SOURCE: Zones, Inc.

April 26, 2007 16:00 ET

Zones Announces Financial Results for the Three Months Ended March 31, 2007

AUBURN, WA -- (MARKET WIRE) -- April 26, 2007 -- Zones, Inc. (the "Company," "Zones"™) (NASDAQ: ZONS):

--  Total first quarter 2007 net sales grew 10.6% year over year to $148.2
    million
--  First quarter 2007 SMB sales grew 28.3% compared to the prior year
--  First quarter 2007 diluted earnings per share increased 33.3% to $0.16
    per share compared to $0.12 per share in 2006
    

Zones, a single-source direct marketing reseller of name-brand information technology products, today announced its results for the three months ended March 31, 2007.

Total first quarter 2007 net sales grew 10.6% to $148.2 million compared to $134.0 million in the first quarter of 2006. The Company's first quarter net income was $2.3 million, or $0.16 per diluted share, compared with a net income of $1.7 million, or $0.12 per diluted share, for the same quarter a year ago.

Firoz Lalji, CEO, commented, "Our performance this quarter, particularly year over year sales growth from our SMB customers, reflects our progress in refining our customer management systems and processes. In order to maintain this sales momentum, we continued our investment in long term initiatives during the first quarter of 2007. These initiatives include the hiring of account executives for our call centers and our major objective of developing, recruiting and hiring a national field sales organization." Lalji continued, "The foundation of our sales strategy and the impetus behind our current sales growth remains our laser focus on providing our customers Five Star Service from all facets of our organization."

Operating Highlights

Consolidated outbound sales increased 12.3% to $146.6 million in the first quarter of 2007 compared to $130.6 million in the same period of 2006. Sales to SMB customers grew 28.3% in the quarter compared to the same quarter a year ago. Customer unassisted sales (primarily web based) were $34.3 million and represented 23.2% of total first quarter 2007 net sales.

Gross profit margins were 12.3% in the first quarter of 2007 compared to 12.4% in the first quarter of 2006 and 12.0% sequentially over the immediately preceding quarter. The sequential increase is due primarily to vendor programs and customer and product mix. Gross profit margins as a percent of sales 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 8.5% in the first quarter of 2007, which is a decrease from 8.9% in the first quarter of 2006 and an increase sequentially from 7.8% for the fourth quarter of 2006.

Asset Management

The Company's balance sheet remained strong and ended the quarter with a cash balance of $3.2 million. Consolidated working capital was $43.2 million at March 31, 2007 compared to $41.7 million at December 31, 2006. During the quarter, the Company repurchased and retired 56,485 shares of its common stock at an average price of $9.77 per share.

Inventories increased to $26.8 million at March 31, 2007 from $21.4 million at December 31, 2006. The increase is due to on hand customer inventory and unshipped orders in various stages of processing at the end of the quarter. Trade accounts receivable increased to $76.3 million at March 31, 2007 over $65.7 million at December 31, 2006.

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, enterprise accounts and public sector accounts. Zones sells these products through outbound and inbound account executives, 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 first quarter will be available on the Company's Web site at www.zones.com/IR under upcoming events. The webcast will be held today, April 26, 2007 at 2:00 pm 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)

                                               March 31,     December 31,
                                                 2007            2006
                                             --------------  --------------
ASSETS
Current assets
  Cash and cash equivalents                  $        3,221  $        9,191
  Receivables, net of allowance for doubtful
   accounts of $1,932 and $1,936                     76,297          65,699
  Vendor Receivables                                 18,578          12,556
  Inventories                                        26,751          21,385
  Prepaids                                            1,380           1,076
  Deferred tax asset                                  1,473           1,473
                                             --------------  --------------

     Total current assets                           127,700         111,380

Property and equipment, net                           4,325           3,771
Goodwill                                              5,098           5,098
Deferred tax asset                                      251             251
Other assets                                            192             195
                                             --------------  --------------

     Total assets                            $      137,566  $      120,695
                                             ==============  ==============

LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
  Accounts payable                           $       36,866  $       42,592
  Inventory financing                                23,139          14,385
  Accrued liabilities and other                      10,737          12,578
  Line of credit                                     12,300               -
  Income taxes payable                                1,501             150
                                             --------------  --------------

     Total current liabilities                       84,543          69,705

Note payable                                              -               6
Deferred rent obligation                              1,598           1,502
                                             --------------  --------------

     Total liabilities                               86,141          71,213
                                             --------------  --------------

Commitments and contingencies

Shareholders' equity:
  Common stock                                       35,614          35,983
  Retained earnings                                  15,811          13,499
                                             --------------  --------------

     Total shareholders' equity                      51,425          49,482
                                             --------------  --------------

     Total liabilities & shareholders'
      equity                                 $      137,566  $      120,695
                                             ==============  ==============




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


                                                   For the three months
                                                      ended March 31,
                                                     2007          2006
                                                 -----------   -----------

Net sales                                        $   148,182   $   133,998
Cost of sales                                        129,982       117,411
                                                 -----------   -----------

  Gross profit                                        18,200        16,587
Selling, general and administrative expenses          12,596        11,862
Advertising expense, net                               1,883         1,802
                                                 -----------   -----------

  Operating income                                     3,721         2,923
                                                 -----------   -----------

Other (income) expense:                                  (24)          178

Income before income taxes                             3,745         2,745
Provision for income taxes                             1,433         1,040
                                                 -----------   -----------

 Net income                                      $     2,312   $     1,705
                                                 ===========   ===========

 Basic income per share                          $      0.18   $      0.13
 Shares used in computation of basic income per
  share                                               13,138        13,179
                                                 ===========   ===========

 Diluted income per share                        $      0.16   $      0.12
 Shares used in computation of diluted income
  per share                                           14,718        14,696
                                                 ===========   ===========

                       Operating Highlights
                        Supplemental Data
                                                    Three months ended
                                                 -------------------------
                                                  3/31/2007     3/31/2006
                                                 -----------   -----------
Operating Data
  Number of orders                                   107,946       102,696
  Average order size                             $     1,398   $     1,334
  Direct web net sales (in 000's)                $    34,317   $    42,803
  Sales force, end of period                             321           278

Average Productivity (annualized)
  Per Account Executive (in 000's)               $     1,847   $     1,928
  Per Employee (in 000's)                        $       886   $       884


Product Mix (% of sales)
  Notebook & PDA's                                      13.4%         12.7%
  Desktops & Servers                                    22.0%         19.7%
  Software                                              16.4%         15.7%
  Storage                                                7.9%         10.3%
  NetComm                                                5.7%          4.7%
  Printers                                               8.8%          8.2%
  Monitors & Video                                       9.8%         11.6%
  Memory & Processors                                    5.3%          7.1%
  Accessories & Other                                   10.6%         10.0%



Contact Information

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