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Executives

Frank Khulusi- Chairman, President and Chief Executive Officer

Brandon Laverne- Chief Financial Officer

Kristin Rogers- Vice President of Marketing

Analysts

Analyst for Brian Alexander - Raymond James

Chris Krueger - Northland Securities

Matthew Sheerin - Thomas Weisel Partners

Jeff Matthews - Ram Partners LP

PC Mall, Inc (MALL) Q4 2008 Earnings Call Transcript February 23, 2009 4:30 PM ET

Operator

Good day, ladies and gentlemen and welcome to the fourth quarter 2008 PC Mall Incorporate earnings conference call. At this time, all participants are in a listen-only mode. (Operator's instruction) On the call with us today are Frank Khulusi, Chairman, President and Chief Executive Officer; Brandon Laverne, Chief Financial Officer and Kris Rogers.

At this time, I would like to refer to the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. During this call, management may discuss financial projections, information, or expectations about the Company’s products or markets, or otherwise make statements about future which statements are forward-looking and subject to a number of risks and uncertainties that can cause actual results to differ materially from statements made. These risks and uncertainties are detailed in the Company’s filings with the Securities Exchange Commission.

I would now like to turn the call over to Mr. Frank Khulusi. Please proceed, sir.

Frank Khulusi

Thank you, Emmanuel. Good afternoon everyone. Welcome and thank you all for participating on this call with PC Mall. Today, we will be discussing the Company's preliminary financial results for the fourth quarter of 2008 and preliminary highlights of the consolidated full year result.

I am pleased with our operating performance in the fourth quarter in light of the economic weakness that is well-known and widespread. I am proud of the way that our team executed in this challenging environment enabling us to deliver increased gross margins and tighter operating expense controls. We continue to believe that despite the economic uncertainty, our dedicated and talented employee base, world class vendor partners and solid customer base position us well in the current environment and going forward.

As we indicated in our third quarter conference call, we do not intend to retrench in the current environment but we will continue to monitor demand conditions carefully. We will continue to be aggressive in our market place in endeavor to make prudent investments which we believe will help position us for long-term growth as the demand environment improves. Some of the financial highlights are as follows; consolidated net sales in Q4 2008 were $334.3 million, down 18% year-over-year. Gross profit in Q4 2008 was $43.5 million, down only 9% year-over-year. Gross profit margin for the quarter was 13% versus 11.7% in Q4 2007, a significant improvement. Now on GAAP diluted EPS was $0.26 per share in Q4 2008 versus diluted EPS of $0.32 per share in Q4 2007.

Operating cash flow was $32.9 million in Q4 2008 and we purchased 741,631 shares of our common stock in Q4 2008 at an average price of $3.49 per share. Consolidated net sales for year-to-date 2008 were $1.3 billion, up 9% year-over-year. Gross profit for year-to-date 2008 was $179.4 million, up 21% year-over-year. Gross profit margin for year-to-date 2008 was 13.5% versus 12.2% for year-to-date 2007. Non-GAAP diluted EPS was $0.91 per share for year-to-date 2008 versus diluted EPS of $0.90 per share last year.

Now I would like to turn the call over to Brandon Laverne, our CFO, who will present the financial results in a bit more detail. Brandon?

Brandon Laverne

Thanks, Frank. Consolidated net sales for Q4 2008 were $334.3 million, a decrease of 18% from $408 million in Q4 2007. Consolidated gross profit for Q4 2008 decreased 9% to $43.5 million from $47.9 million in Q4 2007. Consolidated gross profit margin was 13% for Q4 2008 compared to 11.7% last year. Consolidated operating profit for Q4 2008 decreased 79% to $1.8 million compared to $8.7 million for Q4 2007 and included a $4.1 million goodwill impairment charge which I will explain in a minute.

Excluding the $4.1 million goodwill impairment charge, non-GAAP consolidated operating profit for Q4 2008 was $5.9 million, a decrease of 32% from the same period last year. GAAP consolidated net income for Q4 2008 was $1 million and non-GAAP consolidated net income of $3.5 million excluding the goodwill impairment charge compared to GAAP net income of $4.6 million last year. GAAP diluted EPS for Q4 2008 was $0.07 a share and non-GAAP diluted EPS was $0.26 a share compared to GAAP diluted EPS of $0.32 a share last year.

Let me talk a little about the goodwill impairment. In accordance with statement of financial accounting standards 142, we are performing our annual impairment analysis of goodwill and intangible assets for possible impairment. Our management with the assistance of an independent third-party valuation firm is determining the fair values of our reporting units and their underlying assets and comparing them to their respective carrying values. Based upon our preliminary analysis, we have determined an approximately $4.1 million of goodwill and purchase intangible asset is impaired consisting of $2.7 million within our public sector segment and $1.4 million held by our consumer segment representing all of the goodwill held at each of those segments.

Net of tax as the preliminary impairment charge is approximately $2.5 million. Subsequent to these preliminary charges, the only remaining goodwill and purchase intangible assets reside in our MME segment totaling $29.9 million including $18.8 million of goodwill and $11.1 million of purchase intangible assets. We have not yet completed our review and the completion of our review may result in additional noncash impairment charge which could be material and would decrease our GAAP operating profit, net income and earnings per share in the fourth quarter and year ended December 31, 2008 which we preliminary reported earlier today.

We expect to complete our impairment review and the additional noncash impairment charge if any will be determined prior to the filing of our annual report on Form 10-K for the year ended December 31, 2008 with the SEC. I will now speak a bit about our preliminary Q4 2008 segment results. All comparisons are against Q4 2007, unless otherwise noted.

For our SMB segment, Q4 2008 net sales were $113.9 million, a decrease of $47.1 million or 29% from $161 million last year primarily due to continued softening in IT spending from Q3 2008 by small and medium-sized businesses in North America and $26.8 million decrease in lower margin volume iPod sales to certain customers. SMB gross profit was $14 million, a decrease of $2.3 million or 15% compared to $16.3 million last year resulting primarily from the lower sales. SMB gross profit margin increased by 220 basis points to 12.3% in Q4 2008 compared to 10.1% last year primarily due to an improvement in product mix and the reduction in lower margin volume iPod sales to certain customers mentioned earlier.

SMB operating profit in Q4 2008 was $7.5 million, a decrease of $1.9 million or 21% compared to $9.4 million last year. The decrease was primarily due to the gross profit decrease mentioned earlier partially offset by a $600,000 decrease in SMB personal cost. Average account executive headcount during Q4 2008 in our SMB segment was 364 compared to 371 last year. For our MME segment, Q4 2008 net sales were $105.3 million compared to $107.8 million last year, a decrease of $2.5 million or 2%. This decrease was primarily due to the softening demand by customers in the mid market enterprise sector in Q4 2008 compared to the same period last year. MME gross profit increased by $800,000 or 4% to $17.9 million in Q4 2008 compared to $17.1 million last year.

MME gross profit margin increased by 110 basis points to 17% in Q4 2008 compared to 15.9% last year. The increase in MME gross profit and gross profit margin was primarily due to a change in product mix which resulted in increased vendor consideration. Our MME operating profit in Q4 2008 increased to $5.1 million, $2.1 million or 72% increase compared to $3 million last year. The improvement was primarily due to the MME gross profit increase discussed earlier, a decrease in MME personnel cost of $0.5 million which resulted primarily from the centralization of resources to our corporate and other segment and the reduction in other selling, general and administrative expenses.

Average account executive headcount during Q4 2008 in our MME segment was 107 compared to 106 in Q4 2008. For our public sector segment, Q4 2008 net sales were $36.7 million compared to $45.4 million last year, a decrease of $8.7 million or 19%. This decrease was primarily due to reduced sales to two large customers in our federal government business and a decrease in transactional sales in our federal government business in Q4 2008 compared to Q4 2007.

Public sector gross profit was $4 million, a decrease of $100,000 or 3% compared to $4.1 million last year. Public sector gross profit margin increased by 180 basis points to 10.9% in Q4 2008 compared to 9.1% last year. The decrease in our public sector gross profit was primarily due to the sales decrease mentioned earlier. The increase in our public sector gross profit margin was primarily due to the decrease in lower margin sales to the two large customers in our federal government business mentioned earlier. Our public sector reported an operating loss of $1.3 million in Q4 2008 compared to operating profit of $1.5 million last year. Q4 2008 results were impacted by the $2.7 million goodwill impairment charge described earlier.

Excluding this charge, public sector reported a non-GAAP operating profit of $1.3 million in Q4 2008, a decrease of $200,000 or 12% compared to the same period last year. This decrease was primarily due to the public sector gross profit decline mentioned earlier. Average account executive headcount during Q4 2008 in our public sector segment was 81 compared to 92 last year. For our consumer segment, Q4 2008 net sales were $78.4 million compared to $93.8 million last year, a decrease of $15.4 million or 16%. This decrease was primarily due to continued softness in consumer spending.

Consumer gross profit decreased by $2.7 million or 26% to $7.6 million in Q4 2008 compared to $10.3 million last year. Consumer gross profit margin decreased by 130 basis points to 9.7% in Q4 2008 compared to 11% last year. The decrease in our consumer gross profit was primarily due to the decrease in consumer net sales and the decrease in our consumer gross profit margin was primarily due to continued competitive pricing. Consumer operating profit in Q4 2008 decreased by $3.7 million or 93% to $300,000 compared to $4 million in Q4 2007 primarily due to the decrease in consumer gross profit and the impact of the $1.4 million goodwill impairment charge in Q4 2008 partially offset by a $300,000 reduction in consumer personnel cost.

Excluding the $1.4 million impairment charge, non-GAAP consumer operating profit was $1.7 million in Q4 2008. Average account executive headcount during Q4 2008 in our consumer segment was 100 compared to a 136 in Q4 2007. Corporate and other segment selling, general and administrative expenses included corporate related expenses such as legal, accounting, information technology, product management and other administrative cost that are not otherwise included in our reportable operating segments.

Q4 2008 corporate and other SG&A expenses increased by $0.5 million or 5% to $9.7 million from $9.2 million in Q4 2007 but decreased by $300,000 or 3% from Q3 2008. The increase from Q4 2007 was primarily due to centralization of certain resources from our MME segment and the decrease from Q3 2008 was primarily the result of cost-cutting initiatives at the corporate level. Accounts receivable at December 31, 2008 of $148.5 million decreased by $10.8 million from December 31, 2007 primarily due to lower open account sales during Q4 2008 compared to last year.

Our inventory of $67.8 million at December 31, 2008 represents an increase of $3.3 million from last year. Our outstanding borrowings under our line of credit decreased by $24.9 million to $29 million at December 31, 2008 compared to December 31, 2007 and decreased by $24.3 million from Q3 2008. Operating cash flow generated during Q4 2008 was $32.9 million compared to $20.7 million in Q4 2007.

Now, I would like to turn the Kris Rogers. Kris?

Kris Rogers

Thanks Brandon. I will spend a few minutes on both the segments specific results as well as other key performance indicators for our business to give you more color on both the environment and our numbers. For key performance indicators, I will review areas like product mix, manufacturing and category concentration and growth rates, all of which are on a “gross” basis.

I will start by discussing the results of our segments in more detail. As Brandon indicated, net sales for SMB segment declined by 29% year-over-year, 12% of each point which are related to the $26.8 million decline in lower-margin volume iPod sales to certain customers. During the quarter, we saw demand decelerate with the weakness driven by the uncertainty in the economic environment in the US. We are able to increase gross margins in the SMB segment largely due to an improvement in our sales product mix combined with the large reduction in sales of lower margin volume iPod sales.

Operating margins however were adversely affected as a result of the investment in SMB headcounts for our call centers, particularly in Montreal and Chicago. But we remain confident that these investments are prudent as they allow us to continue to acquire customers throughout these uncertain economic times and we believe we are positioning ourselves for long-term growth as the demand environment improves.

Our MME segment had a 2% decline in revenue year-over-year for Q4 2008. During Q4 2008, we saw demands start to weaken from our mid market enterprise accounts but we remain pleased with the overall performance of our MME business. We believe our MME segment that continues to gain market share were also showing solid growth and increase profit, increase profit margin and operating profit margin.

The chart in gross profit and gross margins reflect continued strength in our services business which maintain at 20% of our revenue and drove a strong performance in key product categories like networking, enterprise, storage and servers. SARCOM's improved performance at the operating profit level reflects both the reduction and overhead due to the centralization of resources at the corporate level and also significant reduction in variable and fix costs as the merged SARCOM's business continues to leverage synergies. We continue to invest in sales and service personnel for SARCOM again positioning ourselves for long-term growth as the economy improve.

In our public sector segment, PC Mall Gov, revenue declined by 19% in Q4 2008 over Q4 2007. Solid growth of 6% year-over-year on our state, local and education business was offset by a decline of 27% in our federal business. The declines in federal were the results of a large transaction from Q4 2007 which did not reoccur in significant declines in the activity from two large contracts. Both contracts are still in place today and we expect to see activity under these contracts to improve in Q1 2009.

The growth we experience in the split space was driven by the growing productivity in the contract vehicles won by PC Mall Gov throughout 2007 and 2008, as well as by the increase in sales account executive headcount. A number of new contracts were awarded to PC Mall Gov in Q4 2008 in both the federal and split market including an award with the Commonwealth in Virginia and award with the Social Security Administration to support the opening of the new data center and a major win with the University of Hawaii. Sales in our consumer segment which include our MacMall and on-sale brands declined by 16% or $15.4 million from $93.8 million in Q4 2007 to $78.4 million in Q4 2008. This decrease is primarily due to continued softening in consumer spending. The current economic condition does create some opportunities from our consumer segment. We are increasingly focused on providing excellent values for our consumer customers.

Today, consumers are increasingly quite sensitive and we are responding by partnering with many of our vendors to create compelling pricing that stimulates demand in the market place. We are investing technology and processes that will help improve the customer experience and plans to launch a new website for MacMall and on-sale in the near future. We are excited about many of the new features on these sites which include search enhances, faster checkout, improve product information to just name a few.

At this time, I will review the product category result. We continue to see gradual shifts in all of our product mix which really we believe is the result of the change in IT spending patterns due to a softer economic environment. Our largest product category was Notebooks at 20% with year-over-year growth of 9%. Software was the second largest category of 15% of revenue versus flat year-over-year. However, within the software business overall, we continue to see strong growth trends for enterprise applications, virtualizations, security fruitions but doing Q4 2008, those growth areas were offset by weakness in consumer spend on software.

Desktops were the third largest category for to date. Percent of revenue has declined 35% year-over-year. We believe the big decline is due to a combination of both lower demand for desktops and also several large deals completed in Q4 2007 which did not reoccur. Storage and iPod/MP3 players each represented 7% of our revenue. However, consistent with the soft demand environment on the consumer side reflecting of significant decline in volume sales of iPod to certain customers, the iPod/MP3 category declined by 55%. Storage on the other hand was one of our strongest growth categories with year-over-year growth of 18%.

Coming in at 86% of our overall revenues are the networking. Security category and the professional services category both grew in the quarter with networking security growing at 9% year-over-year and professional services which also includes managed services growing 30% or our Q4 2007. We continue to see consistent demand and pipeline for professional and managed services and believe that our MME business is positioned well on the space.

In general, the pressure is in the current economic environment drive several phenomena which we believe are major factors in both the areas where we saw growth and also in the areas where we saw decline. In categories like memory display desktops, we saw significant declines in ASP. On the flip side, we saw significantly increased competitive pricing from vendors during Q4 2008 to capture whatever share they could in the market and we saw that specifically in the areas of supplied accessories in the Notebook categories.

We launched our software in the service program in Q4 2008; expect expansion with that program in 2009. From our manufacture concentration standpoint on a gross consolidated basis, our top five manufacturer partners for Q4 2008 were Apple, HP, Microsoft, Lenovo and Cisco who in aggregate represented approximately 56% of our total revenue.

At this point, I will turn the call back over to Frank. Frank?

Frank Khulusi

Thanks Kris. As I said earlier, I am pleased with our performance in the fourth quarter. These are challenging times for most businesses. However, we believe our fundamentals remained strong. We have a season management team and have the benefit of solid relationships with both our customers and our vendor partners. I would like to specially thank all of our hard-working employees who continue to drive value for all of our constituents.

Now, I would like to open up this call for any questions you may have. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Brian Alexander - Raymond James.

Analyst for Brian Alexander - Raymond James

This is Brian Peterson in for Brian Alexander. I think demand environment got a little worse obviously in the quarter. I am just wondering if you could speak to the linearity and maybe how things are tracking thus far in the March quarter.

Kris Rogers

Brian, this is Kris Rogers. Yes, we talked specifically about what we saw in Q4 and I think consistent with what we have seen from some of our other partners in 2009, we saw demand continued to decelerate in January and so from our perspective, we saw weakness across the board in all segments in January and anything more specific than that…

Frank Khulusi

We attribute that to the fact that a lot of these companies that did not get the new 2009 operating budget in place and that continued for a part of February and we are seeing activity pick up now and new budgets get approved and there is more request for quotes and more request for special pricing and so on and so forth.

Analyst for Brian Alexander - Raymond James

That is interesting. Okay in the services growth, it was actually pretty healthy at 30+% this quarter. Is that something you guys see continuing at that rate or should we see that dip?

Frank Khulusi

It is hard for us to project but what I will tell you is that the opportunity continues to be there and actually even greater than the performance that we have exhibited in the fourth quarter specially as we step up our or as we like to call it up-pop, our level of effort and selling these services across the wider category of customers and also making it a wider category of services whether or not in the short term. You get, that has been empty but long term, we continue to be firmly behind this and actually this is one of the top areas that we are focused on at PC Mall.

Analyst for Brian Alexander - Raymond James

Alright and I think just last, I know you guys mentioned the $4 million in cost savings that you guys are planning at taking out on your last quarter's call. Did that actually flow through this quarter?

Brandon Laverne

Yes, significant amount of that $4 million is in there. It is offset a little bit by some of the investments we talked about in the other areas and so when you look at corporate and other in some of our other segments, we have achieved a lot of those savings in almost all of our segments and we continue to look at all of our tightening as we go forward.

Operator

Your next question comes from the line of Chris Krueger - Northland Securities.

Chris Krueger - Northland Securities

Congratulations with good operating margin in the quarter and on that note on the margin trends since obviously it is top line, it is tough out there and it sounds like it has continued to at least in the first part of the current quarter we are in, what kind of impact would that have on gross margin for you to look at first quarter of 2009 versus first quarter of 2008 and how far off do you think gross margin could be or how should I look at that?

Frank Khulusi

Well, with respect to your comment on the sales decline and the fact that we still performed well, thank you for that. However, I would like to repeat that on the sales decline itself, it was exacerbated by the fact that we have some sales to large customers, volume customers of low margin iPod products that did not repeat on a year-over-year basis and that is not just economy based but also with the change of program from Apple with respect to subscales that allowed those sales to be materially reduced.

Chris Krueger - Northland Securities

That is only a fourth quarter event?

Frank Khulusi

That event will continue on a comp basis but again the program allows Apple a lot of flexibility in either approving or not approving transactions and it depends on what their activity is as well as what the demand is for those specific products.

Chris Krueger - Northland Securities

Well what I meant to say was in the first quarter of last year, there is a comparison to that point, were there any large orders in the first quarter of last..?

Frank Khulusi

Yes, and I understood your question. What I am saying is yes. So, since these sales do not contribute materially in anyway to the bottom line, we do not really care that much about them other than just make the reporting about the little bit off here and there. You get a little bit more volatility in your year-over-year comps.

Now with respect to the gross margin, we do expect that some of these improvements that we have made on the gross margin side will pick but again where it ends up 100% first of all, we do not forecast that and secondly, it depends on what our mix is and we will take any business that comes to us. We do not turn away business in order to control a particular gross margin. So I cannot give you more visibility than that other than I do believe that will be up on a year-over-year basis.

Chris Krueger - Northland Securities

Okay. On SG&A, I think I asked the question last quarter but Canadian dollars has been very weak and could you quantify the impact of that had it stayed at third quarter levels? Does that save you million dollars or more in a single quarter?

Brandon Laverne

Not in any given quarter but it would be much less than that but it definitely helped us. It was offset a little bit by the change in our year-over-year basis the change in the subsidy that we get from the Canadian government.

Frank Khulusi

And also offset by the fact that we ramped up some of our sales effort in the US and in our Chicago-based call center and we expect to actually add some people there as time goes on this year.

Chris Krueger - Northland Securities

Okay. Then last, it looks like headcount I believe somewhere here was down year over year. I cannot remember what the trend was last quarter year-over-year but was there several positions reduced during the fourth quarter?

Kris Rogers

Yes, I think there are a couple of different ways to answer…

Frank Khulusi

Is that on sales headcount or overall headcount?

Chris Krueger - Northland Securities

Account executive.

Kris Rogers

Okay, so sales headcount. So, couple of different ways to look at it. I think you did see our reduction year-over-year in our consumer space which I think is the function of both software revenue as well as an ongoing trend to drive more sales to the web but if you focus on the commercial side of the business and the headcount for MME, SMB and Gov segment, I think a pretty safe statement to make is that we are very much focused on continuing to maintain our investment in our sales headcount and so while it may change by a few here and there, that is really more a function of the process we go through to both higher ramp but then also prune sales folks who may not be a good fit.

So I think overall it is safe to say that we are trying to maintain and increase our headcount. So if you see any slight changes, it is really more a function of timing and making sure that we got the right people in those spots.

Operator

Your next question comes from the line of Matt Sheerin - Thomas Weisel Partners.

Matthew Sheerin - Thomas Weisel Partners

Regarding your commentary about seeing a little bit of a pick up in orders from customers because they are just finally starting to see budget approval that makes sense. Are you seeing that in your MME segment as well as the SMB segment?

Frank Khulusi

Yes, we are seeing the level of activity increase with respect to request for quotes and request to special pricing and that kind of thing. It has not really translated in a pick up in business yet but we expect that for the remainder for February and for March although it is really too early to tell and we are not going to forecast that.

Matthew Sheerin - Thomas Weisel Partners

Okay because…

Frank Khulusi

Kris, do you want to add any color to that?

Kris Rogers

No, the only thing that I would say, Matt is that typically our MME and our SMB businesses operate in a little bit of a [hockey skip developing] within the month in the quarter and so I think what we have talked about is that we did see a deterioration of demand in January which in all of the diligence we did absolutely validated what Frank said, which is that there was a lot of sort of flailing around as budgets were not approved and what we saw changed in February that was there in right now is an acceleration of request for quotes and special pricing and normally what would happen, we are in the last week of February and this is the week that we would actually see some of that start to translate into demand in checkout and then you would see that pattern repeat again in March.

So to Frank's point, the activity levels caused us to believe that things have actually and precisely and I do not know so much as of the economy as it is. Budgets are finally starting to get set and so dollars are starting to feel a little bit normally. So we will have a much better feel once we get through this week as to whether or not all of the additional activities actually resulting in demand.

Matthew Sheerin - Thomas Weisel Partners

Okay, that is helpful. And are you getting a sense that even though you are seeing some activity that that budgets will be lower this year or is it hard to tell?

Kris Rogers

I think it is actually very segment specific and so that is where some of these are function of the industry so there are clearly some verticals that help here than others and so for example, healthcare looks okay and so you are not seeing a tremendous change in the demand from healthcare customers and so we have the reason to believe that there will be some consistency there. But I would say in general, we have been fairly fortunate in that our mid-market enterprise customers have been so much steadily from our rate of decline in Q4 that was actually relatively modest vis-à-vis the market and I think some of that are right customers, right time, and right place.

What we are seeing in general is that again certain verticals are strong and certain customer segments are strong but I do not know right now. The outlook is pretty murky. It is very hard to tell what is actually going to translate into anything in 2009.

Frank Khulusi

So Matt I would summarize to say that unless the demand environment improves and the economy improves that budgets overall will be lower in the first, at least in the first half of this year compared to the same period last year. We are trying to compensate for that by launching new initiatives. We have the healthcare push duplexes point. There are some segments that have been less affected and we are going to try to push heavier in those segments and the segments that are affected obviously.

So our result will reflect in part what we do to certain densities, best knowledge and what happens on a week by week and month by month basis.

Matthew Sheerin - Thomas Weisel Partners

Okay that is helpful and just from the standpoint of so you are operating structure now Frank with, assuming that you are going to see at least a seasonal if not more than seasonal decline in revenue this quarter. I know you have got a cost cutting program in place but if you sort of flow the numbers through, it looks like you are going to get close to perhaps breakeven on operating profit basis. Is your intent to remain profitable here or perhaps invest in growth for the future even if it means you might lose a little bit here and there?

Frank Khulusi

No, Matt. Our plan is not to lose at all. So we plan on remaining profitable. So, when I say invest I mean we are going to do whatever we can to cut in the areas that we consider to be nonessential but rather than flow that money to the bottom line, we deploy that money in areas that we think are going to or potentially add value long term. So, our results actually will reflect what happens in the market place and since we do not know what we do not know, I will not comment on what happens to profitability as a result but out of our own actions on a minimum, what I will tell you is that we do not plan on taking the Company to the red or anywhere close to the red as the result of our investment actions.

Matthew Sheerin - Thomas Weisel Partners

Okay understood. And then could you talk about the competitive landscape because I imagine your smaller customers particularly the smaller bars or having issues of credit or having perhaps too much concentration with when specific end market where they are seeing weakness, so are you seeing the opportunities to either grow market share and take share from those smaller players or continue to consolidate the market as you have been doing?

Frank Khulusi

Yes, as you know, the deterioration and acceleration and the iteration to the US economy started around the credit crisis right around the October timeframe. So not enough time has passed yet where we would fold, go bankrupt, consolidate, whatever but we believe that as time goes on and we are starting to see signs of that, people are getting tight. Companies are either in process of going out of business or would be going out of business or we will either let them go out of business or we will consolidate them into us, those that we do care about obviously.

Matthew Sheerin - Thomas Weisel Partners

Okay, got you. And just lastly, I missed kind of the opening comments about the balance sheet. I know your inventory was up on an actual dollar base as what I imagine normally is sequentially but what is your stance on inventory and also I know this source some material directly and some through distribution. Has your policy at all changing now, perhaps you might source more through distribution because you just do not want to hold the inventory. You want to clean your balance sheet.

Frank Khulusi

I will let Brandon answer the first half.

Brandon Laverne

Yes, so the first part of that, the inventory would have been up just a little bit this year, over last year. We did have pretty significant deals that we are making in mainly on the Apple side as we talk about in the fourth quarter and so that caused our inventory dip a little bit nothing that we are concerned about and…

Frank Khulusi

And Matt, talking the exact opposite, our inventory is in really good shape and I wish we have more of that specials given the inventory that we have in December. So there are sort of things like towards any…

Kris Rogers

I would not expect that you will see any changes, Matt. I think that we actually source the bulk of our products direct and our relationships with folks like HP and Apple really dictate that we do direct that gives us optimal terms and conditions and I have not seen anything in the way our manufacturers are going to market in 2009 that would cause us to change that strategy at all. So our decisions have always been based on making sure that we can optimize over our profitability and to a large extent that has been by taking advantage of our direct relationships.

Frank Khulusi

I do expect though that as we try to ramp up our on-sale business, we are in process of trying to ramp up the on-sale business right now as the on-sale business is part of the consumer segment that also includes MacMall that that will necessitate that we will take on a little bit more of an inventory position going forward on certain items.

Operator

Your next question comes from the line of Jeff Matthews - Ram Partners.

Jeff Matthews - Ram Partners LP

I am trying to understand how important Apple and Mac are to your entire business.

Frank Khulusi

They are very important. They are great partners and we enjoy a very good relationship. We are the largest direct marketing reseller of Apple computers and that does create a unique opportunity for us as we move forward and if Apple not as hopefully one Apple continues to execute on their plan that should create even more and more opportunities for us.

Jeff Matthews - Ram Partners LP

Okay and I am just trying to understand this iPod thing. I guess I take that iPods are not a key part of your business, almost among, are they just something you can get at a certain price and if you can sell them, you can sell them or is that…I do not quite understand that.

Frank Khulusi

iPod sold on an individual basis are an important part of our business and they sell to individuals that we care about so if the individual is going to want to buy a computer and iPod or just an iPod, buy cell phone and get something gravy we care about that business than that sale. iPods sold in large quantities to customers who as part of that deal want very low pricing and it is a three-way relationship with Apple that Apple has to agree to that pricing and to the shipment of that product tend to be again low margin and we do not really care that much about those sales.

Jeff Matthews - Ram Partners LP

I see, okay. So those come and go and they do not affect your overall?

Frank Khulusi

Very minimally, again there is some volatility in the year-over-year comps on the sales basis.

Jeff Matthews - Ram Partners LP

I see. So then my real question is, is that business in general, the Apple business particularly as well as your overall business in general shifting from a desktop business to a notebook business? That is part one and part two is, do you sell Netbooks and are those more of a discussion point with customers nowadays?

Frank Khulusi

The answer to the question on notebooks, yes and then it does not just apply to the Mac or Apple market but it applies to the PC or Wintel market also and Netbooks have done well in the fourth quarter and there was a lot of buzz around Netbooks. Some of them fail to live up to customers' expectations but there are ongoing adjustments in new products and so I think Netbooks are here to stay and I think the low price points are essential to continue to drive demand in the current environment.

Jeff Matthews - Ram Partners LP

Do you think they will become a bigger part of your business going forward in steady state or not just a one-shot type of thing?

Frank Khulusi

It depends what you include in that category but I do believe that if you will include potentially new and innovative products that come out in that category then yes, we do think that it will be a bigger and bigger part of our business.

Kris Rogers

Yes, and I think that Netbooks are becoming or getting embraced by the corporate environment and so I think that absolutely they will I think continue to gain ground as a category. I think they have sort of passed the test and are no longer a kind of cute little, I do not know, utensil that somebody might have because they think it will be a corporate have so I think that they are a valid category. They are growing in both our consumer and our commercial businesses so I think you will see a reasonable amount of fraction. Low price point, not an over night phenomena so sort of wait and see but as notebooks prices come down, you are going to continue to see notebooks grow and desktops decline.

Operator

(Operator's instruction) At this time, I show no more questions in queue. Now, I will turn the call back over to Frank Khulusi for any closing remarks.

Frank Khulusi

Thanks Emmanuel. I would like to remind you to call us whenever you have a need for technology products. You could get some great deals on some great products right now. Call 800-555-Mall or visit our website at PCMall.com. Have a great evening.

Operator

And thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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Source: PC Mall, Inc. Q4 2008 Earnings Call Transcript
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