to – look forward to further leveraging our comprehensive platform to support our momentum. The future looks very, very bright for LiveArea. With that, I’ll turn the call over to Zach to review highlights from PFS. Zach?

[Zach Thomann:]

Thanks, Jim. As Mike mentioned at the beginning of the call, our teams outpaced our record Q2 2020 volumes with the record fourth quarter and delivered on our client commitments to ship holiday season order volumes with incredible speed, efficiency and success. We quickly scaled and ramped our operational areas to meet our client’s elevated order loads and deliver a great customer experience at a time when many retailers and service providers struggled to deliver for Christmas. I’m very proud of my business management and transportation teams. We had to work very closely with the transportation partners and our carrier network to drive improved deliverability to ensure our client’s customers had a great fulfillment experience. Executing for our clients during this entire COVID period, but especially during Q4 has required unanticipated investments, including the rapid launch of two new distribution centers, temporary COVID workplace safety measures and expanded use of temp agencies and seasonal labor during Q3 and especially in Q4. These investments enabled us to perform at the higher levels required for our clients, which led to our record revenue results. While these investments have had and will continue to have an impact on our bottom line until we fully exit the pandemic. I believe weathering this transient margin pressure is key to further strengthening the stickiness of our client relationships and our competitive position in the market, while setting us up nicely to capture future growth. We then anticipate the profitability improvements to come as we move into a post-COVID world. Moving on to our holiday performance. As many of you saw and the Q4 highlights we published in January, our fourth quarter marked a largest order fulfillment quarter we have experienced in our company’s history. Relative to Q4 of last year the total number of orders we fulfilled grew 88% to nearly 11 million orders. During November and December, we processed over 4 million customer orders each month fulfilling over 2 million orders during Cyber Week alone. For the full year, we processed over $3 billion in gross merchandise value through fulfillment activity and an additional $400 million for order-to-cash platform only clients. In our financial services operations, the total payment transactional value we processed in 2020 increased 51% year-over-year to $1.4 billion. The strategic investments we made to expand our fulfillment center footprint and capacity, as well as our distribution and contact center personnel allowed us to swiftly address these elevated holiday order volumes. To elaborate on what Mike shared earlier about our two newest fulfillment centers, we had our new Dallas area DC operating at full capacity during the holiday season. This conveniently located center allowed us to expand our daily output capacity, fulfill orders for several existing clients from more than one facility and run full e-commerce fulfillment programs for key brands, including Kendra Scott. In Europe, our new fulfillment center in Liège, Belgium also performed at high levels during the season, allowing us to accommodate accelerating European volumes. Our ability to get these facilities ramped and performing so effectively less than three months after opening demonstrates both our agility and our ability to scale that is core to our operating model. Now briefly to review our Q4 bookings in PFS. We signed four new engagements worth of combined estimated $1.7 million an annual contract value or ACV compared to three new engagements worth have been estimated $6.4 million of ACV in the year ago quarter. This brings our total 2020 bookings for PFS to $14.3 million in ACV compared to $34.5 million in 2019. Our current client engagements clearly grew organically and expanded in scope at an unexpected pace. New bookings did experience pressure due to the complications related to COVID throughout the middle of the year. New opportunities began to build towards the back half of the year, setting up nicely for 2021 with anticipated Q1 bookings showing a clear rebound back to levels we saw in early 2019. I believe our sales cycle is currently benefiting from our strong performance for clients in 2020 and are much improved PFS brand presence in the market, as well as the obvious e-commerce demand tailwinds. As we uncovered in our recent study with Arlington Research, the 2020 holiday peak season offered retailers an urgent glimpse into the long-term trends that will guide our industry even as brick-and-mortar retail gradually recovers from last year’s pandemic related challenges, brands and retailers broadly recognized the need to shift their operations to a digital first approach and facilitate additional omni-channel investments and order fulfillment capabilities. The current operating environment has validated the need for growing brands to carefully choose their partners and despite the complications, I am confident that our performance for our clients will continue to pay dividends for our growth. In response to client demand, we have recently announced the opening of our newest fulfillment center in North Las Vegas, Nevada. Our new facility will expand our North American fulfillment center footprint to seven facilities and will be strategically located near the North Las Vegas airport, allowing us to improve our capacity for servicing clients with large West Coast customer basins. In conjunction with this newest opening, we have signed a new contract with a large skincare company that is set to go live in Q2 of this year. Our services with this client will not only make use of our new North Las Vegas facility, but also our fulfillment and transportation management services from our Memphis and Toronto area fulfillment centers. Expanding our utilization of three North American PFS facilities for this skincare client and getting our newest facility ramp, demonstrates that our operational momentum from 2020 has already carried over into this year. Our ability to scale and optimize our existing infrastructure has allowed us to maintain our high quality of service for current clients in a dynamic environment. I'm extremely proud of our performance throughout 2020, and I'm very grateful for our distribution and contact center teams for their tireless work and deep dedication to our clients during the holiday season. Our agile business model has more than proven its resilience over the past year. And we greatly look forward to the opportunities ahead for PFS. I'll now pass the call back to Mike for closing remarks. Mike?

[Mike Willoughby:]

Thank you, Zach. And before wrapping up my comments, I want to clarify just in case you miss it, the total 2020 bookings for LiveArea projects plus engagements was $73.8 million compared to $61.8 million in 2019. Now wrapping up our prepared comments, I'm very proud of the operational financial results for 2020. Our ability to adeptly navigate a changing retail environment, all part carefully managing our costs and performing strongly for our clients demonstrates the strong foundation we have built across our business. We estimate our PFS business sustain $4 million to $5 million of incremental costs in 2020 from the safety-related costs and from wage rate volatility and wage inflation in the back half of the year and cost associated with the rapid launch of two new fulfillment centers. And while we are all more than ready to close this COVID chapter of our lives, we are still very much in the COVID complicated world and our PFS business continues to sustain for most of 2021, these safety related costs and expected wage inflation compared to pre-COVID wage rates. As we planned this year to exit pandemic conditions in the geographies we operate, we are working to reduce or eliminate these increased COVID costs and adjust our pricing to reflect post-COVID reality for workplace safety and wages. So we certainly would like to see more of the benefits of the scale, we are creating flow to the bottom line in the near term. We are competent that the tailwinds we are currently seeing across our business evident in our 2020 top line results and our 2021 expectations will result in significant benefits to our profitability as we look to a post-COVID future that I believe is very exciting for our business. 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 available for questions right now. Michelle, we'll open up the call for questions and answers.

[Operator:]

Thank you, sir. And our first question comes from Kara Anderson with B. Riley. Please proceed.

[Kara Anderson:]

Good morning. Great job on the performance to your clients all throughout 2020. I did want to ask on, what was the biggest driver or surprise on the EBITDA margin mid to year mid-December internal expectations that you put out there? And then, the timeline for when you think the changes you're making will happen in terms of bringing PFS gross margin back within its targeted range, like, is that at 2Q, 4Q events? And then the last piece of it is just to elaborate on the LiveArea adjusted EBITDA margin?

[Mike Willoughby:]

Okay. I'll take the first two, Kara. So as we were, I think, indicating in August and then again in November, we certainly were seeing a increase in wage rates and a volatility associated with wage rates, particularly with seasonal and temporary labor that we received from our various partners. And while in Q3, the elevated volumes were flatter than that we saw in Q2. We did expect that we would continue to see that volatility and that inflation as we headed into Q4. The difficulty heading into Q4 was really estimating both the overall quantity of order fulfillment volumes that we would experience, and also the distribution of those volumes across that time period. And you may remember that we were hoping for a broad distribution where we would start, late October to see a ramp that carried through sort of more smoothly than we might typically see in a peak holiday. And we did see some of that. We did see an earlier than normal ramp with two weeks before Thanksgiving starting to ramp early, but we also did see a very traditional Cyber Monday looking weak, which did caused us to rely even more on seasonal and temporary labor, which had higher than normal markup on top of wages that were higher. And so as the actual labor cost came in that two, three-week period, they were just higher than we had estimated, not by a lot, but by enough to effect that adjusted EBITDA margin and to pressure that just a little bit below the range that we had communicated back in November. I don't know is the answer both of the questions, Kara, did I missed the second one.

[Kara Anderson:]

The other part of it was just kind of the timeline for when you think you can get back in your targeted rates?

[Mike Willoughby:]

Yes. Well, that's the big question for the year, right? So clearly one of the things that we're looking for is a signal in the geographies that we operate from governmental authorities and medical experts on when we can start to reduce social distancing, potentially alter screening processes and change our policies around PPE. And so far, the expectation has been set to continue procedures that we've had in place now for almost nine months. But some of the CDC guidance regarding what happens in schools has changed recently. And so we're hopeful that we'll start to see an easing and we'll be able to start modifying those procedures that should help us to start to reduce our costs associated with workplace safety, maybe even here in the next couple of months. But it remains to be same. The biggest variable obviously, as you looked at the statistics that Tom quoted and that I indicated in my wrap-up comments is around the labor costs. We have expectations currently in the back half of the year. We will adjust our mix to have more permanent FTEs in our workforce as compared to temporary and seasonal employees that we're bringing in from agencies. So that mix change should help with the adjusted EBITDA margins in the PFS business. And we're also looking for stabilization of those wage rates, which I believe what probably has to be post-COVID stabilization. So we'll be monitoring in the back half of Q2 and early Q3. Two things, one is, how does the supply and demand situation in our core markets, especially in Memphis affect, what – how wages actually stabilize according to market demand, it will probably stabilize at a higher rate than pre-COVID levels, but it's possible they'll stabilize at a rate lower than what we saw in Q3 and Q4 and are seeing in Q1 of this year, we'll just have to see. The other variable that we're monitoring is a federal policy and whether or not federal policy will set a bar for wages and what that might look like as far as how it ramps in. Frankly, either of those two things, a stable wage market or federal policy will then put us in a position to go to clients with permanent price changes to reflect the change costs. In the meantime, and I hope that this is not true, but in the meantime, if we enter the back half of the year, especially Q4 still in a COVID complicated situation, then we'll be having conversations with clients about holiday surcharges, similar to what we did last year. And we did have about $1.2 million of surcharge related revenues from clients to help offset some of the holiday costs. So it did help some, but obviously not completely offsetting our increased costs.

[Kara Anderson:]

Super helpful. And then on the LiveArea side?

[Tom Madden:]

Yes. And Kara, on the LiveArea side, so – for the year, for 2020, our direct contribution or kind of adjusted EBITDA percentage for the LiveArea business was relatively stable with the 2019 level. So somewhere in kind of the 15%-ish range, as you look at Q4, it was lower than that and a couple of big components of that were related to the – some of the strategic investment in terms of personnel that we were making in order to drive some of the growth initiatives that we have for 2021, as well as some increased personnel related costs on variable compensation and that type of stuff. So, we all know normally the Q4 period comes in a little bit lower just because there’s a little bit higher level of PTO time that takes place during that quarter as compared to some of the other quarters during the year. So that came into account as well, but kind of a combination of those things again. But for the year, our LiveArea performance came in relatively in line with the prior year. And as we indicated in our prepared comments, we do expect some adjusted EBITDA expansion for the LiveArea business, as we look at 2021.

[Jim Butler:]

Yes, Tom, just to add to that, it’s, these were purposeful investments that were made, we took advantage of a market that was really struggling when we were doing well. And so we picked up some of the best talent in the marketplace during this period. So, these were purposeful sort of investments that we made, Tom hit on some of the other highlights, but building an innovation lab, as I talked about before and bringing on people like Barry really immediately showing dividends for those investments. So a very, very smart move from my perspective.

[Kara Anderson:]

Great. Thank you. And then just one more, can you guys talk about the cadence of the growth in the 5% to 10% range for PFS throughout the year as you kind of lap certain periods like maybe 2Q of last year?

[Tom Madden:]

Yes. Well, the second quarter is going to be a challenging comp as you know, Kara, we do have new clients coming onto the platform, clients that we booked and either implemented or are implementing at this time. One of them is the client that Zach mentioned that is a kind of an anchor client in our New Vegas facility, along with several of our current clients that are going to be moving into that facility. Those will start to contribute in that facility, during Q2 probably a bit more to the back half of Q2. So it’s likely we’ll have a challenging comp for PFS in Q2. But some of that that new client growth and the continued elevated volumes we’re seeing with current clients will help to hopefully narrow that gap. And then as we look in Q3 and Q4, we would expect at this point to see strong growth both from continued organic growth with our current clients, as we expand those relationships move them into new geographies and with, as we mentioned, but what’s looking like a very strong bookings quarter for PFS in Q1, hopefully that rebound continues into Q2. And we’ll start to see new client revenues contributing in Q3 and Q4. So, I think it’s going to look kind of back-loaded, I think we’ll have a good Q1 from a growth perspective year-over-year, Q2 is going to be difficult comp and then you’ll see Q3 and Q4 making up to help us achieve that 5% to 10%.

[Kara Anderson:]

Great. Thank you. That’s it for me.

[Tom Madden:]

Thanks Kara.

[Operator:]

Our next question comes from Mark Argento with Lake Street Capital. Please proceed.

[Mark Argento:]

Hey, good morning, guys. Just got a couple of segment got a margin questions in particular we can LiveArea, I think Jim had just mentioned so many investments and take advantage of the marketplace. If you stepped back and looked at that business and it got on an annualized basis, what do you think a good target EBITDA margins for that business? I know, I think it was as high as almost 19% back in 2018 last year in 2019, or I should say in 2019, roughly 15%, I haven’t done the math on what it shook out for this year, but obviously somewhere below that as a mid-to-high teens EBITDA margin, how do you guys think about long-term opportunity in terms of segment margins for that business?

[Mike Willoughby:]

Hey, Mark I’ll let Tom answer this question specifically about future expectations, but I’ll comment a little bit on where we were back in 2016, 2017 timeframe, maybe even as we headed into 2018. We were at that point under investing, significantly under investing in sales and marketing in our LiveArea business, which is the primary reason that we saw the revenue declines in 2018 and 2019. And so as you look at the decisions we made to bring Jim in, and to really significantly invest in top tier sales talent, it clearly has paid the dividends we expected with regard to top-line revenue growth, but it has come with some impact to the bottom line in the short-term, we would expect that as we grow LiveArea, you would demonstrate scale on top of that somewhat fixed infrastructure. You’re not going to grow your sales and marketing spend as quickly as the top-line revenue growth would indicate. So, we would expect from the levels that we’re at now, including starting this year to start to see that adjusted EBITDA margins expand. And I’ll let Tom kind of talk about what we think the sort of normalized or normative levels would be in that business.

[Tom Madden:]

Yes. Thanks Mike. Yes. So for calendar year 2020, we thought adjusted EBITDA is kind of direct contribution percentage, if you will, for the library business was about 14.7%, which was just down slightly from the 2019 levels of 15.4%. So both within that kind of 15% range, as we anticipate going forward, as Mike alluded to, we do expect to benefit from the scale of the business as it continues to grow, while still balancing some of the ongoing investments that we want to make there to support that growth. I would anticipate that we, over the next, call it three to four years, we should be moving towards that high teens as a percentage of service fee revenue as we go forward. So, we should be able to see an improvement in that direct contribution percentage as we go forward just from being able to benefit of leverage it off a higher revenue stream as we go forward.

[Mark Argento:]

Got it. It’s helpful. And then just pivoting to the ops business terms of the contracts and the way these are structured in terms of again peak particular in Q4 around the holidays and the opportunity for surcharges. And it seems like you guys are getting punched and I’m sure UPS or FedEx, or whoever you guys they get surge pricing, everybody’s getting surge price, and you guys are kind of stuck in the middle. Given how mission critical the services you guys are providing any thoughts on your ability to be able to be more aggressive with some surcharges instead of really taking it on the chain when everybody else is effectively killing it.

[Mike Willoughby:]

Yes, it’s a great question, Mark. And historically our ability to go to clients, with some sort of exceptional program has really been around the holiday when all the chips are down for our clients as far as bedding on holiday. And that certainly was the case, this last holiday where we were going to save, this is going to be an exceptional holiday. We really need to have some help as we look at some of these exceptional costs and we did get some help. It just – as I indicated earlier some of those costs came a little bit higher than we expected, even as we were rolling into Q4. The real issue is, while we do have in virtually all of our contracts clauses cost of living adjustment type clauses that allow us to have a conversation with the client as our costs are increasing. And frankly, the more that those costs are actually indicated in some of the indices that are out there, which to this point, you really haven’t seen that, but we may actually start to see inflation, indexes catching some of these increased costs. The more there is an opportunity to have sort of a long-term pricing discussion instead of sort of a temporary surcharge related discussion. And then it’s just a question of timing within a client relationship you have only so many opportunities to sort of go to the well, and we want to make sure that we’re going to a client with somewhat stable information. We don’t want to go to a client, say, look, we’re experiencing sort of very near term cost increase. We want to pass along a permanent price increase and leverage that relationship in that way we really want to our clients expect us to have a little bit better handle on what this permanent situation may be. And the difference between us and a transportation carrier, as a transportation carrier operates in a commodity environment. If you don’t like your UPS rates, then you can switch to FedEx, or you can switch to a local delivery carrier, you can move your volumes around and you’re not necessarily locked into a long-term contract with a carrier. We have these three to five year contracts that were operating with clients. And we need to take into account that our most important mission is to take care of those clients and protect those annuity revenue streams for the long-term. So we want to be careful about the timing associated with going back to a client talking about adjustment, but I really think the difference is a matter of a quarter or two versus sort of stepping out too early and potentially over leveraging a client relationship and possibly putting at risk that longer-term annuity revenue stream.

[Mark Argento:]

Got it. I mean, I'm not assuming that, that actively Amazon is setting the wage rates for pick back and ship type employees, especially around the holidays. And I mean, that's obviously difficult given their scale, their ability to even pay off. So that's obviously something you need to contend with. And then just lastly, in terms of the minimum wage laws, are you guys – is that an issue for you in terms of maybe uptake in terms of additional costs here, depending upon how some use wage rates laws roll out?

[Mike Willoughby:]

Yes, Mark, I would think that a macro change that sets officially a different bar is helpful for us with conversations with clients, because at that point you truly have a macro change that affects everybody, so you've got a level playing field that's official. I actually think that in most markets, we're not paying anywhere close to minimum wage for the labor that's in our facilities; it’s quite a bit above that. So the big question is, if a minimum wage change comes into effect and how that actually is phased in, if it's phased in, how does that reset the bar overall? Does it really just bring kind of the minimum up to the effective levels that most of us are already operating at? Or does it cause sort of all wages to adjust at a higher level? It’s hard to say, but I think some action by Federal Government, some guidance is actually helpful for us, because at this point it just creates more uncertainty. And the market will naturally adjust to the new levels. And of course, we continue to look at other ways to offset labor costs such as increasing automation than our facilities. And as I said earlier, kind of balancing the mix between full-time versus the seasonal part-time, which has to do with making sure we are paired up with our clients appropriately to see what their forecast might be, and hopefully this year, as we go into the back half of the year forecast are a little bit clearer than they were as we were in the Q4, which was definitely a rodeo last Q4. But generally speaking, we would probably appreciate guidance from the Federal Government versus this uncertainty that we currently have.

[Mark Argento:]

Right. Thanks guys. Good luck.

[Mike Willoughby:]

Thanks Mark. Appreciate it.

[Operator:]

Our next question comes from George Sutton with Craig-Hallum. Please proceed.

[George Sutton:]

Thank you. I just want to follow on to the North Las Vegas and the large – when you had, that will move forward. As we think about the trend in the industry right now, it's very much around these smaller regional fulfillment centers. As we look forward 24 to 36 months, is that what we're going to continue to see or additional facilities like these that give you the ability to serve larger and larger parts of the world?

[Mike Willoughby:]

Yes. George, I think that's exactly where you're going to see. You're going to see us taking a more agile approach to the way that we open and operate facilities similar to what you've seen in the opening of the pre-port facility here in Dallas with a rapid opening of Riverside in our Liège area. And what we're currently doing in Las Vegas, although we're not on as pressured a timeline in Vegas, which is nice, but the philosophy around opening that facility is exactly the same. Lightweight infrastructure, highly productized operations that are very repeatable and that we can move our teams around and they're working with a toolbox that's very, very familiar and it's relatively low CapEx compared to most of our competitors and how they would open a facility. So I think you will see an evolution, not only in our network, but in any e-commerce fulfillment network to multi-node more smaller hosted facilities. And then the second thing that I think you'll see is co-location with clients, like you saw us do with the client in Europe, where we moved our CloudPick-based solution into their facility and operated about 10% of their European fulfillment volumes out of that CloudPick solution in their facility during Q4. We’re in a position to deploy CloudPick into a client facility, which they're concrete and their labor, but our technology and operational assistance, which is at a higher margin than core fulfillment services. And RetailConnect obviously plays a big part in that, where you're moving a fulfillment node into a metro area or multiple metro areas and co-locating with the client in their stockroom to help them do that. And as I said, we'll have, I think a very exciting update for RetailConnect here, hopefully in the next couple of weeks, but I'm very excited about our ability to deploy both of those solutions in creating not only our own hosted multi-node multi-tiered network, but also leveraging client facilities to further position inventory closer to the consumer and minimize transportation costs for our client as their inventory is closer to the consumer.

[George Sutton:]

Beautiful. Will pass now, or I'll limit that to my one question. Thanks.

[Mike Willoughby:]

Thank you, George.

[Operator:]

Next question comes from Ryan MacDonald with Needham. Please proceed.

[Ryan MacDonald:]

Yes, good morning everyone. Thanks for taking my question, Mike, given the rising cost environment, we seem to be in around wages and sanitation. Would love to hear more about the initiatives around CloudPick and RetailConnect, given you're now through another holiday season and that continues to scale. Would love to know as you sort of look at those offerings, how much scale as a percent of fulfillment volumes with your customers, do you think those solutions can address and is there a way to sort of include that more new booking conversations moving forward to maybe offset some of these rising costs? Thanks.

[Mike Willoughby:]

I think Ryan for the medium and long-term, the answer is yes. I think that there is a way for us to use the product initiatives to not only offset costs within our costs of fees associated with labor and concrete. But also to see margin expansion, both gross margins in the PFS business and adjusted EBITDA margins, it depends on how successful we are, actually rolling those products out. This is the year for us to transition from this beta or pilot phase especially with RetailConnect into a production year, where we are moving it into client environments in production. And one of the things that'll be really interesting for us to see as we start to have clients operating in production with RetailConnect is what percent of their order volumes are they able to send to stores for fulfillment. Our first client that we're working with in this pilot mode saw – according to them, a 30% increase in productivity inside their stores using RetailConnect compared to the previous omni-channels solution that they were using that had manual fulfillment processes. And because of that, they were able to increase the order volumes, they were pushing to their stores. Their aspiration, as they look to the future is to use their stores more for fulfillment as a percent of their total order fulfillment volumes. And so, if that's the case, and that's a consistent trend, as we talk – roll this out to more clients, then that could be exciting, and we could see that become a material part of our revenues. And we would start to call that out separately as a separate category of revenue like we do right now for a call center fulfillment and give you some more details. But hopefully this is the year where you'll start to get bookings details associated with RetailConnect and possibly CloudPick.

[Ryan MacDonald:]

Excellent. I'll leave it to one as well. Thanks.

[Mike Willoughby:]

Thanks Ryan.

[Operator:]

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

[Mike Willoughby:]

Thank you, Michelle. I'd like to thank everyone attended to call early this morning. And we look forward to speaking with our investors and analysts as we report our first quarter results in May, which is just around the corner. So thank you for being with us this morning,

[Operator:]

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation. Everyone have a great day.