PC Connection's (PCCC) CEO Tim McGrath on Q4 2015 Results - Earnings Call Transcript

| About: PC Connection, (PCCC)

PC Connection, Inc. (NASDAQ:PCCC)

Q4 2015 Earnings Conference Call

January 28, 2016 04:30 PM ET

Executives

Tim McGrath - President and CEO

Joe Driscoll - CFO

Analysts

Adam Tindle - Raymond James

Anthony Lebiedzinski - Sidoti & Company

Operator

Good afternoon, ladies and gentlemen and welcome to the Fourth Quarter 2015 PC Connection Incorporated Earnings Conference Call. My name is Kaylie, and I’ll be the 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 call is the property of PC Connection and may not be recorded or rebroadcasted without specific permission from the company.

On the call today is Tim McGrath, President and Chief Executive Officer; and Joe Driscoll, Chief Financial Officer. Any statements or references made during this conference call that are not statements of historical fact, may be deemed to be forward-looking statements. Various remarks that management may make about the Company's future expectations, plans, and prospects, constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the Risk Factors Section of the Company's Annual Report on Form 10-K for the year ended December 31, 2014, which is on file with the Securities and Exchange Commission, as well as in other documents that the company files with the Commission from time to time.

In addition, any forward-looking statements represent management's view as of today and should not be relied upon as representing views as of any subsequent date. While the Company may elect to update forward-looking statements at some point in the future, the Company specifically disclaims any obligation to do so, even if estimates change. And therefore, you should not rely on these forward-looking statements as representing views of any date subsequent to today.

During this call, GAAP and non-GAAP financial measures will be discussed. A reconciliation between the two is available in today’s earning release and at the Company’s Web site. Today’s call is being webcast, and will be available on PC Connection’s Web site. The earnings release is also available on the Web site.

I’d now like to turn the call over to Tim McGrath. Please proceed sir.

Tim McGrath

Thanks, Kaylie. Good afternoon, everyone and thank you for joining us today to review the Company's fourth quarter financial results. We are pleased with our strong fourth quarter performance as we delivered the highest quarterly sales and net income in Company history.

Our sales grew 8.5% as we strive to take market share in our consolidating industry. Net income increased by 14% due to the increase in sales plus a significant increase in gross margin percentage. As a reminder, in 2015, our growth is being compared to our strong performance in Q4 of 2014 where we grew revenue by 9% and net income by 21%.

As we review our results, please note that unless otherwise stated, all of our fourth quarter 2015 comparisons are being made against fourth quarter 2014.

Consolidated net sales increased year-over-year by $54 million or 8.5% to $684 million, led by 23% growth in our Large Account segments. In all of our segments, we continue to help our customers navigate through an increasingly complex IT landscape by investing in security, cloud services, data center, virtualization and converged infrastructure solutions.

Gross profit dollars in the quarter increased by 10.5% to $92 million. Consolidated gross margin increased to 13.4%, a substantial increase over the 13.2% in Q4 2014. SG&A as a percent of sales increased slightly this quarter to 10.1%.

We incurred $296,000 in start-up costs for the new advanced configuration in distribution center that opened in Q3. The new facility will significantly increase our capacity to deliver mission-critical advanced configurations, which is a cornerstone for helping our customers achieve their business outcomes.

Net income for the quarter increased 14% to $13.6 million and diluted earnings per share increased from $0.45 to $0.51. For the full-year of 2015, consolidated net sales grew to 4.5% to approximately $2.6 billion and net income increased by 10% to $46.8 million. These are very solid growth numbers. 2014 was also an excellent year with a 11% revenue growth and 20% net income growth.

And now I’ll turn the call over to Joe Driscoll to discuss the results of our business segments and financial highlight. Joe?

Joe Driscoll

Thanks, Tim. Sales for our SMB segment, which serves small to medium-sized businesses, increased by 0.4% to $263 million. Gross margin was very strong as it increased by 70 basis points to 15.9% led by solid performance in advanced solution categories, such as software, networking, and services.

Sales by our large account segment increased by 23% to $277 million. The $277 million represents the highest quarterly sales in the history of our large account segment. We experienced 45% growth in the software category, which makes this the largest individual category in our Large Account segment.

There were several large deals that closed in December, which had been projected to be Q1 2016 transactions. This is consistent with historical year-end buying activity. Healthcare accounts within the large account segment grew 29% in the quarter, also contributing to the substantial growth. We expect that Q1 of 2016 will return to more normal growth rates for the Large Account sector, especially given the recent volatility in the global markets.

Sales in the Public Sector segment, which includes sales to government and education customers increased by 0.8% to $145 million. The Public Sector segment had a very challenging comparison to 2014 as in Q4 of last year sales grew by 19%.

Gross margin for the Public Sector segment was strong. It increased 41 basis points to 12.3%. Product mix drove the margin improvement with double-digit increases noted in software and networking. Our healthcare vertical which includes customers in all three of our business segments had a very strong quarter with 20% growth in revenues. We continue to focus on connecting healthcare customers with customized solutions in this specialized vertical, which is projected to be a growth area for IT spending for the foreseeable future.

Overall, our top and bottom line performance exceeded our expectations. EPS increased to $0.51 per share, up from $0.45 in the prior year. Trailing 12-month adjusted EBITDA increased to $88.5 million.

Our balance sheet is in very good shape as well. The Q4 2015 cash balance of $80 million is well above the year-ago amount of $61 million. We declared a $0.40 special dividend in Q4, which was paid in mid January, thus returning $10.6 million to shareholders.

It is the fifth year on a row that we’ve paid a special dividend for a total of more than $50 million in dividend payments. Our goal with excess cash is to maximize shareholder value while maintaining financial flexibility. We continue to assess M&A opportunities and other capital allocations such as dividends and stock buybacks. As a reminder, we still have $17.8 million available in previously authorized share repurchases.

I'll now turn the call back over to Tim to discuss current market trends.

Tim McGrath

Thanks, Joe. Our fourth quarter and full-year results reinforce that our strategy is working. We want to grow revenues at an above market rate, improve gross margin and hold the line on SG&A as a percentage of sales.

We accomplish this in 2015, even while comparing into a very strong 2014 results. We also were able to add to sales and technical headcount and little bit into distribution center, all within our SG&A targets. Looking ahead to next year, current industry growth projections for 2016 are consistent with 2015 in the 3% range.

Our goal is to grow faster than the market by taking share. We are highly focused on the Company’s mission, connecting customers with technology solutions, while continuing to grow the bottom line faster than the top line.

We want to deliver a strong and predictable financial performance, while making the investments to strengthen our capabilities as a leading national solution provider. We are focused on advanced technologies and on investing in these complex areas in order to help our customers drive their business outcomes through IT investments. For example, our software business grew 19% in Q4 2015 with growth generated in numerous categories including cloud, virtualization, and security.

We also continue to focus on vertical markets such as healthcare, which grew 16% in 2015. Our business model is more relevant than ever as technology is more complex and more disruptive. We must add value every day for our customers and our vendor partners in order to take market share and increase our relevance in the IT supply chain.

As changes in the market continue to unfold, we will continue to manage our growth appropriately with the focus on expanding margins, investing in solution capabilities and keeping our balance sheet strong.

We also believe that our balanced portfolio of customers, suppliers, products and solutions has helped us to deliver solid results. Our goal is to continue to deliver sustained and consistent performance.

We will now entertain your questions. Kaylie?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Adam Tindle with Raymond James. Your line is open.

Adam Tindle

Okay. Thank you. I’ve got one for Tim and one for Joe. Tim, you outperformed your largest competitor meaningfully last quarter and based on these results, it looks like that’s going to continue. What’s changed in your mix or go-to-market that has allowed this, and how sustainable do you think it is?

Tim McGrath

Well, thanks. We haven’t seen our competitors announced yet, and of course we have a great respect for those in our industry. But I really think, culture is a big driver of our success and that really comes down to our people and the relationships that we have and our ability to execute on behalf of our customer base. So we’re very confident in our business plan moving forward, and we think that you’ll continue to see this type of result from us.

Adam Tindle

Okay. So right from the competitive environment standpoint nothing to point out there that’s causing PC Connection to gain share here?

Tim McGrath

Well, we’ve been internally very focused on advance technologies. We’ve got a company wide goal on that metric. And I think that mix has helped because it really enables us to better solve our customer’s business issues with technology. So I think that’s working.

Joe Driscoll

And there was, a couple of very specific areas that went very well in Q4. The healthcare vertical was definitely a big winner for us in Q4. And as Tim, said we continue to hire technical people and people who are specialists in advanced areas. And you can see our software results were excellent in Q4. So I think those are two sort of specific areas that went very well in Q4.

Adam Tindle

Okay. So, Joe, along those lines, I mean do you think with the growth in solution sales and software, do you think we’re seeing kind of a new normal in gross margin. Do you expect this gross margin level to continue?

Joe Driscoll

So, our goal every year is to grow the gross margin line somewhere around 10 to 20 basis points. All of that really comes down to mix, and we obviously had a very good mix in Q4. A lot of it is really dependent upon what our customers need from us any particular quarter. So I’d say, on a steady state basis, we’re going to try to drive 10 to 20 basis point improvement in gross margin sort of quarter-over-quarter. Sometimes that won't happen if the mix suddenly shifts to a lot of lower margin categories.

Adam Tindle

Okay. And just one housekeeping. Would you be able to size those several large deals that you referred to just to set our expectations for Q1 correctly?

Joe Driscoll

Yes, without getting into too many specifics, there’s probably about $20 million worth of deals that came in right at the end of December which we’ve been forecasting all along to be Q1 events. Some of that was due to customers wanting to spend their budgets at the end of the calendar year. Some of it was due to our vendor partners wanting to get deals closed by the end of the calendar year. So, sort of a convergence of events, and they all kind of popped at the end of December.

Adam Tindle

Okay. That’s helpful. Thank you.

Tim McGrath

Thank you, Adam.

Operator

Thank you. [Operator Instructions] Our next question comes from the line of Anthony Lebiedzinski with Sidoti & Company. Your line is open.

Anthony Lebiedzinski

Good afternoon. Thank you for taking the questions. So, first just a housekeeping item; as far as the distribution center, the start-up cost of the million dollars that you incurred in 2015, should we no longer expect any such cost in 2016?

Joe Driscoll

That is correct. That’s all done.

Anthony Lebiedzinski

Got it -- got it. Okay, thank you. And also, I think, Tim, you mentioned in your prepared remarks that you see, just overall some volatility in the marketplace. Can you just perhaps expand on that?

Tim McGrath

Many of our customers are experiencing what we’re all experiencing, which is volatility in the market right now. So, our forecast and our outlook is that is consistent with our major suppliers and what the analysts are suggesting. We are seeing really good growth in the third platform categories. Good growth in software. Good growth in mobility, and we do expect that to continue. We’re also very proud of the fact that, we’re doing a better job selling across the solution stack. If you look at our S&D business and our call-center business, their margin is now up to 15.9%. So they really are gaining traction. So, we want to be conservative, but steady as she goes. So the market will clearly have an effect on us like it will the entire competitive landscape, but we remain confident.

Anthony Lebiedzinski

Got it. Okay. And as far as the, you’re gaining traction, is that really just because you have more experienced sales and technical people, is that what's driving that?

Tim McGrath

Well a big part of it -- a big part of our success is about our people, and they really deserve a lot of credit. But that said, also selling across the solution stack, as you garner more of that share of wallet, more of that IT spend by delivering those solutions we’ve been talking about.

Anthony Lebiedzinski

Got it. Okay. And lastly, you talked about the healthcare vertical doing well for you. Are there any other vertical markets that you’re particularly excited about?

Tim McGrath

We’re focused on four different vertical markets this year. A quick comment on healthcare, that is our largest vertical today, and we’re seeing good growth in the GPL business and the regulatory environment and healthcare continues to drive demand for us. A number of things are happening there. Security, I think is an opportunity. As we look at some of the other vertical markets, they’re very focused on financial, on manufacturing and on retail. And a couple of those verticals are very large for us as well. And there are number of technology drivers that we think are going to stimulate demand in that market place for us, ranging from the internet of things to in the second of the year 3D printing and of course it’s just a rise in newer technologies around security and the converged data center.

Anthony Lebiedzinski

Thank you very much.

Tim McGrath

Thank you.

Operator

Thank you. And I’m showing no further questions at this time. I’d like to turn the call back to Mr. McGrath for closing remarks.

Tim McGrath

Well, thank you. I’d like to thank all of our customers, vendor partners and shareholders for their continued support, and our dedicated coworkers for their efforts. I’d also like to thank those of you listening to our call this afternoon, your time and your interest in PC Connection are appreciate. Have a great evening.

Operator

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

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