Zones Announces Financial Results for the Quarter and Year Ended December 31, 2007

AUBURN, WA -- 01/30/2008 -- Zones, Inc. (the "Company," "Zones"™) (NASDAQ: ZONS):


--
Fourth quarter 2007 net sales improved 10.1% to $176.1 million
--
2007 net sales were up 17.8% compared to the prior year
--
Fourth quarter 2007 SMB sales grew 28.2% compared to the prior year
--
2007 SMB sales grew 32.5% compared to 2006
--
Fourth quarter 2007 diluted earnings per share increased 30.0% to $0.26 compared to $0.20 in 2006
--
2007 earnings improved 36.4% to $0.90 per diluted share compared to earnings of $0.66 per diluted share in 2006
--
2007 unassisted sales increased to $215.2 million, or 31.7% of total sales

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, 2007.

The Company's fourth quarter 2007 net income was $3.8 million, or $0.26 per diluted share, compared with net income of $3.0 million, or $0.20 per diluted share, for the same quarter a year ago. Total fourth quarter 2007 net sales were $176.1 million compared to $159.9 million in the fourth quarter of 2006.

For the year ended December 31, 2007, net income improved to $13.1 million, or $0.90 per diluted share; this compares to $9.7 million, or $0.66 per diluted share, for 2006. Net sales for the year ended December 31, 2007 increased 17.8% to $679.5 million from $577.0 million for the year ended December 31, 2006.

Firoz Lalji, CEO, commented, "Our operating performance was solid during 2007 as we increased net income 35.6% over last year, and attained an annual operating profit of 3.1%. Total sales this year expanded 17.8% while sales to our SMB customers grew a very healthy 32.5%." Mr. Lalji also said, "During 2007 we invested in the development of a national field sales force which we believe holds significant promise as a foundation for future sustained growth."

Operating Highlights

Consolidated outbound sales increased 11.2% to $174.8 million in the fourth quarter of 2007 compared to $157.2 million in the same period of 2006. Sales to SMB businesses grew 28.2% in the quarter, compared with the same quarter a year ago. Unassisted sales during the quarter were $70.7 million, an increase of 46.1% over the same period of 2006, and represented 40.1% of total fourth quarter 2007 net sales.

Gross profit margin improved 10 basis points to 12.1% in the fourth quarter of 2007, compared to 12.0% in the fourth quarter of 2006. The gross profit margin percentage in the fourth quarter of 2007 was positively affected by product and customer mix, vendor programs and pricing. Gross profit margins as a percent of sales are expected to vary on a quarterly basis due to vendor programs and credits, product mix, pricing strategies, customer mix and economic conditions.

Total selling, general and administrative expenses as a percent of net sales were 7.8% in the fourth quarter 2007, which is flat compared to the corresponding period of 2006 and represented a sequential increase from 7.4% in the third quarter of 2007. The sequential increase is due to compensation and benefit related expenses resulting from incentive compensation and employee benefits.
 


Asset Management

The balance sheet remained strong and the Company ended the year with a cash balance of $12.0 million. Consolidated working capital was $55.0 million at December 31, 2007, compared with $41.7 million at December 31, 2006.

Inventories decreased slightly to $21.3 million at December 31, 2007 from $21.4 million at December 31, 2006. On hand inventory includes approximately $6.3 million of inventory for which the Company has binding customer purchase orders. Trade accounts receivable increased to $71.7 million at December 31, 2007 from $64.2 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, a national field sales force, catalogs and the Internet. Zones offers more than 150,000 products from leading manufacturers including Adobe, Apple, Avaya, Cisco, HP, IBM, Kingston, Lenovo, Microsoft, NEC, Nortel Networks, Sony, Symantec 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 results will be available on the Company's Web site at www.zones.com/IR under upcoming events. The webcast will be held today, January 30, 2008 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, the effect of fluctuating or unfavorable economic conditions on IT purchasing trends and price competition, and the Company's ability to appropriately react to those changing conditions; 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,
 
   
2007
   
2006
 
             
ASSETS
           
Current assets
           
Cash and cash equivalents
  $ 12,004     $ 9,191  
Receivables, net of allowances of $1,993 and $1,936, respectively
    73,581       66,027  
Vendor Receivables
    15,139       12,228  
Inventories
    21,278       21,385  
Prepaids
    861       1,076  
Deferred tax asset
    1,377       1,473  
                 
Total current assets
    124,240       111,380  
                 
Property and equipment, net
    3,383       3,771  
Goodwill
    5,098       5,098  
Deferred tax asset
    411       251  
Other assets
    190       195  
                 
Total assets
  $ 133,322     $ 120,695  
                 
LIABILITIES & SHAREHOLDERS' EQUITY
               
Current liabilities:
               
Accounts payable
  $ 37,040     $ 42,592  
Inventory flooring
    20,252       14,385  
Accrued liabilities and other
    11,479       12,584  
Income taxes payable
    510       150  
                 
Total current liabilities
    69,281       69,711  
                 
Deferred rent obligation
    1,733       1,502  
                 
Total liabilities
    71,014       71,213  
                 
Commitments and contingencies
               
                 
Shareholders' equity:
               
Common stock
    35,676       35,983  
Retained earnings
    26,632       13,499  
                 
Total shareholders' equity
    62,308       49,482  
                 
Total liabilities & shareholders' equity
  $ 133,322     $ 120,695  
 


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


   
For the three months ended December 31,
   
For the twelve months ended December 31,
 
   
2007
   
2006
   
2007
   
2006
 
                         
Net sales
  $ 176,109     $ 159,919     $ 679,492     $ 577,027  
Cost of sales
    154,744       140,753       599,223       505,508  
                                 
Gross profit
    21,365       19,166       80,269       71,519  
Selling, general and administrative expenses
    13,704       12,516       51,201       48,434  
Advertising expense
    1,804       1,872       8,038       7,159  
                                 
Income from operations
    5,857       4,778       21,030       15,926  
                                 
Other (income) expense
    (47 )     (11 )     174       270  
                                 
Income before income taxes
    5,904       4,789       20,856       15,656  
Provision for income taxes
    2,101       1,806       7,723       5,971  
                                 
                                 
Net income
  $ 3,803     $ 2,983     $ 13,133     $ 9,685  
                                 
                                 
Basic earnings per share
  $ 0.29     $ 0.23     $ 1.00     $ 0.73  
Shares used in computation of basic earnings per share
    13,146       13,208       13,139       13,195  
                                 
Diluted earnings per share
  $ 0.26     $ 0.20     $ 0.90     $ 0.66  
Shares used in computation of diluted earnings per share
    14,652       14,800       14,635       14,756  
 


Operating Highlights
Supplemental Data


   
Three months ended
   
Twelve months ended
 
   
12/31/2007
   
12/31/2006
   
12/31/2007
   
12/31/2006
 
Operating Data
                       
Unassisted net sales (in 000's)
  $ 70,674     $ 48,363     $ 215,235     $ 172,385  
Sales force, end of period
                    342       342  
                                 
Average Productivity
                               
(annualized)
                               
Per Account Executive (in 000's)
  $ 2,060     $ 1,870     $ 1,987     $ 1,687  
Per Employee (in 000's)
  $ 999     $ 968     $ 964     $ 873  
                                 
                                 
Product Mix (% of sales)
                               
Notebook & PDA's
    14.5 %     12.7 %     14.2 %     12.4 %
Desktops & Servers
    19.1 %     19.3 %     21.3 %     20.3 %
Software
    18.8 %     19.7 %     18.6 %     17.7 %
Storage
    7.0 %     8.0 %     7.0 %     9.1 %
NetComm
    5.1 %     4.5 %     5.2 %     4.9 %
Printers
    8.5 %     8.5 %     8.2 %     8.2 %
Monitors & Video
    10.2 %     11.4 %     9.7 %     10.4 %
Memory & Processors
    4.4 %     5.8 %     4.8 %     6.2 %
Accessories & Other
    12.4 %     10.2 %     11.0 %     10.8 %


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


The following information was filed by Zones Inc on Tuesday, February 5, 2008 as an 8K 2.02 statement, which is an earnings press release pertaining to results of operations and financial condition. It may be helpful to assess the quality of management by comparing the information in the press release to the information in the accompanying 10-K Annual Report statement of earnings and operation as management may choose to highlight particular information in the press release.

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