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Zones Announces Financial Results for the Three Months Ended
March 31, 2004; Earnings Per Share Improves by $0.10 Year
over Year; Q1 2004 Net Sales Increase 15.7% Compared to Prior Year
AUBURN, Wash.--(BUSINESS WIRE)--April 29, 2004--
Gross Profit Margins Improve to 12.2% for Q1 2004
Zones, Inc. (the "Company," "Zones"(TM)) (Nasdaq:ZONS), a
single-source direct marketing reseller of name-brand information
technology products, today announced its results for the three month
period ended March 31, 2004. The Company's first quarter net income
was $791,000, or $0.05 per diluted share, compared with a net loss of
$646,000, or $.05 per share, for the same quarter a year ago. First
quarter 2004 sales grew 15.7% to $114.1 million from $98.6 million in
the first quarter of 2003.
"We are pleased with the financial results for the quarter,"
commented Firoz Lalji, president and chief executive officer. "The
Company benefited from the operational efficiencies we attained during
the economic slowdown, positioning Zones to take advantage of the
improving economy." Lalji continued, "Our account executives are the
foundation for future sales growth and we intend to continue our
aggressive hiring practices throughout the remainder of the year. To
this end, we added a net 20.6% to our total outbound account executive
headcount compared to prior year levels."
Operating Highlights
Consolidated outbound sales to the small to medium sized business
("SMB"), large customer accounts and public sector markets increased
18.0% to $101.9 million in the first quarter of 2004 compared to $86.4
million in the same period of 2003. These sales as a percent of total
net sales for the three month period ended March 31, 2004 and 2003
were 89.3% and 87.6%, respectively. Direct web orders increased to
$11.5 million, an increase of 37.9% over the same period of the
preceding year. Strategic product categories also contributed to the
year over year growth include printers, software, and notebooks and
PDA's which increased 50.5%, 38.6% and 28.3%, respectively.
Gross profit margins were 12.2% in the first quarter of 2004,
compared to 10.5% in the first quarter of 2003, and 10.7% sequentially
from the fourth quarter of 2003. The 170 basis point year over year
improvement is a result of increased mix of higher margin items and
the complete adoption of Emerging Issues Task Force ("EITF") Issue No.
02-16, "Accounting for Consideration Received from a Vendor by a
Customer (Including a Reseller of the Vendors' Products)". See
Footnote I below for additional information on EITF 02-16. The first
quarter of 2003 gross margins were only partially affected by the
adoption of EITF No. 02-16 due to the transitional reporting
requirements. As a result, gross profit margins were 130 basis points
greater in the first quarter of 2004 compared to the first quarter of
2003. Gross profit margins as a percent of sales are expected to vary
on a quarterly basis due to vendor programs, product mix, pricing
strategies, customer mix, and economic conditions.
Total selling, general and administrative expenses, as a percent
of net sales, were 9.3% in the first quarter of 2004, which is a
decline from 10.3% in the corresponding period of the prior year, but
represents an increase from 8.5% for the fourth quarter of 2003.
Selling, general and administrative expenses totaled $10.6 million in
the first quarter of 2004 compared to $10.2 million and $11.1 million
in the first and fourth quarter of 2003, respectively. The Company's
year over year expense increase relates to the acquisition of
Corporate PC Source on March 31, 2003 as well as a 20.6% increase in
account executive headcount. The Company's sequential decline is
primarily due to process improvements it made throughout 2003. The
Company continues to create efficiencies within the organization to
enhance customer satisfaction and increase the productivity of its
account executives.
Asset Management
The Company's balance sheet remains in excellent condition and the
Company ended the first quarter of 2004 with over $21.8 million of
cash and available credit. Consolidated working capital was $22.7
million at March 31, 2004 compared to $20.9 million at December 31,
2003.
The Company's net inventory of $16.4 million at March 31, 2004
increased from $11.5 million at December 31, 2003. The growth in
inventory levels primarily relates to inventory purchased and
segregated for binding customer contracts. Inventory turns decreased
to 28 times annually from 36 times at December 31, 2003 due primarily
to the Company's investment in inventory for its binding customer
contracts. These contracts will be recorded as net sales when the
criteria for revenue recognition are met. Trade accounts receivable
decreased to $46.1 million at March 31, 2004 from $52.0 million at
December 31, 2003. Days sales outstanding were 47 days, an increase
from 44 days at December 31, 2003.
Other Matters
The Company has terminated its contract for outsourced warehousing
with Airborne Logistic Services. The Company will move its warehousing
operations to a new facility in Chicago, Illinois which will be
operated by its wholly owned subsidiary, Corporate PC Source. The
Company expects to complete the transition to its new warehousing
facility by the end of the third quarter of 2004.
Footnote I
During the first quarter of 2003, the Company adopted Emerging
Issues Task force ("EITF") Issue No. 02-16, "Accounting for
Consideration Received from a vendor by a Customer (Including a
Reseller of the Vendor's Products)." The income statement
classification of EITF 02-16 covers vendor consideration related to
agreements entered into, or modified, after January 1, 2003. EITF
02-16 requires that consideration from vendors, such as advertising
support funds, be accounted for as a reduction to cost of product
unless certain requirements are met showing that the funds are used
for a specific program entirely funded by an individual vendor. If
these specific requirements related to individual vendors are met, the
consideration is accounted for as a reduction in the related expense
category, such as advertising or selling and administrative expense.
The Company provides numerous advertising programs to support its
vendors, some of these programs relate to multiple vendors while other
are performed on behalf of an individual vendor for a specific
program.
About Zones, Inc.
Zones, Inc. and its subsidiaries are single-source direct
marketing resellers of name-brand information technology products to
the small to medium sized business market, large and public sector
accounts, while supporting their legacy Mac customers through an
inbound call center promoted by circulation of the Mac Zone catalog
and a dedicated website. Zones sells these products through outbound
and inbound account executives, specialty print and e-catalogs, and
the Internet. Zones offers more than 150,000 products from leading
manufacturers including 3COM, Adobe, Apple, Cisco, Epson, HP, IBM,
Kingston, Microsoft, Sony and Toshiba.
Incorporated in 1988, Zones, Inc., is headquartered in Auburn,
Washington. Buying information is available at
http://www.zones.com,
or by calling 800-258-2088. The Company's investor relations
information can be accessed online at
www.zones.com/IR.
A live webcast of the Company's management discussion of the first
quarter will be available on the Company's Web site at
www.zones.com/IR under upcoming events. The webcast will be held
tomorrow, April 30, 2004 at 8:30 am PT.
This press release may contain statements that are
forward-looking. These statements are made pursuant to the safe harbor
provision of the Private Securities Litigation Reform Act of 1995.
These statements are based on current expectations that are subject to
risks and uncertainties that could cause actual results to differ
materially from historical results or those anticipated. These risk
factors include, without limitation, future growth, vendor support,
account executive hiring and productivity, increased expenses of being
a public company, pressure on margin, competition, state tax
uncertainties, rapid technological change and inventory obsolescence,
reliance on vendor relationships, dependence on personnel, potential
disruption of business from information systems failure, reliance on
outsourced distribution, and other risks and uncertainties detailed in
the Company's filings with the SEC.
ZONES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
(Unaudited)
March 31, December 31,
2004 2003
----------- -----------
ASSETS
Current assets
Cash and cash equivalents $ 3,111 $ 5,180
Receivables, net 53,118 60,058
Inventories, net 16,377 11,487
Prepaids 1,259 1,101
Deferred income taxes 1,327 1,327
----------- -----------
Total current assets 75,192 79,153
Property and equipment, net 4,270 4,355
Goodwill 3,898 4,193
Deferred income tax 4,601 5,110
Other assets 211 167
----------- -----------
Total assets $ 88,172 $ 92,978
=========== ===========
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 39,846 $ 41,270
Accrued liabilities and other 6,591 8,316
Line of credit 5,425 7,850
Notes payable 662 833
----------- -----------
Total current liabilities 52,524 58,269
Notes payable, net of current portion 1,544 1,667
Deferred rent 596 341
----------- -----------
Total liabilities 54,664 60,277
----------- -----------
Commitments and contingencies
Shareholders' equity:
Common stock 39,606 39,590
Accumulated deficit (6,098) (6,889)
----------- -----------
Total shareholders' equity 33,508 32,701
----------- -----------
Total liabilities & shareholders'
equity $ 88,172 $ 92,978
=========== ===========
ZONES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
For the three months
ended March 31,
2004 2003
--------- ----------
Net sales $ 114,092 $ 98,632
Cost of sales 100,176 88,296
--------- ----------
Gross profit 13,916 10,336
Selling, general and administrative expenses 10,649 10,191
Advertising expense, net 1,890 1,196
--------- ----------
Operating income (loss) 1,377 (1,051)
--------- ----------
Other (income) expense: 77 (7)
Income (loss) before income taxes 1,300 (1,044)
Provision (benefit) for income taxes 509 (398)
--------- ----------
Net income (loss) $ 791 $ (646)
========= ==========
Basic income (loss) per share $ 0.06 $ (0.05)
Shares used in computation of
basic income (loss) per share 13,664 13,625
========= ==========
Diluted income (loss) per share $ 0.05 $ (0.05)
Shares used in computation of
diluted income (loss) per share 14,487 13,625
========= ==========
Operating Highlights
Supplemental Data
Three Months Ending March 31, 2004
----------------------------------
% of net AE's # of AOS
sales Orders
---------- ---------- ---------- -------
Outbound 89.3% 234 83,400 1,287
Inbound & Consumer Unassist 10.7% 34 28,400 439
Q1 '04 Q4 '03 Q1 '03
---------- ---------- ----------
Average Productivity
(annualized)
Per Outbound AE(1) 1,742,000 2,225,000 1,518,000
Per Employee 831,000 989,000 708,000
(1) Outbound productivity excludes sales and headcount from former
major customer.
Sales Mix
---------
Quarter Ended
-----------------------------
3/31/2004 3/31/2003
------------- -------------
Product Mix (% of sales)
Notebook & PDA's 18.1% 17.2%
Desktops & Servers 19.6% 19.0%
Software 15.2% 13.4%
Storage 9.1% 10.7%
NetComm 4.2% 6.3%
Printers 9.8% 8.0%
Monitors & Video 10.3% 10.2%
Memory & Processors 4.8% 5.2%
Accessories & Other 8.9% 10.0%
Direct Web Sales 11,546,000 8,371,000
CONTACT: Zones, Inc.
Ronald McFadden, 253-205-3000
