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PCM, Inc. (NASDAQ:PCMI)

Q1 2013 Earnings Conference Call

May 9, 2013 16:30 ET

Executives

Frank Khulusi - Chairman and Chief Executive Officer

Brandon LaVerne - Chief Financial Officer

Joe Hayek - President, PCM Sales

Analysts

Brian Alexander - Raymond James

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2013 PCM Incorporated Earnings Conference Call. My name is Laura, and I will be your operator for today. At this time, all participants are in a listen-only mode, and we will conduct a question-and-answer session towards the end of the conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

On the call with us today are Frank Khulusi, Chairman and CEO; and Brandon LaVerne, CFO. Also joining us today is Joe Hayek, President of PCM Sales.

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

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

Frank Khulusi - Chairman and Chief Executive Officer

Thank you, Laura, and good afternoon everyone. Welcome, and thank you all for participating on this call with PCM. Today, we will be discussing the company’s financial results for the first quarter of 2013.

I am excited to share the following first quarter highlights. Q1 net sales increased $2.5 million or 1% to our first quarter record of $337.2 million. Q1 gross profit increased $0.2 million or $200,000 to our first quarter record of $47 million. Q1 EBITDA increased 78% to $5.8 million and was $6.1 million when you exclude severance and restructuring related costs. Q1 operating profit increased $2.8 million to $2.9 million, and diluted EPS was $0.11. On an adjusted basis, it was $0.13 when you exclude severance and restructuring related costs.

We repurchased 218,144 shares of our common stock in Q1 2013 at an average price of $7.13. We also completed an amendment to our credit facility increasing our maximum line of credit by $30 million to $190 million. While we are never satisfied, I am very happy with our results in Q1 in what was a challenging IT demand environment. We were able to significantly grow our operating margins, which is a credit to our continued focus on sales of solutions in our commercial segment and on companywide cost management. We are able to grow our EBITDA by 78% year-over-year. In addition, this was the first quarter we operated under PCM name with the related changes to our operations and brand strategy, which we continue to expect will provide opportunities for growth and operating efficiencies. During the quarter we generated $0.13 per share in EPS when we exclude severance and restructuring related expenses and we also entered into the new credit facility I’ve talked about and that provides us additional capital for growth.

I am very proud of our team who continues to execute as well -- continues to execute well and we focus on long-term strategies and short-term results for PCM and its constituents.

I will now like to turn the call over to Brandon LaVerne, our CFO who will take you through our results in bit more detail. Brandon?

Brandon LaVerne - Chief Financial Officer

Thanks Frank. Detailed information about our use of non-GAAP financial measures and a reconciliation of those non-GAAP financial measures are provided in our current report on Form 8-K filed with the SEC earlier today and also available on our website.

All comparisons I make will be against Q1, 2012 unless otherwise noted. In January 2013 we began operating under three operating segments Commercial, Public Sector and MacMall. As we know through the end of 2012, we had four operating segments MME, SMB, Public Sector and MacMall OnSale. However, as a result of reorganization we effected on January 1, we have now realigned our segments primarily based upon their respective customer base.

We include corporate expenses such as legal, accounting, IT, product management and other administrative costs that are not otherwise included in our operating segments in corporate and other. All historical segment financial information discussed here and has been revised reflect those new reportable operating segments.

In our Q4 2012 earnings call, we stated that we have revised our accounting for revenue recognition of certain software maintenance and subscription transactions that were previously reported on a gross basis to record such transactions on a net sale basis with no corresponding cost of goods sold. Accordingly our quarterly periods for prior year have been – have revised revenue and cost of goods sold to reflect this immaterial change which had no impact on a consolidated gross profit, operating profit or earnings per share. All comparisons we make here are therefore using these revised revenues and cost of goods sold numbers for the prior periods in order to conform to the current period presentation.

Our consolidated net sales for Q1 2013 were a record $337.2 million in Q1 compared to $334.7 million last year an increase of $2.5 million or 1%. Consolidated sales of services were $29.5 million in Q1 2013 compared to $28.7 million last year, an increase of $800,000 or 3% and represented 9% of net sales in each period. The increase in our consolidated net sales was primarily due to a $2.7 million or 1% increase in our Commercial segment sales, a $200,000 or 1% increase in our Public Sector segment sales, partially offset by a $400,000 or 1% declined in MacMall segment sales.

Overall, we saw strength in many of our largest product categories including desktops, networking and tablets growing at 12%, 46% and 27% respectively. These gains were partially offset by declines in storage, accessories and servers of 8%, 19% and 8% respectively. Our top five manufacturers in Q1 2013 were HP, Apple, Dell, Lenovo and Cisco, and together represented approximately 54% of our total revenues. This compares to our top five manufacturers in Q1 2012 of HP, Apple, Dell, Lenova and Microsoft which represented about 55% of our total revenues.

Our consolidated gross profit was $47 million in Q1 2013, an increase of $200,000 or 39 basis points from $46.8 million in Q1 2012. Consolidated gross profit margin was 13.9% in Q1 2013 compared to 14.0% in Q1 2012 due impart to our focus on sales of higher margin solutions offset by lower margin sales to the FBI.

Our Commercial segment gross margins increased from 14.7% to 15.1% driven by higher mix of solution sales. Our Public Sector segment gross margin decreased from 12.3% to 9.3% primarily due to the lower margin FBI business we discussed. Our MacMall segment gross margin declined from 11.4% to 11.0%. Consolidated SG&A expenses decreased by $2.5 million or 6% to $44.1 million in Q1, 2013 from $46.6 million in Q1 2012 primarily due to a $2.2 million decrease in net personnel costs. Consolidated SG&A expenses as a percentage of net sales decreased to 13.1% in Q1 2013 from 13.9% in Q1 2012. And this was our third consecutive quarter of year-over-year declines in our SG&A as a percentage of net sales.

Our consolidated operating profit was $2.9 million in Q1 2013 compared to $100,000 in Q1 2012, an increase of $2.8 million. Our consolidated EBITDA increased by $2.6 million, or 78% to $5.8 million. We incurred approximately $200,000 of severance and restructuring related costs in our EBITDA in Q1, 2013 versus $600,000 in the prior year. SG&A as a percentage of sales, I am sorry, our effective tax rate for Q1, 2013 and 2012 was 41%. We generated over $12 million of operating cash flow during Q1, 2013 compared to $23 million of Q1, 2012. CapEx totaled $2.2 million during Q1, 2013 compared to $2.5 million during Q1, 2012 and we expect CapEx to increase throughout 2013 as we commenced the build-out of our new Ohio datacenter. Outstanding borrowings under our line of credit declined by $12.1 million from the prior year end to $75.6 million at March 31, 2013 and it was the primary driver of our cash used in financing activities along with $1.6 million used to repurchase our common stock.

Now, I would like to turn the call back over to Frank Khulusi. Frank?

Frank Khulusi - Chairman and Chief Executive Officer

Thanks Brandon. At this point, I would like to give you an update on the demand environment and provide some additional clarity on our ongoing strategic initiatives and re-branding. First, while we saw return to a more seasonally normal demand environment in Q1, headwinds persist. The U.S. economy while showing pockets of field recovery remains challenged by gridlock in Washington and uncertain tax environment and additional uncertainties, including healthcare costs and global softness in spending.

Turning to our strategic initiatives, we continue to be focused on growing our sales of solutions and services. Our model, our team, and our capabilities give us what we believe in many cases is a better mousetrap. More importantly, it is a key driver of our focus on continuing to expand our margins both on the gross margin and operating margin side. Our commercial gross margin is expanded by 40 basis points in Q1, 2013 and we continue to refine our solutions selling approach. The changes that we are making are intended to better enable our account execs and those that support them to more effectively bring value-added solutions and services to our customers.

As we continue to add to our capabilities, including our new planned Ohio datacenter, we will also be providing our account execs with improved tools training and support. We believe that this will increase our penetration within our various account basis and will also provide scale to our offerings. Our re-branding is as I have mentioned an ongoing process, and I am pleased to tell you that our first quarter at PCM Inc. was characterized by additional progress in our re-branding. Our commercial teams are focused on a common marketing methods and identity whether it is consumer facing in marketing, sales, IT, or finance. We will continue to fine-tune this re-branding as we make additional progress with our key systems upgrades and as it makes sense to provide better value and service for our customers, partners, and shareholders.

In closing, we are cognizant that we have to earn our customers and partners’ trust everyday. And we work very hard to do exactly that. Our team works hard and works smart to ensure that the solutions we provide our customers are world-class. The work that they have done and continued to do with this goal of world-class service positions us very well to successfully serve our customers as a trusted IT solutions provider. In addition, the change to our new PCM name has been fantastic. The feedback that we have gotten suggest that while our team will be successful under any umbrella that PCM brand is beginning to resonate and as we continue to build that customer by customer, success by success will only continue to get stronger.

At this point, I will turn the call over to Laura and open it for any questions. Laura?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from the line of Brian Alexander from Raymond James. Please proceed.

Brian Alexander - Raymond James

Hey thanks. Hey, can you guys just talk about the linearity you saw during this quarter, I think on the last call it sounded like you had gotten off to a reasonable start, and then for the quarter, we ended up down a little bit 1.5% year-over-year from a top line perspective. So, did the quarter get a little bit more challenging as we went throughout and as you kind of look forward given your comments about maybe there being a challenging backdrop, Frank, when do you think we’ll start to see year-over-year growth Q2 or will it take a little longer?

Frank Khulusi

Yeah. So, hi, Brian first of all.

Brian Alexander - Raymond James

Hi.

Frank Khulusi

And then secondly, thank you, we are actually up 1% in Q1 I think the numbers you have are a little bit off because after the immaterial re-class that we did to our top line as a result of certain software contracts that were restated.

Brian Alexander - Raymond James

Okay.

Frank Khulusi

So, we were up 1% and whereas we are not doing carwheels about 1%, this is actually better than most people we track. And we think that’s a good number in the current environment. As you know our sales, our mixture of large deals some things are project based, some things are kind of transactional and demand gets to be lumpy during the quarter. So, yeah we ended probably a little softer than we would like, but the second quarter so far if you look at first month and April for example, I think we are a little up from where we were and what we reported it in the first quarter. So, we’re pleased with that we don’t think the story for our Q2 however is going to be some unbelievable sales growth, we think the story is going to be continued leverage in terms of what we have done both from a solution sales perspective, from a services perspective, from a cost containment perspective and continuing to execute on the things that we consider to be strategic that we’ll have more of an effect for the second half of this year.

Brian Alexander - Raymond James

And just how are you guys thinking about the mobility space as we enter, as we get into the back half of the year with Haswell and more touch enabled Windows 8 devices, is that something that you think customers are waiting for and that could actually spur a bit more of an upgrade cycle in the Commercial space?

Frank Khulusi

We do, I mean you’ve heard me talk about this before I think the so-called slow death of the notebook or the PC, I think is greatly exaggerated. I think some of it is self inflicted. The technology was just not progressing fast enough and wasn’t sexy enough and as that began to change at the same time there was a new operating system. And as you know things take a while with the new operating system to catch up, it’s not easy to upgrade so on and so forth. And it’s especially with the operating system it’s a major change. So, as all these things continue to grab hold and gain traction I think the future is definitely brighter than what it is today. How bright it is, if I knew, I probably would make a lot of money buying some stocks out there. But I think that the notebook is going to do better and exactly as you said with the kind of the conversions between the notebook and tablet, I think that is exciting certainly consumers I don’t know about enterprise customers. Yeah, it’s starting to a little bit, but I wouldn’t call it a very material yet. Do you want to add to that Joe?

Joe Hayek

Sure. Hi Brian, relative to the commercial space and enterprise your point is a good one where I think our tablet sales were up 27% year-over-year in Q1. The largest seller of those tablets was probably not up 27%. And so as you look into the later half of 2013, we do believe that there is in fact a pent-up demand within corporate IT environments for mobility and for tablets. And we’ll see it still some of the folks that have newer entries in that market, still have a little bit to prove to corporate CIOs etcetera. But that is something that many people have historically held off on not being comfortable with certain environments and hopefully for some of those vendor partners of ours that changes in the next six to nine months.

Brian Alexander - Raymond James

And maybe just a follow up Joe on the subject of pent-up demand and large projects and not so much in the mobility space as much as I’m thinking in the datacenter and then the infrastructure area. What are you guys hearing from customers in terms of perhaps them having pent-up demand and keeping their infrastructure out there longer in this difficult environment, do you feel that there is a lot of pent-up demand and what is your pipeline looking like and what’s their appetite for large projects as we move into the next few quarters?

Joe Hayek

So, specifically to more what we’re hearing rather than talking about our own pipeline, but the noise out there is that while there are always going to be refreshes going on what you have seen is people delay refreshes or upgrades because they can through virtualization or through taking advantage of more cloud based offerings. But we absolutely do believe that there are significant projects and more in the larger customers right that either have been delayed or postponed, because of a systems upgrade or because of capital constraints etcetera. And really once we see and once I think people are more comfortable that the hiring environment gets better, when unemployment starts to actually tick down not necessarily because of jobs in construction or on the homebuilding side, but really in call it the private sector non-housing related that, and that will be a leading indicator we believe. So, CIOs are out there trying to sort through that with their management teams. And so that will really be a trigger and catalyst I think for people to really start getting more intentional about what their backend environment looks like from a storage perspective, from a network perspective, and certainly from a server perspective.

Brian Alexander - Raymond James

Okay, alright. Thanks a lot.

Frank Khulusi

Thanks Brian.

Operator

Thank you. (Operator Instructions) Okay. I would now like to turn the call over to Frank Khulusi for closing remarks.

Frank Khulusi - Chairman and Chief Executive Officer

Thank you, Laura. I would like to thank everyone on the PCM team for their continued efforts, dedication, and good work. Thank you all very much again for spending some time with us on this call and for your interest in PCM. We appreciate your support and look forward to speaking with you again on our second quarter conference call. In the meantime, please contact us with any questions or if you have a need for IT solutions. Thanks and have a great evening.

Operator

Thank you for joining today’s conference. This concludes the presentation. You may now disconnect. And have a good day.

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