SOURCE: Zones, Inc.

February 08, 2007 16:00 ET

Zones Announces Financial Results for the Quarter and Year Ended December 31, 2006

AUBURN, WA -- (MARKET WIRE) -- February 8, 2007 -- Zones, Inc. (the "Company," "Zones"™) (NASDAQ: ZONS):

--  2006 earnings increased 57.1% to $0.66 per diluted share compared to
    earnings of $0.42 per diluted share in 2005
--  Fourth quarter 2006 diluted earnings per share increased 42.9% to
    $0.20 compared to $0.14 in 2005
--  Fourth quarter net sales grew 16.0% sequentially to $159.9 million
--  Fourth quarter 2006 SMB sales grew 32.3% compared to the prior year
--  Unassisted sales increased to 30.2% of total sales in the fourth
    quarter
    

Zones, a single-source direct marketing reseller of name-brand information technology products, today announced its results for the three- and twelve-month periods ended December 31, 2006.

The Company's fourth quarter net income was $3.0 million, or $0.20 per diluted share, compared with net income of $2.0 million, or $0.14 per diluted share, for the same quarter a year ago. Total fourth quarter 2006 net sales were $159.9 million compared to $159.8 million in the fourth quarter of 2005.

For the year ended December 31, 2006, net earnings improved to $9.7 million, or $0.66 per diluted share; this compares to $6.1 million, or $0.42 per diluted share, for 2005. Net sales for the year ended December 31, 2006 increased 1.8% to $577.0 million from $566.6 million for 2005.

Firoz Lalji, CEO, said, "I am very pleased with our fourth quarter and 2006 operating performance. 2006 annual earnings grew 57.1% over our reported earnings for 2005, which were 31.3% higher than 2004. Financial results for our most recent two fiscal years have provided shareholders an average annual return on equity of 20.8% and 15.5%, respectively." Continued Lalji, "Our acceleration in earnings demonstrates the continued fiscal improvements made by the Company in key financial and operating metrics. The 2007 plan is expected to build on our 2006 accomplishments and includes an extensive first half customer management initiative and a first half investment to develop a national field sales presence as another point of contact with current and prospective SMB and Enterprise customers."

Operating Highlights

Consolidated outbound sales increased 1.3% to $157.2 million in the fourth quarter of 2006 compared to $155.1 million in the same period of 2005. Sales to the SMB business grew 32.3% in the quarter compared to the same quarter a year ago. Customer unassisted sales (primarily web-based) were $48.4 million, an increase of 18.6% over the same period of 2005, and represented 30.2% of total fourth quarter 2006 net sales.

Gross profit margin improved 160 basis points to 12.0% in the fourth quarter of 2006, compared to 10.4% in the fourth quarter of 2005. The gross profit margin percentage in the fourth quarter of 2006 was positively affected due to product and customer mix, vendor programs and credits.

Total selling, general and administrative expenses, as a percent of net sales, were 7.8% in the fourth quarter of 2006. This represents an increase from 7.1% in the corresponding period of 2005 and a sequential decline from 8.2% in the third quarter of 2006. The year-over-year increase is due to compensation and benefit related expenses resulting from an increase in sales account executive headcount.

Asset Management

The Company's balance sheet remained strong and ended the year with a cash balance of $9.2 million. Consolidated working capital was $41.7 million at December 31, 2006 compared to $33.4 million at December 31, 2005.

Inventories increased to $21.4 million at December 31, 2006 from $19.7 million at December 31, 2005. The increase is due to on hand customer inventory. Trade accounts receivable decreased to $65.7 million at December 31, 2006 from $68.3 million at December 31, 2005.

About Zones, Inc.

Zones, Inc. is a single-source direct marketing reseller of name-brand information technology products to the small- to medium-sized business market, large and public sector accounts. 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, Lenovo, 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 fourth quarter will be available on the Company's Web site at www.zones.com/IR under upcoming events. The webcast will be held Friday, February 9, 2007 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; 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; variations in gross profit margin percentages due to vendor programs and credits, product and customer mix, pricing strategies, and economic conditions; and other risks and uncertainties detailed in the Company's filings with the SEC.

                                ZONES, INC.
                        CONSOLIDATED BALANCE SHEETS
                              (in thousands)
                                (Unaudited)


                                                  December 31, December 31,
                                                      2006         2005
                                                  ------------ ------------
ASSETS
Current assets
  Cash and cash equivalents                       $      9,191 $      3,195
  Receivables, net of allowance for doubtful
   accounts of $1,936 and $1,562                        65,699       68,318
  Vendor Receivables                                    12,556       14,750
  Inventories                                           21,385       19,736
  Prepaids                                               1,076          922
  Deferred tax asset                                     1,473        1,346
                                                  ------------ ------------

       Total current assets                            111,380      108,267

Property and equipment, net                              3,771        3,810
Goodwill                                                 5,098        5,098
                                                           251
Other assets                                               195          179
                                                  ------------ ------------

       Total assets                               $    120,695 $    117,354
                                                  ============ ============

LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
  Accounts payable                                $     42,592 $     45,359
  Inventory Financing                                   14,385        8,469
  Accrued liabilities and other                         12,728        9,069
  Line of credit                                             -       10,700
  Notes payable to former shareholders of CPCS,
   Inc.                                                      -        1,272
                                                  ------------ ------------

       Total current liabilities                        69,705       74,869

Note payable                                                 6           21
Deferred income tax                                          -           35
Deferred rent obligation                                 1,502        1,112
                                                  ------------ ------------

       Total liabilities                                71,213       76,037
                                                  ------------ ------------

Commitments and contingencies

Shareholders' equity:
  Common stock                                          35,983       37,503
  Retained earnings                                     13,499        3,814
                                                  ------------ ------------

       Total shareholders' equity                       49,482       41,317
                                                  ------------ ------------

       Total liabilities & shareholders' equity   $    120,695 $    117,354
                                                  ============ ============





                                ZONES, INC.
                  CONSOLIDATED STATEMENTS OF OPERATIONS
                  (in thousands, except per share data)
                                (unaudited)


                                For the three months  For the twelve months
                                 ended December 31,    ended December 31,
                                  2006       2005        2006      2005
                                ---------  ---------- ---------- ----------

Net sales                       $ 159,918  $  159,834 $  577,027 $  566,553
Cost of sales                     140,753     143,189    505,508    505,997
                                ---------  ---------- ---------- ----------

  Gross profit                     19,165      16,645     71,519     60,556
Selling, general and
 administrative expenses           12,515      11,373     48,434     43,618
Advertising expense                 1,873       1,871      7,159      6,618
                                ---------  ---------- ---------- ----------

  Income from operations            4,777       3,401     15,926     10,320
                                ---------  ---------- ---------- ----------

Other (income) expense:               (12)        200        270        503

Income before income taxes          4,789       3,201     15,656      9,817
Provision for income taxes          1,807       1,227      5,971      3,766
                                ---------  ---------- ---------- ----------


  Net income                    $   2,982  $    1,974 $    9,685 $    6,051
                                =========  ========== ========== ==========


  Basic earnings per share      $    0.23  $     0.15 $     0.73 $     0.45
  Shares used in computation of
   basic earnings per share        13,208      13,309     13,195     13,382
                                =========  ========== ========== ==========

  Diluted earnings per share    $    0.20  $     0.14 $     0.66 $     0.42
  Shares used in computation of
   diluted earnings per share      14,800      14,543     14,756     14,527
                                =========  ========== ========== ==========




                           Operating Highlights
                            Supplemental Data


                           Three months ended       Twelve months ended
                        ------------------------  ------------------------
                        12/31/2006   12/31/2005   12/31/2006   12/31/2005
                        -----------  -----------  -----------  -----------
  Operating Data
    Number of orders        103,743      103,613      406,475      398,437
    Average order size        1,585        1,591        1,451        1,455
    Customer online net
     sales               48,363,000   40,775,000  172,385,000  103,670,000
    Sales force, end of
     period                                               342          250

  Average Productivity
   (annualized)
     Per Account
      Executive           1,870,000    2,557,000    1,687,000    2,266,000
     Per Employee           968,000    1,108,000      873,000      982,000


  Product Mix (% of
   sales)
    Notebook & PDA's           12.7%        15.7%        12.4%        15.3%
    Desktops & Servers         19.3%        19.8%        20.3%        20.1%
    Software                   19.7%        14.0%        17.7%        15.9%
    Storage                     8.0%         9.8%         9.1%         9.1%
    NetComm                     4.5%         4.7%         4.9%         4.2%
    Printers                    8.5%        10.1%         8.2%        11.3%
    Monitors & Video           11.4%        10.2%        10.4%         9.6%
    Memory & Processors         5.8%         6.0%         6.2%         5.4%
    Accessories & Other        10.1%         9.7%        10.8%         9.1%

Contact Information

  • Contact:
    Ronald McFadden
    Zones, Inc.
    Chief Financial Officer
    253-205-3000