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Edited Transcript of PFSW earnings conference call or presentation 18-Mar-19 9:00pm GMT

Q4 2018 PFSweb Inc Earnings Call

Plano Mar 21, 2019 (Thomson StreetEvents) -- Edited Transcript of PFSweb Inc earnings conference call or presentation Monday, March 18, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Michael C. Willoughby

PFSweb, Inc. - CEO & Director

* Thomas J. Madden

PFSweb, Inc. - Executive VP and Chief Financial & Accounting Officer

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Conference Call Participants

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* Adam David Kelsey

Craig-Hallum Capital Group LLC, Research Division - Research Analyst

* Mark Nicholas Argento

Lake Street Capital Markets, LLC, Research Division - Head of Capital Markets & Senior Research Analyst

* Ryan Michael MacDonald

Needham & Company, LLC, Research Division - Senior Analyst

* Sean Mansouri

Liolios Group, Inc. - Director

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Presentation

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Operator [1]

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Good afternoon, 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, 2018. Joining us today are PFSweb's CEO, Mr. Mike Willoughby; the company's CFO, Mr. Tom Madden; and the company's outside Investor Relations Adviser, Sean Mansouri with Liolios Group. Following their remarks, we'll open the call for your questions.

I would now like to turn the call over to Mr. Mansouri for some introductory comments.

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Sean Mansouri, Liolios Group, Inc. - Director [2]

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Thank you, Ebony. 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 would like to remind everyone that this call will be available for replay through March -- excuse me, through April 1, 2019, starting at 8:00 p.m. Eastern tonight. A webcast replay will also be available via the link provided in today's press release as well as available on the company's website at pfsweb.com. Any redistribution, retransmission or rebroadcast of this call in any way without the expressed written consent of PFSweb is strictly prohibited.

Now I would like to turn the call over to Chief Executive Officer of PFSweb, Mr. Mike Willoughby. Mike?

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Michael C. Willoughby, PFSweb, Inc. - CEO & Director [3]

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Thank you, Sean, and good afternoon, everyone. 2018 was highlighted by our continued focus on improving profitability through operational efficiencies and higher-margin engagements and this was reflected in our 270 basis point improvement in service fee gross margin and a 70 basis point improvement in adjusted EBITDA margin and a profitable net income result for the year.

During the holiday season, we delivered another strong period of performance for our clients, exiting the year with strong operational momentum in our PFS business segment and a high level of referenceability for both LiveArea and PFS. We successfully scaled our operation for the critical holiday peak week, defined as the 8 shipping days from Thanksgiving through the following week, Friday. Compared to the same period in 2017, we shipped over 3.7 million order lines for a 35% year-over-year increase in order line volumes, as we move through the pipeline of our clients' holiday volume -- holiday week volumes in a more efficient manner.

Now let me share a few holiday peak week statistics and client-specific success stories. We deployed our new proprietary PFS CloudPick lighted carts for a health and beauty client, resulting in a strong year-over-year increase in order line output. And our highest performing picking team member picked over 8,000 order lines in a single shift using our new PFS CloudPick lighted pick carts. We implemented a new receiving and storage process for an apparel client, and we redesigned and redeployed a jewelry client's distribution footprint in response to the growth of their U.S. online business, resulting in significant operational efficiencies and output capabilities.

We also engraved over 19,000 units for [mall health and beauty brochure] in peak week. We averted over 88,000 fraudulent transactions through our automated and agent-assisted fraud prevention service, helping prevent almost $10 million in potential chargeback losses. We scaled our customer service headcount in our global contact centers over 60% to support a high rate of calls answered in 30 seconds or less. And as mentioned on our last quarterly update, the 2018 holiday season had our first Fulfillment-as-a-Service, or FaaS, solution brought to market. This was a pop-up fulfillment center deployment for a jewelry client in the Toronto Metro area, where we deployed the pop-up in less than 4 weeks and shipped almost 45,000 units across over 25,000 orders for our client's Canadian customers during the holiday. By operating this temporary pop-up solution, we were able to facilitate great savings for our clients and improved the service level for our client's customers compared to shipping the same orders from our U.S. facility. I'll have much more to highlight later on the call regarding our FaaS initiatives, including the 2 most recent FaaS product announcements.

Now quickly reviewing business developments in Q4. Total bookings for LiveArea were 24 engagements worth approximately $4.3 million in annual contract value, or ACV, bringing our 2018 annual total engagements to 59 for approximately 19.2 million ACV. This compares to 15 engagements for approximately 2.3 million ACV and 42 engagements for approximately 6.4 million ACV in the 2017 Q4 and full year, respectively. I continue to be very pleased with the significant improvement in engagement bookings for LiveArea in 2018.

As we stated on prior calls, LiveArea had a challenging 2018 from a new client project sales perspective, which we plan to turn around in 2019 with some of the initiatives that I will highlight later on the call. We booked 118 projects for 2018 for approximately $32.9 million in estimated project revenue compared to 204 projects for approximately $43.6 million in 2017.

For Q4, LiveArea project bookings were 53 projects for approximately $6 million in estimated project revenue compared to 59 projects for approximately $9 million in estimated project revenue for the year-ago quarter. For LiveArea at December 31, we had 94 active client engagements, representing discrete project engagements and ongoing retainer and managed services retainer engagements.

In terms of PFS bookings, we booked approximately $1 million in ACV in Q4 2018, bringing our total 2018 ACV bookings for PFS to $11.8 million. PFS is also off to a strong business development start in 2019, maintaining a sales pipeline value just over double its value since July of 2018.

Since our last call, a large percentage of this pipeline value has progressed into the last stages of our sales cycles, and we look forward to announcing several new client contracts next quarter. For PFS, at December 31, we had 79 active client programs, representing 64 different brands.

Unfortunately, we also received some unexpected news in early 2019 with Charlotte Russe's bankruptcy announcement on February 6 and the subsequent announcement on March 6 that our client intended to cease operations and liquidate their remaining inventory. While it is not unprecedented for a client to enter bankruptcy as part of the reorganization effort, it is very unusual in our experience for an established brand client to seize operations and liquidate. We have been constructively engaged with the restructuring team during the bankruptcy process, and now with the liquidator. And we currently expect to [collect] all the fees for the services provided to our client through the end of our engagement later this month.

Even though we do expect to collect our service fees for this client in Q1, we do expect some negative revenue impact for PFS in Q1, and we will be working hard to compensate for the unexpected loss of this client through the remainder of 2019. For reference, the Charlotte Russe engagement generated $10.4 million in service fee revenue for PFS in 2018, which is just under 4% of our consolidated revenue. We have already begun adjusting our cost in order to minimize the impact on our adjusted EBITDA in 2019. We also had the benefit of a strong pipeline and 3 to 4 months remaining in our fulfillment selling season to help us seek to offset the lost revenue through our sales and marketing efforts. Clearly, the best outcome for us would be to replace this client in the space they currently occupy with 1 or more fashion brands that have needs similar to Charlotte Russe. We will be working aggressively to minimize the impact of this client loss.

Despite this near-term headwind, we have several exciting new developments for both PFS and LiveArea that we expect to revitalize growth and further enhance margins for years to come.

But before touching on these, I'd like to turn the call over to Tom to provide additional financial insights for the quarter and for the year. Tom?

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Thomas J. Madden, PFSweb, Inc. - Executive VP and Chief Financial & Accounting Officer [4]

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Thank you, Mike, and good afternoon, everyone. For the fourth quarter of 2018, our consolidated service fee equivalent, or SFE, revenue increased to $68.3 million compared to $67.6 million in the prior year period. Our service fee gross margin also improved 10 basis points to 34.7% versus the prior year quarter. This strong margin performance, which is again at the upper end of our overall projected gross margin range, was driven by our focus on higher-margin engagements and services, including project work, effective cost management and the transition of certain lower-margin engagements over the last year.

From an adjusted EBITDA standpoint, we generated $9.1 million for the quarter compared to $9.4 million in Q4 of 2017, a slight decrease on a year-over-year basis. Improvements in our consolidated gross margin were slightly more than offset by incremental SG&A expenses, primarily attributable to the PFS segment, which I will discuss further when I provide insight on the segment activity.

Turning to the balance sheet. At December 31, 2018, cash and cash equivalents totaled $15.4 million, and total debt was $42.0 million, resulting in a net debt position of approximately $26.5 million. This compares to a net debt position of $28.2 million at December 31, 2017.

Now let's take a look at our segmented results. Our PFS segment generated $48.2 million of SFE revenue for the quarter with a service fee gross margin of 28.9%. This compares to $45.8 million of service fee revenue in the fourth quarter of last year with a 28.6% of gross margin. Gross margin in this segment continue to operate at the higher end of our targeted range due to focus on higher-margin engagements and service offerings, including project work, operational efficiency through enhanced technology-based tools and effective cost management. However, the direct contribution for the PFS segment decreased from $10.0 million to $9.1 million during the fourth quarter due primarily to incremental sales, marketing and infrastructure costs to support the PFS segment's targeted long-term growth, including our expansion into our new U.K.-based fulfillment center.

Our LiveArea segment generated service fee revenue of $20.1 million in the fourth quarter with service fee gross margin of 48.6%. This compares to $22.6 million of service fee revenue, with a 47.2% gross margin in the fourth quarter of last year. The LiveArea revenue decline is primarily due to lower new client project activity. LiveArea's SG&A costs were lower on a year-over-year basis due to reduced personnel cost as we worked hard to improve efficiency and streamline the business as a result of lower revenue.

In addition to the business segment data, we also have cost reported as corporate SG&A. These include costs that are not currently directly assigned to 1 of the 2 business segments. Our adjusted costs related to corporate SGA -- SG&A declined slightly in the fourth quarter of 2018 compared to the prior year, including an increased level of favorable benefit of certain year-end accrual adjustments. We are continuing to evaluate our allocation of cost among the business units, with the expectation that in 2019, additional costs will be reclassified from the corporate SG&A bucket into 1 of the 2 business segments and certain costs that may have historically been considered within our direct operating expense may be reclassified into cost of fees in the future.

If we do so, we will provide the impact on a historical basis as well in order to maintain appropriate year-over-year comparisons. Note that we did a reclass during the year-end close process to increase our year-to-date through September 2018 cost of fees and reduce SG&A by approximately $0.2 million to maintain consistency in reporting certain expenses during the periods. We also reallocated certain costs previously considered corporate into the LiveArea business for consistency purposes.

Now let's quickly review our annual 2018 results. Consolidated service fee equivalent revenue for 2018 came in at $232.1 million, a slight decrease as compared to $235.7 million in 2017. However, even with the SFE revenue decrease, our profitability improved year-over-year. Service fee gross margin increased 270 basis points to 36.3% compared to 33.6% in 2017. And adjusted EBITDA increased 6% to $24.4 million compared to $23.0 million in 2017.

We are also very pleased to report $1.2 million of net income for calendar year 2018, our most profitable year since our inception. Free cash flow, calculated as cash flow from operations less capital expenditures, was approximately $7 million in 2018, which reflects a slight increase over the prior year.

By segment, the PFS segment's SFE revenue increased to $149.7 million, with a service fee gross margin of 29.0% compared to $147.8 million with a 24.1% gross margin in 2017. We were very pleased with PFS' financial and operational performance in 2018, as we successfully transition certain lower-margin accounts into more profitable new and expanded client relationships and offerings. And also implemented a number of key operational improvements to drive strong gross margin improvements.

And lastly, LiveArea's service fee revenue in 2018 was $82.4 million, with a gross margin of 49.4%, which compares to $87.9 million with a 49.3% gross margin in 2017. On an overall basis, we had generally strong results from our existing client activity. We just ended up with less new client activity than what we were targeting. To help offset the impact of the top line issues, however, there was a strong effort to realign our cost structures in the LiveArea segment.

Now let's move on to our 2019 outlook. Having received the Charlotte Russe news just a few weeks ago, a lot of work continues across the organization to fully account for the potential impact and mitigate the loss through cost controls and adjustments to our sales and marketing efforts.

While Charlotte Russe has been one of our larger service fee client -- service fee revenue clients at approximately $10 million per year, we also have much of the calendar year 2019 still ahead of us to work toward trying to mitigate the impact.

Overall, we expect our consolidated 2019 SFE revenue to increase in the low single-digit range on a percentage basis compared to 2018, and adjusted EBITDA to increase at a low to mid-single-digit range on a percentage basis, as we strive to continue to generate leverage in the business.

A few other key items as we provide further insight into our business in 2019 are as follows: while we continue to target overall service fee activity gross margins in the 30% to 35% range, we expect to be toward the high end of the range in 2019. As always, this will be impacted by the relative proportion of our infrastructure-related services versus the higher margin professional services activity, PFS project work and our new FaaS products.

We expect our product revenue will continue to decline in 2019 from the $34 million that we generated in 2018 to approximately $27 million to $30 million. And our expected gross margin on this product revenue will range between 4% to 5%. We expect our capital expenditures to be in the range of $7 million to $10 million dependent upon new client activity in the PFS segment, some of which is expected to be funded by capital leases, debt or client funding.

For depreciation and amortization, excluding amortization of acquisition-related intangibles, we expect DNA to be between $9.5 million and $10.5 million versus approximately $9.7 million in 2018. And we expect our amortization of identifiable intangibles to decrease from approximately $1.6 million in 2018 to approximately $0.7 million in 2019. We expect our stock compensation expense to increase in 2019 to between $4.5 million to $5.5 million as compared to $4.0 million in 2018.

For our interest expense, while we expect to reduce average debt borrowing level in 2019 as compared to 2018, and our interest rate pricing structure is somewhat improved as a result of our amended financing facilities with our banks signed in November 2018, we do expect our interest expense will be relatively consistent with the calendar year 2018 level of $2.5 million, as a result of increases in the past year of overall LIBOR at prime base rates.

Our income taxes. We currently expect our income taxes to be between $2.5 million and $3 million, relatively in line with the calendar 2018 expense of $2.8 million. And we expect to generate free cash flow of between $7 million to $10 million, excluding the impact of any client-related cash remittance activity.

On a quarterly basis, we do expect a reduction in SFE revenue in Q1 of 2019 as compared to the prior year first quarter and a reduction in adjusted EBITDA in Q1 of 2019 as well. But then we look for trend to relatively flat to eventually improving year-over-year performance in the later quarters of 2019.

This concludes my prepared remarks, and I'll turn the call back over to Mike. Mike?

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Michael C. Willoughby, PFSweb, Inc. - CEO & Director [5]

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Thank you, Tom. And before I continue with new developments, I wanted to clarify the bookings number for LiveArea. We did book 181 projects in 2018 for approximately $32.9 million compared to 204 projects for $43.6 million in 2017.

Now as outlined in our press release today, we do have several exciting new developments across both our LiveArea and PFS business units. I'd like to provide some details on those. For PFS, we announced in Q4 the opening of our new 107,000-square-foot fulfillment center in Southampton, England. Our plan is to utilize this new facility to not only pursue new clients in the U.K. market but also offer our existing U.S. and EU fulfillment clients, and option to expand directly into the U.K. We're already in the process of adding 2 (inaudible) clients to this facility with production launches expected in Q1 and Q2 of this year, and we have an active pipeline of additional opportunities with new and existing clients interested in our end-to-end capabilities in the U.K.

I'm also excited to have received some very positive press for our new launch and commitment to the U.K. market with recent reports airing on CNBC in the U.K. and the U.S., and several follow-up articles appearing in various publications.

You may recall during the 2017 holiday, we first introduced a concept called Fulfillment-as-a-Service, or FaaS. Our FaaS initiative bundles our fulfillment technology, lightweight infrastructure and operations management oversight to solve order fulfillment challenges for our clients. These challenges include handling surge volumes during peak holidays, facilitating pop-up stores for promotional events, deploying temporary regional logistic centers and store stock management for omnichannel order fulfillment. The FaaS introduction started with a successful pop-up pilot during the 2017 holiday and this past season was our first opportunity to truly take it to market. Within the FaaS category, we now have several products and solutions. The first was the Toronto-based pop-up fulfillment center for our jewelry clients that I referenced earlier on the call. This solution has many potential applications to support seasonal peaks or special events for our clients, basically any period of heightened volumes that would require our client to temporarily expand their fulfillment network.

As a point of interest, we successfully utilized our FaaS pop-up solution to quickly open our new fulfillment center in Southampton, with limited electrical power, no logistics infrastructure and no permanent connection to the Internet. Within 3 weeks from signing the lease, we were able to deploy our lightweight pop-up equipment, utilizing a 4G wireless connection and standard off-the-shelving to begin shipping product for our first client in the facility before peak week. This internal quick launch is another example of one of the various use cases for this FaaS product, and I'm excited to be speaking on the subject of pop-up fulfillment centers at the upcoming Ecommerce Operations Summit in Columbus, Ohio on April 10.

The second product we're launching within FaaS is Retail Connect, which is designed to cost-effectively solve store or fulfillment challenges for mall-based stores without requiring those retailers to allocate retail space, adjust staffing and store operations or implement any additional in-store hardware or software. As efficiently announced in January, we have partnered with Simon Property Group to deploy the first wave of Retail Connect by establishing centralized shipping locations called depots in certain of their retail centers.

During this past holiday, we completed our Phase 1 development efforts, and we have been completing production testing of the Retail Connect solution through a pilot program with one of our current clients. Results from this pilot program are encouraging and validated the technology solution and key business processes are ready for full production. We have engaged with Simon to deploy our first production Retail Connect depot and a Simon Mall in the Dallas-Fort Worth Metroplex, and we expect to extend our pilot program to that depot early in Q2 as we take Retail Connect to market, targeting both Simon Partners and current clients of PFS and LiveArea.

Looking ahead, we plan to deploy Retail Connect into 6 to 10 premium Simon Mall locations in 2019, offering a cost-effective shipped-from-mall solution to retailers and brands in these various small locations. As we scale Retail Connect to include additional Simon properties, we plan to include pick up from mall, pick up from store, curbside delivery and a local courier delivery in the menu of Retail Connect delivery services.

And finally, the latest product launch within our FaaS category is called CloudPick. As announced in February, CloudPick is designed to create efficient direct-to-consumer order fulfillment picking operations for brands and retailers within their existing distribution center, or DC, and warehouse management software environment. The CloudPick solution includes pick cards assembled and configured by us that feature our proprietary cloud software, along with PFS IoT controllers and hardware components provided by Pcdata, a global logistics leader in automation systems.

So how does CloudPick solve problems for retailers? It shortens training times for their DC staffing, simplifies warehouse and inventory systems integrations and most importantly, improves picking efficiency. Picking productivity is a vital metric to drive operational efficiencies in a DC. Every few seconds saved for a picked product over the course of the day can quickly add up at scale with thousands of items being picked by hundreds of employees across multiple DCs. In short, we want to help retailers manage their current warehouse and distribution environment more efficiently. And the money they save with our CloudPick carts and technology will far outweigh the cost paid to us, making for a very strong value proposition for prospective clients.

Further, our CloudPick technology integrates with most warehouse management systems through a standard messaging interface and the CloudPick carts operate over existing WiFi networks, which makes for a seamless process for both implementation and future software updates from the cloud.

Looking at our FaaS category altogether, the pop-up solution, Retail Connect and CloudPick products are all expected to be margin accretive to our PFS operations unit and they should significantly expand our addressable market. They provide us with an additional opportunity to generate revenue in this segment in an asset-light model that does not require use of our leased facilities in the fulfillment area or our hourly labor. We expect to continue introducing similar next-gen products and solutions within FaaS as the category presents us with a unique opportunity to expand margins and accelerate growth beyond our typical sales targets for the PFS segment, while creating an even stickier relationship with our clients with consistent recurring revenue streams.

Now moving on the LiveArea. As mentioned earlier, we faced a challenging year from a new client sales perspective in 2018. We did not win as many projects as we would have liked, and that's on us. But contributing to this challenge has been a limitation that we've come to recognize with our addressable market, which has tended to consist of successful scaled up brands and specialty retailers. While these larger enterprises continue to be in our sweet spot as they spend billions overall on replatforming and making the most of their technology investments, not all companies are prepared for an enterprise-scale deployment of their e-commerce strategy. We've also been bound by the relative success of the enterprise platform partners we've traditionally worked with, which can vary considerably year to year. If a particular enterprise platform begins to go out of favor, naturally there are fewer project opportunities and managed services engagements for providers with respect to that platform. Given all these factors as well as increasing demand for services at the lower end of the middle market, we began to expand our focus on small- and medium-sized businesses or SMBs. These companies typically operate their commerce sites on platforms such as Magento, Shopify and BigCommerce. Last year, we organically developed a Shopify practice to complement our Magento service offering.

In January of this year, we added to this growing SMB practice by partnering with BigCommerce, one of the leading all-SaaS e-commerce platforms for the SMB segment. We made a joint announcement regarding our partnership at NRF, and we've already begun to see our pipeline accelerate with prospective SMB clients. We have closed our first BigCommerce deal with a large CPG client, which also happens to be an end-to-end engagement, pointing to another exciting opportunity within the SMB segment.

At the same time, we've been expanding our LiveArea services to include support for these SMB platforms. We've been working to bring to market a productized PFS offering, also tailored for the SMB market. Consisting of a multi-tenant deployment of our technology and operations service offering, this SMB solution provides smaller clients with a lightly branded physical experience at a lower price point for both the initial launch and ongoing support of their program. By combining our LiveArea and PFS solution for SMB clients, we now have a new offering, which I believe should open a new large end-market for our services and also serve as an incubator for emerging brands, which would transition seamlessly into our enterprise-scale customized end-to-end solution. I look forward to providing further updates on this joint PFS light initiative as the year progresses.

Last quarter, we announced our first project to deploy IBM's sterling commerce order management system, or OMS, for one of our current clients to be followed by managed services agreement with this client to include support for sterling. I commented on the last call that I believe this first project would open a lucrative new service category for LiveArea leading to additional project and managed services engagements. I do continue to believe this is a natural extension of our capabilities and experience with the various enterprise-class e-commerce and digital experience platforms we support and a natural cross-selling opportunity for our sales team.

Since our last call, we have been working to extend our capabilities and focus our sales and marketing efforts on this new adjacent market for us, and we now have several new sterling opportunities in our sales pipeline. I look forward to providing further updates on this library initiative as the year progresses.

Now as many of you have seen earlier today, we announced the appointment of Robert Frankfurt to our Board of Directors, which was done in connection with a standstill agreement with one of our larger shareholders, Engine Capital Management and certain of its affiliates. Rob brings a wealth of finance experience to the board, and we look forward to leveraging his background as we enter this next chapter of growth.

In the aggregate, we now have more than 28% of our stock held by owners with direct shareholder representation on our board, so we believe all stakeholder interests are very well aligned as we seek to maximize value for the company.

As I look back at how our company had grown and evolved over the last 6 years since I have had the privilege of leading PFSweb, we have significantly enhanced our footprint and platform capabilities through both organic and inorganic initiatives. We have more than doubled adjusted EBITDA during that time frame, while significantly reducing our client concentration. And now as we look to the future, we plan to build on our global commerce capabilities to grow revenue and profitability. We will continue to expand our addressable market through products and offerings that extend our enterprise-scale capabilities to the large SMB market as well as through measured geographic expansion. We will also continue to bring innovative and new technology products to market so that our clients can utilize the same proprietary world-class technologies we use in our own operations.

Ultimately, our product initiatives are designed to enable us to grow without the margin pressure of a significant increase in our workforce or facility footprint. And as with all our products and services, we will continue to enable brands to deliver premier customer journeys that seamlessly integrate digital and physical storefronts, while differentiating our clients from the common marketplace and retail experience.

Now while I'm certainly disappointed with the unexpected termination of the Charlotte Russe engagement, we plan to quickly adjust, and we are determined to stay focused on our strategic plan to diversify our service revenues, bring exciting new products to market and continue to grow the bottom line as we work to significantly expand our target market. I believe the Charlotte Russe termination also affirms our recently renewed commitment to [strictly] qualify the larger enterprise opportunities in our PFS sales pipeline and focus our efforts on strong iconic brands with high-value products and expectations for a high-touch customer care experience.

With the departures of these types of large discount retailers from our client portfolio over the past 2 years, the vast majority of our PFS, SFE revenue is now generated by long-term engagements with premium brands and manufacturers.

As always, Tom and I are happy to engage with all of our investors to answer questions and communicate our exciting story, and we hope to have opportunities to meet with you over the next several months. And as always, we will make ourselves available by phone.

Ebony, we'll now open up the call for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we will take our first question from Mark Argento with Lake Street Capital Markets.

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Mark Nicholas Argento, Lake Street Capital Markets, LLC, Research Division - Head of Capital Markets & Senior Research Analyst [2]

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Just a couple of quick ones. I know that it sounds like the Retail Connect new business have some nice traction. Can you just talk a little bit about potential scaling of that to multiple locations? Is there an exclusive assignment? Or could you roll that out with other REITs or other mall landlords? Maybe talk a little bit about the path to growth in that business?

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Michael C. Willoughby, PFSweb, Inc. - CEO & Director [3]

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Sure. Thank you. So this year, we're looking to have a measured rollout where, by the end of the year, we hope to have 6 to 10 locations spread across the U.S. in such a way that the retailers that we're working with have the ability to shift to the vast majority of the U.S. from one of these locations, and safe freight compared to if they were shipping out of a centralized location so that's really the thesis behind the rollout this year. The value prop to our clients is largely one of service level and freight savings. And then from that limited rollout, we expect, in 2020, to scale it up to where we have many more locations. We haven't evaluated that number yet, but the expectation would be in major metro areas to have the ability to offer in addition to the ship from mall option, pick up in mall, pick up in store, courier delivery and curbside delivery, which I think is really what will make a difference for these mall-based retailers is the ability to offer true omnichannel capabilities without having to dedicate space in their stores to do it. And then I think the answer to the question about exclusivity is that we're exclusively engaged with Simon at this point. We feel like they are very our best partner. There's nothing contractual about our exclusivity. It's more of the 2 of us feeling like this is a great opportunity and really wanting to focus our [attention]. As we grow and scale the program, clearly, there are other retail storefront operators that would be part of a target audience there and there's no reason why some point in the future we wouldn't start to engage with other partners as well.

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Mark Nicholas Argento, Lake Street Capital Markets, LLC, Research Division - Head of Capital Markets & Senior Research Analyst [4]

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Great. And then one last one for me. So in terms of the LiveArea business, it looks like -- I mean, you had mentioned '18 was a little disappointment, but you made some changes and kind of expanded the addressable market. From a sales perspective, have you guys made some incremental hires to the sales team? What are some of the specific things that you guys have done to address the issues there and maybe the timing around that?

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Michael C. Willoughby, PFSweb, Inc. - CEO & Director [5]

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Right. So I think we'll probably have more to say about the things that we've done on the next call because it will be related directly to Q1 results. But I can tell you that a lot of our effort has been around taking advantage of this OMS opportunity I spoke to earlier. As I mentioned, we landed our first client last fall and then subsequently, have some nice opportunities in the pipeline, and so we feel like that's an area where sales and marketing investments are justified. We really like this OMS project. They tend to be larger and longer term. And then, of course, they're nicely adjacent to these e-commerce platform projects that we do, where we're able to, in many cases, kind of extend an engagement to include OMS in addition to the e-commerce platform, so we're happy about that. That's definitely one area of incremental investment that we're making. We also completed the build-out of our client partner program late last year and really feel like that program has the ability to help us make the most of our client -- current client portfolio. We're also, as we engage with new clients are sort of rolling the responsibility for management of those client accounts into the client partners and beginning to cross-sell and upsell early on just to maximize the opportunity there. But beyond that, I think I'll wait till the next call and talk specifically about some changes and then what we expect the impact to be as we roll into the remainder of 2019.

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Operator [6]

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Our next question will come from George Sutton with Craig-Hallum.

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Adam David Kelsey, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [7]

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This is Adam on for George. It definitely sounds like there's some bright spots in the FaaS segment. I was just hoping you could potentially quantify what that contribution was in Q4? And then how you expect that to play out during next holiday season?

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Michael C. Willoughby, PFSweb, Inc. - CEO & Director [8]

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Sure. Well, so we didn't quantify the -- other than just the order volumes that we put through the pop-up last holiday. And realistically, of our FaaS products, the only production FaaS product we would have had operational in the holiday would have been that pop-up. So we had 45,000 lines that we process to cross over 25,000 orders, and while that would have been a nice revenue stream for our us, realistically, it was, for us, a way to help our client to save money on their freight cost and the incremental revenues that we would have generated would have been fairly low because that activity would have been processed out of our U.S.-based centers. Otherwise, it did allow us to distribute capacity to that facility in Toronto that otherwise might have been difficult for us to process in our U.S. center during peak weeks, so it did help us balance the workload. But I think that 2019 is the year when it will be worthwhile to start to talk about more specifics as these new products start to roll out, particularly CloudPick, which I think has a potential fast launch for us with some opportunities already in our pipeline for that product and look forward to over the coming calls to try to quantify that a little bit more as we actually bring these things to market, not just in pilot project form, but in full production.

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Thomas J. Madden, PFSweb, Inc. - Executive VP and Chief Financial & Accounting Officer [9]

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And this is Tom. To add on to that, many of these FaaS tools that Mike was alluding to, as he also commented during his earlier script, we actually have deployed in our business over the last 3 to 6 months. So some of the CloudPick technologies were deployed in the business for us, so we were getting benefit through that process. Again, our capabilities are being able to put up our U.K. distribution facilities so quickly was completely dependent on our ability to utilize some of that pop-up fulfillment center technology as well. So these tools that we're developing are both being utilized for our own internal purposes as well as being able to go to our clients and potential clients with these components.

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Michael C. Willoughby, PFSweb, Inc. - CEO & Director [10]

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It's a good point, Tom. And the statistic I mentioned earlier were that productivity of 8,000 picks across the shift for a picker is definitely as a result of this technology we've deployed in our own fulfillment centers and look to share those kind of efficiencies with our clients as we enabled them in their own facilities for direct-to-consumer fulfillment. What else, Adam?

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Adam David Kelsey, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [11]

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And then one more question, focusing on the BigCommerce partnership, if you don't mind, could you kind of compare what working with them is like to other partners you have? And what the integration time line looks like?

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Michael C. Willoughby, PFSweb, Inc. - CEO & Director [12]

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Well, we're very excited about that partnership. We think that it's a really good SMB platform. It offers the benefits of multi-tenant SaaS at the same time with extensibility. And I think they've gotten a lot of really good press lately and one of the things that we like is its scalability. I think the way that you integrate with the platform is fairly typical of SMB platforms where you have some limitations on your ability to extend but you've got a lot of great features that are built in. The payment processing around the platform is robust, but fairly locked down. And so it presents a retailer with pretty clear-cut options with regard to how they deployed the site. We think, along with Shopify and Magento, you got a nice quick launch capability that allows you to get a site up and running in a few weeks versus taking months and months to launch a site and especially for our SMB product offering where you really want to get the program up and running as quickly as possible in order to start to support the volumes. We like that quick launch capability. So -- and I think the final thing I would say is we're happy with the relationship that we have in place with the BigCommerce folks down in Austin, they're sort of in the neighborhood, and it's a bit convenient for us to develop a relationship quickly with them and are really optimistic about the long-term potential of that relationship.

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Operator [13]

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(Operator Instructions) We'll take our next question from Ryan MacDonald with Needham & Company.

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Ryan Michael MacDonald, Needham & Company, LLC, Research Division - Senior Analyst [14]

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Just quickly, I guess, on the Charlotte Russe. Unfortunate, obviously, to see liquidation there, but can you talk about the profitability perspective or margin perspective, what sort of the profile of that customer wants? And is this a potential case of perhaps addition by subtraction? Does this help margins at all for the business going forward?

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Michael C. Willoughby, PFSweb, Inc. - CEO & Director [15]

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So Tom, I'll speak to the financial profile. I will say that as we've talked over the past couple of years about our client portfolio and our desire to really focus on premium brands, iconic brands, brands that have high-value, high-margin product and an expectation for a high-touch experience, a really premium experience, a fast-fashion client doesn't necessarily fall into that category. So while we would not have chosen this moment in time for this client to exit, this is not a client that's representative of our target market. And when we came up for a contract renewal, it's quite likely that one way or the other, we might have seen that turnouts because of the changing nature of our target market. Nevertheless, the timing is certainly not what we would have wanted. And certainly, assessing situation where we have to work hard in 2019 to replace the revenue for that client and make sure that we're adjusting appropriately either through successful sales and marketing and cost management to make sure it doesn't have too much of an impact on the bottom line. Tom, do you want to speak to the financial profile?

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Thomas J. Madden, PFSweb, Inc. - Executive VP and Chief Financial & Accounting Officer [16]

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Sure. We don't provide specific gross margin profitability component on a client-by-client basis, but I'll give you a little flavor of the bulk of the activity that we are performing for Charlotte Russe client. Engagement was applicable to our fulfillment and call center activity so all on the PFS operations side of the business. It was a client that came onboard in 2016, and initially was not meeting our targeted profitability levels over the last, especially 6 to 12 months. The team has done a nice job of kind of modifying things in order to get them into improve profitability picture. But any of the clients that normally just have a fulfillment-only or call center-only type of relationship with us probably are tending toward the lower end of our gross margin range as opposed to the upper end of the range. And in the operations business segment, the lower end of the range, I think, the overall range is about a 20% to 30% gross margin profile for our PFS business segment. So again, we end up having some impact there from a gross margin loss standpoint, but the other component of this is that we do have some fixed cost in the business where there was a committed level of square footage and space allocated to this client that, while the team is actively working to identify clients to fill that space, we'll have some negative consequences to it as we look out into the short term from an expense standpoint.

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Ryan Michael MacDonald, Needham & Company, LLC, Research Division - Senior Analyst [17]

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Got it. That's really helpful. And then switching into the LiveArea business, I think you mentioned that you're going to talk a little bit about what you've done there to make some improvements year-over-year on the next quarter call. But I just was curious, you mentioned, and I saw the press release out before the end of the year, about LiveArea being rooted in this independent research report for B2C commerce. Wondering, if at all, or what you've seen, if at all, any benefits from the inclusion in that report on lead-generation pipeline as you head into 2019 year.

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Michael C. Willoughby, PFSweb, Inc. - CEO & Director [18]

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Yes. Well, there certainly has been a benefit, not only from being included in the Forrester report. Just our overall sales and marketing efforts to make sure that, that LiveArea brand is well-known in the market. We had a really good experience in NRF early in the year, shop talk was a good conference for us. And I think between the brand recognition and the referenceability that we enjoy, which is very high, and a lot of our competitors don't necessarily enjoy that same high level of referenceability, we've got everything in the right place in order to scale. One of the challenges that I talked about last year is we started to realize that we had this revenue headwinds was just the target market being too narrow. And I think the best thing that we can do as we go into 2019 is broaden the top of the funnel, not only just by taking control of our sales cycle and being less reliant on partners to refer leads to us, but even more importantly, this SMB initiative. I think there's a lot of opportunity to see a lot more deals in the sales pipeline. They're going to be smaller projects, but they're going to lead to engagements. And one of the things that we're really excited about is the fact that this could be an incubator for us, the emerging brands that become successful like Thrive Causemetics for our PFS business, where you really see a brand take off and become very valuable, and it's a great success story for us to be a part of. So I hope to have a lot more to say about the SMB program, in general, and specifically how that's contributing as we move through the year. But I do feel really good about where the brand is in the market and how we stack up against our direct competitors from that segment.

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Ryan Michael MacDonald, Needham & Company, LLC, Research Division - Senior Analyst [19]

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Got it. And then just one last question for me. On the SaaS offerings, great to see the progress that you're making in terms of the new product offerings and sort of continuing the progress there. But how much work needs to be put into place or needs to be done on building out either a dedicated sales force for this? Or is this something that just kind of expands the toolkit of the existing sales force on the PFS side?

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Michael C. Willoughby, PFSweb, Inc. - CEO & Director [20]

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Well, I think, at this point, we feel like leveraging the partnerships that we have in place with Simon, with Pcdata, with the sales team that we have in place is the appropriate thing to do. Obviously, as we see opportunities start to build, we will put sales and marketing dollars behind those opportunities and respond appropriately. But we want to be conservative with the rollout. One of the things that I really appreciate Tom alluded to earlier is the fact that most of these products are really leveraging capabilities that we're using internally were the R&D dollars that you're putting into these project developments are not one-off. They're building on the things that we're doing, supporting clients within our hosted facilities. And so there's not a lot of overhead associated with bringing them to market. And so we get a lot of leverage that way. But we will, I think, be appropriately measured in our marketing expense as we bring this to market and really wait to see how they're accepted in the market, see our first wins and then apply resources as appropriate.

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Operator [21]

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And at this time, this does conclude our question-and-answer session. I would now like to turn the call back over to Mr. Willoughby for closing remarks.

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Michael C. Willoughby, PFSweb, Inc. - CEO & Director [22]

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Okay. Thank you, Ebony. I'd like to thank everyone that attended the call today. We look forward to speaking with our investors and analysts when we report our first quarter results in May, which is just around the corner. And we'll be available, as we said, by phone, face-to-face when we can and some of the conferences that are taking place in May. Until then, this does conclude today's conference, so thank you for your participation.

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Operator [23]

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Once again, ladies and gentlemen, that does conclude today's teleconference. You may now disconnect your lines at this time, and thank you all for your participation.