SOURCE: Zones, Inc.

October 26, 2006 16:00 ET

Zones Announces Financial Results for the Third Quarter of 2006

AUBURN, WA -- (MARKET WIRE) -- October 26, 2006 -- Zones, Inc. (the "Company," "Zones"™) (NASDAQ: ZONS):

--  Quarterly net income increased 23.1% compared to the prior year
--  Q3 2006 EPS increased to $0.14 per diluted share compared to $0.12 in
    Q3 2005
--  Small and medium business Q3 2006 net sales increased 17.5% compared
    to the same quarter of the prior year
--  Customer unassisted sales increased 45.3% over last year
Zones, a single-source direct marketing reseller of name-brand information technology products, today announced its results for the quarter ended September 30, 2006. Total net sales were $137.9 million compared to $152.8 million in the third quarter of 2005. Prior year third quarter sales included a significant nonrecurring purchase of $25.6 million from a single customer. The Company reported net income of $2.1 million, or $0.14 per diluted share, compared with net income of $1.7 million, or $0.12 per diluted share, for the same quarter a year ago.

Firoz Lalji, CEO, said, "I am satisfied with the continued expansion of our operating margins which increased 50 basis points over the same period last year." Lalji continued, "We remain committed to the objective of 3% operating margins which we expect to attain through margin management, while leveraging our operating expense base as we grow our revenue."

Net sales for the nine months ended September 30, 2006 increased to $417.1 million from $406.7 million for the corresponding period of last year. Net income for the nine months ended September 30, 2006 increased 64.4% to $6.7 million, or $0.46 per diluted share, compared to net income of $4.1 million, or $0.28 per diluted share in the first nine months of 2005.

Operating Highlights

Consolidated outbound sales decreased 9.0% to $135.4 million in the quarter ended September 30, 2006, compared to $148.8 million in the corresponding period of last year. Outbound sales, as a percent of total net sales, for the three month period ended September 30, 2006 and 2005 were 98.2% and 97.4%, respectively. Unassisted sales (principally web based), which represent 26.8% of total sales, increased to $37.0 million, a 45.3% increase over the same period of 2005. Certain strategic product categories contributed to the year over year growth, including network communications, memory and processors, and desktops and servers, which categories increased 32.7%, 15.2% and 11.9%, respectively.

Gross profit margin improved 230 basis points to 11.9% in the third quarter of 2006, compared to 9.6% in the third quarter of 2005, but declined from 13.4% in the second quarter of 2006. The gross profit margin percentage in 2005 was negatively affected by a one time competitive cost concession to one customer in support of a significant purchase of Zones' technology products. The sequential decrease in gross profit margin percentage was primarily due to product and customer mix, vendor programs and a decrease in contributions from enterprise software agreements. 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 8.2% in the third quarter of 2006. This represents an increase from 6.6% in the corresponding period of the 2005 and a sequential decline from 8.8% in the second quarter of 2006. The year over year increase is due to compensation and benefit related expenses, coupled with a decrease in sales volume.

Asset Management

During the quarter, the Company repurchased and retired 89,200 shares of its common stock for $767,000, which is an average price of $8.60 per share. The Company ended the third quarter of 2006 with over $6.9 million of cash and had no outstanding interest bearing borrowings against its line of credit. Consolidated working capital was $39.3 million at September 30, 2006, compared with $33.4 million at December 31, 2005.

The Company's net inventory of $21.2 million at September 30, 2006 increased from $19.7 million at December 31, 2005. Inventory turns at September 30, 2006 are 24 times annualized. Trade accounts receivable decreased to $64.4 million at September 30, 2006 from $67.7 million at December 31, 2005. Days sales outstanding were 46 days, compared to 45 days at December 31, 2005.

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. 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 third quarter will be available on the Company's Web site at www.zones.com/IR under upcoming events. The webcast will be held Friday, October 27, 2006 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)


                                                        September December
                                                           30,       31,
                                                          2006      2005
                                                        --------- ---------
ASSETS
Current assets
  Cash and cash equivalents                             $   6,947 $   3,195
  Receivables, net of allowance for doubtful accounts
   of $1,910 and $1,562                                    65,273    68,318
  Vendor Receivables                                        8,567    14,750
  Inventories, net                                         21,230    19,736
  Prepaids                                                  1,102       922
  Deferred tax asset                                        1,347     1,346
                                                        --------- ---------

       Total current assets                               104,466   108,267

Property and equipment, net                                 4,009     3,810
Goodwill                                                    5,098     5,098
Other assets                                                  195       179
                                                        --------- ---------

       Total assets                                     $ 113,768 $ 117,354
                                                        ========= =========

LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
  Accounts payable                                      $  40,710 $  45,359
  Inventory Financing                                      14,813     8,469
  Accrued liabilities and other                             9,655     9,069
  Line of credit                                                -    10,700
  Notes payable to former shareholders of CPCS, Inc.            -     1,272
                                                        --------- ---------

       Total current liabilities                           65,178    74,869

Note payable                                                   10        21
Deferred income tax                                            35        35
Deferred rent obligation                                    1,386     1,112
                                                        --------- ---------

       Total liabilities                                   66,609    76,037
                                                        --------- ---------

Commitments and contingencies

Shareholders' equity:
  Common stock                                             36,642    37,503
  Retained earnings                                        10,517     3,814
                                                        --------- ---------

       Total shareholders' equity                          47,159    41,317
                                                        --------- ---------

       Total liabilities & shareholders' equity         $ 113,768 $ 117,354
                                                        ========= =========



                                ZONES, INC.
                  CONSOLIDATED STATEMENTS OF OPERATIONS
                  (in thousands, except per share data)
                                (unaudited)
                                For the three months   For the nine months
                                ended September 30,    ended September 30,
                                   2006       2005       2006       2005
                                ---------  ---------- ---------- ----------
Net sales                       $ 137,900  $  152,758 $  417,108 $  406,719
Cost of sales                     121,522     138,146    364,755    362,808
                                ---------  ---------- ---------- ----------

  Gross profit                     16,378      14,612     52,353     43,911
Selling, general and
 administrative expenses           11,291      10,068     35,918     32,245
Advertising expense                 1,717       1,608      5,286      4,747
                                ---------  ---------- ---------- ----------

  Income from operations            3,370       2,936     11,149      6,919
                                ---------  ---------- ---------- ----------

Other (income) expense:               (19)        191        281        303

Income before income taxes          3,389       2,745     10,868      6,616
Provision for income taxes          1,309       1,055      4,164      2,539
                                ---------  ---------- ---------- ----------


  Net income                    $   2,080  $    1,690 $    6,704 $    4,077
                                =========  ========== ========== ==========


  Basic earnings per share      $    0.16  $     0.13 $     0.51 $     0.30
  Shares used in computation of
     basic earnings per share      13,225      13,398     13,190     13,407
                                =========  ========== ========== ==========

  Diluted earnings per share    $    0.14  $     0.12 $     0.46 $     0.28
  Shares used in computation of
     diluted earnings per share    14,782      14,327     14,721     14,340
                                =========  ========== ========== ==========




                                     Operating Highlights
                                      Supplemental Data


                           Three months ended         Nine months ended
                        ------------------------  ------------------------
                         9/30/2006    9/30/2005    9/30/2006    9/30/2005
                        -----------  -----------  -----------  -----------
Operating Data
  Number of orders           99,645       96,583      302,732      294,824
  Average order size          1,375        1,586        1,396        1,407
  Customer online net
   sales                 36,980,000   25,443,000  124,021,000   62,895,000
  Sales force, end of
   period                                                 323          270

Average Productivity
 (annualized)
   Per Account
    Executive             1,708,000    2,263,000    1,291,000    2,009,000
   Per Employee             846,000    1,037,000      640,000      921,000


Product Mix (% of
 sales)
  Notebook & PDA's             11.4%        17.2%        12.3%        15.2%
  Desktops & Servers           20.4%        16.6%        20.7%        20.2%
  Software                     18.5%        17.1%        16.9%        16.7%
  Storage                       9.1%         8.1%         9.6%         8.8%
  NetComm                       6.0%         4.1%         5.1%         4.0%
  Printers                      9.3%        15.8%         8.1%        11.8%
  Monitors & Video              9.8%         8.1%        10.0%         9.4%
  Memory & Processors           5.4%         4.3%         6.4%         5.1%
  Accessories & Other          10.1%         8.7%        10.9%         8.8%


Contact Information

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