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Executives

Frank Khulusi – Chairman, President and CEO

Brandon Laverne – CFO

Kristin Rogers – VP, Marketing

Analysts

Brian Peterson – Raymond James & Associates

Chris Krueger – Northland Securities

Bill Dawkins – Dawson Dawkins Inc.

PC Mall Sales, Inc. (MALL) Q1 2010 Earnings Conference Call May 6, 2010 4:30 PM ET

Operator

Good day ladies and gentlemen and welcome to the first quarter 2009 PC Mall Incorporated earnings conference call. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session.

(Operator Instructions)

As a reminder, today’s conference is being recorded for replay purposes.

On the call with us today are Frank Khulusi, Chairman, President and Chief Executive Officer; Brandon Laverne, Chief Financial Officer; and Kris Rogers, 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 conference over to Mr. Frank Khulusi. Please proceed sir.

Frank Khulusi

Good afternoon. 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 first quarter of 2010. I am pleased that in the first quarter we returned to double digit year-over-year growth as the demand environment continues to improve.

Sequentially on a $47 million seasonal reduction in consolidated sales from Q4 2009, we achieved comparable levels of profitability despite having $0.3 million of severance payments in Q1 2010 resulting from our announced headcount reduction. Higher depreciation expense of $0.5 million on a year-over-year basis is the result of our investments in systems and infrastructure which we believe positions us better for the future. Our results in Q1 support our previously announced goal of achieving 1.5% to 2% non-GAAP operating profit margin by the fourth quarter of this year and we remain committed to that goal.

Net sales without our MacMall segment in Q1 2010 increased by 23% year-over-year. We believe this number may be more relevant as a comparison to certain industry competitors due to them not having a comparable segment or having a much smaller comparable segment as percentage of the overall sales. Sales in the MacMall segment declined primarily due to our intentional strategy shift to focus the MacMall brand on more profitable consumer segments such as small businesses and creative professionals. We believe this strategy has paid off well as evidenced by the operating profit for our MacMall segment in the first quarter increasing by 36% sequentially over Q4 2009 on a 39% decrease in sales over the same period. This is a considerable achievement given that the fourth quarter is typically our strongest quarter for the MacMall segment. Going forward as we continue to execute on this new strategy for our MacMall segment, we believe that the year over year comparisons from a top line perspective will improve as well.

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

Brandon Laverne

Thanks, Franks. All comparisons I make will be against Q1 2009 unless otherwise noted. Net sales for Q1 2010 increased 12% to $289.9 million and gross profit increased 1% to $38 million. Gross margin was 13.1% compared to 14.5% last year but up sequentially from 12% in Q4 2009. Operating profit for Q1 2010 decreased 62% to $800,000 compared to operating profit of $2.1 million last year.

Our first quarter 2010 results include a $600,000 increase in cost due to an appreciation of the Canadian dollar relative to U.S. dollar, $0.5 million increase in depreciation expense reflecting our IT investments and system and infrastructure upgrades and $300,000 increase in employee severance cost due to our previously announced employee reductions earlier this quarter.

Prior year first quarter results also included a onetime $600,000 benefit related to our Canadian subsidy that we discussed last year. The total of these items is $2 million.

Adjusted EBITDA was $3.1 million for Q1 2010. Net income for the first quarter was $200,000 compared to $1 million last year. Diluted earnings per share for the first quarter was $0.01 compared to diluted EPS of $0.08 last year. Our tax rate in Q1 2010 was 41% versus 40% in Q1 last year.

I will now speak a bit about our Q1 2010 segment results. Net sales for our SMB segment increased 21% to $108 million primarily due to an improvement in the demand environment and an increase in revenues from our new sales office located in Chicago. SMB gross profit increased by 19% to $13.4 million primarily due to the increased sales. SMB gross margin decreased by 20 basis points to 12.4% primarily due to competitive pricing environment and aggressive our SMB market share growth strategy. However, SMB gross margin was up 80 basis points sequentially from Q4 2009.

SMB operating profit increased by 17% to $6.4 million primarily due to the increased gross profit and $300,000 reduction in bad debt expense, offset by $1.3 million increase in personnel cost. These personnel cost increase primarily due to a onetime $600,000 benefit related to the Canadian government labor subsidy program in Q1 2009 that did not recur, a $400,000 impact of a higher Canadian exchange rate, investment in our Chicago office and our addition of account executives in that facility and the increase in variable commission and bonus expenses due to the increased SMB gross profit.

Average account executive headcount during Q 2010 in our SMB segment was 367, up one account executive compared to 366 in Q1 2009 and up eight account executives from Q4 2009.

Net sales for our MME segment increased 14% to $96.5 million primarily due to increased spending by customers in the mid market and enterprise sector during the quarter. Product revenues increased by 27% and our service revenues declined by 20%. MME gross profit increased by 4% to $16.5 million driven by the increase in sales and MME gross margin decreased to 17.1% in Q1 2010 compared to 18.7% last year primarily due to a competitive pricing environment and the decline in services as a percentage of sales. However MME gross profit margin increased sequentially by 190 basis points from Q4 2009.

MME operating profit increased by 11% to $4.6 million, driven largely by the increased gross profit. Average account executive headcount during Q1 2010 in our MME segment was 108 of seven account executives or 7% compared to 101 in Q1 last year and down two account executives from 110 during Q4 2009.

Net sales for our Public Sector segment increased by 62% to $44 million with increases in both our federal business and our state, local and educational business driven by stronger demand and our aggressive Public Sector market share growth strategy as well as significant backlog from a large customer that carried over from yearend.

Public Sector gross profit decreased by 1% to $3.6 million and gross margin decreased to 8.2% in Q1 2010 compared to 13.5% last year. The decrease in Public Sector gross profit and gross margin was primarily due to a higher mix of large lower margin deals of Q1 2010. In Q1 2009, our Public Sector business had an unusually high margin mix of transactions that resulted in margins higher than typically achieved.

If you exclude Q1 2009, our Public Sector segment had an average gross margin of 10% for the remainder of 2009. Our 8.2% gross margin for Q1 2010 reflects our previously stated market share growth strategy in the Public Sector business, specifically on the platform in order to broaden our sales mix.

Operating profit for our Public Sector segment decreased by 58% to $400,000 primarily due to an increase in Public Sector personnel costs of $400,000, resulting from our investment in Public Sector’s Health Dynamics division and incremental investments in headcount.

Average account executive headcount during Q1 2010 in our Public Sector segment was 88, up nine account executives or 11% compared to 79 in Q1 2009 and up five account executives from 83 during Q4 2009.

Net sales for our MacMall segment declined 28% to $41.3 million primarily due to our intentional strategy shift to focus the MacMall brand on higher profit customer segments such as small businesses and creative professionals. The decrease in MacMall net sales was also affected by continued competition in the Apple market and the absence of year end opportunistic purchases we made in 2008 which we were able to profitably sell in Q1 2009.

MacMall gross profit decreased by 33% or $2.1 million, primarily due to the reduced sales. MacMall gross margin decreased to 10.8% in Q1 2010 compared to 11.5% last year. The decrease in MacMall gross profit was primarily due to the higher margin sales in Q1 2009 described above that did not reoccur in Q1 2010 and the continued competitive pricing environment.

MacMall operating profit decreased by 70% to $600,000 primarily due to the decrease in MacMall gross profit, partially offset by a $700,000 decrease in MacMall advertising expenditures, and a $300,000 decrease in credit card processing fees on the lower sales. However, MacMall operating profit increased 35% sequentially from Q4 2009 operating profit of $400,000 on a seasonal decline in sales as a result of the aforementioned strategy shift.

Average account executive headcount during Q1 2010 in our MacMall segment was 96, down seven account executives or 7% compared to 103 in Q1 2009 and no change from Q4 2009.

Our Corporate & Other operating expenses include 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.

Corporate & Other SG&A expenses increased by 9% to $11.2 million; however, they decreased sequentially from Q4 2009 by 5% from $11.7 million. The increase from Q1 2009 was primarily related to an increase in personnel costs of $0.5 million, which included $200,000 of severance costs for that segment related to our efforts to reduce personnel expenses and a $100,000 increase in stock-based compensation expenses, and an increase in depreciation expenses of $400,000 primarily related to the completed portions of our systems and infrastructure upgrades.

Accounts receivable at March 31, 2010 of $153.7 million decreased by $7.7 million from December 31, 2009. Our inventory of $42.8 million at March 31, 2010 represents a decrease of $25.7 million from December 31, 2009, reflecting sell-through of seasonal purchases made in late 2009 as well as sell-through of our Public Sector backlog. Accounts payable at March 31, 2010 of $85.6 million decreased by $23.2 million from December 31, 2009. Outstanding borrowings under our line of credit decreased by $8 million to $45.1 million at March 31, 2010 compared to December 31, 2009.

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

Kris Rogers

Thanks, Brandon. I will spend a few minutes on our segment specific results as well as other key performance indicators for our consolidated business to give you more color on our performance in the first quarter, 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 the segments. We discussed at the close of Q4 2009 that we were seeing a positive trend in SMB per day demand, that trend continues through Q1 2010 and resulted in our 21% year-over-year increase in revenues; that’s also represented by a 19% increase in our average order value. The year-over-year improvement in revenues across multiproduct categories and customer segments within SMB and there was no meaningful seasonal decline in Q1, which we believe is further evidence of an improving demand environment.

While we did see improvement in the demand environment, there was pricing pressure during the quarter which resulted in the 20 basis point decline in the gross margin for the SMB business year-over-year. So sequentially gross margin actually increased by 80 basis points from Q4 2009. The competitive nature of the market drove pricing down particularly for larger opportunities and while we expect that pressure to abate, we believe that larger opportunities will continue to be under pressure.

As indicated in earlier calls, we made a decision in 2009 to invest aggressively to facilitate future growth in SMB primarily through the opening of large new call center in Chicago. These and other investments in headcount and an increase in personnel costs driven by both the U.S. Canadian exchange rate and the lack of a onetime benefit from our Canadian labor subsidy in Q1 2009 put downward pressure on operating margins at SMB but we still drove operating profit up by 17% over 2009 due to the gross profit dollars and cost containment across the business.

Our SARCOM business, which targets the mid market and enterprise base grew 14% year-over-year with product sales up 27% but service sales down 20% from Q1 2009. The growth in product revenue was largely driven by accelerating demand for larger projects which we believe may have been delayed due to the economic conditions in 2009. SARCOM branded services declined in Q1 2010 as a result of several large service engagements in Q1 2009, which did not recur.

SARCOM and Abreon branded revenue vehicles are primarily contract based and have longer lead times. As a result, the decline in service revenues lagged the economic decline and we believe service revenue recovery has lagged the economic turnaround. However a stronger pipeline in service engagement opportunities is beginning to develop.

There were primary factors that contributed to the year-over-year gross margin declines in our MME business, like SMB pricing pressure was significant on larger transaction and service was a lower percentage of the total revenue for Q1 2010. However we were pleased with the MME gross margins were up 190 basis points sequentially. As a point of reference, in Q1 2010, services represented 19% of SARCOM revenues versus 27% in Q1 2009 and 20% of revenues in Q4 2009.

Public Sector, which has the state, local education and federal customers had a strong Q1 2010 with growth of 52% over Q1 2009 both the sled and the fed businesses grew with sled growing at 34% year-over-year and fed growing at 75%. The unusual high federal growth rate was partially fueled by backlog carried over from the end of Q4 2009. Gross profit dollars reflects for PC Mall Gov as a gross margin of 8.24% for Q1 2010 was lower than the norm. The year-over-year decline in gross margin percent is a result of two things. We had a larger than usual gross profit percent in Q1 2009 as a result of unusual high margin mix of transactions during that quarter and during Q1 2010, PC Malls government chose to grow its market share in part by pursuing an aggressive pricing strategy, which drove the higher revenue growth but also below our margins. We consider these market share moves strategic for long-term growth as they opened up many new accounts for PC Mall Gov and gained us a foothold with key manufacturer partners and strategic accounts.

As a result, PC Mall Gov significantly increased its Wintel based product mix with the majority of PC Mall Gov’s top 15 manufacturer partners growing over 90% in Q1 2010 versus Q1 2009. PC Mall Gov saw operating profit decline by $500,000 from Q1 2009 to Q1 2010 reflecting the investment in our Health Dynamics division and our addition of sales headcount in Q1 2010 to position our public sector business for a long-term growth.

Sales in our MacMall segment which primarily serves consumers, small business and create professionals declined by 28% in Q1 2010 from Q1 2009. We also experienced a decline in the gross profit of 33% from Q1 2009 to Q1 2010 for MacMall.

Several factors contributed to this year-over-year decline including a lack of an opportunistic purchase we made in late Q4 2008 and sold through Q1 2009. Also a lack of new product introductions from Apple during Q1 2010 as compared to Q1 2009 and the continuing competitive pricing market in the Apple market.

We modified our go to market strategy in the MacMall segment and actually grew MacMall’s operating profit by 36% sequentially despite a 39% sequential decline in revenues from Q4 2009.

At this time, I’ll take a couple of minutes to review the product category results. With the improvements in demand seen across most of our commercial and public sector businesses, we saw most product categories return to year-over-year growth. While some of the growth was driven by larger opportunities we also saw growth in categories that we made technical and marketing investments in such as virtualization and networking.

Our largest category for Q1 2010 was software at 18% of our revenue and up from 13% of our mix in Q1 2009 with revenue growth of 22% over Q1 2009. We saw tremendous growth results of all leading publishers as demand rebounded in the commercial segment. Categories like security and virtualization saw significant growth but we also saw growth in our Microsoft business which we believe is primarily a function of our recovering commercial market.

In addition, we can duly see growth with publishers like Adobe thanks to some public sector contract plans and expect to see ongoing strength of major publishers like Microsoft and Adobe have scheduled large product launches in Q2 2010.

Our second largest product category is notebook, at 16% as compared to 13% in Q1 2009. Notebook sales increased 9% over Q1 2009 reflecting improved demand in the commercial markets. We saw solid growth of 24% growth across all the retail bands with ASPs mixed as we saw higher end notebook manufacturers decrease ASPs to sub 9.99 to compete in that space.

We did see a significant decline in Apple Notebook revenues year-over-year though as a result of the opportunistic close out in Q1 2009, which did not recur in Q1 2010. However, we expect to continue to see growth in the notebook category in Q2 2010 as the leading notebook manufacturers expand their lines with the tablet format.

Our next largest category was desktops at 9% of sales versus 7% in Q1 2009 with very strong growth of 20% over Q1 2009. Desktop sales were also up at all customer segments and across all platforms including Apple. There was clearly additional upside volume driven by larger enterprise desktop refreshers in the dot.com business.

In general, desktop ASPs remained flat to slightly up over Q1 2009 so we continue to be optimistic about the stabilization of ASPs in the desktop category. Storage was 8% of revenue in Q1 2010 up from 6% of revenue in Q1 2009 with year-over-year growth of 15%. Storage was a growth category for both higher end enterprise solutions as well as for home and small business; however, we continue to see strong activity in pipeline in storage and are pleased to see that results in the growth in Q1 2010.

Networking was 7% of sales versus 5% in Q1 2009 with sales increasing 19% year-over-year and Q1 showing the third straight sequential growth quarter for networking. We continue to see a strong pipeline for networking in our commercial customer segment and saw ongoing strong demand in Q1 2010 for networking solutions in the public sector.

We continue to see tremendous upside for growth in networking across all of our commercial customer segments and we’re very pleased to be the winner at Cisco’s Small Business Partner of the Year for 2009 for the US. We believe that the conversions in the data center is still an opportunity at both traditional networking and traditional data center solutions and believe there are partnerships with Cisco and HP particularly in light of the 3Com acquisition announced by HP provide us with the comprehensive portfolio for all of our commercial customers.

Our overall delivered services, excluding package services, were our next largest product category at 7% of total sales in Q1 2010, down from 9% of total sales in Q1 2009 with a decline of 20% year-over-year. The decline in delivered services was due to both the decline in our (inaudible) E-learning and change management service practice and our core SARCOM branded delivered services.

We continue to invest however in our managed and professional services capability to better support our clients from a total lifecycle management perspective as well as to drive hardware and software solution sales. Manufactured package services came in flat at 4% of our sales in Q1 2010 versus Q1 2009 were up 20% over Q1 2009 as we added new third party service providers and increased our cash to our leasing portfolio.

Service sales grew to be 4% of sales in Q1 2010 with a 65% increase from Q1 2009 with growth coming in all commercial segments. The business was driven by strength in both the X86 Platform as well as in our Sun Microsystems business.

We did see a growing pipeline in the service business as companies start to put capital dollars back into the data center. Displays and printers represented 4% and 3% respectively of sales.

Printer sales were up slightly with only 1% growth over Q1 2009 and continued to reflect slight product shortages, but we believe going forward there are no more material supply issues. Our printer mix shifted upwards from an ASP perspective but we believe that this is a function of doing less promotional activity on the MacMall business and stronger growth coming from the commercial segment.

We also continued to see growth in new categories like POS albeit still small part of our overall business.

The managed print business continues to ramp, although it is also a small piece of the business today, but we do expect to see stronger adaption in 2010 to both enterprise and SMB for managed print solutions.

In displays, we saw strong growth of 40% of our Q1 2009 aided in part by increasing LCD prices but also by aggressive inventory positions taken during the quarter to maintain supply at advantageous prices. As a result, growth came in both the smaller business segments as well as mid market enterprise account in support of big (refreshes).

We also saw huge improvement in the growth of large format displays for digital signage solutions with revenues up over 300% in that category. We believe it’s a reflection of larger projects that were on hold last year but now being pushed through 2010.

We also saw some strength with emerging technologies in Q1 2010 including some entries in the cloud world like Meraki a manufacturer that provides networking solutions for the cloud. In addition, we continue to see good demand ramping for traditional services like activations or remote diagnostics for small businesses.

From a manufacturer concentration standpoint, on a gross consolidated basis, our Top 5 manufacturers for Q1 2010 were HP, Apple, Lenovo, Sun Microsystems and Cisco respectively who at aggregate represented approximately 52% of our total revenues.

As a point of reference, the top five manufacturers for Q1 2009 were Apple, HP, Lenovo, Microsoft and Cisco who also represented approximately 52% of our total revenues. At this point I will turn the call back over to Frank Khulusi, Frank.

Frank Khulusi

Thanks Kris. I would like to take a moment now to discuss in more detail our strategic shift in the MacMall business. During Q1 of 2010 MacMall shifted resources away from the less profitable low end consumer web transactions to the more profitable high end consumer, small business and creative professional segment and started investing late in Q1 and incremental outbound business headcount to capitalize on the demand for Apple products in the commercial space.

With the launch of the iPad coupled with the expanding commercial adoption of the Apple platform, we believe that we have an opportunity to expand the footprint for MacMall in the commercial space. MacMall will be expanding its promotional efforts to target small business including the supreme studio makeover promotion by MacMall a few weeks ago.

While this shift in strategy has contributed to lower revenues in Q1 2009, we have already seen benefits from a profitability standpoint and sequential operating margin increased significantly in Q1 2010 from Q4 2009, on a $26 million sequential decline in sales.

This is considerable achievement, given that the fourth quarter is typically our strongest quarter for the MacMall segment. Going forward, as we continue to execute on this new strategy for our MacMall segment, we believe that the year-over-year comparisons from a topline perspective will improve as well.

In addition, MacMall is an enabler to our strategic partnership with Apple and therefore is a significant lever to growth with Apple across all of our MME, SMB and public sector segment evidenced by our results in Q1, which included a 100% year-over-year growth in Apple sales, excluding the iPod commercial business, in those commercial segments.

I’d like to close by updating you on some of our other growth initiatives. In Q1, we continued to see solid growth in the small business network followed by PC Mall, which we launched late last year, the social media community for small businesses with a focus primarily on businesses with less than 99 employees.

As you may have heard me say, this is the largest segment of businesses in the US and specifically the hardest for technologies suppliers to reach effectively. We believe that our unique approach with a social media platform gives us a cost effective way to market to and engage in small businesses and gives them an efficient and cost effective way to support their IT needs.

Our initial goals for the small business network were focused on building the community and we have surpassed our near term goals for active members with over 16,000 active users in our community.

We have also been working very hard to partner effectively without technology OEMs and we’re very proud to recently receive Cisco Small Business Partner of the Year for the US for 2009, which is largely due to our collaboration with them in the small business network.

We’re also partnering with HP, Apple, Symantec and Sony on the development of an emerging model for selling IT to small businesses.

We’re excited about our growth in both our headcount and revenue in the new Chicago location and we believe that we have a long term plan for our Chicago office to rival the historical performance of our Montreal call center.

We are pleased with initial results we are getting in both the quality of the reps we have hired and the initial sales results we’re getting from that operation.

As of now, we have 90 SMB account executives in Chicago including those in training.

In December of 2009, we completed our acquisition of certain assets of DSW in order to strengthen our portfolio for advance networking solutions. We have centralized certain of DSW’s technical resources and those resources are now supporting and enabling the sales forces in our commercial segments to broaden our portfolio into the physical security and unified communication segments, leveraging our status as a Cisco advanced technology partner.

Last year, we launched our Health Dynamics division dedicated to providing IT solutions to clients in the healthcare marketplace. Health Dynamics combines our sales, service and technical capabilities to provide a unique value proposition to its clients.

We’re continuing to develop a large customized solution of Health Dynamic as we speak and that organization did begin contributing modest incremental revenue to Q1 2010. We expect that health dynamics will be an increasingly meaningful part of our results in future period.

In closing while the demand environment remains competitive across the board, we’re pleased to be back in growth mode. While we have reduced costs which were deemed appropriate during this recession, we have invested and expect to continue to invest significant dollars and growth initiatives. We believe that these investments are beginning to pay dividend. And going forward will provide us the competitive advantage over companies who are unable to or chose not to innovate and invest in challenging economic times. Now I’d like to open up this call for any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Brian Peterson, with Raymond James & Associates. Please proceed.

Brian Peterson – Raymond James & Associates

Just under 1.5% to 2% margin target in the fourth quarter – it sounded like – I’m just trying to get a sense of what revenue growth assumptions you’re using or even on demand directionally because most of your commentary on margins sounds like we’re not going to see a heck a lot of improvement given pricing pressure investments etc. So what kind of demand environment are you assuming for that target for the rest of the year?

Frank Khulusi

We’re expecting I wouldn’t say it’s a demand environment but more of some of our growth initiatives actually kicking in, Brian. We’re expecting Health Dynamics to start contributing positively. We’re also this – headcount that I talked about at Chicago, a lot of those people are still in training and those that have been deployed have generated a relatively decent topline and as the rest of them get deployed and we continue to hire the additional staff we’ll also generate incremental topline. So as we leverage some of these investments and they try to save to bottom line that’s largely how we plan on getting to our target.

Brian Peterson – Raymond James & Associates

So that’s not really a market commentary but that’s more of a productivity assumption so should we be seeing potentially some above seasonal revenue growth as we go throughout the year?

Frank Khulusi

I would say that as we go forward yes and obviously if the market goes against us it becomes tougher, but yes we’re not expecting the market to further improve, we’re expecting that our efforts will start transmitting into material results.

Brian Peterson – Raymond James & Associates

Okay alright on the public sector gross margins those were a little bit later what I was looking for. And I know that you pulled forward a lot of lower margin business, but you also mentioned that you were looking to gain share particularly in the Wintel space. So how should we look at modeling those going forward? Is that – is the 8% kind of the new norm or should that hit back up to like the double digit levels?

Frank Khulusi

The margin is – I wouldn’t say that’s the norm, that’s more of a norm in the short term as you know you stated previously that business has traditionally been largely fun for us and we need a strategic decision to really increase and shift our sales mix in the direction of more Wintel business. We’ll continue to be very committed to Sun. We want to grow that as well but we want to have a healthy mix of Wintel sales in there as well. As we do penetrate accounts and get a new relationship with vendors and things like that, we expect to bring the margin backup. And also the margin there was affected by and widely publicized industry thing that has affected one of our very large competitors the software program changes that happen at very large publisher namely Microsoft, that have affected has on year-over-year basis.

Brian Peterson – Raymond James

Okay. So but it sounds like with Sun still be in the top three customers, that business actually performed pretty well in this quarter and I know there has been some talk out of them that or Oracle is looking to consolidate some of their channel efforts that we didn’t see any big impact of that in the quarter?

Frank Khulusi

No, our relationship with them continues to be very good. So we don’t anticipate any major issues in our relationship relative to consolidation we mark that that you may, but more of really want a healthy mix between Sun and Intel and that business efforts are really oriented towards that.

Brian Peterson – Raymond James

Okay, last one from me then I’ll hop back in the queue but you mentioned that pricing pressure, I think across most of your segments but on the commercial side it was mainly on large deals and I think you should expect that alleviate a little bit going forward, is that something we’ve seen thus for in the quarter in what gives you the confidence that’s going to improve versus maybe just continue to be aggressive.

Frank Khulusi

Actually the pricing pressure is more of coming relative to the pre-recession and into the initial phase of the recession timeframe with respect to on a sequential basis, we’ve had very significant increases in our gross profit margins in both our MME segment and our SMB segment and we think that there continues to be considerable upside in the SMB segment for example to further increase gross margins going forward.

Brian Peterson – Raymond James

Okay, that’s it from me, guys. Thanks.

Frank Khulusi

Thank you.

Brandon Laverne

Thanks Brian.

Operator

(Operator Instructions) And your next question comes from the line of Chris Krueger with Northland Securities. Please proceed.

Chris Krueger – Northland Securities

Good afternoon.

Frank Khulusi

Hi.

Brandon Laverne

Hi Chris.

Chris Krueger – Northland Securities

Hi little more help on gross margin, I know last quarter you stated that you felt that it would get back to pre fourth quarter levels, I know its quietly moved up nicely from 12 to 13.1, but the three quarters before the four quarters, it was closer to 14% and I am just wondering if we can look in the near term as we expected to continue moving upwards from first quarter levels or is it too soon to tell?

Frank Khulusi

When we did comment in the last quarter about our gross margin, we were A, two months into quarter, but B, we commented specifically about two of the segments and actually talked about where we thought that we will be and we were pretty much on the notes with respect to what we said. We – I would check your notes we really do not say that we’re going to be after quarter’s prior to the fourth quarter in terms of overall consolidated gross margin.

Going forward I would say that its really going to be on for us in the quarter now because we’re reporting one month earlier than last time or few weeks I should say before we did last time and as a results we’re not comfortable in pinpointing a number for to say, but I would say that we’ll continue running at lower than the last year in terms of gross margins. We do however believe that we have upside in certain aspect of our business offset by the fact that we are doing some things in the public sector side that I talked to you about and as you know consolidated gross margin comes from the result of where each of those sales went up relative to the overall mix.

So depending on how much of a percentage public sector is relative to the overall number that’s going to affect the consolidated number. That makes hard for me to talk about, a consolidated number with that degree of precision. I would say a longer term, there is actually meaningful upside to our gross margins and we continue to execute our plan. I spoke for example earlier about the pipeline for services building up, services are margin rich business, so as the pipeline turns from pipeline into actual contracts and orders that should translate into meaningful improvement to the gross margins as well.

Chris Krueger – Northland Securities

Okay, you had some severance expenses in first quarter, is there anything expected in the second quarter?

Frank Khulusi

We always have severance expenses here and there, the reason we talk about in the first quarter because it was meaningful and we made a meaningful cut. So the question is there going to be meaningful severance expense in second quarter, the answer is no but there will some.

Chris Krueger – Northland Securities

Okay.

Brandon Laverne

We’re always fine tuning here and there.

Chris Krueger – Northland Securities

Okay, and then as far as nice momentum in sales versus last couple of quarter and during the second quarter was there any reason to believe things have changed so far in the quarter from the first quarter results?

Frank Khulusi

No actually we’re – as a result of our efforts I would say probably more so then the market we’re even – some of the things continue to go further north, i.e., they get even better.

Chris Krueger – Northland Securities

Okay. And last, I know iPad sales began in I think in the first week of April. Can you talk about how you guys are doing with iPad sales and is it meaningful or is it low margin and how does that play out?

Frank Khulusi

Off the chart, unfortunately we can’t get the number that we need or the number that we have demand for and from a margin perspective we’re selling each one of them at (inaudible). So however they’re not margin rich to begin with. So that’s not anything to like home about but it’s not discounted product and I don’t predict it will be a discounted product for a relatively long time.

Chris Krueger – Northland Securities

Alright. That’s all I got. Thanks.

Frank Khulusi

Thank you.

Operator

And your next question comes from the line of Bill Dawkins with Dawson Dawkins Inc.

Frank Khulusi

Hi Bill.

Bill Dawkins – Dawson Dawkins Inc.

Hey guys. I had a question much like Brian Peterson is early, but I didn’t quite understand the answer on – in assuming your net op goals for the end of the year, 1.5 to 2%, I was wondering at what revenue level do you need that, what kind of growth are you assuming for that, I don’t quite understand your answers so I was going to get to the re answer that question for me to?

Frank Khulusi

Okay, well as you know as we stated early we have the Health Dynamics division which is losing money right now, we have the investment and additional headcount in our Chicago office and the fixed cost associated with our Chicago office and the tax associated with our small business network. And so I can may go on and on. We listed up quite a few strategic initiatives that we’re doing and working on as well as IT initiatives and things of sort and as they kicking in, we are right at the point where incremental fails can bring down a quite a bit down to the bottom line and at this point other than variable expenses going up with sales are SG&A from a corporate and other perspective. We don’t plan on materially raising that.

So any incremental sales flow right down to the bottom line after variable expenses, that’s how we plan on getting there.

Bill Dawkins – Dawson Dawkins Inc.

Y’all and one of your competitors as well have goffered around the consumers side. Can you explain to me why your industry is doing this? Does this go into a couple of year things several quarters ago about the businesses changed forever, is this part of that business has changed forever, is it just too easy to find the stuff everybody else that you just kind of locking down the consumer side?

Frank Khulusi

I don’t think it has changed forever, it’s cyclical and some of the things in our business are counter cyclical, other things are cyclical. So we are – its best to think of us is a well balanced portfolio, we think we need to be in all segments and plan to continue to part fit in all segments that we think that is leverage that comes from one segment to the other, our Apple relationship for example is really key and we talked about how that’s transmitted into 100% growth on the commercial side, we firmly believe that that’s wouldn’t have happened not for how strong our Apple relationship is as a result of our Mac Mall business and the way that it is.

Our iPad sales for example are starting to make some significant inroads on the business-to-business side, but also with high-end consumers there is quite a bit of money to be made there and we continued to believe that there is opportunity even on the consumer level, we’re saying the short term, because the market is competitive very competitive and where the economy is and where our plays in the food chain and the supply chain is and taking into consideration all those dynamics we think that the immediate money to be made is relative to concentrating on the small business, the (inaudible) the creative professional so on and so forth.

And that’s translating into immediate dollars. For example Bill, we talked about how the operating profit for Mac Mall business was actually better in Q1 relative to Q4, that’s probably in the first time ever of this company. So that’s a huge achievement and a huge sales drop in the Mac Mall business. While we think we’re actually going to grow that further going from Q1 to Q2. We think we’re going – there is going to be an improvement from Q1 to Q2 and we think by the time we get to Q4 we’re going to have a nice sizable number in terms of operating profit contribution coming from that business.

Bill Dawkins – Dawson Dawkins Inc.

For many years y’all talked about one of the set parts of the story is that the industry is so fragmented amongst so many different bars and so many local bars and all that kind of stuff but with y’all buying power in your ability to service your customers rapidly, y’all would be able to go after that small businesses, if you look at and of course you don’t CDW [ph] number any more but if you look at the other three that play and you just assume that CDW has followed the same rate the bar count hadn’t changed. So as far as y’all taking share, is that model broken, is that – did the bar channel just did not got cleansed because of recession.

Frank Khulusi

We absolutely believe that if you look the IDC numbers business did not grow by 23% year-over-year and our sales excluding the Mac Mall segment which is our commercial sales public sector sales grew 23% in the first quarter out for the same quarter last year. So that is taking share.

Bill Dawkins – Dawson Dawkins Inc.

Good, alrighty and then lastly on -- there are two more things, in respect to your marketplace in your direct competitors that play the trade publicly inside PCConnection and PC Mall. Frank why would you say that the street got you valued and such a discount to your peer group.

Frank Khulusi

Well we don’t really comment on that, I’m not going to go there, we think what we do believe in is that in the long term what we can affect as the performance of the company we think the stock price will reflect true performance for the company over the long term. We believe in the stock at the point of buying back stock, we continue to buy back stock in last quarter. We unfortunately couldn’t buy as much as we want because we had a very short window by which we could buy but we still bought some and we’re in this for the long term and we’re believers and we think in the long term everything will take care of itself.

Bill Dawkins – Dawson Dawkins Inc.

So you’re in plan that maybe the Street doesn’t quite understand what you’re doing or has you mis-priced?

Frank Khulusi

We’re planning that we think that stock is a good value relative to and that’s why we’re actually buying it.

Bill Dawkins – Dawson Dawkins Inc.

Okay and one more thing. Service and I understand service lag the downturn, service is lagging the upturn. Do you think that the service side of your equation, what is the – let me put it this way, what is the competitive landscape on the service side of your equation going forward?

Frank Khulusi

Yes. So on the service side of our equation is actually a very nice value add and very nice something in the flux (inaudible) that we have relative to our competitors including some that are larger than us and an important differentiator and as both enabler for new relationships with customers as well as the protector of existing relationships with customers. So we think that we’re uniquely positioned as far as that goes and can compete with the best of the best whether its Dell, Wipro, HP with EDS or whatever that maybe we’re in there either working with them or competing with them or doing whatever with respect to customers and can perform a very broader way and very broad portfolio of services.

And our quest continues to expand all services and in order to increase our value add and decrease or minimize the conversations about price with our clients.

Bill Dawkins – Dawson Dawkins Inc.

Okay, thank you.

Frank Khulusi

Thank you.

Operator

And there are no further questions. I would like to turn the call back to Mr. Frank Khulusi for closing comments.

Frank Khulusi

Well thank you Christa and I would like to thank everyone for participating on this call. I would also like to thank all the PC Mall employees, the PC Mall team for their continued efforts and dedication and back to thanking the audience, not only do we thank you but we would appreciate if you call us and we can help you with your IT solutions and IT needs. Thank you very much. Take care.

Operator

Ladies and gentlemen that concludes today’s conference call. Thank you for your participation. You may now disconnect and have a great day.

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Source: PC Mall Sales, Inc. Q1 2010 Earnings Call Transcript
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