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Executives

Frank Khulusi- Chairman, President and Chief Executive Officer

Brandon Laverne- Chief Financial Officer

Kristin Rogers- Vice President of Marketing

Dan DeVries - Executive Vice President

Analysts

Brian Peterson - Raymond James & Associates

Chris Krueger - Northland Securities

Bill Dawkins - Dawson Dawkins Incorporated

PC Mall, Inc. (MALL) Q2 2009 Earnings Call Transcript August 5, 2009 4:30 PM ET

Operator

Good day ladies and gentlemen and welcome to the second quarter 2009 PC Mall Incorporated earnings conference call. My name is Stacy and I will be your conference moderator for today. At this time, all participants are in a listen-only mode and we will be facilitating a question-and-answer session towards the end of the conference. (Operator's instruction) As a reminder, this conference is being recorded for replay purposes.

On this call with us today are Frank Khulusi, Chairman, President and Chief Executive Officer; Brandon Laverne, Chief Financial Officer; Kris Rogers and Dan DeVries, Executive Vice President.

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 you, Mr. Frank Khulusi. Please proceed sir.

Frank Khulusi

Thank you, Stacy. Good afternoon everyone. Welcome and thank you all for participating on this call with PC Mall. Today, we will be discussing the Company's financial results for the second quarter of 2009.

Though the economy remains challenge in the second quarter and IT spending while stabilizing has not yet recovered, I am pleased with our results and our progress to better position ourselves for growth as the economy rebound while we grew this outline sequentially and reduce our operating expenses while we continue to make strategic investment. As I have stated previously, we believe that a recession is not the time to shy away from making strategic investments that we believe are essential for long-term success of PC Mall and we expect to continue making this investment for the foreseeable future.

As an example, we are preparing to open a new call center and sales facility in downtown Chicago that will serve as a new hub for our SMB business while we intend to add new account executives. We will also consolidate our local MME office into the new facility and plan to locate resources in the facility dedicated to our new healthcare initiative which will be part of our public sector business. In addition, we have continued adding talent of professionals to our sales, marketing, IT and finance teams.

We also continued selectively pursue acquisitions. We believe that the investments we are currently making when a company with an economic rebound will position us very well for 2010 and beyond. Some of our financial highlights are as follows; net sales for Q2 2009 were $261.4 million, down 21% year over year. Gross profit for Q2 2009 was $35.8 million, down 22% year-over-year. Gross profit margin for the quarter was 13.7%. GAAP diluted EPS was $0.06 a share in Q2 2009 versus GAAP diluted EPS of $0.22 in Q2 2008. Non-GAAP diluted EPS was $0.07 in Q2 2009 versus non-GAAP diluted EPS of $0.25 in Q2 2008.

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

Brandon LaVerne

Thanks, Frank. All comparisons I will make are against Q2 2008 results unless otherwise noted.

Consolidated net sales for Q2 2009 were $261.4 million, a decrease of 21% from $331.2 million last year. Consolidated gross profit for Q2 2009 decreased 22% to $35.7 million from $46.2 million last year. Consolidated gross profit margin was 13.7% for Q2 2009 compared to 14% last year. Consolidated GAAP operating profit for Q2 2009 decreased 67% to $2 million compared to consolidated GAAP operating profit of $5.9 million last year.

GAAP consolidated net income for Q2 2009 was $800,000 compared to $3 million last year. Non-GAAP consolidated net income for Q2 2009 decreased by $2.6 million to $900,000 compared to non-GAAP consolidated net income of $3.5 million for Q2 2008. GAAP diluted EPS for Q2 2009 was $0.06 per share compared to GAAP diluted EPS of $0.22 per share for Q2 2008. Non-GAAP diluted EPS for Q2 2009 was $0.07 a share compared to non-GAAP diluted EPS of $0.25 for Q2 2008.

As this time, I would like to point out that in Q2 2009; non-GAAP financial information excludes the impact of $100,000 income tax adjustment related to a dividend from international subsidiary which affected diluted EPS by $0.01 per share in Q2 2009. Our effective tax rate for Q2 2009 increased to approximately 50% compared to 38% last year primarily due to the income tax adjustment made in Q2 2009 related to that dividend.

As a result, our effective year-to-date Q2 2009 tax rate was approximately 45% while manufactures will cost our effective tax rate to vary from quarter to quarter, we anticipate that this adjustment will continue to impact our effective tax rate for the remainder of 2009 and is not anticipated to recur in the years thereafter.

In Q2 2008, non-GAAP financial information excludes the impact of an $800,000 pre tax or $0.5 million after tax loss and settlement charge which affected diluted EPS by $0.03 per share in Q2 2008.

I will now speak a bit more about our Q2 2009 segment results. Again, all comparisons are against Q2 2008 unless otherwise noted.

For our SMB segment, Q2 2009 net sales were $85.3 million, a decrease of $44.7 million or 34% from $129.9 million last year primarily due to ongoing economic weakness and the result in softness and IT spending by small and medium sized businesses in North America and an $8.9 million decrease in lower margin volume iPod sales to certain customers.

SMB gross profit decreased by $4.5 million or 28% to $11.6 million in Q2 2009 compared to $16.1 million last year resulting primarily from decreased SMB net sales mentioned earlier and a competitive pricing environment. SMB gross profit margin increased by 120 basis points to 13.6% in Q2 2009 compared to 12.4% last year primarily due to an increase in many consideration as a percentage in net sales and a reduction in lower margin volume iPod sales to certain customers, partially offset by the competitive pricing environment.

SMB operating profit in Q2 2009 decreased by $1.8 million or 24% to $5.8 million compared to $7.6 million last year. The decrease in SMB operating profit in Q2 2009 was primarily due to the decrease in SMB gross profit mentioned earlier partially offset by a $2.1 million decrease in SMB personnel costs and a reduction in bad debt expense.

Average account executive headcount during Q2 2009 in our SMB segment was 353, down 57 account executives or 14% compared to 410 last year and down 13 account executives from Q1 2009.

For our MME segment, Q2 2009 net sales were $92.4 million compared to $104.4 million last year, a decrease of $12 million or 12%. This decrease was primarily due to ongoing economic weakness and the result in softness in IT spending by customers in the mid market and enterprise sector in Q2 2009. Product revenues declined by 17% in Q2 2009 compared to Q2 2008 while service revenues increased by 9% in Q2 2009 compared to last year. Service revenues represented 25% of MME net sales in Q2 2009 compared to 20% of MME net sales last year.

Our MME service revenues include services performed under our Abreon brand which is primarily focused on change management and elearning consulting which declined 14% in Q2 2009 compared to last year due to a reduction in projects associated with larger ERP migrations that was more than offset by an 18% increase in MME SARCOM branded professional and managed services.

MME gross profit decreased by $3 million or 16% to $15.8 million in Q2 2009 compared to $18.8 million last year and MME gross profit margin increased by 90 basis points to 17.1% in Q2 2009 compared to 18% last year. The decrease in MME gross profit was primarily due to the decreased MME net sales mentioned earlier and a decrease in vendor consideration in Q2 2009. The decrease in MME gross profit margin was primarily due to a decrease in MME selling margin and a decrease in vendor consideration in Q2 2009 as a percentage of net sales.

Our MME operating profit in Q2 2009 decreased by $200,000 or 4% to $4.6 million compared to $4.8 million last year. The decrease was primarily due to the decrease in MME gross profit mentioned earlier partially offset by a $2.4 million decreased in MME personnel cost which resulted primarily from centralization of resources of $1.2 million to our corporate and other segment and reductions in variable compensation cost and other expenses.

Average account executive headcount during Q2 2009 in our MME segment was 99, down 7% compared to 106 in Q2 last year and down 2 account executives from 101 during Q1 2009.

For our Public Sector segment, Q2 2009 net sales were $38 million compared to $37.3 million in Q2 2008, an increase of $700,000 or 2%. This increase was primarily due to an increase in sales in our state and local business reflecting our increased business development efforts in that market, partially offset by reduced sales in our Federal government business primarily relating to a decline in demand under our GSA electronic distribution and delivery contract during Q2 2009.

Public Sector gross profit decreased by $100,000 or 3% to $3.8 million in Q2 2009 compared to $3.9 million last year. Public Sector gross profit margin decreased by 40 basis points to 10% in Q2 2009 compared to 10.4% in Q2 2008. This decrease in our public sector gross profit and gross profit margin was primarily due to a decrease in vendor consideration.

Public Sector segment operating profit in Q2 2009 remained flat at $800,000 compared to last year. Average account executive headcount during Q2 2009 in our Public Sector segment was 76 account executives, down 25% compared to 101 account executives in Q2 2008 and no change from Q1 2009.

For our Consumer segment, Q2 2009 net sales were $45.8 million compared to $59.5 million in Q2 2008, a decrease of $13.7 million or 23%. The decrease was primarily due to continued weakness in the economic environment and a decrease in average selling prices resulting from a decrease in sales, higher price items in the notebook computer category.

Consumer gross profit decreased by $2.7 million or 37% to $4.6 million in Q2 2009 compared to $7.4 million in Q2 2008. Consumer gross profit margin decreased by 230 basis points to 10.1% in Q2 2009 compared to 12.4% in Q2 2008. The decrease in our Consumer gross profit was primarily due to the decreased Consumer net sales mentioned earlier. The decrease in our Consumer gross profit margin was primarily due to very competitive pricing environment and a decrease in vendor consideration. We expect that our Consumer gross profit margin will continue to be negatively impacted by competitive pricing pressure in the current environment.

Consumer operating profit in Q2 2009 decreased by $2.3 million or 83% to $500,000 compared to $2.8 million in Q2 2008, primarily due to the decrease in Consumer gross profit mentioned earlier, partially offset by reductions in Consumer credit card related charges, advertising expenditures and Consumer personnel cost.

Average account executive headcount during Q2 2009 in our Consumer segment was 99, down 18% compared to 121 account executive last year, and down 4 accounted executives from 103 during Q1 2009.

Corporate and other selling, general and administrative expenses includes corporate related expenses such as legal, accounting, information technology, product management and other administrative costs that are not otherwise included in our reportable operating segments. Q2 2009 Corporate and Other SG&A expenses decreased by $0.5 million, or 4%, to $9.7 million from $10.2 million last year. The decrease from last year was primarily the result of cost cutting initiatives at the corporate level and an $800,000 lawsuit settlement charge in Q2 2008, partially offset by an increase of $1.2 million attributable to centralization of certain resources from our MME segment.

Accounts receivable at June 30, 2009 of $131.9 million decreased by $16.7 million from December 31, 2008 primarily due to lower open account sales during Q2 2009 compared to Q4 2008.

Our Inventory of $47.6 million at June 30, 2009 represents a decrease of $20.2 million from December 31, 2008 reflecting the sell-through of seasonal and strategic purchases made in late 2008.

Outstanding borrowings under our line of credit decreased by $15 million to $14 million at June 30, 2009 compared to December 31, 2008.

Operating cash flow generated during the first six months of 2009 was $19.5 million compared to a negative operating cash flow of $25 million in the first six months of 2008.

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

Kristin Rogers

Thanks Brandon. I will spend a few minutes on our segments specific results as well as other key performance indicators for our consolidated business to give you more color on our performance in this environment. I will review 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. As Brandon indicated, net sales for SMB segment declined by 34% year-over-year with $9 million or 7 percentage point of the 34% decline coming from a reduction in lower margin volume iPod sales to certain customers and while we continue to see softness in the demand environment in April and May, we did see an improvement in demand as we close the quarter. We experienced the best per day demand so far in 2009.

We were able to increase gross margin in the SMB business by approximately 120 basis point largely due to an improvement in our sales product mix and a reduction in lower margin volume iPod sales to certain customers. However, we did see real pricing pressure as we started the quarter in April and we actively work to fulfilling margins up to the quarter and did walk from uncomfortable business throughout May and June.

For our SMB headcount numbers were down 57 account executives year-over-year as we adjusted to the demand environment. We remain committed to investing strategically in SMB to position ourselves for long term growth and profit and have announced an expansion of our SMB of call center in Chicago which is waiting for September of this year.

Sequentially while sales declined marginally from Q1 2009 for SMB, both gross profit and operating profit increased. Gross profit increased 3% over Q1 2009 and operating profit increased by 6% over Q1 of 2009. Operating profit margin also increased year-over-year and sequentially as the SMB business executed its strategy with tight cost controls and continue to focus on selling higher margin solution.

Our MME segment which we market under the SARCOM and Abreon brands had a 12% decline in revenue year-over-year for Q2 2009. For MME, we experienced a 22% decline in hardware and software sales offset by a 9% growth in sales services. MME revenues increased sequentially over Q1 2009 with a 9% increase and while we did see improvement sequentially in the demand environment, we continue to see capital dollars being restrained and limited to certain product type and typical run rate business for desktops, notebooks and printers continue to be under pressure.

We could really see very strong demand in pipeline for managed and professional services through the SARCOM brand and experience 18% year-over-year growth and services revenue in Q2 2009. Abreon however had a 14% decline in exchange management in elearning consulting offering as its enterprise clients downsize to deferred projects in response to the economic recession. Abreon had seen a significant up tick however in the number of new clients in 2009 which has been a partial offset to the enterprise project shrinkage. Goss profit for MME business declined 15% year-over-year all coming on the product side.

A combination of changes in specific manufacturers' terms and conditions in software arena and the competitive environment in general contributed to lower product gross margin. Gross margin also declined 90 basis points to 17.1% in Q2 versus 18% from same quarter last year. The drop in margins on the product side was caused by the items I mentioned earlier but we also saw this degradation in the service gross margin.

The service margin decline was the result of an increase in work done in partnership with tier one service companies and in combination with some large projects in Q2 that were competitively priced. We do expect service margins to improve sequentially as a result of improved mix as we go forward. Operating margin improved by 41 basis points but we do have a modest 4% year-over-year decline in operating profit. Both were the result of a reduction in operating expenses of 20%.

The reduction in operating expenses is the result of a combination of cost moving to centralization as well as direct operating cost reduction. MME's improving performance reflects continued strength in our service to business and our value of purchase to that market. Despite the challenging demand environment, we continue to maintain a strong pipeline for services with several key wins in Q2 2009. We continue to invest in building more service capability both in the manage service side and for professional services.

Our solutions is focused in professional service our teams are working together to drive opportunity in key technology segments like storage virtualization, unified communication security and others. We continue to invest in both MME sales and service personnel positioning ourselves for long term growth as the economy improves.

In our PC Mall Gov public sector segment, revenues increased by 2% in Q2 2009 over Q2 2008. Growth of 8% year-over-year on our state, local and ed business was partially offset by a decline of 2% in our federal business, much of which is attributable to the decline in the GSA, EDD demand during the period. In this bad business, we continued to see growth as a result of increasing A, productivity and ongoing investments in our sled business. We saw strong improvement in both federal and sled sales over Q1 2009 which is inline with seasonality.

In the federal space, we saw contracts sales growth for 77% last year Q2 to 81% in Q2 2009 which is facilitated by the federal budget being approved in late Q1 2009. Late contract sales remain flat at 18% of sales. Strong growth results for large harbor OEM through PC Mall Gov were partially offset by a large year-over-year sales decline for a large software publisher.

We saw a significant pricing pressure in the sled business that is related specifically to a certain large software publisher's product who just walked away from such revenues in the quarter and expect to continue to do so which will have an ongoing impact on our sled software revenues. Gross profit margin declined slightly for PC Mall Gov by 40 basis points largely due to pricing pressure in certain categories during Q2 2009. Gross profit dollars also declined slightly but were up 3% sequentially. Operating profit margin was flat from Q2 2008 and down slightly from Q1 2009. Both operating profit and gross profit were directly impacted by a reduction in vendor consideration from a large software publisher I referred to earlier.

We continue to invest in additional capability in headcount for both our sled and fed businesses as well as drive for additional contract vehicle. During the quarter, we added a number of new awards in this sled base. In addition, we are announcing the formation of a dedicated healthcare division within PC Mall Gov while we have a solid legacy business in healthcare and we continue to see year over year growth in this market. We believe that by enhancing our value proposition and by dedicating resource to healthcare providers that we can accelerate that growth and capitalize on the volume opportunity.

We have promoted Dan Schneider, currently VP of Marketing Solutions of a PC Mall subsidiary to head up that effort. Dan will be working over the next several months to add a new ecommerce site, hire additional sales and technical resources and enhance our technology solutions through strategic partnership. You should expect to hear more as we progress through the quarter.

Sales in our consumer segment which include MacMall, ClubMac and OnSale brands declined by 23% in Q2 2009 from Q2 2008. Consistent with seasonality in our consumer business, there is also decline 21% from Q1 2009. This decrease was primarily due to ongoing softness in consumer spending. Gross profit declined 37% from Q2 2008 primarily a result of lower revenues but exacerbated by competitive pricing practices and aggressive promotional marketing across retail in these sales channels and we have been continuing to respond aggressively to maintain our share in the space.

Operating profit declined 83% for Q2 2009 compared to Q2 2008 as we maintain our level of investment for future growth. We are expanding our capabilities in the consumer segment and have recently announced launch of a brand new improved website for MacMall. This site gives a significantly more capability to support our customers and we expect to further enhance our customer touch point over the next several months.

At this time, I will review the product category results. With the ongoing pressure on demand, almost all categories experienced year-over-year decline although we continue to see activity in pipeline strong for technology areas, the storage solutions, archiving, data reduplication, virtualization, unified communications and security and while we are not yet seeing year over year growth in all these areas, in addition to seeing strong pipeline, we have seen an increase demand on services as it relates to these technology segment.

We also saw some seasonal lift in the category of software and networking which typically strengthen in Q2 in correlation to leading manufactures as the yearend closes. We continue to make investments in our pre sells and services capability in those areas to enable a strong value proposition for our existing and perspective customers across all commercial segment.

Our largest product category in Q2 2009 was software at 21% compared to 17% in Q2 2008. Software sales decline 2% over Q2 2008 but were up significantly from Q1 2009. The biggest growth in the software category came from virtualization, security solutions from publishers like IBM, VMware, [22.56] and Symantec. While we saw a strong sequential growth in our Microsoft business from Q1 2009, we did experience year-over-year decline which we believe are attributable to changes in programs from Microsoft in combination with significant pricing pressure in the market. We chose to selectively lock the business that was unprofitable.

Our second largest category was Notebooks at 15% flat with Q2 2008. The Notebook category shrunk 23% from Q2 2008 that was largely affected by midmarket and large customers delaying deployment with Notebooks. In addition, Notebook revenues were negatively impacted by dropping ASPs as a traditional Notebook product is competing with the Netbook price point. Netbook sales, which are included in our Notebook numbers, basically doubled each month with Q2 2009 but on a small base. While we do not see Netbooks pushing it appropriate in any material way, we do believe that they have driven down Notebook price point.

Our next largest category was Desktops at 10% of sales versus 11% in Q2 2008 and down 28% over last year. We continue to see SMB and MME customers defer new investments and test op as well and only respond with purchase any of Desktops and Notebooks when there is a perceive deal.

Servers' sales remain flat at 3% of sales with the 15% decline from last year. With IT capital spending under pressure as well as the verging opportunities for virtualization and hosting, we continued to be challenged in the space. However, we are encouraged with this strong sequential growth in servers from Q1 of 2009.

Network increased 8% of sales versus 7% last year while sales decline 13% year over year. Sales did increased 90% over Q1 2009. We continue to see strong pipeline for networking and even stronger pipeline for services associated with networking. Through that end, our overall delivered services for our next largest category at 7% of total sales versus 6% of total sales in Q2 2008 and through year over year at 6%.

We continue to invest in our managed and professional services capabilities to better support our clients from a total life cycle life management perspective as well as to drive hardware and software solution sales. Manufacture spend at warrantees came in at 5% of our sales versus 4% last year and were flat with prior year from the growth perspective.

Store sales grew to 7% of total revenues versus 6% last year and while there is solid activity around storage solutions, sales decline 10% year over year. We did see sequential growth and enterprise storage with sales at 10% over Q1 2009 with the strongest growth coming from partners like EMC and Compellent and expected to continue the improvement particularly with our mid market and enterprise customers.

Displays and printers are presented in 3% and 4% respectively at sales but shows substantially year over year decline at 38% and 36% respectively year over year. Printer sales decline were exacerbated by certain product constraints from a large print manufactures during Q2 2009. However, we did see an increase in printer sales over Q1 2009 and specifically in our MME and public sector segment. Similarly in displays, we did see modest improvement each month of Q2 2009 displays but we believe that the sales of displays by tier one OEMs will dominate the bundles that are used to stimulate Desktop sales.

Finally, supplies and accessories remain flat at 3% and 2% respectively in Q2 2009 with declines in both categories at 27% and 11% respectively. iPod/MP3 players shrunk from 4% of sales last year to 2% this year with a 52% revenue decline. From a manufacture concentration standpoint on a gross consolidated basis, our top five manufacturers for Q2 2009 were HP, Apple, Microsoft, Cisco and Sun Microsystems respectively with an aggregate represented approximately 54% of our total revenue.

As a point of reference, the top five manufacturers for Q2 2008 were HP, Apple, Microsoft, Cisco and Lenovo who represented approximately 56% of our total revenue last year.

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

Frank Khulusi

Thanks Kris. As I stated earlier, I am proud and aware our team has continued to execute in a very challenging environment. I mentioned last quarter that we are cautiously optimistic that we are near the bottom from a year over year demand comparison perspective and in the second quarter, we saw sequential growth which I would characterize as a return to normal seasonality in most of our segment.

We have seen the strength continued up far in Q3 and while we remain cautious in our outlook for the remainder of 2009, we are optimistic that we are getting closer to our return to growth. We continue to execute on our strategy of containing cost while making strategic investment, many of which I articulated in my opening comment. We firmly believe that a demand environment like this creates opportunities for companies that are nimble and are able to make strategic investments and people systems and processes.

While making these investments may impact our operating margin in the short term, we believe that they will pay significant dividend as the demand environment improves. In closing, I would like to thank everyone on the PC Mall team for their continued efforts and dedication.

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.

Brian Peterson - Raymond James & Associates

This is Brian Peterson for Brian Alexander. If I look at the MME gross margins, I would have expected them to be a little higher with sales up about 9% sequentially and I know you mentioned a lot of headwinds. Can you maybe break that down into product pricing versus software pricing versus mix in services, maybe in, what gives you confidence that that may tick up in this area?

Kristin Rogers

Bryan, it is Kris Rogers. There were three things that in fact affected the gross margins for MME. Let me take them one at a time. So, you talked specifically about software and we mentioned vendor consideration and there was an absolute impact in Q2 of 2009 as a result of some changes that were made by one of the large publishers in terms of both the fees and then the backend dollars that we have the potential to earn and that had an effect on MME gross margin. I cannot quantify it off the top of my head but that was one of the three contributors.

The second thing was on service margins were depressed during the corner from prior period as a result of a couple of pretty specific things. We actually had some larger transactions with a tier one service provider where were to sub. We had a little bit of a shift at are mix for this particular period in conjunction with a very specific project that we executed during this quarter that was consistent to this margin. So from our perspective, while I do not know that from the software perspective we can expect that that trend will change. What I cannot tell is in terms of the service margins themselves and the next we had in Q2, we do expect that to improve going forward because that was some of adventure events.

And then the third component is just the general product margins and again a reasonable amount or maybe unreasonable amount of pricing pressure on normal product margins but similar to that that is certainly about we work hard during the quarter to address the product margins and do expect that we turn to normal see in the product margins. So, I do not know if that answers your question or not.

Brian Peterson - Raymond James & Associates

No. It does. I appreciate it. Just on the vendor consideration, is the differing it all by segments or you think vendors maybe put a little back in dollars more towards SMB versus MME?

Kristin Rogers

I think that is kind of fair away to character is that I think if you for example take some of like publisher, I think what we are hearing and seeing is that for large enterprise accounts where the manufacturer may see less value ad or may see quite less value is the best way to articulate it.

They are less likely to reimburse the channel for large enterprise transactions and they are more inclined to increase the incentives and SMB where they pick a channel providing a lot of value.

So, I think you have characterized pretty well.

Brian Peterson - Raymond James & Associates

Okay. On cash flows, the performance was actually pretty good. I know the second quarter is normally a week recorder for cash flow. You guys have done about $30 million in operating cash flow over the last couple of years. Is there any reason to think that you could not deliver on that for 2009?

Frank Khulusi

On the cash flow for what we have seen so far clearly probably half of that is due to the trends in sales. But on the good side, a lot of that is due to our efforts to increase our performance in this area and so we do expect that some of that will continue will be hampered by our overall lower profitability so far this year versus last year. But we do see favorable trends in that area.

Brandon Laverne

And also our finance organization has done a very wonderful job of managing that working capital of the Company but so far they have gone after the low hanging fruit. There is more fruit to go after. It is higher hanging fruit that will take a little longer. But I do believe that there is more that can get on the working capital line.

Brian Peterson - Raymond James & Associates

Okay. There has been a lot of optimism about a PC upgrade cycle whether it would be in 2009 and 2010 benefiting from the Windows 7 launch. Did you hear anything from your customers on that it is something like you said PC demand was pretty soft? Any thoughts on how the launch of Windows 7 is going to impact I guess?

Frank Khulusi

Yes. I mean we are starting to hear more, more of a buzz and we know the level is definitely increasing with respect to Windows 7. We are also hearing some noise, some possible difficulties in the upgrade cycle itself on existing technology that may push our customers would be vary to make the upgrade to change the technology and upgrade the technology altogether.

So, whereas previous versions may have been as simple as doing and then sell of a new operating system on the new machine. That is one maybe a little bit more complicated and therefore in some customers to make a wholesale to change the machine that self abate touch along to upgrade.

Kris, do you want to add anything to that?

Kristin Rogers

No. I think Frank is right. I would actually agree that the noise level with respect to the Windows 7 launch is significantly higher than it had been in prior months and so I think that is actually all good news and light.

Our hope is that in fact what Frank is articulating is what going to happen that we will not only see a tremendous opportunity with Microsoft itself in deploying Windows 7 but it will also spur on sales of desktops and notebooks. So, we will safe.

Brian Peterson - Raymond James & Associates

Lastly, did you guys put your shares in the quarter and if so could you give that out? I am just wondering how you guys are looking at share repurchases versus M&A going forward. Thanks.

Brandon Laverne

We did not purchase shares in the last quarter. However, we continued to believe in our share repurchases program. We continued to have it out there. In any given quarter, Brian, we looked at multiple factors. Some of which we talked about publicly. Some of which we cannot. But the fact our decision, for example, we may be working on an M&A acquisition in a given quarter or may be actually backed out as a result of working on an M&A acquisition or et cetera, et cetera.

So, just believe us when we say we continue to believe in the stock and continue to believe in the program to repurchase stock but have to way all the other factors when it comes actually buying the fact.

Operator

(Operator Instructions) Your next question comes from the line of Chris Krueger - Northland Securities.

Chris Krueger - Northland Securities

I missed a little bit in the call so I apologize if you are already heard over this. But did you give an indication of how the month-to-month trends rolled out during the quarter or there are any changes or it was a consistent to other things finished stronger than they started?

Frank Khulusi

We did have month-to-month improvement throughout the quarter. Some of which is reflective of normal trends but it was a little bit more pronounced with the end of quarter rebound in the last month. That was higher than normal as Kris mentioned on her part at the scripted portion of this call.

She did or we did have the back sales day in the last month of the quarter of the whole quarter. Kris, do you want to add anything to that?

Kristin Rogers

No. I think, Chris, on the commercial side of the business it is normal linearity if you want to call that for the first month to be. So we get the second month to be strongest and the third month we have a hockey stick and as Frank indicated our business follows the same normal patterns. Q2 is known for a couple of things. Seasonality in our state, local or education business because of the close of these budget seasons and so you do have additional portion at amount of business being done through the latter part of the quarter in sled.

The other thing it is known for is couple of many manufacturers, one in the software space and one in the networking space for closing out their fiscal years during the end of the calendar second quarter. So, you tend to have a little bit of a hockey stick as a result of that.

But I would say that the trends are pretty consistent with what we would normally expect in the given quarter with slightly improved performance in June.

Chris Krueger - Northland Securities

If you are looking back to last year on the same issue, what would have been in the third quarter of last year kind of the reversal where trends kind of we start the normal in the third last year then by the end of the quarter we are clearly getting bad negative general where were up against.

Kristin Rogers

Yes. With a couple of caveats, Chris, you are absolutely right the calendar Q3 of last years when we start to fill the effect of the economy but really only in our consumer and SMB businesses. And so I think if you made the statements for either our consumer business or SMB business is actually true.

We actually had a pretty good start through July of last year and then the businesses were affected in August and September. So we did not follow normal pattern for consumer and SMB last year. However, for a public sector and our MME business in calendar feature of last year, they really did not have any material affected the economy in the calendar Q3 of last year. So they follow a normal transact here.

Chris Krueger - Northland Securities

Okay. Last, on the Chicago office, what is the timing of opening that up in adding people in going that out?

Frank Khulusi

We planned opening that this quarter, Chris.

Operator

Your next question comes from the line of Bill Dawkins - Dawson Dawkins.

Bill Dawkins - Dawson Dawkins Incorporated

Question, Brandon, when was the last time that we have sequential growth Q1 to Q2 per year?

Brandon Laverne

I do not have that handy. My guess would be if it was not last year would be the year prior to that.

Bill Dawkins - Dawson Dawkins Incorporated

It is pretty impressive.

Brandon Laverne

A typical season of growth arrest would be a little bit less than Q2 with the slight business outside of course by the consumer business.

Bill Dawkins - Dawson Dawkins Incorporated

Okay. In respect to sales and service, Kris, did you see a sequential growth in that Q1 to Q2?

Kristin Rogers

For services itself, Bill?

Bill Dawkins - Dawson Dawkins Incorporated

Yes, for services.

Kristin Rogers

Yes. Services did grow sequentially Q1 to Q2.

Bill Dawkins - Dawson Dawkins Incorporated

Okay. And then respect to July and I know you do not give any guidance whatever, but how did this July compares year-over-year to last July in respect to going from June to July in each year? I know that sounds confusing but I know your totals are strong Q3 of last year but how did this July compared to last one.

Kristin Rogers

I think from my perspective, I will characterize this July in terms of year-over-year trends as some consistent with how the entire year has gone. And so I guess what I would say to you is that it is actually pretty consistent. So, if you will get where are your year-over-year growth and where last year all has been, July was actually a strong month as I mentioned for us last year with respect to our traditional consumer and SMB businesses. And so it did not get any worst but it did not get any better in terms of the year-over-year trends.

Frank Khulusi

The answer to your question after with respect to Q1 to Q2 is that last year we did go down sequentially from Q1 to Q2 and of course if we grew sequentially from Q1 to Q2 so that is positive.

Bill Dawkins - Dawson Dawkins Incorporated

Right. And then, Frank, you did not mentioned earlier that the quarter get better going through June and the July was experiencing the same?

Brandon Laverne

What I did mention, what Kris mentioned has scripted portion is we have the back sales day and at the end of the quarter and the last month that we did for the whole quarter and yes we were relative to how that quarter went. We were happy in the way that the quarter ended for second quarter. However, as Kris mentioned, we did experienced the return to normal seasonal patterns with the beginning of this quarter. So, we have not been able to maintain the higher sales per day that we close quarter at.

Bill Dawkins - Dawson Dawkins Incorporated

Okay, so the trend did discontinue from June to July kind of with back to seasonality.

Dan DeVries

Yes, it is still positive however because we do have some seasonal tailwinds with us specifically in our PC Mall Gov subsidiary.

Bill Dawkins - Dawson Dawkins Incorporated

Okay, in respect to the Window 7 launch and I do not want to go too far to this but are you hearing up there any customer push out in respect to upgrading their actual hardware in relation to this Window 7 release? I mean delaying the purchase to wait for the Window 7 because of what Frank was saying earlier about they do like demand to upgrade for systems instead of just the operating system but the whole system.

Dan DeVries

We do not hear that they are delaying for Window 7. We do believe that they are delaying for economic reasons. We do however feel that Window 7 may push them over the edge. That and accompanied with the fact that they have aging technology that at some point, the cost of maintaining the technology will exceed the cost of actually replacing the technology. So, I do believe that we are about to experience at some point in the future where do that point exactly is, nobody knows where there is going to be a flood of upgrading in the market.

Bill Dawkins - Dawson Dawkins Incorporated

Okay and then Brandon on the corporate, I cannot remember the title of this paragraph but we are ahead of that, the part in here, SG&A and all that that had the $800,000 lawsuit and then $1.2 million MME consolidation, if you net those two things out then add back that $0.03 back into your EPS on a non-GAAP basis?

Dan DeVries

Yes, the 2008 number is, I am sorry, the $800,000 is from last year and the $1.2 million is this year.

Bill Dawkins - Dawson Dawkins Incorporated

Okay.

Brandon LaVerne

So, the $0.03 is the last year comparison, not this year.

Operator

(Operator's instruction) At this time, I would like to turn the call back to Mr. Khulusi for closing remarks.

Frank Khulusi

Thank you all very much for spending some time with us on this call and for your interest in PC Mall. We appreciate your support and look forward to speaking with you again soon. Finally, please give us a call over one of our websites whenever you have a need for IT solutions. Have a great evening.

Operator

We thank you for your participation in today’s conference. This does conclude your presentation. You may now disconnect and have a great day.

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Source: PC Mall, Inc. Q2 2009 Earnings Call Transcript
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