PCM's CEO Discusses Q1 2014 Results - Earnings Call Transcript

Apr.29.14 | About: PCM, Inc. (PCMI)

PCM, Inc. (NASDAQ:PCMI)

Q1 2014 Earnings Conference Call

April 29, 2014 09:00 ET

Executives

Frank Khulusi - Chairman and Chief Executive Officer

Brandon LaVerne - Chief Financial Officer

Operator

Good day, ladies and gentlemen and welcome to the First Quarter 2014 PCM Incorporated Earnings Conference Call. My name is Destiny and I will be your coordinator for today. At this time, all participants are in a listen-only mode. Following the prepared remarks, there will be a question-and-answer session. As a reminder, this conference is being recorded for replay purposes.

On the call with us today are Frank Khulusi, Chairman and CEO and Brandon LaVerne, CFO.

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. Such 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, Destiny and good morning 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 2014. I am very pleased to report our record first quarter results. We closed our Q1 2014 with record first quarter revenues, gross profit, EBITDA and diluted EPS and our highest ever quarterly gross profit margin.

Our first quarter 2014 highlights are as follows. First, record first quarter net sales, which increased 1% to $339.1 million and that’s 17% in public sector; record first quarter gross profit, which increased 8% to $50.6 million; record quarterly gross profit margin of 14.9% compared to 13.9%. Our operating profit increased 104% to $5.9 million. And we had record first quarter EBITDA, which increased 48% to $8.6 million and record first quarter diluted EPS, which increased 109% to $0.23 per share.

I am very pleased to report these record first quarter results. While we still face a challenging but stabilizing demand environment, we were able to achieve these record first quarter sales, gross profit, EBITDA and EPS numbers and notably grew our gross margin to an all-time high of 14.9%. Our sales mix continued to improve as it reflects about significant growth in many of our strategic categories, including networking and software, which increased 32% and 19% respectively. This performance resulted in operating profit and EPS that more than doubled over Q1 last year, while we continue to invest in our future.

I will now turn the call over to Brandon LaVerne, our CFO, who will take you through our results in a 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 2013 unless otherwise noted.

Our consolidated net sales were a first quarter record $339.1 million in Q1 2014 compared to $337.2 million in Q1 2013, an increase of $1.9 million or 1%. Consolidated sales of services continued strong at 9% of net sales in each of Q1 2014 and ‘13 significantly higher than all the public company competitors that we track. The sales increase was driven by strength in our public sector business related to our new contracts despite continued federal budgetary headwinds as well as strength in our state, local and educational business related to the common core standards. While we achieved record consolidated first quarter sales, our MacMall branded growth of 4% was offset by a $6 million decline in our non-core eCost and OnSale brands.

Our PCM commercial sales, while increasing, were impacted by a $6.1 million decrease in low margin, non-recurring sales to promotional companies, which were only $2 million in the quarter. And our consolidated sales also reflected increase in software maintenance and service contracts, which are recorded on a net and not on a gross billed basis. Had we recorded these software maintenance and service contracts on a gross billed basis and excluding the impact of these declines in non-core sales, our sales would have increased $19.5 million or 6%. We saw strength in some of our most strategic product categories in Q1 2014. Our networking, software, notebooks and desktop categories grew at 32%, 19%, 11%, and 14% respectively. These gains were offset by declines in tablets, displays, and our all other catch-all of 12%, 11%, and 21% respectively.

We continue to see a shift towards data center and higher margin solutions. Our top partners by revenue in Q1 2014 were HP, Apple, Microsoft, Lenovo, Cisco, and Dell. On a productivity basis, our Q1 sales increased 4% per account executive over last year as our average account executive headcount declined from 726 last Q1 to 702 this year or 3% that was up slightly from 700 during the fourth quarter.

Our consolidated gross profit was a first quarter record $50.6 million in Q1 2014, an increase of $3.6 million, or 8% over last year. Consolidated gross profit margin grew to an all-time record 14.9% in Q1 2014 from 13.9% last year. The increase in gross profit and gross profit margin was primarily due to an increase in vendor consideration of $2.2 million or 63 basis points, a higher mix of solution sales, which drove in part the increase in vendor consideration, and a higher mix of sales reported on a net basis.

Consolidated SG&A expenses were $44.8 million in Q1 2014 compared to $44.1 million last year, an increase of only $700,000, or 2%. Consolidated SG&A expenses as a percentage of net sales increased slightly to 13.2% in Q1 2014 from 13.1% last year. The increase in consolidated SG&A expenses in Q1 2014 was primarily due to an increase in personnel costs of $1.3 million reflecting some of the investments Frank has talked about partially offset by a decrease in advertising expenditures of $400,000. Our effective tax rate was 41% for both Q1 2014 and 2013. We generated $0.23 of diluted EPS during Q1 2014, a record first quarter and reflects a 109% increase from diluted EPS of $0.11 in Q1 2013.

Turning to the balance sheet and cash flow, net cash provided by operating activities for Q1 2014 was $18.1 million compared to $12.1 million for Q1 2013. The primary sources of cash during the current period were decrease in inventory of $45.3 million due to the sell-through of the majority of the inventory purchase for specific customer contracts and large strategic purchases made at the end of the year and a decrease in accounts receivable of $18.7 million primarily related to improved DSOs. Such sources of cash were partially offset by a $52.1 million decrease in accounts payable.

CapEx during Q1 2014 was $4 million compared to $2.2 million during Q1 2013. CapEx for Q1 2014 includes leasehold improvements and other build-out costs for our new Chicago office as well as continued investments in our new ERP. Outstanding borrowings under our line of credit decreased by $20.2 million to $90.3 million at March 31, 2014 from prior year end, while overall working capital increased by $3 million.

Now, I’d like to turn the call back over to Frank for some closing comments. Frank?

Frank Khulusi - Chairman and Chief Executive Officer

Thanks, Brandon. I would like to take a few minutes to discuss some updates related to key elements of our strategic initiatives and to comment on the current demand environment. We have been very busy transforming our company from PC Mall, which was primarily known as a direct marketer of personal computers and related products to PCM, a leading IT solutions provider with world-class capabilities in procurement, consulting and managed services as an PCM. This is a journey, not an event, the primary goals of which are to achieve much more relevance to loyalty and penetration with our customers resulting longer term and significant improvements to the bottom line. As we continue this journey, these improvements may not manifest themselves every quarter, but overall the trend line is very solid.

We are now entering the next phase of this transformation. To that end, we will be making strategic and significant additions in headcount and our technical resources and sales force with the goal of accelerating our sales growth as we go forward. These investments should start contributing to such growth in the latter part of this year. For example, in Q1, we opened and in Q2 we are already expanding a new office in Austin, Texas, which will be a new hub for various strategic elements of our business, including the technical and sales resources I just mentioned. Also in Q1, we moved, upgraded and expanded our Chicago office in line with these goals.

I am also very happy to say that we are well on our way to opening our new cloud data center in New Albany, Ohio currently slated for its grand opening later this quarter. We believe this cloud data center further exemplifies our journey to becoming a leading IT solutions provider for the world-class consulting and managed services capabilities. We are increasingly engaging with our customers to design, build and ultimately provide sophisticated services.

And we believe that the penetration of services like these in our marketplace is currently very low. As a result, we believe we are positioning PCM very well for customers who are exploring ways of moving to our utility consumption model for both their infrastructure and associated spend as they seek to optimize their own IT environments. We will continue to look for ways to accelerate our growth in these areas, including the development of additional capabilities and the provisioning and development of tools that better enable our account execs to engage their customers and powerful conversations related to these services.

Commenting on the demand environment, we remain optimistic that the IT environment will at a minimum remains stable and are looking forward to more healthy growth as unemployment continues to decline and companies feel better about investing in IT solutions that can provide them with competitive advantages rather than simply saving them money in the short-term. When paired with these investments I have discussed and our very strong second quarter 2013 results, we expect the same Q2 on a year-over-year basis followed by a strong Q3 and Q4 in an overall great 2014.

In closing, we are committed to that ongoing transformation of PCM that we have discussed and have and continued to make significant investments and efforts towards this end. We are excited about the profitability improvements we have already demonstrated related to these efforts and look forward to our resulting prospects for significant future profitable growth and further increase shareholder value.

At this point, I will turn the call over back to Destiny and open it up for any questions.

Question-and-Answer Session

Operator

(Operator Instructions) I am not showing any further questions at this time.

Frank Khulusi - Chairman and Chief Executive Officer

Thank you, Destiny. Again, 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 this morning with us on this call and for your interest in PCM. We appreciate your support. We 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. Thank you again and have a great day.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program. You may all disconnect. Everyone have a great day.

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