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Cabot Small-Cap Confidential Special Bulletin

PFSweb (PFSW) reported a better-than-expected quarter with revenue up 22%. Let’s keep it at Hold until we can assess the stock’s reaction

PFSweb Reports Q2 2016 Results

PFSweb (PFSW) reported a better-than-expected quarter with revenue up 22% to $77.2 million ($6.5 million ahead of expectations) and EPS of $0.01 ($0.05 ahead of expectations). On the company’s service fee equivalent revenue measure, growth was 30% to $51.8 million. As expected, product revenue decreased by 20% to $11.4 million due to ongoing restructuring activities by its last remaining client in this segment.

The company ended the quarter with $16.7 million in cash, down from $21.8 million, and debt of $55.0 million, compared to $35.4 million at this time last year. The differences reflect money used in the June 2016 Conexus acquisition, and payment of calendar 2015 related earn-out liabilities related to prior acquisitions (which are largely done at this point). Cash flow should improve throughout the rest of the year.

Conexus is a U.K.-based e-commerce system integrator, and helps PFSweb attain its goal of expanding its system integration presence in Western Europe, especially on the SAP Hybris platform. The company expects around $7 million in annual revenue from Conexus, but only around $400K was booked in Q2 due to the timing of the acquisition. Management doesn’t think any more acquisitions are required in the U.K., but will look for opportunities in France and Germany. It doesn’t anticipate any more acquisitions in 2016. Management said there’s certainly potential from disruption from Brexit, but that ultimately it doesn’t think that uncertainty is going to have a big impact. Long-term, a U.K. presence is necessary.

DemandWare (one of the platforms that PFSweb works with) was acquired by, and will become part of that company’s Marketing Cloud, Sales Cloud and App Cloud. PFSweb thinks this is a net benefit for them. PFSweb also works with Oracle, who has acquired NetSuite, which PFSweb doesn’t work with. This M&A activity is indicative of the fast moving e-commerce/cloud industry and it sounds like it all amounts to a neutral to net positive for PFSweb, though there could be some bumps as these companies all get integrated.

The company booked an additional $10 million in project bookings, bringing the year-to-date total through two quarters up to $23 million. Bookings include a mix of website builds, define and design consulting services, managed services, digital marketing services and creative design services. In early 2015, PFSweb introduced a bookings metric called “lifetime contract value,” which is an estimate of the total recurring service revenue to be generated from contracts it wins (most of which are three to five years in length). This is different from project revenue. In this quarter, the company booked an additional $85 million in lifetime contract value, bringing the year-to-date total up to $110 million. Management said this was the highest quarterly bookings in a year. It has been investing in expanded facilities to support the three new clients, and that will curb profitability in 2016 but help significantly in 2017 as those client activities ramp up.

Examples of contracts booked in the quarter include:

• An engagement with a large crafts retailer to provide U.S. order fulfillment services, utilizing the company’s newest distribution facility. The deal is a five-year contract, estimated to be worth over $45 million in lifetime contract value.

• A three-year engagement with a women’s fashion-forward brand to provide U.S. order fulfillment and customer care operations, planned to go live in late Q3 of 2016 in another newly leased distribution facility in the Memphis area. This deal is estimated to be worth approximately $29 million of lifetime contract value over the three-year contract period.

• An engagement with a hair care brand as part of a larger master services agreement with a global consumer packaged goods company. PFSweb will provide U.S. order fulfillment services and several digital marketing solutions. It is a five-year contract estimated to be worth approximately $5 million in lifetime contract value, with the potential to add more brands from the parent company’s portfolio in the future. Go-live is scheduled for Q4 2016.

• A project with a three-year recurring revenue engagement with a global apparel brand to provide a website built on Demandware, order management and digital marketing solutions. This deal is estimated to be worth approximately $6 million in lifetime contract value and is currently schedule to go live in Q1 of 2017.

Revenue from the CrossView subsidiary has been a little light, and factoring in the costs from facilities ramp up management has left revenue guidance for 2016 the same at $220 to $230 million (implying 19% to 24% growth). But it has pulled in adjusted EBITDA guidance to a range of between $21.5 million to $23.5 million, slightly down from $23 million to $25 million.

Management has seen an uptick in business-to-business e-commerce activity, which could help revenue build into the latter half of the year, when business-do-consumer activity typically wanes since those projects are usually wrapped up by the holiday season.

That’s a lot of detail to digest. But it’s reflective of what we need to pay attention to with a company like PFSweb, which has to support a lot of different platforms to provide a full-suite of global e-commerce capabilities. The bottom line sounds like things are going well. It’s investing a lot, but trying to build a formidable company that can compete. I expect we’ll see the stock rise today, as ultimately that’s what matters. It’s been our worst performer, and after this report, the analysts following the stock should all raise their price targets. Let’s keep it at Hold until we can assess the stock’s reaction. On Thursday, it will present at the Canaccord Conference, and that presentation could help to further increase the stock’s profile. HOLD.